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September 30, 2024

BILBoard

BILBoard October 2024 – Harvest season

Executive Summary

As autumn approached, we saw increased volatility on capital markets. Bad days were swiftly followed by significant rallies, and like the leaves currently on the trees, we had a varying mix of red, green, and amber on our screens. For the month of September as a whole, however, the general direction was still positive. In keeping with the season, we decided to harvest some of the gains generated over the course of the year in the equity segment of portfolios.

This decision was based on the fact that we expect volatility to continue in the months ahead. Markets are still trying to ascertain whether the Fed’s bumper rate cut will be enough to usher in a soft landing and, as such, emotions may be high when economic data is released, resulting in exaggerated market moves. At the same time, the US Presidential election is heating up. As polls shift, markets could also swing, especially given that the two candidates have very different agendas.

Like shoppers saving up for Black Friday, selling some of our holdings means we have cash at hand to seize opportunities that expected volatility might present in the months ahead – especially in the US equity space.

The Macro Context

“Autumn carries more gold in its pocket than all the other seasons”, American author Jim Bishop once wrote. When it comes to the US economy, one of the key issues is that consumers don’t have many dollars left in their pockets. Excess savings from lockdowns are a distant memory, credit card debt has soared, and delinquency rates are elevated. This is watch-worthy because consumption is the primary growth driver, accounting for around two-thirds of activity. If we don’t see any further cooling in the labour market, consumers are likely to continue spending on the belief that future income streams aren’t under threat. However, if the labour market continues to deteriorate, spending could dry up and the coveted soft landing could run into difficulty. Fully aware of this, the Fed lowered its key rate by 50 basis points to a range of 4.75 to 5% in September. It was the first rate cut in more than four years and signaled a pivot from monetary tightening to a policy of monetary easing. The question now is whether the Fed is too late, or if its actions will bolster the economy and corporate earnings growth. Until there is more certainty on this point, market participants will be particularly sensitive to any signs of economic softness.

The Presidential election on November 5th is fast approaching. Patterns of a “Trump trade” and a corresponding “Harris trade” are emerging. The former is campaigning on low taxes, low regulation, low energy costs and higher trade tariffs. Potential beneficiaries are perceived to be big oil, financials, and small caps (which tend to be domestically focused). Input duties as well as a tougher stance on immigration could be inflationary, which in turn could lead to higher long-term yields and a steeper yield curve. Harris has discussed higher corporate taxes, tax credits for lower middle-income families, and a Federal ban on grocery price gouging. Continuity is expected when it comes to the Inflation Reduction Act, launched by Biden. Consumers, renewable energy companies and EV makers are expected to be the key beneficiaries. Health care providers could potentially suffer from Harris’ plans to expand Medicare and target drug price reform. At the time of writing, Harris was slightly ahead of Trump in the polls (48.4% to 45.8%[1]) though the situation continues to evolve, and no definite conclusions can be drawn.

In many parts of the Eurozone, including Luxembourg, it’s hard to believe that Autumn has already arrived, given that we were somewhat cheated out of a summer this year. There are parallels to be drawn with the economy. While all signs pointed to an economic upturn at the start of the year, the sun failed to shine on the bloc and the economy remains stuck in the mud with little sign of improvement. While service-oriented Southern economies have held up relatively well, malaise in the manufacturing sector is weighing heavily on the European economy, with Germany re-entering contraction territory in Q2. An anticipated upturn in consumption has been slow to materialise, despite rising real incomes in key economies. The ECB has indicated a gradual rate cut campaign given the embedded stickiness in inflation prints. This is largely due to the service sector, where uncomfortably high wage growth is pushing up costs. Unemployment remains at a record low of 6.4%.

Looking to China, the macroeconomic situation continues to be challenging. Consumption remains very weak, leading the country almost to the brink of deflation. The PBoC has unveiled a broad package of monetary stimulus measures in an attempt to revive activity, including rate cuts, reduced reserve requirements and additional support to the property sector. Direct measures aimed at boosting consumption are perceived as the “missing ingredient” by some analysts.

Investment decisions

As part of our most recent asset allocation, we trimmed exposure to both US and European equities. Globally, this leaves us slightly underweight equities, with a modest overweight to the US. We are slightly positive on Emerging Markets ex-China, and underweight on Europe, Japan, and China.

The proceeds from the sale of those equities are being held in cash but we aren’t squireling it away and entering hibernation. We are actively seeking opportunities to exploit volatility that may arise, in order to identify opportune entry points – especially in US equities where earnings growth is holding up and where the expectations hurdle for future results has been lowered.

In terms of currencies, we lowered US dollar exposure within portfolios (the proceeds of the aforementioned trades are held in euros and we also applied currency hedging to 2 percentage points of our US equity exposure in each risk profile). The greenback recently touched a 14-month low against a basket of currencies and further weakening is possible: though the Fed is unlikely to sustain a pace of half-point cuts, it is still looking to ease policy faster than the ECB, which would weigh on the USD, all else equal…

Looking at sectors, we upgraded US Consumer Discretionary from negative to neutral. While questions remain about the long-term stamina of US consumers, in the near term they have shown resilience in against high rates and elevated prices, with spending rising at a generous 2.9% in Q2. Spending could be supported in the near-term by the fact that mortgage rates are now falling. Consumers will also feel the benefit of lower oil prices, given the US’ firmly ingrained driving culture. Gas prices have plunged as demand dropped at the end of the busy summer travel season and despite ongoing geopolitical risks. In some states and at some gas stations, prices have fallen below 3 USD a gallon, the lowest level in more than three years.

To recap our other sectoral preferences, we continue to favour IT (market positioning is now less crowded), Utilities, Real Estate, US Communication Services and European Pharma.

In the Fixed Income realm, we favour quality investment grade, which remains in a sweet spot with an economy that is neither too hot nor too cold. We continue to have only light exposure to Sovereigns, as we feel rate markets are vulnerable to a pull-back as market participants remain far more dovish than the Fed in their expectations for rates this year and next. Uncertainties regarding budget deficits in the US and Europe might also re-appear in the coming months, with neither US Presidential candidate having done much to alleviate concerns and the French government yet to approve its budget. In terms of duration, we’re focusing on the intermediate part of the curve, seeking insulation from potential volatility on both the short-end (everchanging expectations about monetary policy), and the long-end (shifting views about debt, growth and inflation).

Whether the markets are experiencing autumn, winter, summer, or spring-like conditions, our aim is to capture performance for our clients with a four-seasons approach. More specifically, this means being invested across the course of the cycle, and adjusting where required in order to take advantage of short-term opportunities.

[1] According to fivethirtyeight as of 26/9/24

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

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