Edmond de Rothschild provides insights into the financial landscape, highlighting challenges from political upheaval in France and ongoing market volatility. Despite recent capital outflows linked to the Ukraine war, the firm remains optimistic about 2024, particularly in the CAC 40 index. Investment strategies focus on mid-cap stocks across Europe and the U.S., anticipating growth amid inflation. Concerns linger regarding economic policies under a potential Trump administration, which may complicate market stability and inflation management.
Market Insights from Edmond de Rothschild
The financial landscape is currently influenced by significant developments from the new administration in the White House. On February 13, Edmond de Rothschild, with assets amounting to 176 billion euros, delivered an overview of its outlook for 2024 and the strategies it intends to pursue in the upcoming months.
Julien Vincenti, the investment director for France at Rothschild, reflected on their previous optimism two months ago. “Jerome Powell, the head of the Fed, had indicated potential rate cuts, and we were confident due to a less alarming inflation situation,” he noted. These anticipated cuts were expected to lead to a revaluation of stocks and spur economic activity.
Navigating Market Volatility
However, the financial sector is always subject to the unpredictable nature of market fluctuations. Rothschild has not been immune to this reality. Vincenti acknowledged, “While the rate cuts arrived later than we had hoped, they did arrive. We also prepared for Trump’s election early on, yet the unexpected dissolution of the National Assembly in France caught us off guard.”
This political upheaval, although primarily a domestic issue, has had repercussions that extend beyond France. Vincenti explained, “If the second-largest economy in the eurozone diverges from its deficit reduction path, it raises concerns about the overall stability of the region.”
Since the onset of the Ukraine war in 2022, Rothschild has observed a significant capital outflow, estimated at around 300 billion euros. “This has crucial implications for market dynamics and the capacity of European companies to achieve favorable valuations necessary for growth,” he added.
Despite the challenging environment, there remains a glimmer of hope. Vincenti pointed out that when events transpire that are less detrimental than expected, markets can rebound sharply. “We maintained our investments in 2024, even after the political shake-up, and strategically reinforced our positions in the CAC 40 at 7400 and 7100, based on profit growth and valuation probabilities,” he stated.
Rothschild’s analysts are optimistic, projecting that a valuation of 14 times profits, combined with a profit growth of 6 to 8%, could push the CAC beyond 9100 points. Vincenti remarked, “If Ukraine were to yield territories and a ceasefire were established, the reduction in political risk may lead to a resurgence of capital flows and rising values.”
Concerning France’s financial outlook, Rothschild aims to instill confidence. “Our current situation is not comparable to the turmoil experienced by Liz Truss in the UK,” Vincenti asserted, referencing the recent successful bond auctions and France’s favorable VAT rate relative to the European average.
In this context, the bank has allocated 15 to 20% of its equity exposure to mid-cap stocks in both Europe and the United States. “We invest in both regions for different reasons, capitalizing on growth and inflation, with global growth forecasts of 2.7% for 2025 and 2026. In an inflationary environment, stock investments become crucial,” he explained.
Vincenti highlighted that 81% of European companies have outperformed expectations, with only 3% falling short. He anticipates that 2025 could mirror the dynamics of 2021, beginning with rate tensions and initial valuation declines, followed by a recovery in profit growth in the latter half of the year.
On the topic of Donald Trump’s potential return to the presidency, Vincenti noted that markets have responded positively so far. Growth projections in the U.S. have risen from 1.8% to 2.2%. “Historically, during Trump’s first term, the S&P saw an impressive 80% increase, leading many to view him as pro-business,” he commented.
However, he advised caution, emphasizing that the current context differs significantly from 2016. “Interest rates and deficits are markedly higher now, which complicates the application of past policies,” he cautioned. He likened Trump’s potential fiscal strategies to “administering steroids to an already sprinting athlete.”
Moreover, the combination of increased tariffs and mass deportations of undocumented migrants could contribute to rising inflation, which would pose challenges for Jerome Powell and the Fed in their efforts to stabilize prices.
Vincenti concluded with a note of vigilance regarding Trump’s unpredictable approach to policy, stating, “His remarks about tariffs are inconsistent, making it difficult for the market to react appropriately.”