Upcoming earning season and fund flows

The reporting season of our international holdings gets underway in the weeks ahead. After a particularly strong Q1 reporting season, forward earnings per share estimates for the STOXX 600 have been flat since June. Some sectors, like in travel and leisure have observed an increase in their earnings revision while others, like in luxury or in construction and materials have obtained a lower-than-expected earnings revision. On the revenue side, we saw a weaker forward sales revision lately, a potential signal that the macroeconomic trends might remain complicated for the second half of 2024. On a sector basis, consumers and technology seems to be experiencing a soft patch. When not impacted by delay, new order intakes seem to be coming through but the cadence in manufacturing is progressing at a slow pace.

Political risk is back

Index performance rebased to 100 (USD)

Source: Bloomberg, MSCI.

Volatility spiked last month due to a political risk resurgence in Europe. The French election caught investors off guard and prompted many to de-risk and reallocate elsewhere. French bond yield has narrowed since the end of June, but equity hasn’t recovered much. French equities have suffered and have trailed other benchmarks since early June.

The left-wing alliance unexpectedly won the election, beating both the presidential and far-right party. Now, attention turns to the election of a new President of the National Assembly in July. The balance of power seems to have shifted towards the center-left alliance and this could be the best-case scenario for markets. The formation of a technocracy cannot be ruled out either.

The first real test for the new government will probably be to vote on the upcoming preliminary budget that needs to be submitted to the European Commission by mid-October. Last month the European Commission signaled that France should be put under excessive deficit procedure. If that proposition is adopted by the European Council, France will have to meet the requirement of the European Union’s (EU) fiscal rules. The incoming government will have little room to maneuver from a fiscal point of view. Considering that the last time France recorded a surplus was in 2001, the challenge is colossal.

Political uncertainty adversely affects the decision-making processes of companies. It will be interesting to track how companies intend to reallocate capital in the upcoming months.

Investors positioning

Fund flows are trending towards bonds and money market funds. US equity fund inflows remain high but have slowed, reflecting cautious investor sentiment. In Europe, equity funds are experiencing outflows, while Asia ex-Japan sees significant inflows, particularly in China and India. Technology remains the top sector, while materials and consumer sectors show muted interest. Shares of small caps in the US have recently surged, with the Russell 2000 Index hitting a 2024 high, fueled by optimism regarding the federal reserve’s advancements in combating inflation and the increased likelihood of interest rate cuts.

Fund Flows (last 4 weeks, % of assets)

Source: Deutsche Bank.

Cumulative equity flows (last 12m, weekly, $bn)

Source: Deutsche Bank.

Small caps is a key beneficiary of the expected lower rates, and given they continue to trade at a 20-year low valuation versus their larger counterparts, we believe now is an interesting time to own small caps.