Weekly Comment

It was recently announced that China’s economy advanced 5.3% annually in the first quarter of the year, a slight acceleration compared to the 5.2% rate of the 4Q23, and above the 4.6% expected by the consensus. Quarterly growth was 1.6% (vs. 1.2% in the 4Q23 and 1.4% expected). This result was driven in part by external demand, as export volume increased by 14% annually. However, as for the real estate sector, it continued to show a weak performance, after property investments declined by 9.5% annually in the 1Q24. The square footage of new commercial buildings sold fell 19.4% annually.

On the other hand, although the latest figures, corresponding to March, showed increases, they did not end up convincing, with industrial production advancing 4.5%, below the 6% estimate; while retail sales grew 3.1%, below the 4.6% forecast, and fixed asset investment grew 4.5% annually, slightly exceeding some expectations. Finally, the unemployment rate in major cities declined slightly to 5.2%, breaking a three-month streak of increases.

As can be seen, economic activity is showing divergent signals, with production growth stronger than consumption growth, and within fixed asset investment, real estate investment will continue to disappoint (mainly due to the problems faced by developers).

Under this mix of factors, the perspective that this economic performance would make the government comfortable with current policies is beginning to gain traction. Therefore, the impact of new stimulus (fiscal – monetary) would be reduced in the very short term, due to the pressure it could generate on banks and the additional pressure that the Yuan (CNY) could experience now that the Fed’s rate cuts could take longer than originally contemplated. However, the consensus baseline scenario still suggests that the economy could expand by 4.7% this year, which is in line with the government’s projection of “around 5%” growth.

China’s GDP growth

(Y/Y): Refers to annual growth

(Q/Q): Refers to quarterly growth

Source: Reuters

Understanding the dynamics of financial markets is crucial in the investment world, just as recognizing the psychological factors that influence our decision-making process. Behavioral finance addresses various biases and cognitive shortcuts that can lead investors to make poor decisions, impacting both short-term actions and long-term results. By becoming aware of these mental states and implementing strategies to mitigate their impact, we can improve our ability to make rational and disciplined investment decisions aligned with our financial objectives. In this context, we share some key points that can help mitigate these biases:

• Rationality vs. Loss Aversion: When facing potential losses, it’s natural to feel a strong emotional response. However, resisting the urge to make irrational decisions driven by fear is essential. Maintaining a long-term perspective and focusing on investment fundamentals can help navigate turbulent markets. Regularly reviewing your investment strategy ensures alignment with financial objectives and risk tolerance.
• Beware of Overconfidence: While confidence in our abilities can be empowering, overconfidence may lead to excessive risks and wrong decisions. Recognize that predicting market movements with certainty is impossible, necessitating a receptive and humble approach. Diversifying the portfolio and seeking objective perspectives from industry experts can mitigate overconfidence.
• Question the Herd Mentality: Following the crowd is tempting, especially in uncertain times. However, blindly following the herd can lead to unwise investment decisions. Cultivate an independent mindset, relying on critical analysis and research before making decisions. Evaluating information critically and seeking diverse perspectives are crucial for making justified decisions based on analysis and conviction.

In conclusion, understanding and managing behavioral biases is essential for making informed decisions in investing. Supported by a financial advisor, these skills become invaluable for developing and implementing strategies aligned with established objectives. Remember that investing is a long-term process, requiring discipline, patience, and a commitment to continuous learning.

Annual returns and intra-year declines of the S&P 500

Although historically there has been an average intra-annual decline of 14.2%, annual returns have been positive in 33 of the last 44 years.

Source: JP Morgan

The Consumer Price Index (CPI) experienced an increase of 0.4% this month, mirroring the rise seen in February but exceeding the anticipated 0.3% forecast. Consequently, this has elevated the annual inflation rate to 3.5%, compared to 3.2% in February, and slightly above the projected 3.4%.Upon examining the core components of the CPI, which exclude the volatile food and energy sectors, we observed a 0.4% increase, surpassing the expected 0.3%. This has resulted in an annual rate of 3.8%. The primary drivers of this month’s inflationary pressures were identified in the shelter and gasoline indices, which collectively accounted for over half of the monthly increase in the all-items index.

The energy sector experienced a notable revival, registering a 1.1% increase for the month, which corresponds to a 2.1% increase on an annual basis. Particularly, gasoline prices witnessed a monthly increase of 1.7%, culminating in a 1.3% annual growth. Concurrently, the food sector saw a modest uptick of 0.1% in March, amounting to an annual increase of 2.2%. It is significant to highlight that the cost of dining out surged by 0.3% on a monthly basis, resulting in a 4.2% annual escalation, while the prices for groceries remained unchanged. Moreover, shelter expenses sustained their ascending trend, making a substantial contribution to the monthly inflation surge with a 0.4% increase in March, equating to an annual rise of 5.7%.

The inflation rate has shown a notable acceleration since the beginning of the year, with persistent challenges in mitigating housing and shelter costs, further exacerbated by the recent pressures from the energy sector due to geopolitical tensions in the Middle East. In light of the March policy meeting, the Federal Reserve, along with several of its officials, emphasized the ongoing need to address inflation concerns. As such, it is anticipated that we will persist in a higher interest rate environment for an extended period before considering any potential reductions. Presently, the market consensus for the June policy meeting has significantly shifted, with a 79% expectation for maintaining the current rate, diverging from previous anticipations of an initial rate reduction.

Change (%) in the last twelve months in CPI and Core CPI

Source: U.S. Bureau of Labor Statistics

Monthly change (%) in CPI

Source: U.S. Bureau of Labor Statistics

Setting itself apart from other developed country central banks, the Bank of Japan (BoJ) decided to raise the short-term interest rate from -0.1% to a range of 0.0% – 0.1% in recent weeks. This move ended a 17-year era of negative interest rates, a situation unprecedented in recent history. Additionally, it ended its control of the yield curve (although it will continue to buy sovereign bonds) and its program of buying ETFs and real estate investment trusts (REITs).

In this context, the question arises: What structural changes have occurred in the country’s macroeconomic environment? After many years of fighting deflation, Japan has been experiencing inflation above the BoJ’s 2% target since April 2022, driven by wage increases not seen in decades, the rebound in the economy, and cost increases that local companies have been able to pass on to consumers after a long period of stable and declining prices. This mix of factors has allowed company profits to rebound. There is speculation that this change in the course of monetary policy is considered a legacy of the policies introduced by Japan’s late Prime Minister Shinzo Abe with the inception of ‘Abenomics’ over a decade ago to combat two decades of a deflationary environment. Much of the optimism that the country’s equities have registered in just over a year would be supported by all of these factors and the region’s longstanding underexposure.

It is worth noting that the reaction within the financial markets was moderate, with Japanese government bond yields experiencing minimal change, the Japanese yen (JPY) experiencing some depreciation, and Japanese equities showing little change.

Finally, the question is whether the Bank of Japan will raise rates again in 2024, and if so, what will be the pace of further increase? Currently, market expectations suggest that the short-term rate could reach 0.25% by the end of the year. However, the most likely scenario points to a broadly accommodative policy stance in the near term, with gradual rate hikes. To provide further clarity, the central bank will be watching the release of the April economic report, the conclusion of the spring wage negotiations, and the inflation release (April 19) before its next monetary policy meeting on April 26. In summary, this move by the Bank of Japan, although symbolic, should be interpreted as a first step on a long road to monetary policy normalization still to come.

MSCI Japan Index cumulative price returns (%)

* Cumulative price yields shown from December 31, 1980 through February 29, 2024 in Japanese yen.

 Source: Capital Group

Quarterly earnings season will begin in the coming weeks. The most recent report indicates that the analyst consensus anticipates annual earnings growth for the S&P 500 of 3.4% (YoY) for the first quarter of the year. If confirmed, this could mark the third consecutive quarter of YoY earnings growth for companies. However, this estimate is lower than the 5.7% YoY increase that analysts estimated at the beginning of the quarter.

Six of the eleven sectors are projected to report YoY earnings growth, led by the utilities, technology, communication services and consumer discretionary sectors. In detail, it highlights the expected 20.3% YoY earnings growth in the technology sector, where NVIDIA, Microsoft and Micron Technology have been the main contributors to this increase. In the case of the consumer discretionary sector, Amazon.com and cruise companies stand out as the main factors behind the expected growth of 15.3% YoY. On the other hand, four sectors are expected to report a YoY decline in earnings, led by the energy and materials sectors in the face of lower commodity prices. Finally, the industrial sector is expected to report an unchanged (0.0%) YoY earnings performance. 

At the revenue or sales level, the consensus forecasts a 3.6% YoY increase, which is below the average revenue growth of the last 5 years (+6.9%) and below the average revenue growth of the last 10 years (+5.0%). Nonetheless, if the 3.6% expected revenue growth were to materialize, revenues would accumulate fourteen quarters of positive growth. With this combination of factors, the net income margin for the quarter would be 11.6%, practically the same as in 1Q23, although better than the 11.5% average of the last five years.

Analysts continue to project that earnings and revenues for the full year could reach increases in the order of 10.9% and 5.1%, respectively. 

As is customary, JP Morgan will kick off on April 12; therefore, investors’ focus will be on the development of the season, amid a high level of optimism for the AI boom and the prospect that the first interest rate cutbacks could occur later this year. 

S&P 500: expected earnings growth for the 1Q24

Source: FacSet

The Federal Reserve (FED) made the unanimous and widely anticipated decision to once again leave the target range for the federal funds rate unchanged at 5.25% – 5.50%, its highest level in the last 22 years. Since July 2023, the FED has not changed the target range. This decision comes in the context of accelerating inflation, which reached 3.2% annually in February (3.8% annually excluding the most volatile components such as food and energy), along with an increase of 275,000 jobs (versus 198,000 estimated).

In this context, the statement described that the latest employment indicators have shown solid performance, while inflation remains elevated despite its notable reduction over the last year. Additionally, the statement reiterated that the Committee does not expect it to be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%, while it will continue to monitor the implications of incoming information for its future decisions.

On the other hand, the FED updated its macroeconomic perspectives, reaffirming that there will be 3 rate cuts of 25 basis points (bps) in the remainder of the year, unchanged compared to December’s estimate. This would bring the federal funds rate to 4.6% from its current average level of 5.4%. By 2025, it could end at 3.9% from 3.6%. As for the economic scenario, the new estimate underwent a notable upward revision, with GDP growth of 2.1% from the previously estimated 1.4% by the close of 2024. By 2025, strength could be maintained with growth of 2% from the 1.8% previously forecast. These scenarios place the economy at growth very close to its long-term potential of around 2%. The unemployment rate remained unchanged for both years at around 4%. However, estimated core inflation (excluding volatile components such as food and energy), as measured by the Core PCE, rebounded slightly to 2.6% from 2.4%, while the estimate for 2025 remained at 2.2%.

During his press conference, Jerome Powell confirmed that the federal funds rate has peaked. Additionally, he reaffirmed the commitment to return inflation to its long-term target of 2% and expressed confidence that eventually we will begin to see less pressure related to services and housing costs, which have been affecting core inflation. However, Powell noted that the timing of when this may occur is difficult to estimate.

Economic projections of Federal Reserve (March vs. December)

Source: Federal Reserve

With monetary policy generating much anticipation in the macroeconomic and financial outlook for this year, it is inevitable that investors will wonder how the presidential election might influence the Federal Open Market Committee (FOMC). Historically, the Federal Reserve (Fed) has not stood on the sidelines during election years but has continued to pursue its dual mandate of price stability and maximum employment, always seeking to maintain its independence from politics. Since 1980, the Fed has adjusted rates in every election year, except in 2012 when rates were at zero due to the recovery from the financial crisis.

The Fed lowered rates in five election years and raised them in five others. In 1980, the Fed raised rates by 1% (the federal funds rate, Fed Funds, had hovered around 17% earlier that year). It then cut back rates by 5.5% between February and July as the economy entered a recession. However, it resumed rate hikes to combat double-digit inflation between August and November (the Fed Funds closed that year around 19%). In 1984, the Fed raised rates by 2.25% in the second quarter as inflation rose and unemployment declined, only to reduce them by 3.5% in the fourth quarter as inflation stabilized. In 1988, the Fed began the year with modest rate cutbacks, then raised rates through August and resumed hikes after the election.

On the other hand, in 1992, it concluded the consecutive rate reductions initiated at the beginning of the 1990-1991 recession and implemented its last reduction in January 1996 after the soft landing that followed the 1994-1995 hiking cycle. Also, the Fed concluded its May 2000 hiking cycle, which began in 1999, noting that the stock market was peaking in March 2000.

In 2016, the Fed waited until after the election to hike once in December and continued with rate hikes in 2017 and 2018. It is also relevant that the Fed entered new monetary policy cycles that required an accelerated reaction, as in the severe recessions of 2008 and 2020, respectively.

In this context, it can be seen that the Fed continued to pursue its dual mandate goal, regardless of the political issue. This year is expected to follow a similar pattern, with a potential decrease in the Fed Funds rate as inflation approaches the 2% target, and the economy experiences a ‘soft landing.’

Note: A soft landing in the economic cycle is the process by which an economy moves from accelerated growth to slow growth, potentially reaching a stagnation phase, although it avoids going into recession.

Changes in monetary policy in an election year.

Net change in the federal funds rate, %.

Source: JP Morgan 

According to JP Morgan’s monitoring, both headline and core global inflation, excluding China and Turkey (where China is experiencing deflation and Turkey has a double-digit inflation rate), increased slightly by 0.3% on a monthly basis in January. While their annual variations continued to decline, headline inflation rebounded to 2.6% in the last three months up to January. Core inflation (excluding volatile components such as food and energy) also saw a slight increase, reaching 3%.

U.S. core goods prices, excluding autos (e.g., apparel, electronics, furniture, etc.), rebounded by 0.16% monthly in January, indicating the end of global goods price deflation in the first half of 2024. Another interesting point to note is that container shipping costs have surged by 150% since the beginning of December. However, supplier lead times still remain near historical levels, suggesting limited impact so far due to geopolitical tensions in the Middle East. Additionally, oversupply in China continues to exert downward pressure on manufactured goods prices.

Furthermore, there was a 0.5% monthly increase in services prices, driven by a 0.7% increase in the United States. Core services (e.g., shelter, medical services, education, etc.) increased by 0.46% on a monthly basis, marking their largest increase since December 2022, pushing the annual rate for the last quarter above the 4-4.5% range. Much of this rebound was attributed to the increase in the United States, reaching an annual rate of 6.2%, while services inflation in developed countries, excluding the U.S., remained stable at 3% annually. Particularly noteworthy was the continued pressure on shelter costs in the United States.

Global food inflation remained stable at close to 3.5% annually, although food inflation in emerging markets accelerated to 6.5% annually. The latter was due to a spike in the weather phenomenon known as “El Niño,” causing localized increases in fresh food prices in Mexico and Brazil.

With this mix of factors, core inflation (a metric of particular interest to central banks) at the global level is expected to rebound to 3.3% in the first quarter of 2024, compared to 3% in the fourth quarter of 2023. In this context, conditions suggest that monetary authorities, especially within developed countries, may temporarily postpone interest rate cutbacks, pending clearer signals of more significant cooling in key categories such as essential services and housing.

 Global Consumer Price Index (CPI) headline and core (excluding China-Turkey), monthly variation (%)

• The dotted lines refer to the three-month moving average. 

Source: JP Morgan

Recently, the renowned investor and Berkshire Hathaway Chairman, Warren Buffett, shared his annual 2023 letter with the company’s shareholders. Similar to previous years, the letter places less emphasis on ‘news’ and more on providing valuable reminders to investors on successful investment strategies, articulated in Buffett’s distinctive style.

Buffett on investing: “Although the stock market is considerably larger than in our early years, today’s active participants are neither more emotionally stable nor better educated than when I was in school. For whatever reasons, the markets now exhibit much more casino-like behavior than when I was young. The casino now resides in many homes and tempts its occupants daily.”

In this context, Buffett’s new letter reiterates some of the principles that have contributed to Berkshire’s success over time, including:

1.  Be clear about the purpose of investing.
2. Focus on quality investments, or as he would say in his own words, “wonderful businesses”.
3. Prefer companies run by good management teams. 
4. Stay for the long term, as patience pays off.

As part of his investment philosophy, Buffett highlighted the holding of two stocks that Berkshire could maintain indefinitely, namely Coca-Cola and American Express. These examples emphasize the importance of “sticking with a truly wonderful business” and how “patience rewards, and a wonderful business can make up for the many mediocre decisions that are inevitable.”

This year, Buffett emphasized two additional long-term investments that he expects Berkshire to hold indefinitely. The first is Occidental Petroleum (OXY), a key player in oil and gas and a leader in carbon capture initiatives. The second involves holdings in five large Japanese financial conglomerates: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. He highlighted their good management teams, as well as shareholder-friendly policies, including share buybacks when the price is right, reinvestment of profits to develop their businesses, and reasonable compensation for their executives.

Concerning the succession plan for Warren Buffett, Berkshire supporters have long assumed that Greg Abel, responsible for managing Berkshire’s non-insurance operations, could be the successor. Buffett all but confirmed this notion, noting that Abel “in all respects is ready to be Berkshire’s Chief Executive Officer (CEO) tomorrow.” However, investors may learn more on that topic at Berkshire Hathaway’s annual meeting on May 4th in Omaha. 

Finally, on a separate note, Buffett pays tribute to Charlie Munger, who passed away last November, crediting him with guiding Buffett (and subsequently Berkshire) to quality companies. Buffett acknowledges Munger as the “architect” of today’s Berkshire.

Main investments within the Berkshire Hathaway portfolio

Source: CNBC with Berkshire Hathaway data

* Holdings are as of December 31^st, 2023, as reported in Berkshire Hathaway’s 13F filing on February 14^th, 2024, except for: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, which are as of June 12, 2023. Also, Occidental Petroleum, which is as of February 5, 2024. At December 31 Berkshire held a cash and cash equivalents position of US$168bn. 

Note: The companies cited in the image do not necessarily constitute an active Axxets/Activest recommendation and are for informational purposes only.

With the launch of ChatGPT a little over a year ago, as well as other artificial intelligence (AI) tools, the exponential growth of these new technologies continues to arouse particular interest due to their contribution to generate important advances in productivity, benefiting various industries, reducing costs and generating efficiencies for both companies and consumers. 

In this sense, it is common to overestimate the effect of technology in the short term and, conversely, to underestimate its impact in the long term. Therefore, it is key to distinguish between what could be considered speculation and trendy, and what could be a real and lasting opportunity over time. As examples, the use of AI in the following sectors stands out:

• Healthcare

• Diagnosis and treatment planning: AI is used to analyze medical images, such as X-rays and MRI scans, for faster and more accurate diagnosis.
• Drug discovery: AI algorithms help to identify potential drug candidates and predict their efficacy.

• Finance:
  • Algorithm-based securities trading: AI is used to analyze financial markets and execute trades at optimal times.
  • Fraud detection: AI algorithms can detect unusual patterns in transactions to identify and prevent fraudulent activities.
• Retail:
  • Customized recommendations: AI analyzes customer behavior to provide customized product recommendations.
  • Inventory management: AI optimizes inventory levels and predicts demand, reducing overstocking or shortages.
• Manufacturing:
  • Predictive maintenance: AI analyzes sensor data to predict equipment failures and schedule maintenance before problems arise.
  • Quality control: AI-driven systems inspect products for defects on production lines.

As seen, the further development of these trends in technology and other areas appears to have the capacity to transform everyday life in the coming years, potentially generating opportunities for companies and investors who possess the virtue of adaptation and patience. 

A wide range of companies are harnessing the potential of AI

Source: Capital Group.