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Five insights in five minutes

Five in Five: inflation, Singles’ Day, US rates, natural capital, ECB
19 November 2021

    Global inflation

    A whopper here. An eye-popper there. Not a week goes by it seems without at least one country’s inflation number making headlines. It’s hard to keep score – especially in aggregate. So let us help. As things stand today, half of the world’s 20 biggest economies are now experiencing inflation in the 80th percentile of its two-decade history. Three quarters have above average inflation. If you construct an index that tracks price changes in proportion to country weights of the MSCI ACWI, then global inflation broke into the 90th percentile in May and is currently at its second highest level (see chart below). Should investors care? Clearly bond owners must – coupons are nominally priced. But the picture is mixed for equities. Globally they have performed well since the millennium so long as inflation keeps below the 90th percentile. Above that, however, and even excluding the spike in prices during the financial crisis, stock markets only rose 2.4 per cent on average in the year after that level was crossed – compared with a nine per cent return overall.

    Conversation starter for...global equities, US equities, global fixed income

    Global inflation  

    Singles’ Day

    November 11th is a solemn day during which western nations remember the courage of those who fought to defend freedom and liberty. Across the pacific, the date celebrates another freedom – being single! Thanks to their abundant disposable income, Singles’ Day has morphed into an online shopping frenzy. This year, the top two internet retail platforms reported one day sales of 890 billion yuan, up 16 per cent versus 2020. This happened despite the pandemic, energy shortages, and lacklustre local investment returns. Ironically, indeed, internet stocks themselves were down by almost 60 per cent at one point this year. But as the regulatory dust settles and investors note the chart below, which highlights another record year for revenues thanks to a 1.4 billion customer base, the on-line sector is again drawing attention. It shot up almost ten per cent last week. Investors shouldn’t allow the young, free and single to have all the fun.

    Conversation starter for...China equities, Asia equities, technology theme

    Singles’ Day  

    US rates and global stocks

    At its November meeting the Federal Reserve left the target funds rate at zero to 0.25 per cent. More important, the US central bank also announced it would begin reducing asset purchases this month. Those fearing a repeat of the 2013 ‘taper tantrum’ were comforted by the relatively muted market reaction. The S&P 500 continues to push all-time highs. Meanwhile, two-year treasury yields have risen by less than ten basis points over the last month. Ten-year yields have barely moved, implying a modest flattening of the curve – investors still don’t expect rates to move much higher over the long term. Given consensus inflation forecasts for 2022, real rates are expected to hover at around negative three per cent in the US. Sure, that’s not great news for US bond investors, but don’t assume that’s a problem for broader portfolios. See below the lack of any relationship between US bonds and global equities, for instance. Diversify smartly.

    Conversation starter for...Multi-asset portfolios, US fixed income, global equities

    US rates and global stocks  

    Natural capital

    Cop26 finally ended on Saturday. It closed on a deal setting the rules for carbon trading that will allow 200 countries to partially meet their net-zero targets by buying offset credits representative of the emission cuts made by others. The objective is to drive investments into emissions reduction projects thanks to big, efficient, transparent, and broad-based carbon markets. As of now, offset trading is worth about $1 billion a year. But according to the chief executive of the Institute of International Finance, the market could be worth a hundred times that by 2050. Glasgow paved the way for this to happen, although the appetite for voluntary carbon credits is already there. As illustrated below, demand has doubled over the past three to four years. It has also evolved in terms of projects to be funded, with nature-based solutions now counting for around 30 per cent of the total demand, reinforcing the case for natural capital as a standalone asset class.

    Conversation starter for...natural capital, alternatives, ESG funds

    Natural capital  

    ECB rules

    The Fed isn’t the only one on tapering watch. Future buying constraints may loom for the European Central Bank, which holds even more assets on its balance sheet relative to output. ECB Asset Purchase Programme rules dictate bond purchases be made in proportion to the size of a country’s economy and population, while also placing a cap on how much of a nation’s sovereign debt can be held. Per the chart below from our strategists, the latter one-third limit is being approached for the block’s largest and notoriously frugal economy – Germany. There are indications a new coalition government in Berlin may loosen purse strings and issue more debt, thus shrinking the proportion held by the ECB. President Lagarde awaits news. Halting bond buying could apply brakes to eurozone growth and prolong below-target medium-term inflation. Higher yields in eurozone periphery countries would also likely result. For now, being selective in euro area corporate bonds that offer much better yields than their government counterparts is one approach to lifting returns.

    Conversation starter for...Europe fixed income, eurozone credit

    ECB rules  


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