Aubrey: European Prospects for 2024

The Strategy had an excellent November as the market looked forward to a more benign interest rate environment in 2024, and has continued to rise, albeit at a more modest rate, in December.

The market is expecting interest rate cuts on both sides of the Atlantic by Q2 at the latest.  Inflation is falling more rapidly towards the 2% level in Europe, than in America, so we would expect a cut in the former first.

America is now paying more in gross interest on its record $33trn debt than on national defence.  In the fiscal year through end of September, the U.S. Treasury paid $879.3bn in interest on its debt securities, while the Department of Defense’s budget totalled $775.9bn.  In the month of October alone, the defence outlay was $87bn vs nearly $89bn in debt interest. The economy’s appearance of holding up well, is therefore illusory and unsustainable.  Nominal growth is almost entirely the result of the government’s book of debt.

I read an interesting article recently by a City financial worker whose six figure salary had reduced to the very modest one of a school teacher starting out, his new vocation.  He made the salient observation that when you are making a lot of money expenditure rises to meet the income you bring in, and when your income falls, one of the keys to maintaining happiness is not the absolute level of money you have but whether or not you can live within your means.  The same applies to countries and we are well past this point now.  Countries are clearly not living within their means and haven’t been doing so for a long time.  They need to learn how.  Interest rates have to come down, and debt has to be repaid. This implies an economic contraction as spending cannot continue to be fuelled by loose money and everyone will have to learn to consume ‘smart’ and consume less.

That said, 2024 will be an election year in the US and the deadline for an election in the UK is January 2025.  One can hardly believe the Democrats will slam the breaks on the economy in the run-up.  If the Republicans win in November, it may be different story.  But meanwhile to keep the consumer happy, rates must certainly not go up.  If they fall too fast while there is so much debt in the system that is not sustainable either and inflation could rise again. In that respect the Fed’s indication of “higher for longer” might suit the current administration’s best interests, if not the market’s.

In Europe the situation is slightly different.  There are no upcoming elections in the main economies and inflation is already lower and so is economic growth. That could signal interest rate reductions ahead of the US, which would be supportive of the equity markets, if not the currency.  Germany has a funding gap following a ruling by the Constitutional Court that reallocation of €60bn of unused debt from the pandemic era to the climate and transformation fund was not in line with the constitution.  Despite all the commitments regarding greenhouse gas reduction by 2030, the government cannot afford it.  In the UK interest rates appear to be on hold at 5.25% with inflation higher than either the US or the Eurozone.  The election is likely to be fought out on the ‘cost of living crisis’, and the government’s record on immigration.  The UK market has trailed other European markets this year and we do not believe a change in the ruling party will remedy that.

We continue to be very cautious on consumer discretionary sectors and prefer to deploy capital with strong thematic tailwinds, such as the advance of AI, the search for environmental improvements, and business services offering corporates greater efficiencies at lower cost – all the while looking for companies that can grow earnings by at least 15% p.a. for the next two years.

A lot can happen in a month, even in December, and we will reassess the outlook again in January.  Meanwhile, we wish you a happy, peaceful Christmas and send the best season’s greetings to you all.


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