Five insights in five minutes
Contrary to what you read in the papers, investors have not been dumping equities in the past fortnight. There is a buyer for every seller. And those purchasing shares must be drawn to the prices on offer. Half of US stocks are now trading below their pre-covid five-year average forward p/e multiple. For equities elsewhere around the world, that number is closer to 70 per cent. Ex-US shares are lower on a price-to-book basis too, with a third of them at a discount of one standard deviation or more versus the same five-year average. As can be seen in the chart below, the UK, Japan, China and Latin America stand out. Meanwhile, it’s true that the most expensive quintile of global stocks on an earnings basis has become cheaper at a faster rate than the bottom quintile. That’s catnip for the Kathy Woods out there, although the multiple spread between them at 34 times is still ten turns above the pre-pandemic mean. If the long run case for equities was strong before, all the more so now.
Conversation starter for… global equities, emerging market equities, China equities
Good old gold
Just when you thought the glamour of gold had worn off – prices are only now shining like they did a decade ago – the yellow metal is the talk of the town again. It has even pushed so-called digital gold off the front pages, despite the wild swings in crypto of late. Indeed, bitcoin is now more than 40 per cent off its November high after gaining nearly 60 per cent last year. Yet it’s gold’s relatively steady rise of 20 per cent over the past 12 months that has made it en vogue amidst a world of uncertainty. Per the chart below, prices have closely tracked the inverse of real bond yields – as they do given gold’s lack of income. And with soaring energy costs continuing to push inflation higher, now at a four-decade high of eight per cent in the US, real yields are firmly negative. What is more, gold has historically outperformed other commodities after oil price shocks, so you can buy a chunky new watch or piece of jewellery and claim you are merely diversifying your family’s portfolio. Of course you are.
Conversation starter for… active multi-asset
Short term bonds
The lustre and frivolity of gold doesn’t appeal to everyone of course. Investors may prefer haven assets with more calculable factors, such as yield and maturity. But with six interest hikes on the Fed’s agenda this year, it’s hard to find long-duration bonds attractive no matter how hard you try. What about short-duration bonds then? With yields back to pre-pandemic levels, they definitely line up well versus longer-dated bonds. This can be seen in the chart below, where a typical global short-term index now has a yield of 1.3 per cent for a modified duration below two, which measures the sensitivity to interest rate movements. For just 50 basis points more yield the implied duration jumps to 7.5 and all the longer-term risks that come with it. Also compelling is what is called the ‘pull to par’ affect, which means that short duration bonds tend to recover relatively quickly in market sell-offs. That’s because the credit risk element is reduced due to the shorter period left to maturity. Even in fixed income then, there are still corners of the market that glitter more brightly.
Conversation starter for… short duration fixed income
We celebrated International Women's Day this week, with the year’s theme (#BreakTheBias) urging everyone to call out gender bias and inequality. Some recent good news is that European Commission president Ursula von der Leyen said she is “increasingly optimistic” that a directive on women’s representation in larger companies’ boardrooms will be established this year. But what about smaller firms? Looking at European venture capital deal flow by female-founded companies, shown below, numbers are moving in the right direction, with deals up by three-quarters last year versus 2020. In dollar terms, there was a five-fold increase in the past five years. Since this has been achieved without specific regulation, investors must be reckoning that female representation is positively correlated with corporate performance. Meanwhile, a recent report from Credit Suisse analysed more than 3,000 listed companies globally and found that the best-performing ones by share price returns exhibited superior diversity in both the boardroom and the c-suite. It’s no wonder that asset managers (including yours truly) are making commitments to engage with investee companies on board diversity.
Conversation starter for… listed and private equity, venture capital, credit, ESG strategies
EU defence and energy bonds
Rumour has it this week that Europe is discussing a joint debt issuance to finance energy infrastructure and defence. The SURE fund implemented in 2020 in response to the pandemic could be used as the blueprint, for which €90 billion has been raised so far, as per the chart below. Certainly the numbers would be as large this time, if not much bigger. What about the €1.8 trillion emergency package launched last year, you may ask? Additional spending has its benefits. For starters, European countries with borrowing costs higher than the EU, such as Spain or Italy, could tap into the fund to finance existing defence spending and to tackle the energy crisis more cheaply than issuing their own bonds, thus reducing pressures of near-term domestic issuance. And with inflation at a scorching 5.8 per cent, such stimulus means the ECB can focus its monetary efforts on curbing rising price pressures. For green investors, it will be interesting to see what their appetite would be for bonds linked to arms and energy – even in these desperate times.
Conversation starter for… government bond funds, EU fixed income, risk assets
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