What happened in the markets
Just like August, September started with a sea of red due to weak economic data in the United States, which sparked recession fears, again. Chip stocks fell more than 7 %, the worst day since March 2020, and the overall technology sector had its worst day since September 2022. Nvidia shares lost nearly 10 % on 3 September and erased $ 278 billion in market value, the largest single-day decline for any company in history.
The US presidential candidates met for their first (and probably only) debate, and Kamala Harris was widely regarded as the event’s winner.
The biggest event of the month was the decision of the US Central Bank FED to cut interest rates by 50 bps, bringing them down to 4.75 % - 5 %. Intense debates preceded the decision, with some calling for a strong move to avoid a recession, while others warned of an inflationary stimulus. Some market participants argued that the ‘FED Put’ is back, and markets responded positively to a pivot towards supporting economic growth over controlling inflation. The S&P 500 and many other equity markets ended the month near or at record highs.
In Europe both the European Central Bank and the Swiss Central Bank cut rates, as expected. Overall economic data was rather disappointing, and the French economy experienced a sharp post-Olympics slowdown. In Germany, the right-wing AfD (Alternative fuer Deutschland) achieved strong results in several state elections, while the governing German ‘traffic light coalition’ reached new record lows in an Insa poll where it only achieved 28 % combined, well below the 52 % it had reached in the 2021 elections. German consumer prices reached its lowest level since more than 3 years.
France finally managed to appoint a new government, which now has the challenge to manage a bigger-than-feared deficit. The bond market has sent a clear signal of nervousness, as the 5-year yield of French government bonds rose above the Greek ones.
In China, more disappointing economic data led to an unprecedented blitz of policy support for the economy. This gave a boost to the Chinese stock market, which experienced the biggest weekly gain since 2008, as well as to companies outside China with a significant exposure to the country, for example in the luxury and mining sectors. Time will tell if these measures will be enough to accelerate growth, but some structural problems remain. For example, deaths in the country outnumbered births by the largest margin in history after births fell to a record low in 2023.
Gold hit record highs and Silver hit the highest price in more than a decade while Iron ore tumbled to a 22-month low on signs of weakening demand. The oil price hit a new multi-year low as global oil demand fell to the lowest since the Covid crisis.
What happened in the fund in the last quarter
Payment solution provider Adyen was the best performer in the last quarter thanks to solid results and an improved communication of the management. Revenues in the first half of the year increased by 24 % despite a difficult economic environment, and probably most importantly, it looks like the big investments the company has made in the last quarters, mainly in new salespeople, are finally starting to yield results. It was always communicated that these investments are key to delivering on the company’s mid-term targets of accelerating revenue growth from low 20s in 2024 to high 20s by 2026, but investors clearly doubt(ed) this vision.
Lotus Bakeries, best known for its Biscoff cookies, was the second-best performer. This was after strong results for the first half of the year, with an astonishing revenue growth of nearly 20 %. This was well above estimates and driven by volume growth of more than 20 % for Biscoff. Not surprisingly after this strong result, management was a bit more cautious for the second half of the year, but nevertheless increased its investment program due to the continued good momentum. The most successful cookie brand in the world is Oreo, and Biscoff is trying to follow in its footsteps. Some analysts expect a growth rate of well over 10 % per year for the next 10 years, which explains why the valuation resembles a successful tech or luxury company. It is therefore no surprise, that over the last 2 years, more analysts recommended to sell the stock than to buy (while the share price doubled).
On the negative side, semiconductor stocks in general had a rough quarter. This has various reasons, which span from increasing doubts about the returns of investments in Artificial Intelligence or fears of tougher restrictions when doing business with China to a general weakness in end markets like automotive or industrials. Intel shocked the market with a big profit warning during the quarter, and for semiconductor equipment companies like ASM International, ASML or BE Semiconductor, especially Intel’s plans to cut its investments may dampen business prospects in the coming quarters. It is difficult to say how exactly this will play out, but ASML for example claims that the global number of chips being produced is crucial, not who produces them. Intel losing market share can mean, for example, TSMC winning share (which could lead to increased investments in new factories). And while Intel stopped or delayed plans for the construction of some of its projects, it may not be wise to stop investments in the newest technologies, as gaining an edge in these areas is probably the best strategy to survive.
Regarding the doubts on Artificial Intelligence, it is worth noting that Nvidia CEO Jensen Huang has made several optimistic comments recently, and said for example that companies get things done 20 times faster with generative AI. He reiterated his earlier comments that globally, $ 1 trillion of data centers are getting accelerated due to the advent of generative AI. Obviously, Mr Huang has to confirm this optimism in November again, when the whole world will focus on its results. Nvidia’s share price remains very volatile: it had over 24 trading sessions this year with more than a 5% gain or loss. In comparison, Microsoft and Apple, the only two companies valued higher than Nvidia, have registered just a pair of 5% or more daily moves this year, combined.
Looking ahead
At the beginning of Q4, apart from the economy, the focus will be on the US elections and the tensions in the Middle East. Regarding the elections, it currently looks like a very close race. And if we use history as a guide, October has always been a very weak month in election years (but at the same time marked the low point before a year-end rally).
After the election, the focus will turn back to the US economy. According to a recent fund manager survey, 79 % of global investors expect a soft landing in the US, while just 11 % expect a recession. Recession probabilities are diverging between asset classes though. Equity markets are hoping for a so-called soft landing, while bond markets are pricing in a high probability of a recession. Even after the 50 bps interest rate cut, the difference between the FED interest rates and the 2-year Treasury yields is the highest in over 3 decades. As usual, many market participants are trying to predict the future market development by trying to identify similar patterns in the past. The bears may want to hear that the last two times the FED's first cut was 50+ basis points : Jan 3 2001, S&P 500 fell 39% in the next 448 days, and Sept 18, 2007: S&P500 fell 54% in the next 372 days. The bulls may prefer a study by JP Morgan which said that over the past 40 years, the FED has cut interest rates 12 times when the S&P 500 Index was within 1% of its all-time highs. Each of these 12 times, the index was higher 1 year later and averaged a 5% return.
On the day of writing this article, MW GESTION ACTIONS EUROPE holds the following quoted securities:
- Adyen for 1,6% of its outstandings;
- Apple for2,4% of its outstandings;
- ASM International for 5,8% of its outstandings;
- ASML for 6,5% of its outstandings;;
- BE Semiconductor for 1,6% of its outstandings;
- Lotus Bakeries for 4,6% of its outstandings;;
- Microsoft for 3,7% of its outstandings;
- Nvidia for 3,6% of its outstandings;
Written on 9 october 2024
Communication-Marketing
The MW Actions Europe fund is a compartment of the Luxembourg SICAV MW ASSET MANAGEMENT. You should contact the fund management company MW GESTION or your financial advisor for more information.
Past performance is not a reliable indication of future performance. Past performance is no guarantee of future performance.
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