While economic growth and growth expectations for the US are leveling off slightly, the European economy appears to be strengthening. A unique moment lies ahead: the European Central Bank (ECB) may pre-empt the Federal Reserve (Fed) with rate cuts.
“This scenario offers buying opportunities on both sides of the Atlantic,” said Iris van de Looij, head of investment and client solutions at InsingerGillissen, the Dutch subsidiary of Luxembourg-headquartered private bank Quintet. “On balance, we are more positive on European equity markets. Valuations are a lot more attractive, and we see improvements in several forecasting indicators.”
Slight overweight in European equities
InsingerGillissen recently increased the weighting of equities in its management portfolios, a move also seen among other Dutch banks in recent weeks and months. “Late last year and early this year, we still assumed a recession scenario for Europe, with a corresponding underweight in European equities. We recently reduced that and now have a slight overweight of 1 percent in equities,” Van de Looij explained. Of these equities, a 3 percent position is reserved for small caps, two-thirds of which are US small caps.
However, the private bank believes it is too early for a “firm” overweight in equities. Regarding interest rate cuts, it remains a matter of “seeing first, then believing.” “Small caps may perform better if their funding costs fall due to lower interest rates. But those interest rates need to come down first,” said Van de Looij. Another reason for caution is the high valuation of many companies, particularly in the US.
Economic outlook
Whether these high valuations will persist remains uncertain. InsingerGillissen noted that growth forecasts for the US are softening slightly, with expectations of 2.2 percent by the end of this year, while forecasts for Europe are strengthening to 0.9 percent by year-end. Van de Looij describes this as “a particularly interesting phase” in the global economy’s development. “It may be early to speak of weakening US growth, but for Europe, the sun is certainly shining again,” she added.
The general market expectation is for the ECB to implement its first rate cut in June, with InsingerGillissen predicting one or two more cuts to follow in 2024. For the US, the bank anticipates one or two cuts this year, especially as inflation remains somewhat higher there. “For the eurozone, we expect inflation to be 2.4 percent by the end of this year, but for the US, we anticipate 2.8 percent by the end of 2024. In the services sector, prices continue to rise and US consumer spending remains strong. In Europe, energy prices were the main cause of inflation, and they are currently a lesser concern.”
Geopolitical factors and market volatility
Energy prices, largely dependent on geopolitical factors, are certainly being taken into account by InsingerGillissen. Such factors could potentially lead to more market volatility, prompting the bank to opt for a broader spread in its portfolios. “Both in asset classes and regions, we opt for more diversification. If turmoil arises somewhere, we have more opportunities to absorb it than if we were less diversified,” said Van de Looij.
There is no need for hasty decisions, she believes. “Geopolitics only have a real impact when they also affect the economy. With an election victory, for instance, it’s about what you see reflected in new tax measures. There is always a lag in that.”
The outcome of the US presidential election in November could impact companies’ prospects in healthcare and tax policy. In the shorter term, it is about volatility. Van de Looij concludes, “We expect the US election campaigns to intensify around the conventions, creating more turmoil and volatility in stock markets.”
This article originally appeared in Dutch on InvestmentOfficer.nl.
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