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Market Insights – September 17th, 2018

Weekly financial & economic analysis.

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Essentials

Retails sales in China were up 9% year on year in August, and manufacturing output rose 6.1%. Both of these figures beat the forecast – a sign that the Chinese economy is stable. Infrastructure spending, however, continued to slow but should bounce back in the coming months as lending conditions loosen.

At its meeting last week, the European Central Bank confirmed that it would be stopping its quantitative easing programme at the end of the year. Mr Draghi has not let geopolitical tensions change his view of the eurozone economy, mainly because domestic demand is holding up well. In fact, Mr Draghi even appeared more confident about the gradual uptick in inflation.

Unsurprisingly, the Bank of England kept interest rates unchanged at its meeting last week. Despite the recent improvement in economic newsflow, its outlook remains cautious, primarily because of Brexit-related uncertainties and the possibility that the UK parliament could throw out any deal with Brussels.

Inflation more dormant than resurgent ten years after the Lehman collapse

Exactly ten years ago the financial world awoke with the worst possible hangover. Over the previous weekend, the US authorities had agreed to let the country’s fourth largest investment bank go under. Lehman Brothers, which was bogged down in subprime debt, could no longer meet its commitments. Systemic risk had risen sharply, and the entire financial system was about to collapse, freeze up and plunge the world economy into the longest recession of the post-war period. In the months that followed, governments and central banks the world over worked night and day to prevent the world from entering a long-lasting depression. Despite being slow to pick up and some occasional dips – such as the crisis that affected the eurozone between 2010 and 2012 – the world economy has since returned to growth. But there have been some major disparities, with most countries still lagging far behind the world’s two main drivers of economic growth – the USA and China. Ten years after the crisis, we should be happy that deflation – a central banker’s worst nightmare – did not set in. Getting rid of deflation is no easy task, as economic agents tend to put off purchase and investment decisions in the hope that prices will fall even further. While it’s true that deflation was avoided, the aggressive stimulus policies that were adopted failed to spark the expected rise in inflation. After a decade of rock-bottom interest rates and quantitative easing, prices are still very low across the board, mainly due to major structural changes, such as the rise in online shopping, automatisation and robotisation. In Europe and Japan, for instance, core inflation remains below 1% year over year. Only the USA’s inflation figures seem to be anywhere near normal, mainly because the economy is close to full employment, which has prompted a rise in wages. But with the core CPI coming in at 2.2% year over year in August, compared with 2.4% in July, inflation figures are below expectations. Could it be that the price rebound has come to an end? If a slowdown sets in, the Fed is unlikely to try and rein in growth and the US stockmarket. And if that is the case, this unusual macro cycle, which has lasted since the 2008 recession, could keep going a bit longer.

Health care – a defensive growth sector

As the end of the macro cycle inexorably approaches, we think health care is a sector worth investing in. It is a defensive sector that is weakly correlated with macroeconomic ups and down, and more importantly, it offers attractive growth prospects. Life expectancy is constantly on the rise, and the population is ageing, particularly in developed countries. This has created a surge in health-care spending. Companies in this sector will therefore have to develop new technologies and tools in order to meet the demand for new, innovative treatments, while at the same time reining in the cost of health care.

We are therefore getting ready to launch our new theme-based equity basket – the Piguet Galland Disruptive Healthcare certificate. This certificate, which will be actively managed, will invest in around 30 groups that are meeting these challenges through disruptive technologies and developing the health care of tomorrow. Medical robotics, gene therapy and telemedicine are just some of the areas in which the companies making up the certificate are active. We will focus on small and mid caps, which, in addition to offering solid growth prospects, could be bought out by large pharma conglomerates that are struggling to find new growth drivers.

 

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