Friday Morning coffee Nr 71 - Point taken

Our base scenario remains that we are in an environment of slowing economic momentum but certainly not under the threat of an imminent recession. The volatility seen during the month of August in financial markets shows to what extent investors are nervous of a severe economic downturn. The flight to perceived safety has taken proportions which make us wonder to what extend these safe havens are not becoming overly risky now as prices paid disconnect from economic reality. A 10 year German government bond yielding minus 0.28% is for us more a sign of capitulation by investors seeking shelter than a credible investment. Growth stocks are also seen as a safe haven against economic turmoil and their valuations have reached extremes compared to value stocks.

"Unlocking events could be progress in the trade negotiations, spending plans by the German government or more central bank measures to boost the economies"

However, this could rapidly change if our base scenario is proven right and we are in for a period of slow, however positive economic growth. If we would need to nail down the underperformance of European smaller value companies over the last 18 months to one factor, it is certainly German business expectations as can be seen from the graph below :

source: Bloomberg

As a matter of fact, investors have been extremely sensitive to the deteriorating business sentiment in Germany and have been dumping small cap value stocks as they are being perceived as the most cyclical part of the market.

However, we need to be aware that business sentiment can improve as quickly as it has come down. Unlocking events could be progress in the trade negotiations, spending plans by the German government or more central bank measures to boost the economies. Economic surprises also happen like for example the French manufacturing PMI this Wednesday that was much stronger than expected.

 If we are being proven right, growth investors are in for a rollercoaster.

 I wish you a nice weekend,

 Léon

 You can find this article on European Capital Partners' website in English.

Important notice: This document is published for information purposes only and gives the opinion of the author at the time of the publication. It does not constitute an offer to buy or sell financial instruments or investment advice and does not confirm any transaction unless expressly agreed otherwise.