Alpinum Investment Management Q4 2024 Investment Letter

Powell opens dances, markets at ATH

In the third quarter, the the global economy has been shaped by the easing of monetary policies and evolving investor expectations. In August, a disappointing US jobs report and the The Bank of Japan’s tightening measures led to a the sharp opening of the marketcausing the VIX to hit its highest levels since the start of COVID-19, a 20% drop in Japanese stocks in three days, and a 75 basis point drop in the 2-year US Treasury yield. Despite this turmoil, global stocks rebounded stronglyreaching new highs in September. Disappointing US employment data was offset by other labor indicators, solid retail sales and revenue reports. A third consecutive surprise drop in inflation allowed Federal Reserve Chairman Powell to adopt a dovish stance at Jackson Hole.

Chart 1: No shock wave, softer economic growth outlook

The The US economy has slowed, raising the risk of a mild recession in 2025. Inflation eased in the US and Europe, although Europe struggled with services inflation. Central banksincluding Fed, ECB, NBS, BoC, BoE and PBoC reduce rateswhile Japan maintained its reflationary stance. China experienced weak demand and declining profitability. (US-) Equity market valuations remained high, with defensive sectors and high quality fixed income ActiveE well positioned to weather potential market corrections in the middle the relaxation of monetary policies and the the upcoming US election.

United States

The The US economy maintained strong momentumwith real GDP rising 3.1% in Q2, largely driven by robust government spending and continued business investment, marking 14 consecutive quarters of expansion. The labor market is normalizing to pre-Covid trendswith wage gains averaging 202,000 and the unemployment rate rising to 4.2%. Despite this increase, indicators such as job openings and the participation rate remain close to 2019 levels, signaling a resilient labor market. Inflation is moderating, albeit service-related inflationespecially in insurance, it remains a challenge. While shelter inflation is easing, inflation is expected to remain above the Fed’s 2% target for the rest of the year, leading to a cautious approach to rate cuts. Equity markets reflect high valuationswith the S&P 500 forward P/E ratio at ~21x, suggesting lower forward yields. Market concentration remained a significant risk in Q3, even though nearly 70% of S&P 500 stocks outperformed the index, reversing the trend in Q2, where less than a quarter did so. Despite this broader outperformance, the market’s heavy reliance on a few large-cap stocks increases vulnerability to potential negative fundamental surprises.

Chart 2: Economic surprises different from stock markets

Despite general optimism, recent economic data showed negative surprisessignaling potential market vulnerabilities. The The Federal Reserve kicked off its interest rate cut cycle with a 50 bps cut at the September 18 FOMC meeting, markets priced in up to eight cuts through 2025, dropping the Fed funds rate to 2.9%. The uncertainty around Presidential elections add to the volatilitya typical trend in election years. While the economy remains resilient, slowing growth and persistent inflation create a more cautious outlook for the rest of the year as investor complacency against downside risks grows.

Europe

The economic prospects of Europe displayed a a cautiously optimistic but mixed trajectory. Major economies such as Germany and France showed resilience, although overall growth remained moderate. Consumer confidence fluctuatedreflecting both improvements and concerns about rising living costs and economic uncertainty. The Composite Purchasing Managers’ Index (PMI) rose to 50.9 in August from 50.1 in July, reflecting the fastest rise in three months, driven by stronger expansion in the services sector (52.9), while production stagnated at 46.0, underscoring continuity difficulties in the industrial sector. The the labor market remained stableeurozone unemployment rate falling to a record low of 6.6% in July. Inflation moderated during the quarterheadline rate falling to 2.2% in August from 2.6% in July, marking the weakest increase since July 2021. This decline was largely attributed to a sharp drop in energy prices (-3.0%) , although inflation for services (4.2%) and food (2.4%) remained elevated. Core inflationexcluding energy and unprocessed food, remained constant at 2.8%indicating persistent inflationary pressures in non-energy sectors.

Chart 3: The gradual normalization of the yield curve in the euro area

In response to the moderation in inflation, The European Central Bank (ECB) cut its deposit rate by 25 basis points to 3.50% in Septemberfollowing a similar reduction in June. Market expectations point to further rate cuts before the end of the year, reflecting the ECB’s continued efforts to balance growth with inflation control. European equity markets saw volatility during the quarter. The Euro Stoxx 50 he saw sharp declines at the beginning of Augustfollowed by a rebound in the second half of the month, driven by positive economic data and anticipated monetary easing. Government bonds saw increased demand as investors sought safe-haven assets, while the yield curve has started to normalize.

China and emerging markets

Despite cautious optimism, China’s economic landscape has faced ongoing challenges. GDP growth slowed to 4.7% year-on-year in Q2, down from 5.3% in Q1 and below the forecast of 5.1%. This slowdown reflects ongoing struggles in the real estate sector, weak domestic demand and ongoing trade frictions. The Caixin China General Manufacturing PMI improved slightly to 50.4 in August from 49.8 in July, signaling a modest expansion in production as new orders increased. However, foreign demand fell for the first time this yearindicating some external pressure. In August, of China CPI and PPI were both below expectationsreflecting worsening deflationary pressures. CPI rose 0.6% year-on-year, below the 0.7% forecast, while core CPI growth slowed to 0.3%. PPI fell -1.8%, beating the anticipated -1.5% decline, highlighting weak domestic demand and difficulties for manufacturers to pass on costs. The the labor market remained stable but it showed signs of strain as the unemployment rate rose to 5.3 percent in August from 5.2 percent in July and 5.0 percent in June.

Chart 4: Deflationary headwinds intensify in China

The People’s Bank of China held Prime rates for one-year and five-year loans at 3.35% and 3.85%respectively, after the recent interest rate cuts. It also cut the seven-day reverse repo rate to 1.5 percent and injected CNY 234.6 billion into the banking system to boost economic support. The the yuan appreciated from 7.27 to about 7.01 per dollar, reflecting a weakening of the US dollar. The The CSI 300 index fell 8.7% during the quarter but fast recovered the losses in a week driven by PBoC policy incentives. The the real estate market continued to strugglewith new home prices falling 5.3% year-over-year in August.

Investment conclusions

The market’s initial decline in August was quickly reversed, although concerns about a potential economic downturn persisted. While a a slight slowdown is likely, a severe recession is not on the cards. The anticipated easing of monetary policies and a weakening of the USD will contribute to a yield curve normalization and subsequent economic recovery. However, this may limit upside potential for equity markets, which are already valued at relatively high valuations. Despite potential volatility, the overall outlook for the market remains neutral. Current environment favors active portfolio management across asset classes and supports credit markets, although selective credit risk remains a concern.

Chart 5: Yield at the weakest of global bond segments

Bonds: The global shift towards looser monetary policiesexcluding Japan, contrasts with commercial banks’ continued tightening of lending conditions, hampering corporate lending. While default rates have risen slightly, selective lending opportunities remain.

Actions: Stock valuations appear reasonable given lower interest rates and moderate growth prospects. There is limited growth potentialespecially for large US stocks with high valuations.

A mixed investment style is recommended as we maintain a positive outlook for the US treasury and short term high yield bondsand a neutral outlook for stocks. In the credit market, we anticipate a modest increase in default rateswhich leads to slightly elevated levels. However, we consider current credit spreads to be relatively tight, but still aligned with the broader economic outlook, providing a reasonable risk-reward profile for investors.