Michel Saugné

Is contrarianism set to make a comeback?

Michel Saugné, CIO and Enguerrand Artaz, Fund Manager, La Financière de l’Échiquier (LFDE) | January 2025

 

In markets as in boxing, psychologies can change in surprising ways. In the blue corner you have the United States, with its unwavering growth, never-satiated consumers, raised electoral expectations and a policy approach that, however uncertain, will put American interests front and centre. In the red corner, meanwhile, you have Europe, with its anaemic growth, households that are more inclined to save than spend, and a troubled political context in the form of French instability and upcoming German elections. On paper, this match-up looks all the more lopsided given that the result of the first round was so clear-cut: For an investor in euros, the S&P 500 rose by 33.6% in 2024, compared with 9.6% for the Stoxx Europe 600.

This kind of track record, coupled with the wide gap between the two regions in terms of economic background, naturally gives many market players reason to think US domination will continue unchallenged. For the American fighter, however, the road ahead is paved with pitfalls – the most obvious one being Donald Trump. The measures the new President wants to implement are designed to consolidate the power of the United States, but the side-effects of higher tariffs, the mass expulsion of immigrant workers and drastic cuts in public spending could upset the well-oiled machine that is the US economy – which is not without its weaknesses, with the employment market in particular continuing to deteriorate. The rise in unemployment seen in recent months is increasingly due to net job losses. Whether or not this trend continues is something to keep an eye on, as the strength of US consumer spending now depends largely on whether labour incomes hold. The health of the labour market is all the more crucial given that the equity markets, with their very high valuations and investors’ very optimistic positioning, are anticipating a perfect economic scenario. The asymmetry, therefore, is not very attractive on the other side of the Atlantic: Although the economic situation is currently solid, there are very few pleasant surprises in store and the slightest hiccup could lead to a significant contraction in valuation multiples.

On this side of the Atlantic, meanwhile, the situation is the complete opposite. Against a backdrop of mediocre economic momentum and political instability, pessimism around European assets is at an all-time high – which is reflected in the record valuation differential between European and US equities. With very weak growth expected in 2025 and the risk of higher US tariffs looming large, the outlook is clearly far from rosy. But the fact that there is little light at the end of the tunnel is also precisely the reason why any pleasant surprises could have a significant effect. An end to the Russia-Ukraine conflict, ambitious fiscal stimulus measures in Germany, renewed political stability in France, a faster rate cut by the European Central Bank and a Chinese economic recovery are among the many somewhat improbable – but not impossible – hypotheses. In contrast with the US, the asymmetry is therefore more favourable in Europe: Although the economy is sluggish, very few unpleasant surprises are likely and the slightest piece of good news could lead to a marked improvement in sentiment and a significant rebound in the equity markets.

For investors, of course, it is not a question of sitting around hoping for a miraculous change in leadership but of restoring credibility to this fundamental reflex of contrarian management, which has been on ice for the last two years: daring to take profits where everyone else is buying, and diversifying into areas where no-one else dares to invest.

The opinions expressed reflect the views of the author. LFDE shall not be held liable for these opinions. Securities and sectors are provided as examples. Their inclusion in the portfolio is not guaranteed.