“In the fog and rumours of the market, you have to be able to distinguish the true from the false”
In his regular presentation at the beginning of May, Christopher Dembik, Investment Strategy Adviser at Pictet AM, gave an analysis of the economic data, with indications of the strategy that may currently be adopted in the markets.
In the United States, as spring draws to a close, the main active buyers in the equity market are retail investors. Institutional investors are still holding back, probably waiting for a little more visibility, as are hedge funds, which sold technology stocks in January. These same hedge funds sold off gold for the fifth week in a row at the beginning of May. Note that statistically, May is not a ‘good’ month for the stock market (the average historical performance is negative). Christopher Dembik also warned that August could become a dangerous month, as the slightest piece of economic or geopolitical news could have an amplified impact (as has happened several times in the past), with trading volumes lower than normal.
In the current market atmosphere, the 10-year Treasury bond rate is one to watch like milk on fire. Currently at 4.44% (12/05/2025), it remains on track but should not exceed the fateful level of 5%, which could be devastating for the equity markets. In an erratic move at the start of the year, the yield on these same 10-year Treasury bonds briefly jumped to over 4.8% in a tumultuous market, sending shivers through the equity markets. Several explanations had been put forward for this surprising move, which came out of nowhere. “You have to be able to distinguish the true from the false,” moderates Christopher Dembik. “At this stage, there is nothing to suggest that a major easing by a holder of the US Treasury bond (China, Japan, etc.), as feared by operators, is behind this movement. The market is still torn between rumours and rumours, many of which are unfounded or false,” added the strategist from Pictet AM.
Another point to keep an eye on over the next few weeks is liquidity, which has fallen to a five-year low for euro/dollar options. Without liquidity, the market can experience erratic movements in currencies and cause uncontrolled waves in the markets.
Bearing these observations in mind, it should be stressed that the latest downtrends have brought the price/earnings ratio substantially back towards its long-term historical average (US indices). Some stocks have already reached their average. For example, the price/earnings ratio for AMD (semiconductors) has fallen to 14 (at the beginning of May), a level which has proved to be an entry point in the past, while that for Microsoft, currently back at 27, is described as very reasonable by Christopher Dembik. And while hedge funds have not yet gone ‘buy’, they continue to hold 34% of NVIDA shares and even 44% of Microsoft shares. These are ‘base’ titles, but they are certainly also a sign that confidence in the sector has not broken down. Meanwhile, the price/earnings ratio for cyclical stocks has fallen to the level seen during a recession.
Growth not so bad
The latest poor quarterly growth figures for the United States, published at -0.3%, should be taken with a grain of salt and also requires us to disentangle the true from the false, says Christopher Dembik. This figure does not accurately reflect the state of the US economy, as it is impacted and weighed down by an unusually sharp rise in imports. There is an obvious justification for this aberration. At the start of the year, many companies rushed to build up their stocks in anticipation of the customs duties that would push up their purchase prices. In addition to this rise in imports, which had a negative impact on growth, there was an exceptional increase in purchases of gold bullion by savers motivated by fears of a fall in the dollar. But growth figures should return to normal next quarter. In fact, Visa has announced an 8% rise in the amount outstanding on its credit cards, testifying to continued buoyant consumption. A recession is not yet on the cards, especially if job creation remains above expectations, as is the case. The economy may be slowing down, but it is starting from a high point. So far, no indicator has been analysed to show that the positive economic trend is reversing.
Defence investment will take time to pay dividends….
Europe is more dependent on raw materials such as rare earths (100%) and gallium (71%). And while investment in defence is very promising and profitable for growth, since it is estimated that one euro invested yields 10, it must be tempered. This maxim only holds true after 10 years.
In an unprecedented move, the dollar’s role as a safe haven is being challenged by the euro and the Swiss franc, which served as safe havens until early May, before the first China-US talks got underway in Geneva.
“We have not changed our view of the market, mainly our positive view of US technology stocks, because the key remains to maintain a long-term horizon, away from short-term noise. The fall in tech stocks has returned them to attractive valuations. This is undeniable, even if some will consider it prudent to use currency hedging to protect themselves against a possible further depreciation of the US dollar. We are still steering clear of the Chinese market, which has yet to prove anything to us,” adds Christopher Dembik. The fall in the price of a barrel of oil, a bad thing and a good thing. It will handicap some shale oil producers, but will above all benefit consumers. Finally, reduced inflation in Europe, aided by the fall in the price of a barrel of oil, may lead the ECB to lower its key rates below 2% (1.8%?).
