Fed, Markets, and European Value (with Guy, Anna)

What is your latest thinking on the tone Warsh will set?

Guy

Hugh Kimber

The press conference is about whether Warsh speaks for himself or the committee. I think he will say very little, which would be a good outcome. The Fed is overpriced for hikes.

We see no reason for central banks to hike, given falling oil prices and softness in labor markets and wages. Both the Fed and BoE can be on hold through the year.

How does someone who doesn't like forward guidance deliver a message?

Anna

Hugh Kimber

He can push back against rate hike pricing without giving forward guidance. Saying very little and being patient would be a good outcome.

The economy is in a different place than six months ago, and the activity over the past week offers him time. The pressure for tightening is gone.

Is there any reason not to buy stocks?

Guy

Hugh Kimber

I still see value, but it's sector-specific. Value is in consumer-facing stocks, energy-sensitive cyclicals, and Europe.

Earnings revisions show tech and energy have given all the upward momentum. Other sectors have been revised down. The S&P 500 has priced in good news, but beneath the surface there is value.

Europe has reliance on autos, which are struggling. Is it still important?

Anna

Hugh Kimber

Europe is less auto-heavy than five years ago. Banks have further room to run with a steepening yield curve. Chemicals are energy-intensive and will benefit from lower energy prices.

If 2025 was about global diversification, I see no reason for that not to continue now that we are moving past the worst of the energy shock.

Will money have the courage to come to Europe when SpaceX is climbing every day?

Guy

Hugh Kimber

You have to strip tech out of the regional discussion. Emerging markets are an underappreciated opportunity, trading at 12x forward earnings. For Europe, if we get a broadening out across sectors, that strengthens the case for diversification.

The recipients of US AI spending are often in EM, Korea and Taiwan in particular.

Do you like this equity market?

Anna

Hugh Kimber

Yes. The economy has gone through another massive shock, yet earnings have been upgraded and corporates show resilience. The more chaotic politics becomes, the more fiscal stimulus drives growth and profitability.

Is it sustainable? Yes, if earnings are still there. Fiscal spend is sustainable as long as the bond market sees a growth benefit. You have to consider debt-to-GDP in the context of what it's doing for growth.

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