The last quarter of 2023 has ensured another “grand cru” year. Many reasons can be cited for this, but let us focus on the two most important ones.
- First, US economic growth in the second half of 2023 was much stronger than expected. You should be aware that the companies we invest generate 50% of their sales in the United States. This was confirmed for us once again when our companies announced their third-quarter results in October and November. These figures were good to very good, with very few disappointments. In other words, share prices are not falling in this environment; quite the contrary.
- A second, more important, reason has driven up share prices. Incidentally, this reason is also responsible for a major price increase in the bonds in which we invest on your behalf: specifically, the sharp fall in long-term interest rates. 10-year government bond yields in the USA fell from around 5% to around 4%. And Germany’s leading 10-year government rate fell from around 3% to around 2%. The reason for this decline is all to do with inflation, which has fallen significantly. This has led to speculation among bond investors who are convinced that the FED and ECB will cut their interest rates significantly in 2024.
All these issues have prompted us to make a final significant or substantial change. You may recall that we significantly increased the maturities of our bonds during the period when interest rates were rising. We are now doing just the opposite, taking advantage of the significant fall in interest rates to significantly shorten the maturity of our bond portfolio.
This type of contrarian management is really our trademark. We are more inclined to buy stocks and bonds when they are down, and sell stocks or bonds when they are up.
What is our outlook for 2024?
A great deal of uncertainty, as always. This means that we have to keep a close watch on issues such as:
- Are central banks really going to drop their interest rates significantly, as is anticipated at present?
- Will inflation continue to fall, or do just the opposite?
- Will economic growth remain stronger than expected, contrary to the consensus of opinion?
One point on which there should be no uncertainty: our governments will continue to engage in deficit spending. 2024 will be a year of elections in the United States and in Europe. Politicians are never bold in an election year. And they will do what they need to do, which is to get our public finances back under control.
In this geopolitical, monetary and fiscal environment, we will, as always, analyse our dashboard every day and ask ourselves questions including the following:
- What is going to happen to interest rates, credit spreads, expected inflation and our companies’ results?
- Where will opportunities present themselves due to daily, weekly, monthly changes in equity and bond prices?
And meanwhile, your bond and equity investments will slowly but surely be creating returns. Finally, it is also important to stick to a 5- to 10-year investment horizon, in order to protect itself from the inevitable intermittent volatility.
