Market Overview
Global equity markets rose modestly in June, as investors juggled the latest developments in central bank policies, political risks, and uneven corporate earnings results.
With concerns about inflation continuing to hang over markets, the monetary policy paths of key central banks were front and center in the minds of investors during the month. At the forefront of this market attention was the Federal Reserve (“Fed”), which, as expected, left interest rates unchanged at their highest level in nearly 23 years in June, the seventh consecutive policy meeting that it has done so. In an acknowledgment that domestic inflation has been stickier than anticipated, the world’s most influential central bank predicted that it will likely lower borrowing costs just once in 2024—down from the three rate cuts it had projected late last year—and warned that it would not move until it saw more data indicating that inflation was slowing sustainably. The Fed’s actions came on the heels of the latest reading from a closely watched gauge of inflation that suggested that price increases in May slowed materially and broadly, marking the second consecutive month of positive data after beginning the first three months of the year with worst-than-expected numbers. Global stock markets received a boost from the encouraging inflation numbers, which reinforced their optimism that the Fed will begin a monetary easing cycle this year. The yield on the benchmark 10-year U.S. Treasury note ended June at 4.40%, 10 basis points (“bps”) lower than a month earlier.
Across the Atlantic, the European Central Bank (“ECB”) lowered interest rates for the first time in nearly five years with a 25-bp cut in June. While the ECB cited a marked improvement in the eurozone’s inflation outlook as the reason behind its pivot to a less restrictive monetary policy stance, it also warned that price pressure remained strong and that it was not committed to a particular rate path. In the U.K., the Bank of England (“BOE”) held its main interest rate at a 16-year high in June, even as inflation slowed to its 2% target. While the BOE reiterated that it would maintain its hawkish stance until there was clear evidence that inflation can sustainably stay at its 2% target, expectations were growing that rate cuts were imminent. In June, the yield on the 10-year German Bund, Europe’s principal safe-haven asset, fell 17 bps, ending the month at 2.50%.
While the ECB’s latest actions sparked a modest rally, European stocks soon found themselves under pressure after far-right parties across several of the 27 countries in the European Union (“EU”) recorded significant gains in the European Parliament elections. France’s stock market tumbled after French President Emmanuel Macron called for a snap national election in the wake of his party being trounced in the European Parliament elections by the populist far-right National Rally party. Investors feared that the ascendance of these far-right parties to high office could weaken the EU, stall fiscal plans, and trigger a financial crisis in France by hindering the ability of the already heavily indebted country to pay its debts.
The conclusion of the first-quarter earnings season painted a mixed picture of how company profits held up in an uncertain macro environment. In the U.S., 80% of the companies in the S&P 500 Index topped consensus estimates, which was above the long-term average of 67%. The first-quarter earnings growth rate increased 6.0% from a year earlier. In Europe, 54% of the companies in the STOXX 600 Index posted better-than-expected earnings, in line with the beat rate in a typical quarter. The year-over-year first-quarter earnings growth rate contracted 5.7%. In Japan, 57% of the companies in the TOPIX reported positive earnings surprises, which was below the 59% beat rate over the past four quarters. The first-quarter earnings growth rate increased 12.2% from a year earlier. In Hong Kong, 59% of the companies in the Hang Seng Index registered better-than-expected earnings, in line with the beat rate over the past four quarters. The first-quarter earnings growth rate increased 3.9% from a year earlier.
Against this backdrop, equity markets in the developed and developing worlds advanced in June, with the latter outperforming the former. In the U.S., the S&P 500 outperformed, thanks to strong quarterly earnings results and hopes that the U.S. interest rate cuts will be forthcoming. Across the Atlantic, the pan-European STOXX 600 fell on concerns that future rate cuts from the ECB will be limited and worries about political risks stemming from wins racked up by far-right parties in elections across the EU. In Japan, the TOPIX retreated, as foreign investors sold off Japanese shares on concerns that the yen’s ongoing depreciation may hurt the Japanese economy. Elsewhere in 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 invest there, fell on concerns about tepid domestic economic data, the lack of new supportive initiatives, and company earnings results from Chinese companies.
Information technology was the best-performing sector in the June, as the fervor over artificial intelligence (“AI”) continued to benefit the stock price of companies leveraged to it. Utilities was the worst-performing sector, as shares of US power producers fell on profit-taking after strong recent stock price appreciation.
Outlook
April was a setback; May a (bullish) reversal, in our view. June, accordingly, represents in our view yet another tick forward towards deciphering the prevailing macroeconomic conditions that will underpin both the pace of economic easing as well as deceleration in inflation and eventual easing of monetary policy. Collectively, the last three months’ performance serves as an important reminder to take short-term reactions to changes in interest rate expectations in stride.
We maintain our investment outlook and believe the portfolio is designed to both structurally take advantage of compelling opportunities that span a wide range - from a budding resurgence of interest in defensive utilities that will power an electrified future - to the key enablers, including materials, services and technologies, that will both facilitate and benefit from increased investment in infrastructure. We remain highly confident and enthusiastic about our investment strategy and positioning for the long-term.
Moreover, while performance of infrastructure as an asset class, with its above average sensitivity to interest rates, has had a tough time keeping up, performance-wise, with broad-based growth equity indices recently, the combination of defensive business models, highly predictable revenues and cash flows, and strong inflation pass-through characteristics has demonstrated commendable resilience and we find the investment category trading at considerably more attractive valuations vis a vis broad market indices.
We believe this leaves publicly-listed infrastructure equities well positioned to benefit from a continued brisk pace of investment, with plenty of runway ahead, and 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.
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 July 17, 2024.