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Inflation Not That Transitory and Omicron: Will Wall Street Keep On the Rise?

dices-over-newspaper-g2d61b5a04_640 — Pixabay CC0 Public DomainRiesgos en las bolsas. Wall Street

The U.S stock market set a record high in mid-November before a sharp selloff that started when the new COVID-19 variant, Omicron, was identified, and ended the month with a slight loss. Other factors in the backdrop were supply chain disruptions, labour shortages, a higher U.S. dollar and lower oil and UST yields. Rising inflation, previously termed “transitory” by Chair Powell who now says, “It is probably a good time to retire that word,” shortened the bond taper timetable.

From Economist Gary Shilling’s Insight: ‘Historically, global supply shortages haven’t existed outside of wars, so the current episode, the result of temporary supply-chain bottlenecks and economy reopening disruptions, is unusual. But the reaction to it by consumers and businesses isn’t, as they rush to order and buy in anticipation of shortages and price increases in a self-fulfilling cycle.’

Another note, from economist Ed Hyman, on stock market tops vs Fed tightening: ‘The last three major S&P peaks occurred after 6 hikes in fed funds to 6.50% in 2000, after 14 hikes to 5.25% in 2007, and after 9 hikes to 2.50% in 2018.’

M&A activity remained robust in November with newly announced deals to the portfolio including: American Tower’s acquisition of data center operator CoreSite Realty for $10 billion; Novo Nordisk’s acquisition of biopharmaceutical company Dicerna Pharmaceuticals for $3 billion; GIC and CPP’s acquisition of IT security company McAfee for $15 billion; KKR and GIP’s acquisition of adata center operator CyrusOne for $15 billion; and, DuPont’s acquisition of specialty materials company Rogers Corp for $5 billion. Deals that closed in November included Merck’s acquisition of Acceleron Pharma for $11 billion, Pfizer’s acquisition of Trillium Therapeutics for $2 billion, and Paper Excellence’s acquisition of Domtar for $3 billion.

From the WSJ’s Buyout Boom Gains Steam in Record Year for Private Equity: ‘Private-equity firms have announced a record $944.4 billion worth of buyouts in the U.S. so far this year, 2.5 times the volume in the same period last year and more than double that of the previous peak in 2007…The IPO market is also running at a record pace, and merger volume in the U.S. is twice last year’s level.’

Lastly in the convertibles space, similar to the first quarter, the market saw multiples contract, which disproportionally affects growth equities. The convertible market is generally more growth oriented, so there was some weakness as the month came to a close. Despite this, issuance picked up significantly and we expect global issuance for the year to come in just below last year’s level. This expands our investible universe and is a sign of a healthy market.

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To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:

GAMCO MERGER ARBITRAGE

GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

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GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

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GAMCO CONVERTIBLE SECURITIES

GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.

The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.

By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.

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Class I EUR LU2264532966

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Class F USD LU2264533691

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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to ﬁnd out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reﬂect the manager’s current view of future events, economic developments and ﬁnancial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

Infrastructure for Smart Portfolios

| For Constanza Ramos | 0 Comentarios

Smart cities are no longer a topic of the future. Across the world, industries from infrastructure, to resource management to transportation to technology are mobilizing to make them a reality. Omar Moufti, BlackRock’s Thematic Investment Specialist for EMEA, explains the investment opportunities that may arise from this urban transformation.

Urban future
In 1972, world leaders met at the United Nations Conference on the Human Environment in Sweden, where they defined actions that would ultimately lay the foundation for companies and global organizations to join the efforts to combat climate change. In later years, the United Nations Sustainable Development Goals (SDGs) set key targets to guide international efforts.

This year, the United Nations Climate Change Conference (COP26) continued the conversation to meet sustainability goals in the short term. Cities play a central role in the collective effort to meet these goals, as they are directly or indirectly significant contributors of carbon emissions and pollutants. This transformation of cities, aside from changing the urban landscape, will also offer the opportunity to incorporate exposure to the industries involved in this process to investors’ portfolios.

Over the course of this decade there will be one billion new inhabitants in highly urbanized areas. Of these, 90 percent will be absorbed by emerging markets⁵. This means that more than 900 million people will move to cities in the coming years. For example, Mexico is expected to grow from 384 cities today to over 900 by 2030, according to UN-Habitat.

Smart cities
The UN sees cities with smart infrastructure as a sustainable path to urbanization, and smart cities along with smart urban management models revolutionizing current infrastructure (5G, the internet of things (loT), etc.) have the potential to reduce environmental impact while improving the quality of life of their inhabitants.

And the creation of smart cities is getting a lot of attention from policymakers, such as President Biden as well as the European Commission allocating significant budget to infrastructure to boost GDP. “With the pandemic, many municipalities and federal governments have had to accelerate the modernization of their offerings. Information sharing has greatly improved. Emergency response teams have been modernized,” explains Omar Moufti, BlackRock’s Thematic Investment Specialist for EMEA.

With the weight of global governments and organizations behind it, the development of the infrastructure sector has the potential to generate investments that foster economic growth. Opportunities abound – From equipment manufacturers and service providers improving resource efficiency, to real estate development and renovation.

Future urban growth opportunities also extend to software developers and new technology solutions. “Undoubtedly, 5G and IoT are key to increasing machine-to-machine communication and real-time data updates, which are already part of today’s reality and will consolidate as a core element of smart cities,” adds Moufti.

Investment strategy
Investing in the transformation of urban spaces and infrastructure offers investment possibilities to generate results with a good balance of risk and return. In this sense, the macro theme of infrastructure could be incorporated as a countercyclical strategy to help recovery after the social and economic impact of the current market environment.

“The integration of intelligent infrastructure will generate urban complexes that allow a positive coexistence between the environment, society, and modes of connectivity. All with a goal of long-term improvement in people’s quality of life and recycling resources to preserve the planet,” says Moufti.

Infrastructure is a multi-decade driver of development, and it is vital to choose the right strategy for investing in it. “We put a lot of research effort into developing our benchmarks, along with our index partners, to help ensure we capture all the long-term opportunities,” says Moufti. “Some sub-themes may outperform in some cycles, but the most important thing when creating thematic indexes is to capture the entire opportunity set so that the growth in that theme accumulates in the portfolio.”

Smart City Infrastructure is an ETF developed with not only megatrends in mind, but also the UN SDGs.. This and other types of instruments with exposure to smart infrastructure themes are a solution aligning an investment portfolio with major global trends and investing in cities that are already leapfrogging into the future.

Additional related products:

Sources:

¹ ONU. “Objetivo 11: Lograr que las ciudades sean más inclusivas, seguras, resilientes y sostenibles”. https://www.un.org/sustainabledevelopment/es/cities/ As of November 2021

² ONU-Habitat. (20 junio 2017). “Tendencias del desarrollo urbano en México”. https://onuhabitat.org.mx/index.php/tendencias-del-desarrollo-urbano-en-mexico As of November 2021

³ UNAM (2018). “Mientras la población crezca más que el PIB, los problemas económicos en México serán mayores”. https://www.dgcs.unam.mx/boletin/bdboletin/2018_299.html As of November 2021

⁴ ONU-Habitat Op. Cit

⁵ ONU. “Objetivo 11: Ciudades y comunidades sostenibles”. https://www1.undp.org/content/undp/es/home/sustainable-development-goals/goal-11-sustainable-cities-and-communities.html

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Healthy Cities

| For Meritxell Sedo | 0 Comentarios

Jonathan Roger Blue City — Pixabay CC0 Public DomainJonathan Roger. Jonathan Roger

Smart cities aren’t just about robotics and futuristic design. To be truly smart, they also need to protect and promote the health of their inhabitants – a task that’s all the more pertinent in the wake of the Covid-19 pandemic, which saw busy, crowded metropolises reporting some of the highest rates of infection.

In all, a smart city can reduce the disease burden by up to 15 per cent and reduce greenhouse gas emissions by around 10 per cent, research from consultants McKinsey shows (1).

According to the Pictet-Smart City Advisory Board, it’s not just about healthcare but also about taking care of the population’s health even before they get sick. The aim is to create an environment that promotes healthy living. It’s a priority for planners and regulators, and an opportunity for businesses and investors, according to the Advisory Board members, who dialled in from cities across the globe.

Pollution is a major challenge. More than 80 per cent of city dwellers are exposed to air quality that breaches WHO’s limits, with the problem particularly acute in low- and middle-income countries (2). Air pollution, in turn, is a major cause of illnesses and diseases, accounting for some 4.2 million deaths a year (3).

A holistic approach is needed. That includes more parks and greener buildings – both figuratively, in terms of reduced emissions and improved efficiency, but also literally, using plants within construction projects.

Businesses are increasingly embracing the innovation challenge. The 51-storey Jian Mu Tower in Shenzhen, China, for example, will provide 10,000 square meters of space for aeroponic farming, growing everything from salad greens to fruit and providing enough sustainably-produced food for some 40,000 people. These plants will absorb 200,000 kg of CO2 a year, as well as helping to shade the building, thus improving its energy efficiency and reducing the need for air conditioning.

Another way to reduce pollution is to encourage people to use alternatives to petrol-guzzling cars. That could mean making better use of existing public transport infrastructure, including sensors and apps to encourage people to travel at quieter periods – something that may be increasingly possible thanks to the advent of flexible working. (Conventional trains in Europe, for example, run on average at 35 per cent of capacity (4). They may be full during rush hours, but there is plenty of room at other times.)

Micromobily – from bikes to scooters – not only reduces the need for cars but can also have health benefits for users. By 2030, the micromobility market could be worth up to USD500 billion, according to consultants McKinsey (5). The trend can be further accelerated with more infrastructure – like secure parking and charging points – as well as with better city design.

Waste management, clean water and sanitation are also key. As an island with limited freshwater resources and limited land, Singapore is one of the leading innovators, with initiatives such as a new deep tunnel sewage system and high-grade reclaimed water. NEWater, the name Singapore’s Public Utilities Board gives to its highly treated reclaimed wastewater, is purified through a multi-stage process – including microfiltration, reverse osmosis and ultraviolet disinfection – and used in industry and for air conditioning. During dry periods it is also added to reservoirs, where it is mixed with raw water, treated again and supplied to consumers’ taps.

Accommodating ageing

Covid-19 highlighted the need for healthcare infrastructure. This is a growing area of the economy – Singapore, for example, has doubled its healthcare spending over the past decade.

Cities need to provide easy access to everything from basic diagnostic centres and strengthened early-stage outpatient treatment capacity to acute hospitals and assisted living. Technology can help, bringing access to diagnostics via apps, enabling doctors to consult colleagues remotely or speeding up diagnosis and drug discovery with the help of machine learning. The growing telehealth universe includes companies such as Teladoc Health Inc, which diagnoses, recommends treatment, and prescribes medication for routine medical issues through phone and video consultations (6).

Care for the elderly is becoming increasingly important as populations age. Of the 238 million people aged 65 and over in OECD countries, some 43 per cent live in cities (7). A key focus is on assisting people to stay in their homes even when they can no longer be fully independent. Swiss non-profit Spitex, for example, provides millions of hours of home care and assistance each year, offering services which range from changing bandages and administering medicine to meal delivery and wheelchair hire.

Technology also helps the elderly stay healthy and independent for longer – something that Lucerne’s iHomeLab has focused on. Its CleverGuard, for example, uses non-intrusive appliance load monitoring (NIALM) technology to analyse current and voltage. It detects any unusual patterns in the use of electrical appliances, including any unexpected inactivity which could be a sign of help needed. The iSens light sensor, meanwhile, can be installed next to the bed and used to alert carers of any abnormality in movement.

Last but not least, city infrastructure needs to be able to cope with the next pandemic – including plans and facilities for quarantine accommodation, for the isolation for the mildly ill (to reduce pressure on hospital beds), for the rapid conversion to ICU beds and for centres to distribute masks and vaccines.

Sustainable cities are one of the UN’s Sustainable Development Goals, and health is a key part of that – from reducing the adverse environmental impact of cities to ensuring access to green spaces and sustainable transport systems. The Covid-19 pandemic has made these targets all the more urgent. Investors can help drive the change, embracing a growing number of opportunities and innovations.

Tribune written by Thematic Advisory Board.

Discover more about Pictet Asset Management’s expertise in thematic investing.

Notes:

(1) Theoretical improvements in key KPIs if a “smart city” concept is being applied. Source: McKinsey Global Institute analysis, 2018

(2) WHO, “Global Urban Ambient Air Report”, 2016

(3) “Global, regional, and national comparative risk assessment of 79 behavioural, environmental and occupational, and metabolic risks or clusters of risks, 1990-2015: a systematic analysis for the Global Burden of Disease Study”, Forouzanfar et al.

(4) European Environment Agency, 2005

(5) McKnisey, “Micromobility’s 15,000-mile checkup”, 2019

(6) Teladoc Inc is part of the Pictet-Smart City portfolio

(7) OECD, “Ageing in cities”

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

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Pictet Asset Management: No Reason for Pandemic Panic

| For Meritxell Sedo | 0 Comentarios

Luca Paolini, Pictet Asset Management. Luca Paolini, Pictet Asset Management

Riskier asset classes are trading at or close to all-time highs. There are good reasons for this.

Consumer and industrial demand is robust, supply bottlenecks look set to ease – potentially placing downward pressure on inflation – and corporate earnings and margins remain healthy.

This augurs well for equity markets over the near term.

And yet this positive picture needs to be balanced against the emergence of a new threat to the economy. Though it had fallen right down the list of investors’ worries, the recently identified Omicron variant of Covid shows the pandemic hasn’t faded away. While pandemic-related developments can no longer dictate the economic cycle, they can certainly influence it.

Markets were clearly spooked by the emergence of a new Covid variant classed as “very high” risk by the World Health Organization. While the unprecedented number of mutations in the strain suggests that the virus could evade current vaccines to some degree, this has yet to be established.

Also unclear is the severity of the disease the new strand causes, even if anecdotal evidence is encouraging.

For their part, governments aren’t taking risks. Many have imposed travel restrictions, perhaps learning lessons from the dithering they were guilty of during the spread of the Delta variant earlier in the year.

But the picture is not universally negative.

Although Covid has caused distortions and supply bottlenecks, economies have by and large adapted remarkably well to the vagaries of the pandemic and are now are better prepared to withstand its effects.

Also, it appears that the vaccines that have been rolled out globally can be modified to target the new variant.

At the same time, we see no signs of ‘froth’ in the shares of companies that would have benefited from a full re-opening of the economy. Valuations for Covid-sensitive stocks suggest investors had been largely sceptical of the prospect of a smooth, hiccup-free reopening of the economy.

So, despite the heightened uncertainty, we believe the direction of travel is still towards the reopening and near-normalisation of economies worldwide.

All of which leads us to maintain a neutral positioning on equities and remain negative on bonds.

Overall, our business cycle indicators show the economy continuing to recover from the pandemic. Notwithstanding concerns about short-term risks to European growth, largely related to fresh lockdowns and a new surge in Covid cases, we are more confident on how economic conditions are shaping up in the developed world.

US growth can be expected to remain very strong in both real and nominal terms (see Fig. 2). Worldwide, we expect services industries to gain momentum. Under normal conditions, services sectors would typically follow the lead of manufacturing – which has shown some softening lately. However we believe the next phase of the recovery will be powered by services as the reopening of economies should remains by and large on track (albeit with the added uncertainty due to the spread of the Omnicron variant).

We forecast a sequential re-acceleration in growth through to the first half of 2022. The pace of global economic expansion should remain above-trend for the foreseeable future – our forecast of 4.8 per cent GDP growth next year remains above consensus.

Our liquidity indicators show a significant contraction in credit supply this quarter, thanks to a sharp withdrawal of central bank stimulus. More positively, however, there are signs of credit supply growing in the private sector, particularly in the US, while the Chinese authorities are also starting to relax their stance.

The pickup in private borrowing has historically put upward pressure on interest rates, as it allows central banks to tighten even faster.

Our valuation indicators show that all major asset classes remain expensive by historical standards, with equities hovering at all-time highs. One exception is Latin America, whose equity markets are now cheap even in absolute terms. In relative terms, the UK is also good value.

US stocks are the most richly priced. And consumer discretionary stocks are beginning to look as expensive as technology shares. Meanwhile, cyclical stocks have outperformed their defensive counterparts as inflation expectations have increased; this has taken cyclical stocks’ premium over defensives back close to cycle highs of 16 per cent.

A decline in liquidity and upward pressure on real yields will reduce stocks’ price-earnings ratios, though about half the contraction we envisaged earlier this year has already occurred. Meanwhile, though the a surge in profit growth looks to be easing, we still expect corporate earnings to rise 16 per cent for the coming year.

Within fixed income, the signal on Chinese government bonds is neutral while US investment grade bonds appear expensive. Surging inflation has triggered a flight into US inflation-linked bonds, leaving them with yields below -1.0 per cent and the second most overbought asset class in our models.

Our technical indicators show that positive trends for global equities intensified, compensating for an absence of positive seasonal factors. Technical readings for bonds were negative although surveys show investor positioning in fixed income appears excessively bearish, which would normally be a ‘buy’ signal.

Opinion written by Luca Paolini, Pictet Asset Management’s Chief Strategist.

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Coping with Inflation

| For Cecilia Prieto | 0 Comentarios

man-g78f2d0726_640 — Pixabay CC0 Public DomainInflación. Inflación

The question of whether inflation is transitory or structural is the crux of what financial markets and central banks today are currently grappling with. We have been notably below trend inflation for at least the last decade within the U.S. and the eurozone. Japan and some other countries have been experiencing this for 20 plus years. In fact, Japan even faced deflation.

Coming out of the Covid experience we believe most of the supply chain issues today are transitory in nature. However, the biggest challenge pointing to at least some level of structural inflation is the shift in the mindset of workers, which is likely to result in higher wages and unlikely to be transitory in nature. For decades, we have seen a move away from the power of labor towards the power of capital, and many workers are reluctant to go back to low wage jobs without relatively solid and forward career progression. Covid accelerated this swing.

In the U.S., there is notably stronger stimulus from the Democrats in power than under the Republican party, with a substantial infrastructure plan as well as possible additional social fillip in the works. In the EU, stimulus has been injected into economies for years now, and in China, there is a movement towards what is being called common prosperity.

Such stimulus will feed through to inflation, but we caution that this is likely to be viewed by the Federal Reserve as “good” inflation and a return to what they want to see in terms of changing social dynamics in the economy. So, in short, we think that most of the underlying inflation pressures are transitory in nature, but “transitory” is likely to be a multi-year process as we recover from supply chain issues.

What’s Next?

Today, the U.S. consumer balance sheet remains robust, with household debt still at a lower level than before the pandemic, although Q2 2021 showed an increase in credit card debt. Even corporate balance sheets, though they are elevated, show a strong ability to service that debt. We don’t believe that a potential small incremental move up in underlying borrowing rates is likely to bring the growth to a significant halt.

Tapering and the idea of higher U.S. rates (nearly two Fed interest rate hikes are now priced into 2022 on the back of supply driven inflation, rather than transitory inflation) are proving to have a profoundly negative impact on emerging market asset performance. This is most notably true with high yield EM sovereign/corporate credits where the market has been “Offer Wanted” and many participants fear a liquidity crunch.

As a global system, we’ve fought the last two slowdowns in growth with a significantly elevated level of debt and leverage. If we’re to see strong growth continue, it’s unlikely that it comes with notably higher rates, as higher rates typically act as a brake on growth. However, given the likelihood of higher wages this time around, we are likely to see elevated inflation compared to pre-pandemic levels. In fact, inflation ran notably below trend for over a decade leading into the pandemic, and thus, to central banks and the Fed in particular, it’s unlikely to be a challenge if it runs just slightly above trend for some years to come.

Despite the pressure around the globe and in the U.S. from higher inflation and the questions surrounding its transitory nature, rates remain relatively contained. There has been a flattening in the U.S. yield curve since the spring of this year, with long rates falling modestly, while front-end rates moved up.

It has often been stated that fixed income is ballast to an equity portfolio, and so it has been in a low rate, low inflation environment. Typically, when fixed income zigs, equity markets zag. But in a rising rate environment, and in a rising inflation environment, that may not be the case. As interest rates rise, fixed income is less defensive, and perhaps, equity multiples compress, and equities themselves drop. The way we’re thinking about this in our multi-asset portfolios is first and foremost reassessing the risk and return that fixed income can have. Today, that means maintaining an underweight duration posture. As rates rise and potentially slow the economy, an increase in duration can rise right along with it.

Today, we think investors are best served playing more defense from a rate perspective, focusing on consumers with strong balance sheets through asset-backed securities such as securitized auto loans and mortgages that represent that market. Although we currently retain an underweight duration stance, we do believe that as rates rise and the economy normalizes, we’ll want to step into what we believe are relatively neutral levels of duration so that we position the portfolios to have a natural balance and act as an offset to other risk global assets.

On the equity side, we don’t want to be too underweight risk. There are both significant positives to a healing economy and workers returning to offices and other worksites, but there’s also some risk as we transition to whatever the new economic paradigm is.

Equity indices in most parts of the world sit notably higher than they were going into the pandemic, so financial markets today don’t just represent a return to normalization. They represent perhaps a new paradigm: one of significantly depressed rates, ongoing government stimulus, and higher multiples across the world.

We are relatively neutral on our equity allocations and our overall risk budget, while retaining a defensive posture in fixed income. We don’t try to time the economic cycle, but we want to make sure that we’re well-equipped to step into any weakness and take advantage of opportunities when they come forward.

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Corporate Earnings Season Keeps Pointing Towards Higher Growth

| For Cecilia Prieto | 0 Comentarios

magnetic-compass-gf080bda6b_640 — Foto cedidaCorporate Earnings Season Keeps Pointing Towards Higher Growth. Brújula

US equities propelled the market higher, with major indices achieving all-time highs. Despite the backdrop of supply chain issues, input cost pressures and tight labor markets, corporate earnings season highlighted higher demand and improved margins.

The FDA is on track to approve Pfizer’s COVID-19 vaccine for use in children ages 5-11 and booster vaccines continue to be distributed to the rest of the population. While the Delta wave of the pandemic is past its peak, the approaching holidays and winter months will test whether the U.S. can sustain that momentum.

Markets have shown that investors are expecting the Fed to raise interest rates next summer, following recent inflation reports and signals from other major central banks that they are moving towards tightening policy. Inflation has been linked to the supply chain crunch that is leading to shortages and shipping problems, which has already affected holiday shopping. Fed Chair Jerome Powell noted that while we see those things resolving, it is very difficult to say how big those effects will be in the meantime or how long they will last.

M&A continued pace in October with many notable deals making progress including Kansas City Southern and Canadian Pacific had their voting trust reaffirmed by the Surface Transportation Board leaving just Mexican regulatory approval outstanding for their $31 billion deal; and Kadmon received U.S. antitrust approval to be acquired by Sanofi for $9.50 cash, or about $1.6 billion, clearing the way for the deal to close in November.

Equity markets surged in October bringing convertibles along with them. In sharp contrast to the many concerns facing equities in September, the market shifted its focus towards earnings, which have been generally good so far. Convertible issuance stalled but should pick up again as we get closer to year-end.

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Pictet Asset Management: Inflation Presents Greater Risk to Bonds than Stocks

| For Meritxell Sedo | 0 Comentarios

Times are tough for global financial markets. Monetary conditions are tightening while supply chain bottlenecks are starting to take their toll on the global economy. At the same time, inflationary pressures are proving more persistent than previously expected.

We believe fixed income markets will be particularly hard hit, as yields adjust to higher inflation and the prospect of tighter monetary policy. High yield bonds appear especially vulnerable. Equities won’t be immune to market jitters either. But, on balance, we believe they should hold up better than bonds because economic growth is still strong enough to allow for positive surprises in corporate earnings.

Our business cycle indicators for the world have turned neutral after a year in positive territory. However, they still suggest that economic growth will remain comfortably above the long-term trend, at 5.9 per cent this year and 4.8 per cent in 2022.

That is consistent with corporate earnings growth of around 15 per cent next year – double the pace of the consensus forecast. Upside surprises in profits are more likely in Europe and Japan, where the economic recovery has further to run.

Although growth momentum in the euro zone appears to be stalling, with industrial production weighed down by supply frictions, government and central bank policies remains supportive. The risk of monetary and fiscal tightening here is lower than in other developed markets.

In Japan, meanwhile, confidence is recovering from historically depressed levels and business activity surveys are improving.

The situation is more negative in China, however, where activity continues to slow, whether that’s in terms of industrial production, construction and fixed asset investment. However, sentiment surrounding the vital property sector (which account for around 25 per cent of the country’s GDP) appears to be stabilising. That is in part due to debt-laden property developer Evergrande coming good on coupon payments, averting a default at the last minute. Authorities in Beijing, meanwhile, have encouraged banks to lend to the property sector.

While we still expect more stimulus from China, it has been less forthcoming than we originally expected, with policymakers prioritising deleveraging over short-term growth. Elsewhere central banks are starting to drain liquidity, particularly the US Federal Reserve and the Bank of Japan. Private credit creation, meanwhile, remains dormant and is not expected to recover until next year. As a result, the total liquidity provision among the world’s five biggest economies has now dropped to the equivalent of 11.9 per cent of GDP, down sharply from last year’s peak of 28.7 per cent. This prompts us to downgrade our global liquidity score to neutral (1).

However this decline should be gradual in order to ensure the recovery remains on track. Indeed, central banks are likely to show higher tolerance for inflation, not least because their policy moves cannot address the most immediate cause of price increases – supply bottlenecks.

Nevertheless, tighter liquidity is sure to have a negative impact on valuations – both for equities and bonds. Our models suggest that a 100 basis points rise in real yields translates into a 20 per cent drop in stocks’ price-earnings ratios. However, we believe we have already seen most of that move.

Although equities look expensive relative to bonds, our estimate of the equity risk premium still points to relative upside for stocks in most regions. Companies’ sales figures are beating forecasts by less than the previous quarter, but corporate earnings surprises are still high, which points to healthy operating leverage (see Fig. 2). In the short-term, at least, we believe profit margins will be resilient to rising input cost pressures.

Valuations support our preference for defensive healthcare stocks (among the cheapest sectors in our model, in relative terms) and caution on expensive US high yield bonds.

Technical charts show positive seasonality for equities, as well as supportive medium-term trends. Some investor surveys, including the American Association of Individual Investors (AAII), indicate bullish sentiment.

In contrast, short-term momentum for bonds has deteriorated across the board. The Bank of America fund manager survey shows investors allocation to bonds sits at all-time lows. At the same, net short positioning for US Treasuries, especially in the 2- and 5-year maturities, has increased significantly.

Opinion written by Luca Paolini, Pictet Asset Management’s Chief Strategist.

Discover Pictet Asset Management’s macro and asset allocation views.

Notes:

(1) Measured as policy plus private liquidity flows, as % of nominal GDP, using current-USD GDP weights for US, China, euro zone, Japan and UK.