During August, European equities were essentially flat while US equities regained some ground, led by the technology sector. The Nasdaq rose by +3.1%, the S&P by +1.8% and the Stoxx Europe 600 by +0.5%.
Recently, investors have again been concerned about the trajectory of interest rates, notably across long-dated sovereign maturities. At the time of writing, the US government is borrowing for 10 years at 4.8%, the United Kingdom at 5.2%, France at 4.3%, and even Germany and Japan must pay annual coupons of 3.4% and 3.0% respectively. We are far from the negative rates experienced during the previous decade.
It appears that many market participants are questioning why lenders demand increasingly higher yields on long maturities, which are nonetheless substantially above observed inflation rates. The fear of payment defaults can be safely dismissed, as CDS spreads, which implicitly measure this risk, show no particular stress. The explanation therefore likely lies in a loss of confidence in central banks’ ability to control inflation, not immediately but in a few years. Indeed, governments currently maintain significant deficits, often exceeding 5% of GDP, levels rarely seen in peacetime and acting as powerful stimulants in the economy. That excess money injected, however, risks generating inflation. Normally, the regulatory mechanism comes from central banks raising policy rates in such circumstances to force governments toward greater fiscal discipline. But that is precisely what they have done since 2022, and it must be noted that policymakers have not rushed to tighten fiscal belts anywhere.
Moreover, the very high level of public debt in many countries means that an aggressive increase in policy rates to combat runaway inflation, such as under Paul Volcker’s presidency of the FED in the 1980s, would be fiscally unsustainable over the long term and is therefore not credible today. Central banks will only regain their deterrent capacity when sovereign indebtedness has returned to levels far below those of today. And the only way to achieve that is a strong inflationary impulse lasting at least several years.
In short, the question is not fundamentally why rates are rising but rather why they remained so low for so long. The only way for governments to reduce the pressure exerted by the market through this risk premium is to drastically cut their budget deficits, in a context where interest expense is rising rapidly and will everywhere reach very high levels by the end of the decade, with rates likely around 4 to 5% of GDP. It is a real mountain for governments to climb, and they will not undertake this effort willingly, knowing that it is always easier to spend more than to spend less to secure re-election.
The Clartan funds delivered respectable performance in August: Valeurs rose by +1.7%, Europe rose by +1.7% and Ethos by +2.0%. The defensive funds are again almost flat with Patrimoine unchanged at 0,0%, Flexible at +0,2% while Multimanagers displays +1.7%.
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