We don’t expect central banks to cut rates before the second half of 2024.
What is your central economic scenario for the next few months?
Eleanor Taylor Jolidon: As regards the United States, we are leaning towards a scenario in which the economy slows but avoids recession. Consumer spending will remain robust because of jobs and real incomes, and the investment cycle should turn upward again. In the eurozone, we expect limited growth, with Germany remaining weak in early 2024.
What about interest rates?
E.T.J.: We don’t expect central banks to cut rates before the second half of 2024. Initially, they need to move from a restrictive monetary policy to a neutral one, before turning accommodative. We think that the markets are getting ahead of themselves in anticipating that final stage. In our view, we will have to wait until the second half of 2024 to see rate cuts, which could amount to 100 basis points or slightly more in the US and 50 or 75 basis points in Europe.
Are you confident about future movements in equity markets?
E.T.J.: There are several reasons behind the recent market rally: confirmation of the soft landing in the US and lower inflation, less hawkish comments from central banks, and falling commodity prices. The markets are right in terms of direction, but not necessarily in terms of extent and timing. We don’t expect earnings multiples to rise in 2024 and market performance is likely to be driven by growth in earnings per share due to the rebound expected in 2024. However, the consensus forecast is for markets to rise 12%, which is too optimistic in our view. We are expecting a 7% gain.
Do you still favour growth stocks in the tech sector?
E.T.J.: Our strategy is based on companies that create value and outperform their market, via a high, stable cash flow return on investment (CFROI - source : UBS HOLT). In our view, there is a good correlation between a company’s CFROI and its long-term share-price performance. Strategically, therefore, we are remaining invested in tech stocks. They will continue to make up a significant proportion of our portfolio. The “Magnificent Seven” – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – are driving returns in global equity markets. The tech sector remains attractive in 2024, but not all of the Magnificent Seven have the high, stable CFROIs we are looking for. We expect that to continue in 2024.
What does your CFROI strategy produce in terms of investments in individual companies?
E.T.J.: The correlation between CFROI and relative returns can be seen at the individual company level: the share prices of companies with high, stable CFROIs outperform over the long term. Roche has done better than Novartis in the long run: Roche’s CFROI is higher than its cost of capital, whereas the reverse is true for Novartis. In general, we like companies that generate strong growth, are capable of maintaining a CFROI higher than their cost of capital, and are in a recovery phase.
