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06.09.2024
#EQUITIES

Equity Focus - September 2024

A Nightmare on Vol Street - What comes next?

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A foggy morning leads to a sunny day

Key Points

Earnings Season recap – The Q2 reporting season saw earnings reports generally better than expected, where EPS growth came in better than initially expected. Encouragingly, the US saw a broadening in earnings delivery beyond the Mag7. While earnings delivery in the US continues to be stronger than in Europe, the spread between the region’s EPS growth has narrowed further.

The crash that didn’t happen  – The markets were quick to recover from the yen-related flash crash. Interestingly, the Mag7 failed to reached new highs during the rebound. History tells us that future long-term performance, after such incidents, is usually above average.

The next few miles might still get choppy though – Markets tend to double dip after huge spikes in the VIX. This coincides with seasonal headwinds as the second half of September is the weakest period of the year and election years often experience a correction in October. 

The long-term picture still supports equities – While the short-term outlook may look bumpy, the long-term backdrop of falling rates in a non-recessionary environment still looks encouraging for equities. We would see any short-term weakness as a buying opportunity, especially in our favoured markets such as the EU + UK Equities, Japan and Small Caps. 

Main recommendations

Look for Japanese small caps as a way to diversify away from FX sensitive exposure while harvesting the potential of domestic economic reacceleration. High levels of cash allow for a growing shareholder return.

We downgrade Mexico to Neutral following the Judicial reform proposal the Executive sent to Congress. We believe replacing the judicial system should increase risk, Mexico's risk premia and limit Capex. That is a problem as nearshoring is reaching key bottlenecks.

EU Telecoms UPGRADE to Neutral: one of the most defensive sectors when policy risks and trade tariffs increase. We expect EPS  cuts to come to an end as previous investments in fibre are now generating free cash flow and EBITDA.

EU Travel & Leisure DOWNGRADE to underweight: The YOLO (You Only Live Once) effect is fading as the services demand catch-up effect comes to an end due to the rising cost of living. Earnings estimates continue to face downgrades. Sell into strength.

The key risks are that the markets start to reprice growth fears with central banks being perceived as “behind the curve”. Increasing policy uncertainty around tariffs could weigh on sentiment, too.