This time it is not different.
Carta GENER 2024 - Alkimia? - CAT
Carta GENER 2024 - Alkimia? - ESP
Carta GENER 2024 - Alkimia? - FRA
Financial markets have started 2024 with the same dynamics they closed the previous year: seemingly robust North American macroeconomic figures, upward-trending markets primarily driven by technology (with the usual protagonists), and a certain consensus that central banks will be able to achieve a soft landing or "immaculate disinflation." Apparently, the economy is increasingly close to declaring its victory over inflation without anything breaking, despite interest rates being broadly restrictive for the economy. A narrative framed within a Goldilocks scenario, where markets are already pricing in aggressive interest rate cuts due to lower inflation, while the economy does not cool enough to impact corporate profits. We are more skeptical about it, as we see reasons to be more concerned about the future.
Returns main markets: 31/12/23-31/01/24
Source: Bloomberg
MSCI World started the year with a 2.9% increase, driven especially by large technology, telecommunications, and financial companies. Once again, large-cap companies are outperforming small ones, while traditionally considered value sectors (such as materials or energy) have lagged. Fixed income has begun 2024 with slight losses despite positive recent readings on inflation figures. These figures have not been affected yet by the tumultuous situation in the Red Sea, which already threatens to disrupt global maritime transport and the flow of goods. Currently, traffic through the Suez Canal has fallen by 64% year-on-year compared to the previous December, while fuel and insurance costs are rapidly increasing.
Nevertheless, the "7 magnificent" companies in the S&P 500 have continued their multiple expansion at the beginning of this year. But even more surprising is that since 2010, international equities have only managed to surpass those of the United States in two years (2017 and 2022). Beyond the creation of technological oligopolies that accumulate unmatched competitive advantages, it is necessary to reflect on the factors that would justify this superiority over other markets and whether these factors will persist in the future.
Source: BofA Research
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A first factor that we have already mentioned in previous letters is the strong expansion of public spending, which has acted as a counterweight to restrictive monetary policy. In the past year, many market participants have underestimated the resilience of the North American consumer, with the essential role of direct transfers standing out. However, the debt stock continues to increase at a dizzying pace, and it is expected that treasury issuances will almost double this year compared to 2023. It is not at all clear that the private market, as the year progresses, will be able to absorb this amount of debt with a central bank that, through Quantitative Tightening, is de facto also a net seller of US debt. In our opinion, this pace of public spending is not sustainable. The competition to capture available liquidity in the market will gradually gain prominence in the evolution of interest rates, and this could be a point of fragility that needs reflection when constructing portfolios.
US Treasury Bond Issuances: Expected increase to around 1.9 trillion dollars by 2024.
Source: Reuters
Secondly, the significance of the energy revolution in the United States and the impact of shale oil on its economy are often overlooked. A differentiating factor in the fight against inflation has been the energy sovereignty of the country, a key point compared to previous stages. Considering the recent enormous geopolitical conflicts, the stability in the price of energy cannot be understood without highlighting how the United States has already become the world's leading oil producer (16% market share), and a net exporter that has helped stabilize the global energy price. Without this structural change, the Federal Reserve would have had a much more challenging time managing monetary policy, and the peak of interest rates might have possibly been even higher.
Energy Independence of the United States: Evolution of production and exports.
Source: BofA Research
This increased influence of the United States on global stock markets has come at the expense of the rest of the world, especially impacting emerging markets. A growing discrepancy, particularly when viewed from the perspective of GDP evolution: if in December 2009, the GDP of emerging markets accounted for 31% of the global total and their stock markets represented 15%, today the GDP share has increased to 42%, but the share of these same stock markets has declined to 12%. We are convinced that in the next 10 years, this trend should tend to reverse, not exacerbate.
Emerging Markets versus the rest: Evolution of the global weight in % GDP and stock markets.
Source: GQG Research
The market is not rewarding the regions and companies leading global growth. How long can this situation last? We don't know, but we are clear that the risk-return balance is increasingly favorable (and conversely, less favorable in developed countries). Therefore, we consider that the asymmetry between the two is becoming harder to ignore.
The construction of this type of imbalance is almost always gradual and with an abrupt ending. As a curiosity, the combined weight of the "7 magnificent" companies already exceeds the combined weight of the economies of Japan, Canada, and the United Kingdom. In the short term, it suggests that the opportunity lies with the former, but we cannot help but feel increasingly tempted by the latter. Because nothing goes up or down indefinitely, and even though it may be tempting to think that "this time is different" (the most dangerous phrase in the investment world according to John Templeton), if anything, the history of markets proves that, in the end, it is never different.