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October 2024

Global Market Pulse (EURO)

Leveraging expertise from the MFS Market Insights team to provide timely perspectives on economic and market dynamics that are top of mind for clients.

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AUTHORS

Benoit Anne
Managing Director
Strategy and Insights Group

Jonathan Hubbard, CFA
Managing Director
Strategy and Insights Group

Brad Rutan, CFA
Managing Director
Strategy and Insights Group

KEY TAKEAWAYS

  • The US labour market is weakening amid reduced hiring but has yet to see an alarming rise in layoffs, though a rise in pink slips could derail expectations for a soft landing. 
  • Strong and resilient US profit margins underpin American economic resilience, although a sharp downturn would likely necessitate the need for layoffs and signal a worse economic outcome. 
  • Against a backdrop of flagging domestic consumption, Chinese companies are cutting export prices to boost market share in both intermediate and finished goods, undermining producers in the rest of the world.
  • Duration and credit are more attractive in Europe than the United States. Global policy easing and potential USD weakness are supportive for local currency EMD. 

  • Economy & Markets

    Economy & Markets

    | US Labour

    Slower hiring, not job losses, pushed unemployment up.

    MFS PERSPECTIVE

    • Post-pandemic labour hoarding is potentially driving today’s declining hire rate. 
    • Strong margins and profitability are not typically associated with accelerating layoffs. 
    • While unemployment rates are likely to tick up, there is no impetus for a rapid deterioration.

     

     

    | US Profits 

    The US corporate sector remains a source of macro strength

    MFS PERSPECTIVE

    • The robust health of US corporates, particularly persistently elevated profit margins, bolsters the case for a soft landing. 
    • While recession risks remain, owing to the weaker labor market, there is no indication that the profitability of US companies is subject to major downside risk

     

     

    | Chinese Deflation

    Chinese companies are slashing export prices.

    MFS PERSPECTIVE

    • China, once known for exporting lower-value goods, now competes in higher-value export markets. 
    • Given weak domestic demand, many companies have aggressively cut export prices to increase market share. 
    • This could further heighten trade tensions and lead to tariffs from affected countries.

     

     

    | European Economy

    UK activity is strengthening while Germany weakens.

    MFS PERSPECTIVE

    • Germany, by far the eurozone’s largest economy, has faced pressure from weak demand from China and declining domestic new orders. 
    • UK manufacturing has shown surprising strength since mid-2023. 
    • Domestic demand has been a driver of a broad-based increase in UK output.  

  • Global Developed Equity - US
    Euro based

     

     

    US
    decorative

     

     

    • UNDERWEIGHT     • NEUTRAL     • OVERWEIGHT

    • US equity markets, already strong year to date, rallied after the US Federal Reserve made the first of what is expected to be a series of cuts. 
    • With this initial 50 basis point cut, the Fed demonstrated it was not afraid to take aggressive action. 
    • Historically, equities have done well following the start of a rate cutting cycle as long as recession is avoided, which is the near-term base case in our soft landing scenario.
    •  Investors have been aggressively buying equities with $34 billion in flows for the week ended September 18, the third-largest weekly rise this year. 

     

    MFS CONSIDERATIONS
    LARGE CAP
    • The S&P 500 continued to hit all-time highs in September after a successful earnings season where earnings jumped 13% on a year over year basis, exceeding expectations of 11%.
    • Large caps have been able to defend their higher margins while lower leverage levels make them more defensive should the economy slow more than expected.
    SMALL/MID CAP
    •  Small caps rallied sharply following the Fed’s rate cut announcement. 
    • Small caps have been disproportionally punished in the higher rate environment given their heavy reliance on floating and short-term debt.
    • While valuations look reasonable, the potential for a slowing economy could remain a headwind.

     

    GROWTH
    • Concentration (44% of the index in five stocks) and the AI theme continue to drive Russell 1000® Growth Index stocks.
    • With multiples reflecting high expectations, investors may want to be increasingly discerning as stocks that miss expectations are likely to be punished, as we saw during the quarter.
    VALUE
    • Lower rates should help supported valueoriented sectors, including financial services, real estate and industrials. 
    • A soft-landing scenario would be supportive of value as rates ease, but growth remains intact. 
    • Value remains cheap relative to growth at 16 times next year’s earnings versus 28 times for growth.

    Global Developed Equity - Ex US
    Euro based

    EUROPE EX UK
    • Macro data remain mixed in light of political uncertainty, poor sentiment and growth challenges in Germany and France. The periphery is experiencing a stronger recovery. 
    • Further rate cuts and steady wage growth should support a recovery in domestic consumption, particularly for more ratesensitive countries and sectors. 
    M F S   C O N S I D E R A T I O N S
    • Valuations remain reasonable and a recovery in earnings offers some room for multiple expansion. 
    • After recent rates cuts, stocks should benefit due to Europe’s greater interest rate sensitivity.
    UK
    • Growth is recovering and PMI data are improving.
    • However, consumer confidence is slipping amid rising public debt and the new Labour government’s “painful budget” rhetoric. 
    • The BOE remains cautious in cutting rates.


       
    M F S   C O N S I D E R A T I O N S
    • A broadening of global earnings and an easing in tech leadership should support UK equities on a relative basis. 
    • UK equity valuations remain undemanding on a forward-looking basis.
    JAPAN
    • Markets have settled down following recent yen-driven volatility. 
    • Real wages in Japan are improving and should be supportive of a recovery in domestic consumption. 
    • The Tokyo Stock Exchange continues to drive reforms targeted at governance and improved profitability.
       
    M F S   C O N S I D E R A T I O N S
    • Despite the recent turmoil, Japanese equities offer opportunities, though investors, in our view, should be selective rather than seek broad market exposure. 

  • Emerging Markets
    Euro based

    • UNDERWEIGHT     • NEUTRAL     • OVERWEIGHT

    EM EQUITY
    • PBOC has announced a raft of monetary stimulus measures for the housing and stock markets, injecting additional liquidity 
    • Slowly recovering global trade and an improving growth outlook in EM Ex China is supporting earnings improvement. 
    • India (21%) and Taiwan (18%) have become increasingly important in the MSCI EM index. 
    M F S   C O N S I D E R A T I O N S
    • Chinese developments are positive but further fiscal support may be required to revive credit demand. 
    • A positive view on India, stable commodity prices and improving global trade (particularly the semiconductor cycle) are supportive of earnings improvement.
    EM DEBT - HARD CURRENCY
    • Fundamentals have deteriorated somewhat recently, mainly reflecting higher fiscal risks. 
    • The spread valuation backdrop has become more challenging. 
    • However, a potential weakening of the US dollar could act as a supportive driver. 

       
    M F S   C O N S I D E R A T I O N S
    • While valuation is still compelling, especially on a total yield basis, EMD remains exposed to global risks, including uncertainty over geopolitics and China’s structural headwinds. 
    • We have turned more cautious in the near term
    EM DEBT - LOCAL CURRENCY
    • Global policy easing and progress towards disinflation, as well as relatively high level of real rates, all act as positive drivers. 
    • However, the asset class is highly sensitive to global factors, so close monitoring of the international backdrop is a must. 

       
    M F S   C O N S I D E R A T I O N S
    • While a more tactical asset class by nature, given the higher volatility involved, we believe that the global macro backdrop has turned more supportive, especially given potential downside risks to the US dollar. 

    BLANK

  • Global Fixed Income
    Euro based

    • UNDERWEIGHT     • NEUTRAL     • OVERWEIGHT

    USD DURATION
    • A soft landing, progress towards disinflation, along with aggressive Fed rate cuts, are generally supportive of long duration, although this is already partly reflected in market prices. 
    • Looking ahead, the key driver will continue to be Fed signals on the pace and magnitude of policy easing.
    MFS CONSIDERATIONS
    • Now that the yield curve is no longer inverted, we believe it is likely to steepen further, which will help support the relative attractiveness of the long end.
    EURO DURATION *
    • Amid ECB rate cuts, the moderating inflationary trajectory and a challenging growth backdrop, the stars appear to be aligned for long duration in the eurozone. 
    • Core eurozone economies face major growth headwinds, with Germany first and foremost. 
    M F S   C O N S I D E R A T I O N S
    • In our view, with the balance of risks skewed towards accelerated ECB policy easing, the case for long duration is compelling.
    US IG CORP
    • The macro backdrop remains positive, including the high probability of a soft landing, but asset class fundamentals are no longer showing signs of strength. 
    • In particular, we have observed a pick-up in net leverage combined with a worsening of free cash flow.
    M F S   C O N S I D E R A T I O N S
    • While total yields remain fairly attractive, we have turned more cautious in the near term, mainly reflecting a more challenging spread valuation picture.
    US HIGH YIELD
    • Fundamentals remain robust, helped by historically low levels of leverage and strong free cash flow generation. 
    • Other positive drivers include low default rate projections, attractive breakeven yield valuation and a supportive macro outlook.
       
    M F S   C O N S I D E R A T I O N S
    • The risk/reward may be attractive for investors who may consider deploying credit risk exposure. 
    • While we are not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
    EURO IG CORP
    • Supported by sound fundamentals, a favorable macro environment and robust technicals. 
    • The ECB easing cycle is likely to boost investor sentiment towards EUR credit.
    • While the spread valuation backdrop has become more challenging, spreads remain cheaper than in the US.
    M F S   C O N S I D E R A T I O N S
    • One of the most attractive opportunities across global fixed income.
    EURO HIGH YIELD
    • The macro backdrop and strong fundamentals, including favorable net leverage, support the asset class. 
    • Breakeven yields remain attractive.
    • Risk appetite towards riskier assets in the region is likely to benefit from the ongoing ECB easing cycle.
       
    M F S   C O N S I D E R A T I O N S
    • The asset class has shown resilience and remains attractive for the investor with high risk tolerance. 
    • Security selection remains key, given the dispersion of fundamental stories at the security level. 

    BLANK

    The Global Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly. 

    The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.

    Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

    “Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.

    These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.

Economy & Markets

| US Labour

Slower hiring, not job losses, pushed unemployment up.

MFS PERSPECTIVE

  • Post-pandemic labour hoarding is potentially driving today’s declining hire rate. 
  • Strong margins and profitability are not typically associated with accelerating layoffs. 
  • While unemployment rates are likely to tick up, there is no impetus for a rapid deterioration.

 

 

| US Profits 

The US corporate sector remains a source of macro strength

MFS PERSPECTIVE

  • The robust health of US corporates, particularly persistently elevated profit margins, bolsters the case for a soft landing. 
  • While recession risks remain, owing to the weaker labor market, there is no indication that the profitability of US companies is subject to major downside risk

 

 

| Chinese Deflation

Chinese companies are slashing export prices.

MFS PERSPECTIVE

  • China, once known for exporting lower-value goods, now competes in higher-value export markets. 
  • Given weak domestic demand, many companies have aggressively cut export prices to increase market share. 
  • This could further heighten trade tensions and lead to tariffs from affected countries.

 

 

| European Economy

UK activity is strengthening while Germany weakens.

MFS PERSPECTIVE

  • Germany, by far the eurozone’s largest economy, has faced pressure from weak demand from China and declining domestic new orders. 
  • UK manufacturing has shown surprising strength since mid-2023. 
  • Domestic demand has been a driver of a broad-based increase in UK output.  

Global Developed Equity - US
Euro based

 

 

US
decorative

 

 

• UNDERWEIGHT     • NEUTRAL     • OVERWEIGHT

  • US equity markets, already strong year to date, rallied after the US Federal Reserve made the first of what is expected to be a series of cuts. 
  • With this initial 50 basis point cut, the Fed demonstrated it was not afraid to take aggressive action. 
  • Historically, equities have done well following the start of a rate cutting cycle as long as recession is avoided, which is the near-term base case in our soft landing scenario.
  •  Investors have been aggressively buying equities with $34 billion in flows for the week ended September 18, the third-largest weekly rise this year. 

 

MFS CONSIDERATIONS
LARGE CAP
  • The S&P 500 continued to hit all-time highs in September after a successful earnings season where earnings jumped 13% on a year over year basis, exceeding expectations of 11%.
  • Large caps have been able to defend their higher margins while lower leverage levels make them more defensive should the economy slow more than expected.
SMALL/MID CAP
  •  Small caps rallied sharply following the Fed’s rate cut announcement. 
  • Small caps have been disproportionally punished in the higher rate environment given their heavy reliance on floating and short-term debt.
  • While valuations look reasonable, the potential for a slowing economy could remain a headwind.

 

GROWTH
  • Concentration (44% of the index in five stocks) and the AI theme continue to drive Russell 1000® Growth Index stocks.
  • With multiples reflecting high expectations, investors may want to be increasingly discerning as stocks that miss expectations are likely to be punished, as we saw during the quarter.
VALUE
  • Lower rates should help supported valueoriented sectors, including financial services, real estate and industrials. 
  • A soft-landing scenario would be supportive of value as rates ease, but growth remains intact. 
  • Value remains cheap relative to growth at 16 times next year’s earnings versus 28 times for growth.

Global Developed Equity - Ex US
Euro based

EUROPE EX UK
  • Macro data remain mixed in light of political uncertainty, poor sentiment and growth challenges in Germany and France. The periphery is experiencing a stronger recovery. 
  • Further rate cuts and steady wage growth should support a recovery in domestic consumption, particularly for more ratesensitive countries and sectors. 
M F S   C O N S I D E R A T I O N S
  • Valuations remain reasonable and a recovery in earnings offers some room for multiple expansion. 
  • After recent rates cuts, stocks should benefit due to Europe’s greater interest rate sensitivity.
UK
  • Growth is recovering and PMI data are improving.
  • However, consumer confidence is slipping amid rising public debt and the new Labour government’s “painful budget” rhetoric. 
  • The BOE remains cautious in cutting rates.


     
M F S   C O N S I D E R A T I O N S
  • A broadening of global earnings and an easing in tech leadership should support UK equities on a relative basis. 
  • UK equity valuations remain undemanding on a forward-looking basis.
JAPAN
  • Markets have settled down following recent yen-driven volatility. 
  • Real wages in Japan are improving and should be supportive of a recovery in domestic consumption. 
  • The Tokyo Stock Exchange continues to drive reforms targeted at governance and improved profitability.
     
M F S   C O N S I D E R A T I O N S
  • Despite the recent turmoil, Japanese equities offer opportunities, though investors, in our view, should be selective rather than seek broad market exposure. 

Emerging Markets
Euro based

• UNDERWEIGHT     • NEUTRAL     • OVERWEIGHT

EM EQUITY
  • PBOC has announced a raft of monetary stimulus measures for the housing and stock markets, injecting additional liquidity 
  • Slowly recovering global trade and an improving growth outlook in EM Ex China is supporting earnings improvement. 
  • India (21%) and Taiwan (18%) have become increasingly important in the MSCI EM index. 
M F S   C O N S I D E R A T I O N S
  • Chinese developments are positive but further fiscal support may be required to revive credit demand. 
  • A positive view on India, stable commodity prices and improving global trade (particularly the semiconductor cycle) are supportive of earnings improvement.
EM DEBT - HARD CURRENCY
  • Fundamentals have deteriorated somewhat recently, mainly reflecting higher fiscal risks. 
  • The spread valuation backdrop has become more challenging. 
  • However, a potential weakening of the US dollar could act as a supportive driver. 

     
M F S   C O N S I D E R A T I O N S
  • While valuation is still compelling, especially on a total yield basis, EMD remains exposed to global risks, including uncertainty over geopolitics and China’s structural headwinds. 
  • We have turned more cautious in the near term
EM DEBT - LOCAL CURRENCY
  • Global policy easing and progress towards disinflation, as well as relatively high level of real rates, all act as positive drivers. 
  • However, the asset class is highly sensitive to global factors, so close monitoring of the international backdrop is a must. 

     
M F S   C O N S I D E R A T I O N S
  • While a more tactical asset class by nature, given the higher volatility involved, we believe that the global macro backdrop has turned more supportive, especially given potential downside risks to the US dollar. 

BLANK

Global Fixed Income
Euro based

• UNDERWEIGHT     • NEUTRAL     • OVERWEIGHT

USD DURATION
  • A soft landing, progress towards disinflation, along with aggressive Fed rate cuts, are generally supportive of long duration, although this is already partly reflected in market prices. 
  • Looking ahead, the key driver will continue to be Fed signals on the pace and magnitude of policy easing.
MFS CONSIDERATIONS
  • Now that the yield curve is no longer inverted, we believe it is likely to steepen further, which will help support the relative attractiveness of the long end.
EURO DURATION *
  • Amid ECB rate cuts, the moderating inflationary trajectory and a challenging growth backdrop, the stars appear to be aligned for long duration in the eurozone. 
  • Core eurozone economies face major growth headwinds, with Germany first and foremost. 
M F S   C O N S I D E R A T I O N S
  • In our view, with the balance of risks skewed towards accelerated ECB policy easing, the case for long duration is compelling.
US IG CORP
  • The macro backdrop remains positive, including the high probability of a soft landing, but asset class fundamentals are no longer showing signs of strength. 
  • In particular, we have observed a pick-up in net leverage combined with a worsening of free cash flow.
M F S   C O N S I D E R A T I O N S
  • While total yields remain fairly attractive, we have turned more cautious in the near term, mainly reflecting a more challenging spread valuation picture.
US HIGH YIELD
  • Fundamentals remain robust, helped by historically low levels of leverage and strong free cash flow generation. 
  • Other positive drivers include low default rate projections, attractive breakeven yield valuation and a supportive macro outlook.
     
M F S   C O N S I D E R A T I O N S
  • The risk/reward may be attractive for investors who may consider deploying credit risk exposure. 
  • While we are not concerned about the maturity wall, spread valuation looks stretched, so security selection is key.
EURO IG CORP
  • Supported by sound fundamentals, a favorable macro environment and robust technicals. 
  • The ECB easing cycle is likely to boost investor sentiment towards EUR credit.
  • While the spread valuation backdrop has become more challenging, spreads remain cheaper than in the US.
M F S   C O N S I D E R A T I O N S
  • One of the most attractive opportunities across global fixed income.
EURO HIGH YIELD
  • The macro backdrop and strong fundamentals, including favorable net leverage, support the asset class. 
  • Breakeven yields remain attractive.
  • Risk appetite towards riskier assets in the region is likely to benefit from the ongoing ECB easing cycle.
     
M F S   C O N S I D E R A T I O N S
  • The asset class has shown resilience and remains attractive for the investor with high risk tolerance. 
  • Security selection remains key, given the dispersion of fundamental stories at the security level. 

BLANK

The Global Market Pulse leverages the firm’s intellectual capital to provide perspective on broad market dynamics that are top of mind for asset allocators. We celebrate the rich diversity of opinion within our investment team and are proud to have talented investors who may implement portfolio positions and express different or nuanced views to those contained here, which are aligned to their specific investment philosophy, risk budget and entrusted duty to allocate our client’s capital responsibly. 

The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as MFS’ investment advice, as portfolio positioning, as securities recommendations, or as an indication of trading intent on behalf of MFS.

Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

“Standard & Poor’s®” and S&P “S&P®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith The views expressed are subject to change at any time.

These views should not be relied upon as investment advice, as portfolio positioning, as securities, recommendations or as an indication of trading intent on behalf of the advisor. No forecasts can be guaranteed.

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