Market Overview
Global equity markets recorded their third consecutive month of gains in January amid growing speculation about when major central banks will begin retreating from their current interest rate-policy stances.
Stock markets found themselves in the middle of a tug of war during the month—while being pulled in one direction by rising investor optimism about the global outlook for interest rates, they were also being pulled in the opposite direction by key central banks seeking to rein in expectations. Against this backdrop, all eyes were on the Federal Reserve, which last month hinted that its rate-hiking campaign had reached its conclusion and forecast that it could lower interest rates three times in 2024. With preliminary data for the fourth quarter suggesting that the U.S. economy grew at a healthy pace while domestic inflation continued to slow, stocks rose on hopes that the world’s most influential central bank would begin reducing rates in March. As expected, the Fed held borrowing costs steady in January for a fourth consecutive time, leaving them at their highest level since 2001. However, the U.S. central bank’s warning that it would not lower interest rates until inflation was “moving sustainably” toward its 2% target and that a rate cut in March was unlikely, sapped some of the momentum from the market rally. The yield on the benchmark 10-year U.S. Treasury note ended January at 3.92%, four basis points (“bps”) higher than a month earlier.
Across the Atlantic, the European Central Bank (“ECB”), as expected, held interest rates steady at their current record high in January, the third consecutive time in which it has done so. With price pressure in the eurozone easing faster than expected, and the region’s economy weakening, investors were hoping that the ECB would begin cutting interest rates as early as April. However, with eurozone inflation still above its target rate, the ECB vowed to keep rates at their current levels for a “sufficiently long duration” and to make monetary policy decisions based on incoming economic data and not by any set timetable. In January, the yield on the 10-year German bond, Europe’s principal safe-haven asset, rose 17 bps, ending the month at 2.17%.
The start of the fourth-quarter corporate earnings season painted a mixed picture of how interest-rate headwinds have impacted company profits. In the U.S., 76% of the companies in the S&P 500 Index that reported results topped consensus estimates, which was above the long-term average of 66%. The fourth-quarter earnings growth rate is estimated to have increased 0.1% from a year earlier. In Europe, 36% of the companies in the STOXX 600 Index that reported results posted better-than-expected earnings, below the 55% that do so in a typical quarter. The year-over-year fourth-quarter earnings growth rate is expected to have contracted 12.7%. In Japan, 53% of the companies in the TOPIX reported positive earnings surprises, which was below the 56% beat rate over the past four quarters. The fourth-quarter earnings growth rate is estimated to have increased 27.0% from a year earlier.
Equity markets in the developed world gained in January while those in the developing world receded. In the U.S., the S&P 500 outperformed and hovered near an all-time high, boosted by shares of some heavyweight technology companies, especially those linked to artificial intelligence. In Europe, the STOXX 600 retreated on worries about the eurozone’s weak economy and the possibility that interest rates may remain higher for longer than hoped. Preliminary data suggested that the common currency bloc recorded zero growth in the fourth quarter. In Japan, the TOPIX outperformed, thanks in part to a weakened yen after the Bank of Japan announced that it will maintain its negative interest rate-policy stance for the time being. Japan’s stock market received an additional boost from a new tax-saving investment program, the Nippon Individual Savings Account, which lured retail investors into buying more Japanese stocks. Meanwhile, in emerging Asia, the Hong Kong-based Hang Seng Index, which is comprised mostly of companies from mainland China and serves as a gateway for foreign investors wanting to put money there, tumbled on worries about China’s mounting economic woes and the lack of a sufficiently forceful response from Chinese policymakers despite the country’s central bank announcing a series of measures intended to support China’s beleaguered equity market and debt-laden real estate sector.
Information technology was the best-performing sector in January, thanks to market enthusiasm for large U.S. technology companies linked to artificial intelligence. Materials was the worst-performing sector, as the shares of commodity producers came under pressure due to worries that China’s mounting economic woes will curb the country’s demand for raw materials.
Outlook
There has been a striking difference in share price performance during 2023 between renewable energy and clean technology companies, and real asset-centric utilities, midstream energy, and transportation infrastructure companies. While top line growth still favors much of the renewable energy and clean technology space, and there is plenty of runway ahead, multiple factors have pressured shares in the short run, including decelerating order activity, excess channel inventory, higher borrowing costs and relief from last year’s exceptionally high oil & natural gas prices.
This has led to a meaningful pullback in valuation for companies across an incredibly dynamic and innovative space in both renewable energy and electrification, while the opportunity set ahead remains just as great and the direction of travel in no way changed. The portfolio’s measured exposure to this higher volatility, higher risk category of infrastructure-related services, materials and technologies served us well last year and the portfolio is designed to maintain this defensive posture. But we also believe the valuation pullback for many high-quality companies poised to capture a meaningful share of this growing market represents an exciting opportunity for investors that we expect to take advantage of in 2024.
The share price performance of real asset-heavy, core infrastructure securities also had to contend with the headwind of substantially higher interest rates in 2023, leading to underperformance versus most growth-oriented broad equity market indices. But the combination of defensive business models, highly predictable revenues and cash flows, and strong inflation pass-through characteristics has demonstrated resilience. This leaves the portfolio’s holdings very well-positioned to benefit from an end to the rate-hiking cycle, when we expect eventual lower interest rates will be used to discount cash flows that have been adjusted higher either for regulatory or contractual inflation-adjustment, or the indirect benefit of inflation adjustment that tends to stem from owning and operating high fixed cost, long life assets.
In summary, we believe infrastructure investment allocations have been playing a relatively commendable defensive game in an aggressive and adverse monetary policy tightening phase. With key central banks signaling that interest rates have likely peaked, we are optimistic that market momentum is ready to shift in favor of companies with significant upside potential such as those in our portfolio.
The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
Information and opinions presented have been obtained or derived from sources believed by Lazard Asset Management LLC or its afflliates (“Lazard”) to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change.
Allocations and security selection are subject to change. The performance quoted represents past performance. Past performance is not a reliable indicator of future results. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.
Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries.
Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors.
Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.
Published on February 14, 2024.