DPAM Artikel vom 12.12.2023
As the year draws to a close, the U.S. takes the lead with its strong economy and promising sectors. With reshoring and breakthroughs in tech & healthcare, we're at a pivotal point of change and opportunity.
The American economy's solo flight
In the grand theatre of global economics, the U.S. has been playing a surprisingly strong lead so far this year. Yet, the rest of the world isn’t quite following suit, with global growth looking increasingly one-sided. Investors are banking on a smooth ride —a ‘soft landing’ or ‘no landing’ for the global economy—but with central banks keeping a firm grip on interest rates, any prospect for multiple expansion is limited and hence the equity market’s further upside may need to lean heavily on earnings growth. Recent firm stances by the Fed and the ECB underscore this reality.
Interest rates loom large, and a recent spike in oil prices is testing many market forecasts, signalling potential turbulence ahead. China's economic struggles and policy tweaks add to the global unease. Government interventions in pricing practices to curb inflation are becoming more commonplace.
Valuation-wise markets are not cheap. The U.S. market stands at a pricey 20x P/E, buoyed by a surprisingly strong economy and the performance of mega cap companies. This contrasts with the more sober valuations of the broader market, which align closer with European levels. The U.S. forecasts a 12% earnings growth in 2024, but this seems ambitious. Europe, while cheaper at a glance, at a more reasonable 12x P/E, adjusts to a less attractive 15-16x P/E without the ultra-cheap sectors like energy and banking. With Russia’s invasion of Ukraine on its doorstep, a weak general economy (Germany is in an industrial recession) and ongoing energy transition challenges, Europe clearly isn’t out of the woods yet.
Policy & purchasing power — the economy’s twin lifeguards
With central banks pushing through aggressive policies, the world's economy has surprisingly not tumbled down the abyss. Why is this?
First off, fiscal policy has been the wind beneath the economy's wings, fueling both growth and inflation. Uncle Sam has been particularly generous, fattening American disposable income by 12%, while Europe, slightly more conservative, boosted theirs by 6%. All this while, the financial markets have been having a field day. In 2021, companies were on a borrowing binge, locking in low interest rates for the long haul.
So, why are consumers still flashing their cash? It boils down to jobs, especially for those earning modest paychecks. Their incomes have been on the rise, outpacing their wealthier counterparts. As supply chain snarls cause a backlog in business, companies cling to their staff like life rafts, thanks to a job market tighter than a drum. As a result, the sting of soaring interest rates takes a while to bite into the economy. Simply put, consumers will likely keep spending until unemployment hits critical levels.
Economic vanguards — which sectors stand out?
While most companies are tightening their belts, some have shown remarkable resilience. Like the 'Magnificent Seven' or old sectors such as telecom, insurance, technology, and healthcare stand tall as bulwarks against economic downturns. No matter the financial climate, people will always need to communicate, stay healthy, and keep the lights on. The insurance sector too has been surprisingly resilient. In this landscape of "higher for longer" interest rates, insurers, especially those in non-life categories, are finding a silver lining. Higher interest rates broadly mean they can expect better returns on investments, boosting their earnings and outpacing the costs of doing business.
On the flip side, several sectors are clearly more at risk. Those tied closely to the evolution of GDP –such as banks, energy, industrials and materials – are more vulnerable. And while energy is a special case with its political puppet strings, others, like food and beverages, have not benefitted from the shift to defensives initiated this summer and are currently among the worst-performing sectors this year. In terms of valuations, a bit of a seesaw is at play. Some sectors, like beverages, are looking tempting as their price-to-earnings ratios dip below 15-year averages. But food? That's still a pricey plate, and caution is the word of the day for names trading at elevated multiples.
On the industrial front, hope springs with mega projects and a brighter order book forecast for next year. In the tech world, while semiconductor companies face headwinds, AI supply chains gleam with promise, and in tech hardware, suppliers are picking up evidence of upward revisions to PC orders. This type of mixed outlook across industries is typical in a late cycle backdrop.
Market makeovers through thematic innovations
But it's not just sectors; some key themes have defined the market's narrative in recent month. Take GLP-1 drugs, tackling diabetes and obesity – a trend so significant it's reshaping the entire healthcare industry. Patients reported notable reductions in food consumption across the board thanks to the drugs, with a noticeable reduction in food intake during daily meals (-20%) and a significant impact on snacks and confections (-40%). With obesity linked to a myriad of health issues, the potential market for these drugs will likely broaden, expanding the addressable market beyond the current estimates of more than $100 billion for obesity alone. The potential impact of this drug is so vast that it has been felt across multiple sectors, from medtech to consumer staples - though the jury is still out on who will be the ultimate winners or losers of this medical breakthrough.
Then there's AI, a game-changer in its infancy. With data as its lifeblood, the AI revolution favors the giants who can amass and harness it – think of Meta, Apple, Google, Tencent and Alibaba to name but a few. In years to come, AI-enabled chip production will likely be in high demand, meaning that today’s major chip makers will be important players in the AI revolution. In other words, the nature of machine learning and its data requirements imply high barriers to entry for quantum AI applications. If this is the case, a significant share of profits might be concentrated among a few large corporations. And while semis and hardware reap the immediate rewards, healthcare and finance may well join the party as AI matures. Keep your eyes peeled for opportunities, but don’t discount the potential impact on data safety, workforce impact, machine dependency and even geopolitical meddling.
Homeward bound — reshoring of global supply chains
And finally, let’s not forget the ongoing geopolitical dramas, like the Russia-Ukraine conflict and the recent upheaval in the Middle East. These don't just make headlines—they tangle up supply chains and impose trade barriers, reshaping the equity landscape. Europe, ever cautious, is shoring up its wind industry against a backdrop of uncertainty with China, illustrating a broader trend: countries are knitting their supply chains closer to home, seeking refuge in political allies and bulking up domestic security. And it’s not just about fortifying borders—it's a strategic chess move to keep technological crowns and diversify the board.
The reshoring wave is hitting U.S. shores with electric verve—electric vehicle batteries are leading the charge back home, followed by transportation equipment, which is revving down on foreign direct investment due to pandemic-induced roadblocks and semiconductor crunches. The reshoring of electrical equipment has surged from a mere 3% to a whopping 44% of job announcements. Computers and electronics aren't far behind, riding the wave of solar panels, robotics, drones, and, crucially, semiconductors—poised to require expansive domestic markets for long-term success.
Not to be outdone, the chemical sector, fueled by pharmaceuticals, renewable energy sources, and essential battery components, is shifting gears. High gas prices and shortages are rerouting petrochemical refining to U.S. shores, promising a robust future for industries like plastic processing. The electric and semiconductor sectors are the twin engines powering this reshoring movement, charting a course for financial landscapes transformed by a return to homegrown production.
As the curtain falls on this economic narrative, the U.S. economy's resilience offers some hope in an otherwise unsteady world. With a vigilant eye on interest rates and oil prices, investors are prepared to face headwinds, though the resilience of some dynamic sectors are charting a hopeful course ahead. As tech titans and health heroes reshape the financial landscape, some traditional industries will have to reinvent themselves in the face of these shifting market conditions. Additionally, the reshoring of supply chains is likely to accelerate these trends, ripe with both challenge and opportunity. Looking ahead, the path is clear: embrace innovation, adapt to change, and be open to the new horizons of a world in economic flux.
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