LGT Private Banking House View

March 2024 - in a nutshell

In this month's House View, we review some of our "Outlook 2024" forecasts and take a look at the latest developments in the financial markets.In our Macro article, we discuss the challenges faced by the manufacturing sector in recent years, highlight the factors behind this development and share our outlook for this part of the economy.We also take a look at the outlook for US technology and Chinese equities, and review our positive view on bond proxies.

Data: 28 febbraio 2024
Autore: Gérald Moser, CIO & Head Investment Services EMEA
Tempo di lettura: 7 minuto

House View March Global Manufacturing — © Shutterstock

In this month’s House View, we are reviewing some of our "Outlook 2024" predictions and have a look at the latest developments in financial markets.

In our macro article, we discuss the challenges faced by the manufacturing sector in recent years. The decline in economic sentiment and manufacturing PMIs (Purchasing Managers’ Indices) has been severe, particularly in Europe. We highlight the factors behind this development and share our outlook for this part of the economy.

An improvement in the manufacturing sector, albeit from a low base, would be a welcome sign for equity markets, particularly the S&P 500, which is currently unusually dependent on the technology segment. The US technology sector has been the strongest driver of the S&P 500, with a few top stocks accounting for a significant portion of the sector’s performance. At the other end of the performance spectrum, Chinese equities have been the largest consensus underweight, but have recently shown some signs of life, breaking out of a downtrend channel. We discuss the outlook for both US technology and Chinese equities and review our positive view on "bond proxies", first mentioned in our "Outlook 2024".

In our investment strategy, we assess two of our convictions from the 2024 annual outlook report. The first belief was that growth would become the main driver of risk assets, overtaking returns. The second was that fixed-income markets would not experience another year of low returns. We remain convinced that both of our convictions will come true in 2024.

Speaking of fixed-income markets, we put the recent resurgence of banking stress into perspective with the apparent calm in international bond markets. For now, the market seems to view these events as isolated and continues to focus on the robust US economy. We also add our thoughts on the recent reassessment of central banks’ monetary policy, which is now much closer to our own forecasts.

Finally, in our currency view, we look at the Swiss franc and the Swiss National Bank’s shift in currency intervention. The SNB has taken a very pragmatic approach to its currency management, with a recent focus on the negative implications of a strong real effective exchange rate for the Swiss economy.

Macroeconomic environment

Global manufacturing sentiment witnessed a sharp two-year decline, with Europe experiencing a more severe and prolonged downturn than the US, as the industry faces both cyclical downturns and long-term structural challenges. Weak manufacturing growth results from high global interest rates, concerns over economic growth, and a considerable list of external headwinds impacting capital-intense business models. Meanwhile, the industrial sector shows signs of a hesitant stabilisation with relative improvements in stock market valuations and a recovery in optimism, underpinned by tentative signs of a stabilisation of sentiment.

Investment strategy

In our annual Outlook report released early December, we had highlighted four convictions for 2024: 1) growth will overtake yields as the main driver for risky assets, 2) fixed-income markets are unlikely to experience another year of low returns, 3) geopolitics will remain in the spotlight, and 4) uncorrelated assets will continue to be important to diversify a portfolio. Three months after publishing our convictions, we want to take the opportunitiy to make a first assessment on the first two statements as those can directly be observed in current market developments.

Equity strategy

In the US, industrial activity is showing signs of stabilising, while leading indicators in the euro-area manufacturing sector, the UK and Japan remain in recessionary territory. Meanwhile, the global industrial sector is already pricing in a solid recovery in the manufacturing sector, but it seems that these expectations are running a little too far ahead of reality. On the other hand, the defensive, qualitatively more stable sectors with above-average dividends - pharmaceuticals, consumer staples and utilities - which are regarded as "bond proxies", are boasting positive earnings expectations for the current year at valuations below the global equity index, which, in combination with expected interest rate cuts later in the year, should offer rerating potential. Finally, if we shift the focus to the east, Chinese equities lost 45% of their value between 2020 and 2024 and valuations and sentiment are depressed. Interestingly, Chinese equities have started to show signs of life on expectations of more concerted policy action. For investors with a high risk tolerance, Chinese equities may pose a tactical buying opportunity.

Fixed-income strategy

While credit risk premiums are moving in line with US economic data, the situation regarding key interest rates is much more volatile. Expectations of interest rate cuts by the end of 2024 have turned out to be too optimistic, or in other words too aggressive, as the market reaction over the past month has shown. Dovish market sentiment seems to have peaked and the narrative of high policy rates remaining at these levels for longer than usual is back. As we pointed out in early December, we believe that a rapid and significant easing of monetary policy is only likely in a recessionary environment. We therefore expect the ECB to kick-start a decisive cycle of monetary easing with a first step, while the Fed can afford to be more gradual given the strong economic data.

Currency strategy

The Swiss National Bank (SNB) played a key role in supporting the Swiss franc in 2023, but as the year unfolded, there was a noticeable shift in its strategy. Initially, the SNB actively purchased francs to combat inflation, but later, the focus moved towards addressing the challenges posed by a strong real effective exchange rate on the Swiss economy. The SNB’s evolving stance highlights a pivot in its approach to FX interventions, acknowledging their importance in maintaining economic stability and adjusting its actions to mitigate the negative impacts of currency strength, with evidence suggesting market interventions to manage the Swiss franc’s value.

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Risk information for single stock/single bond recommendations

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Reference regarding analysis history

If this analysis was made available to any issuers mentioned in the publication prior to its distribution or publication, no changes were made to the price or rating after the issuer’s feedback. Important references for Liechtenstein can be found in articles 3 to 6 FinMV [Financial Analysis Market Abuse Ordinance], for Switzerland in the Swiss Bankers Association Directives on the Independence of Financial Research, and for Austria in section 48 BörseG [Stock Exchange Act], the Austrian analysis principles of the Österreichische Vereinigung für Finanzanalyse und Asset Management [Austrian Association for Financial Analysis and Asset Management, ÖVFA] and the Austrian Society of Investment Professionals (ASIP) and the Standard Compliance Code of the Austrian banking sector. A history of all ratings and recommendations is available at your LGT relationship manager.

Essential sources of information

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Reference regarding valuation rates

Unless otherwise stated or specified, the rates used in the analysis are normally the share prices provided by the news agencies Reuters and/or Bloomberg at the close of the stock exchange of the domestic market of the analyzed security or the relevant principal market of this security on the respective local stock exchange on the eve of the day of compilation.

Explanation of investment recommendations for stocks

We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).

Reference regarding share valuation basis: The analysis compiled by LGT Bank (Switzerland) Ltd. are essentially based on secondary research relating to fundamental and quantitative analysis. Generally accepted valuation methods (valuation multiples, return figures, sector comparisons, comparisons with past valuations etc.) are used for this. The forecasts for the quantitative analysis are prepared with the help of mathematical-statistical procedures (see statements above concerning the analysis tool “theScreener”). Economic indicators such as interest rates, currencies, commodity prices and assumptions relating to the economy are included in the overall assessment. The mood of the market also affects the company valuation. Moreover, many of the approaches are based on estimates and expectations that may change quickly and without warning, depending on developments specific to the industry. Therefore, the recommendations derived from the analysis can also change accordingly. The investment judgements generally refer to a period of 6 to 12 months. However, they are also subject to market conditions and represent a snapshot of the situation. They may be achieved more quickly or more slowly or be revised upwards or downwards.

Explanation of investment recommendations for bonds

We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.

This publication does not constitute either an issuing or listing prospectus, nor any other kind of prospectus. This publication also does not constitute any offer for subscription or any other transaction or obligation.

Definition of rating categories of S&P and Moody’s which are relevant for us:

AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates

For more information on our methodology for bonds, please contact your LGT relationship manager or your local LGT Group company.

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Country-specific information

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This recommendation was prepared by LGT and not by an independent financial analysis department. Therefore this recommendation does not meet all the statutory requirements for guaranteeing the impartiality of financial research. The Swiss Bankers Association Directives on the Independence of Financial Research do not apply to this recommendation. Investments in structured products entail a wide range of risks. Investment decisions should therefore only be made on the basis of the valid prospectus or complete documentation following consultation with an expert. This does not constitute financial analysis within the meaning of the Liechtenstein Ordinance on the Preparation of Financial Analysis according to the Law against Market Abuse in the Trading of Financial Instruments.

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