Five insights in five minutes
Up, down, up, down… markets are pogo sticking all over the world. Even the volatility of volatility is on the rise. The Vix index, which tracks expected volatility of the S&P 500, is a fifth lower this week but still 40 per cent above its five-year average. Meanwhile, the renminbi is twice as volatile in dollars as its average over the past 200 days – global high yield bond prices a third so. One of the exceptions may surprise you: bitcoin. Leaps and dives in the cryptocurrency price have been trending lower this year. And despite its reputation of being a wilder ride than other asset classes, volatility compared with global equities, for example, is approaching the lows of 2020 again, as can be seen in the chart below, while bitcoin’s return since January has been similar. Its trading pattern in relation to other riskier indices has also broken down. Since 2017, any bitcoin outperformance of the Nasdaq, say, would be accompanied by relatively more volatility, and vice versa. But lower vol has not led to poor relative returns this year. Make of that what you will.
Conversation starter for… global equities, high-yield, China, technology stocks
If you’ve been on planet Zog this week you’ve missed a busy period of central bank activity. Here’s a recap. On Tuesday the Reserve Bank of Australia increased its cash rate for the first time since 2010. A couple of days later, the Federal Reserve announced an extra-large hike of 50 basis points. Finally, the Bank of England returned its base rate to the highest level since 2009. Bond yields followed, with ten-year treasuries breaching three percent, around 40 basis points higher than last month, while UK equivalent gilts made a similar push to two per cent. Not wanting to lag, eurozone ten-year yields rose by roughly the same proportion, even though the ECB is not expected to lift rates before July. All of which has prompted many economists to say the era of ‘lower forever’ yields is finally coming to an end, except in Japan. Certainly, the global pile of negative-yielding bonds is rapidly shrinking back to its 2015 levels – now one-sixth the USD 18 trillion mountain at the end of 2020 (see chart below). That said, with inflation everywhere it’s impressive that investors still exist who are happy to pay for the privilege of holding well-rated bonds.
Conversation starter for… government bonds, fixed income funds, multi-asset
Beijing policy easing
Shares in China’s real estate industry rebounded 15 per cent on March 16; stocks in its tech sector gained a tenth on April 29. The common denominator? No fortune cookies for readers who answered ‘policy announcements’. Too easy. Increasingly in need of supporting an embattled economy, the government first hinted at loosening previously enacted regulatory measures in the tech and real estate sectors. Soon after, mortgage rates were lowered 20 to 60 basis points on average across 100 cities and another sizable infrastructure spending package was revealed on April 26. Then at the end of the month, China’s top governing committee pledged to support the healthy development of internet platforms. Such announcements generally give a boost to securities markets (see chart) and their increasing frequency is being welcomed. A multiple of forward earnings not far from single digits makes investors particularly responsive to good news at the moment.
Conversation starter for… Chinese equities, Chinese fixed income, emerging markets
As detailed in the upcoming edition of Europe Insights, plans by the EU to cut Russian gas imports two-thirds by the end of this year is positive for the clean energy transition. With Russia being the block’s largest supplier of natural gas and crude oil, providing around 45 and 25 per cent of total supply respectively, it won’t help with inflation pressures. Accordingly, there is a reactive inclination to subsidise fossil fuel consumption. However, as the chart below shows, the EU’s energy security plan, REPower, still has aggressive targets for transitioning to alternate energy sources now. This includes triple the use of wind, solar and hydrogen versus the need estimated by the International Energy Agency. The EU has also forged a transatlantic Energy Pact with the US and other European countries, which among other things will support technical collaboration, new infrastructure and clean tech deployment. Given this transatlantic group accounts for over 40 per cent of global output, any acceleration in their energy shift bodes well for investors in the transition.
Conversation starter for… ESG funds, climate change funds, green bonds
Fed and equities
We’ve written often why higher interest rates should not (and do not) harm stock returns in the long run. But hefty central bank policy hikes, such as the Federal Reserve move this week, do not even hurt shares over short periods of time. As illustrated below, both US and broader developed market stocks have been relatively immune to Fed rate hikes – even bigger ones such as 50 basis points. To be sure, half-per cent moves have only happened five times in the past 30 years. But each time the S&P 500 rose more than a fifth over the following twelve months on average. Limited sample sizes can be misleading, so we extended the analysis back to the 1970s for all rate hikes of 50 basis points or more. The average subsequent one-year total return is still a very respectable eight per cent. This week’s sharp moves in both directions for stock markets is yet another illustration of the poor predictive power of interest rates.
Conversation starter for… global equities, US equities, multi-asset
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