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Back to the Deutsche Discotheque

To put it mildly, there’s not been too many positive things to say about Europe recently as war, inflation and political upheaval have weighed on investor sentiment. To quote a US hedge fund manager by the name Dan Loeb, “Markets are like a bad party. When things get too euphoric, it’s time to go home. When everyone is throwing up in the bushes, it’s time to come back.” In September last year we rejoined the party, moving to an overweight Europe allocation in the Overseas Equity fund and just this week, taking a new position in the Fixed Income fund via a European Government Bond ETF.

Eurozone GDP growth has been non-existent for some time, Italy and Germany’s industrial output has been falling and the French are still arguing amongst themselves as to who’s even in charge. Clearly each constituent nation of Europe has their problems. Europe’s silver lining is that they are one of the first developed regions that can say with a degree of confidence that they have inflation largely under control now. What this means is that the European Central Bank has a greater opportunity to cut interest rates than other regions and should we see further ‘bad’ economic news, so long as inflation remains under control, this would be a positive for asset prices as it would further fuel the expectation for interest rate cuts to support growth. For fixed income assets, falling interest rates means falling bond yields, which in turn causes capital values to rise. As a direct consequence of these views, we’ve recently taken a position in a European Government Bond ETF with substantial duration, meaning that the ETF will have a high degree of sensitivity to changes in interest rates. Falling interest rates are also a positive for equities as it means the cost of borrowing falls and lower discount rates are used for valuing future cash flows – a benefit to many alternative and property assets too.

Donald Trump has returned to office and has already put pen to paper on over 20 executive orders, more than any previous president signed on their inauguration day. From the protectionist policies we expected to see such as “Protecting The American People Against Invasion” to the slightly bizarre “Putting People Over Fish”. Trump is making his mark but so far, the imposition of widespread tariffs seems to have been avoided – it seems someone has tapped him on the shoulder and reminded him that he can’t have lower inflation and widespread tariffs.

It’s clear Trump sees China as the nation’s main international trade competitor. Elon Musk becoming his new best friend and a plethora of tech CEOs lining the front row of his inauguration appears to be a clear sign that he believes technology companies have a key part to play in future growth, a view reinforced by the subsequent signing of an executive order titled “Removing Barriers To American Leadership In Artificial Intelligence”. Unfortunately for him, as at the time of writing, at the top of the Apple App Store charts is a Chinese AI app called DeepSeek which has caused Nvidia to DeepSink, falling in value by $589bn, the largest ever single day fall. The reason not necessarily being that the technology is superior in performance, all AI software remains far from polished, but the reported massive difference in development cost, power requirements and number of chips needed to function, brings into question the future level of demand for Nvidia chips.

Introduction

Gone are the days of ultra formal, unrelatable marketing distributions and so we at BAM have taken the decision to give our newsletter a refresh. The BAMalyst newsletter will seek to provide clients with the investment team’s latest thoughts in a light-hearted and easy to digest, conversational tone. Most importantly, you will receive the newsletter on a fortnightly basis and so you’ll never be more than two weeks away from our reaction to the latest major events if there are any, or more trivial yet relevant thinking such as in this edition.

Who drank all the Guinness?

Our world has a finite amount of a number of commodities – fossil fuels might come to mind, but we now face a new crisis in the form of a shortage of Guinness. The stout drought is due to the drink becoming more popular with Generation Z (people currently aged between 12 and 27, although I hope the Guinness consumed by age is skewed to the upper end of that range).

Diageo, the brewer of Guinness declared the shortage on the 4th of December and in the following week the share price rose by nearly 10%. Why?

In the majority of developed countries, populations are ageing. This only elevates demand for healthcare services at a time when you could argue demand already dwarfs supply, *insert disappointing NHS statistic*. This presents a clear opportunity for businesses offering some form of healthcare solution. Another consequence of an ageing population is a shrinking workforce, which arguably increases the requirement for technological developments to compensate. No politician will ever say it, but it’s very difficult to accommodate an ageing population without either significant immigration or computers ‘taking’ jobs.

On a different note, we wanted to acknowledge that bond yields, representative of the cost of borrowing, are rising again, particularly in the UK. This appears to be primarily due to political missteps and the outlook not being one of high growth. Another contributing factor may simply be Mr Market being fed too much government debt and suffering with ‘issuance indigestion’. There is the potential that this could lead to faster interest rate cuts than is currently anticipated but given the development is in its infancy, it’s much too early to take a high conviction view. At present this isn’t a major concern but something the team are keeping a keen eye on and potentially a future BAMalyst topic should there be further notable developments.