European espresso: the rate-cutting cycle could be good for European equities
As part of our Espresso series, providing an expert blend of views on European equities, Portfolio Manager Robert Schramm-Fuchs explains why he believes a trend of fiscal and monetary easing measures globally could be positive for European equities.
3 minute watch
Key takeaways:
- Recent weeks has seen significant market-moving changes, with important monetary and/or fiscal policy easing changes in the US, Japan and China.
- Changes in the US and Japan took pressure off the Chinese central bank, which responded with a co-ordinated range of monetary and fiscal measures, and guidance on further plans.
- We think that is great news for European markets, which have a greater exposure to global factors, versus domestic demand. A co-ordinated global macroeconomic cycle upswing could represent a healthy tailwind for European equities.
Hi everyone. Now we thought it was worthwhile doing a quick video because we have had significant market-moving events in the past few weeks. Strangely, they all come from other parts of the world, but they mostly affect the European equity market.
Yet the US Federal Reserve bank initiated a significant interest rate cutting cycle, with guidance for more than the 50bps cut, and we had the Bank of Japan easing off its aggressive rate hike cycle guidance. These two things are actually the most important for China to orient its monetary policy on. Taking the pressure off like that gave the Chinese central bank much needed breathing room to initiate monetary easing, without worries about capital outflows or undue currency depreciation.
Consequently, without delay this week, China is following a number of monetary and fiscal easing measures. Now many market participants are saying this won’t be enough for the Chinese economy, but we disagree. Because we think it is quite rare to see a simultaneous cut of all the policy interest rates, and the required reserve rate (which is essentially how much lending banks can do). It is rare to see such a large magnitude of cuts. Thirdly, it is rare to see such unusual guidance on further policy measures to come.
Moreover, it is now followed by fiscal policy measures. This coordination between monetary and fiscal is also something we haven’t seen in recent years. We had the financial cash handout to poor people. We had a number of property market loosening restriction measures. There has been easing in local government bond issuance measures, purchase commitment for the stock market, recapitalisation investment into banks, etc. Overnight, Chinese state media reported of further measures that are expected over the coming weeks.
Now we think that is great news for European markets. And the reason is that European markets are essentially driven by more export-oriented, more by what is going on in the rest of the world. It is just a much higher exposure of export versus domestic demand. And typically, European equity markets tend to do best (ie. see a supportive market environment) when we are in a more co-ordinated global macroeconomic cycle upswing, that we think we might be on the cusp of right now.
Please note: Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Basis point (bps): One basis point equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
Fiscal policy: Describes government policy relating to setting tax rates and spending levels.
Macroeconomic: The domain of large-scale factors related to the economy, such as inflation, unemployment or productivity. A macroeconomic upswing would be one where indicators are improving across a range of broad metrics, generally leading to more positive sentiment.
Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money. Monetary stimulus, or ‘easing’ refers to a central bank increasing the supply of money and lowering borrowing costs.
Rate-cutting cycle: The part of the monetary policy cycle when central banks are cutting interest rates.
Rate hike cycle: The part of the monetary policy cycle when central banks are increasing interest rates.
Reserve rate/ratio: A regulatory requirement typically imposed by a central bank that sets the minimum amount of cash reserves that a bank must hold relative to the amount that it lends. It is a monetary policy tool used to increase or decrease the money supply, as well as to ensure that banks retain sufficient money on hand to meet the needs of depositors.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund involves a high level of buying and selling activity and as such will incur a higher level of transaction costs than a fund that trades less frequently. These transaction costs are in addition to the Fund's ongoing charges.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund involves a high level of buying and selling activity and as such will incur a higher level of transaction costs than a fund that trades less frequently. These transaction costs are in addition to the Fund's ongoing charges.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
3 minute watch
Key takeaways:
- Recent weeks has seen significant market-moving changes, with important monetary and/or fiscal policy easing changes in the US, Japan and China.
- Changes in the US and Japan took pressure off the Chinese central bank, which responded with a co-ordinated range of monetary and fiscal measures, and guidance on further plans.
- We think that is great news for European markets, which have a greater exposure to global factors, versus domestic demand. A co-ordinated global macroeconomic cycle upswing could represent a healthy tailwind for European equities.