Executive summary
This week we look at three critical issues:
- Quarterly country and sector risk changes: Normalization in the making? As of end-Q1 2024 we upgraded the corporate non-payment risk rating for eight countries (Brazil, Cape Verde, Egypt, Kazakhstan, Madagascar, Mauritania, Philippines and Thailand) and downgraded two (Bahrain and Israel). Seven industries got an upgrade while six industries got downgraded. Non-payment risk for automotive, machinery equipment and household equipment improved, while it deteriorated for construction, chemicals, IT services and energy. Overall, country and sector risk returned to pre-pandemic levels.
- Equity markets going long trends on both sides of the Atlantic. While US corporates posted a (very) decent performance throughout the Q4 earnings season, European ones recorded their third consecutive quarter of earnings and revenues declines. This trend is expected to continue during most of 2024. However, European risky assets have managed to keep up with the US bull market, joining the upward trajectory. Why? Because markets’ focus is slowly shifting from short-term drivers such as monetary policy expectations to long-term trends (e.g. AI, climate, reshoring). In this context, we continue to expect 5-10% yearly returns in both 2024 and 2025 for both the US and Europe.
- Sticky services inflation is the fly in the ointment for the ECB. Eurozone inflation fell to 2.4% in March, but services inflation remains a key contributor. Labor costs, a major component of output prices in the services sector, continue to rise at a rate above historical average. Moreover, nine out of 20 countries show inflation rates above 3%. Germany and France have seen a strong slowdown in inflation while inflation in Spain and Italy is bouncing back as negative base effects from energy fade. For 2024 we continue to expect inflation at 2.4%. Disinflation will continue, albeit at a lower speed, paving the way for ECB cuts starting in July.