Market bets that U.S. inflation in August will continue the downward trend of last month’s inflation have been beaten this week. The latest CPI data, the indicators seem to be far from satisfactory. The gloom of stagflation has enveloped the global economy, and US stocks, gold and Bitcoin have warned the world with a plummeting decline.
On the same day, the Bank of Japan’s financial system malfunctioned, a phenomenon that was questioned by global institutions, or a machine crash caused by a large amount of money when the market was defending.
The CPI data in August also made the US rate hike by 75 basis points in September close to a certainty, and a 100 basis point rate hike is not out of the question.
According to the investment philosophy of Merrill Lynch, when the US stock market is in a period of economic stagflation, the preferred investment strategy is that cash is king.
According to the Bank of America Global Fund Manager Survey, as of the week of September 8, among the 212 respondents who managed $616 billion in assets, 52% and 62% were underweight stocks or overweight cash, respectively. a record high.
Bridgewater Chief Investment Officer Greg Jensen also warned that we face the risk of a massive market crash, as well as a devastating recession.
But as Buffett said, a moment of panic is also a good time for greed to deploy. From experience, the best-performing ETFs are from commodities and emerging markets, said Jay Pelosky, CIO of TPW Investments. When the environment improves, it will be sought after by funds, and it also has high security when the environment is bad.
Moderator Li Jian
The three core issues of European energy, US inflation and China’s recovery are all showing good momentum
The concept of the “bottom line” is very useful. To meet the bottom line is to meet a certain standard. As the Grateful Dead sang in their masterpiece “Fire on the Mountain”, “it is the limit that people can’t reach.”
What strikes me, though, is that in today’s economic environment, there are all kinds of bottom lines. For example, the bottom line of soaring commodity prices, the bottom line of interest rates and the bottom line of policy. Taking the policy bottom line as an example, the EU restricting energy prices is “bottom-line thinking”, and China’s allocation of US$30 billion for the real estate industry is also “bottom-line thinking”.
There are also many bottom lines in capital markets. For example, the S&P 500 rebounded immediately after hitting the 61.8% Fibonacci retracement level, which is technically because funds formed support there.
Under the “bottom line thinking”, we continue to focus on three core issues affecting the market: the rate of decline in US inflation, the trend of energy prices in Europe, and China’s smooth recovery from the new crown epidemic and economic recovery. At present, good progress has been made in all three aspects, and the good progress should continue.
First look at energy prices in Europe. Dutch natural gas prices have fallen sharply since a “massive crash” in European energy prices was thought to be possible, and there is a good chance it will continue to fall. At present, the EU is united and is jointly dealing with the dilemma of the energy market.
In response, the European Central Bank followed the Fed’s lead and raised interest rates by 75 basis points. This is the largest interest rate hike in 20 years, and judging from the statement of European Central Bank President Lagarde, there may be further interest rate hikes in the future.
Under the influence of the interest rate hike, financial assets in the European market did not plummet. Instead, the euro stabilized, the stock market rose, and bank stocks rose sharply. Because for years, people in Europe have been worried that negative interest rates will affect the profitability of banks, and now interest rates have turned positive again, bringing huge benefits to the euro and bank stocks. As the Jackson Hole message sent, the era of low growth will come to an end and the era of high nominal growth is coming.
We expect growth in Europe to exceed 3% this year and around 1% next year. However, with almost the entire investment community believing that Europe is already in recession, some investors believe that growth in Europe may not exceed 2% this year, but at 1.6%. But either way, everyone is relatively optimistic about Europe’s economic growth.
Look at China again. We see that Chinese high-yield bonds are still showing signs of recovery. It is worth noting that the purchasing manager index of the service industry reached 55BTE in August, while the year-on-year growth of auto sales in August was 28%, and the year-on-year growth of electric vehicle sales exceeded 100%.
Finally look at the United States. Currently, the prevailing view in the U.S. investment community is that the U.S. economy is already in recession, or will soon be in recession. But we still stick to a more “neutral” view, and we expect inflation to fall faster than expected, growth to stabilize, real incomes to rise, and consumption to remain strong.
JPMorgan forecasts that U.S. inflation will average 3 percent in the second half of the year, and they also forecast global inflation to fall to 5 percent from 10 percent in the first half. We believe that these forecasts are reasonable.
Commodities and Emerging Markets ETFs Do Well
Faced with various bottom lines and forecast lines, what can we do?
Through our focus on global assets and multi-asset, we noticed that despite all kinds of sensational news every day, such as inflation, recession, emerging market risks, etc., in terms of performance, the best performing ETFs are almost all From the commodities and emerging markets industries.
If things are as bad as the news reports, ETFs in these two areas are unlikely to stand out. But in the past month, among the top five products of global multi-asset ETFs, three are commodity ETFs and two are industry ETFs in emerging markets. From the performance of our own products, the above trend is also shown, and the performance of Asian high-yield ETFs is exceptional.
Shares of Dr. Copper, for example, rose more than 5% from Sept. 5 to Sept. 9 as copper inventories fell to an eight-month low and data showed that copper’s Inventory levels may even be zero.
Emerging markets take Brazil as an example. The inflation rate fell from a peak of 12% in April to around 9% in August. At the same time, Brazil’s benchmark interest rate was close to 14%.
More broadly, emerging-market convertible bonds are heading toward the end of their rate hike cycle, which began well before the Fed.
This is reality, not fiction. We often say that we tend to let Mr. Market tell us everything. But there are bound to be well-respected market players who are bearish on the future, believing that there will be a decline of more than 20% this month or before the end of October.
How should investors respond to this?
We decided to “step forward” and increase the allocation of advantageous industries. For example, we added to emerging markets last month and the energy sector just last week. Our strategy is that if the market improves as we expect, these sectors will be the first to be sought after by funds; if not, these sectors are also resilient.
JP Morgan Chase conducted some analysis on U.S. energy stocks a few days ago, proposing that “the energy industry has many positive factors, and it has become the most favorable industry in various quantitative models.”
Although the U.S. stock market has fallen sharply recently, the market is volatile. But there was still plenty of institutional buying last week, valued at as much as $8 billion. According to All Star Charts, buying at the height of the global financial crisis was only a third of that. This indicates a great panic in the market, but perhaps also a huge opportunity.
We expect weaker inflation data for August and a 75bps rate hike from the Fed, which will lead to a weaker dollar. So it’s getting investors to start thinking about emerging markets and growth styles, as well as a spending spree across global assets as governments and businesses look for ways to deal with Covid-19, climate concerns and conflict.
