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Growth Team Weekly Investment Insights

1) Why Central Banks May Be Reluctant to Declare Victory Over Inflation

This Financial Times article highlighted a few reasons global policymakers may hesitate to declare that inflation is under control. Most notably, economic strength, particularly in labor markets, may be too good. Economists argue that the disinflation story from here will rely on labor markets, and there is a risk that wage growth remains robust.

The worry is that workers will demand pay rises to restore the purchasing power lost during the initial spikes in prices. As that increased spending power finds its way into the economy, it may trigger a fresh surge in prices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Some economists worry that the deflation in goods prices caused by the easing of supply chain pressures will soon come to an end, making the job of suppressing overall price growth yet harder, especially with worries of other “upside risks” like continued geopolitical conflicts and the disruption to shipping from attacks by Houthi rebels on vessels in the Red Sea.

Given these looming risks, there could be a risk that policymakers err on the side of caution so they don’t claim victory too early, like in the 1970’s.

 

2) The Lastest Sign of US Economic Strength: Services PMI

The monthly Purchasing Managers Index ("PMI") measures the change in production levels across the U.S. economy. In addition to the manufacturing PMI, a services PMI is also released to measure changes for the non-manufacturing sector. A PMI above 50 generally indicates an expansion of the segment of the economy compared to the previous month, while a reading below 50 suggests a contraction.

While the manufacturing PMI has continued its trend below 50, services have been showing strength, which continued in January. The services PMI sector rose to 53.4 in January from 50.5 in December, with the new orders subindex rising to 55.0 from 52.8 and the prices-paid index to 64.0 from 56.7.

Souce: FactSet, as of 9 Feb 2024

 

3) New All Time Highs

The S&P 500 has officially recovered from its 2022 drawdown and hit the $5,000 milestone a little under three years after hitting $4,000 in April of 2021.

Source: FactSet, as of 9 Feb 2024. Past performance does not guarantee future results.

However, the US is not the only market hitting new all time highs. The dominance of US mega cap in 2023 masked another success story, Japan. Looking at the MSCI AC World Index, Japan actually outperformed the United States in local terms.

2023 MSCI AC World Index Sorted by Highest Country Local Returns

 

 

 

 

 

 

 

 

 

Source: FactSet, as of 31 Dec 2023. Past performance does not guarantee future results.

And after an amazing 30+ year drawdown, the Nikkei 225 is just a few percent from its prior all time high from December of 1989.

 

Investors may experience an all-time high, worry that the market is near the top, and get defensive. While there is no way to tell what the future holds, this Financial Times article highlights a recent analysis that indicates that the S&P 500 Index has averaged a 14% return in the 12 months following previous all-time highs going back to 1950.

 

 

 

 

 

 

 

 

 

 

Past performance does not guarantee future results.

 

5) Securing Manufacturing Capacity in Drug Development

Novo Nordisk announced an agreement to acquire three fill-finish sites from Novo Holdings for $11B earlier this month. Novo Holdings acquired these sites as part of a larger transaction in which it purchased Catalent, a global contract development manufacturing organization (“CDMO”). These sites specialize in the sterile filling of drugs, are located in Italy, Belgium, and the United States, and are an important step in securing the capacity to meet the growing demand for its GLP-1 obesity drugs.

The CDMO industry is an area that our team has followed closely over recent years and believes it will grow in importance due to continued innovation in biologic drugs. Drug development is complex, and CDMOs allow pharmaceutical and biotech companies to outsource their drug development and manufacturing needs. This provides several benefits, including reducing or eliminating infrastructure costs, providing access to additional expertise, and enabling pharma and biotech companies to scale capacity rapidly.

 

Artisan Growth Team manages portfolios which held securities issued by Novo Nordisk as of 12/31/23.  Portfolio securities are subject to change.