Perspectives: Financial Markets Analysis
Perspectives: Financial Markets Analysis
Perspectives: Financial Markets Analysis
N°
4th quarter 2021
Perspectives
Financial markets
analysis
Macroeconomic environment Hopes that robust economic growth will
3 continue in 2022 may be disappointed.
There is ongoing debate as to whether the current
inflationary pressures are transitory or permanent.
The US Federal Reserve will begin to taper its
asset purchases in the fourth quarter.
Financial markets The most important question for the financial markets at
9 the moment is whether or not inflation is here to stay
The main conclusion to be drawn from the current high
valuation multiples is that future returns are likely to be low.
Changing economic fundamentals and much more
reasonable valuation multiples continue to point
towards a gradual shift from West to East.
Macroeconomic
environment
30
2000 2003 2006 2009 2012 2015 2018 2021
GROW TH IN US CONSUMER SPENDING SINCE W W2 In 2021, US consumer spending will have recorded the
strongest growth since World War II as American households
have benefited from exceptionally favourable financial conditions
10
throughout the year. Government support measures in the wake
of the pandemic have resulted in household disposable income
8 2021: 8 %
being higher than it would have been without the health crisis.
In addition, the surge in house prices and equity markets,
6
fuelled by the Federal Reserve's ultra-accommodative monetary
4
policy, has produced an unprecedented wealth effect. Low
interest rates have also minimised the debt burden and financing
Annual change (%)
-4
-6
1948 1958 1968 1978 1988 1998 2008 2018
US JOB OPENINGS US economic growth is set to remain robust in the short term.
Although recent signs of moderation in several key economic
12000 indicators suggest that the peak in growth is behind us,
their continuing high levels do not point to a major cyclical
weakening in the immediate future. The decline in the number
10000
of coronavirus infections after the deterioration of the health
situation in the summer, the need for the distribution sector to
replenish depleted inventories, the record number of vacancies
in the labour market and increasing wage pressures due to the
8000
labour shortage even suggest a slight acceleration in growth
in Thousands
2000
75 80 85 90 95 00 05 10 15 20
GOOD TIME TO BUY A HOUSE GOOD TIME TO BUY A CAR Visibility for the growth outlook next year is much more limited.
Advocates of the scenario that robust growth will continue point
to the strong recovery in corporate investment as companies
strive to increase their production capacity. The hope is that
85 80
this additional expenditure will trigger a virtuous circle similar to
the usual pattern for a post-recession period – translating into
an improvement in the labour market, wages and productivity
75
70
gains, which will trigger a non-inflationary growth cycle.
Although this favourable scenario cannot be ruled out, it does
65 not seem very likely in the current circumstances. The end of
60 the exceptional pandemic-related public support measures,
Index
25 30
University of Michigan Consumer Sentiment Index
Source: Cornerstone Macro
DISPOSABLE INCOME OF EUROZONE HOUSEHOLDS The economic recovery remains more moderate in Europe.
In contrast to the US, the European authorities limited their
7400 public support measures to levels that only compensated
for loss of income caused by furlough whereas, across
the Atlantic, the scale of public support ratcheted up the
7200
overall level of household disposable income. Greater fiscal
discipline is therefore the main factor behind Europe's
7000 more moderate growth rates. A second element that has
a stronger effect on the European economy is its greater
In EUR Billion, annualised
%
250 and the implementation of reforms to improve the country's
20 competitiveness. One year on since the end of Abe's reign,
200
the facts show that the targeted objective has hardly been
150
achieved. Inflation remains close to 0%, consumer spending
100 10 is below the level it was at the start, average household
50
net wealth fell by 3.5% from 2014 to 2019 while average
household nominal income rose slightly by 3.6%. The main
0 0
consequence of the programme was the accumulation of
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Japanese government bonds by the central bank, which now
holds almost half the total of all outstanding government bonds.
Volume of government bonds held by the central bank (LHS)
% of total outstanding bonds (RHS)
Source: Jefferies, Bank of Japan
HOUSING ACTIVITY IN CHINA One of the first consequences of the Chinese Communist
Party’s new direction is the financial difficulties of the
30
Evergrande Group, China’s second largest property developer.
Following Xi Jinping's words that "houses are for people
20
to live in, not for speculation", Vice-Premier Han Zheng
recently added that the property sector should not be used
10
as a short-term tool to stimulate the economy. The desire
Change (%) from same month in 2019
-50
2020 2021
Floor space sold Floor space started Residential property investment
05 0
20
06 0
20
07 0
08 0
09 0
10 0
11 0
12 0
01 0
02 1
03 1
04 1
05 1
06 1
07 1
08 1
09 1
1
02
02
02
02
02
02
02
02
02
02
02
02
02
02
02
02
02
02
0
0
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
01
04
02
03
Gas price in the US (LHS, USD/MMBtu) Gas price in Germany (RHS, EUR/MWh)
Source: Jefferies, Bloomberg
0 0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Inflation excluding energy and food Inflation excluding energy, food and the automotive sector
Source: Minack Advisors, U.S. Bureau of Labor Statistics, National Bureau of Economic Research
Source: Minack Advisors, Congressional Budget Office, Federal Reserve, Bureau of Economic Analysis, Historical
Statistics of the United States 1789-1945
N ° 16 9 — 4 th q u a r t e r 2 0 2 1 MACROECONOMIC ENVIRONMENT 7
-6
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021
20
core and peripheral countries, it seems unlikely that the ECB
15
will be prepared to abandon asset purchases altogether,
despite the economic recovery and rise in inflation. At the
10 December meeting, the monetary authorities expect to give
more details on the monetary policy outlook for 2022.
5
0
5
15
16
1
01
01
01
01
01
01
01
01
01
01
01
01
02
02
02
02
02
20
20
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/
/
01
03
09
01
09
01
05
09
01
05
09
01
05
09
01
05
09
01
05
Eurozone government bonds held by the ECB as a percentage of total outstanding sovereign debt
Source: Jefferies, ECB
N ° 16 9 — 4 th q u a r t e r 2 0 2 1 FINANCIAL MARKETS 9
Financial markets
330
320
310
300
290
October November December January February March April May June July August September October
2020 2021
Source: Bloomberg
12 12
10 10
8 8
6 6
4 4
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
Emerging markets Developed markets ex US S&P500
Source: MSCI, IBES/Datastream, NBER; Minack Advisors
10 Perspectives Financial markets analysis
-1
-2
-3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Bloomberg
20
10
9
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
M I C RO S O F T (6 % O F S & P 5 0 0 , 3 % O F M S C I W O R L D, A A A E S G It follows from the above that the current environment is clearly
R AT I N G) S H A R E P R I C E O V E R 10 Y E A R S not conducive to index-based investing. The irony of passive
350
management is that it often appears most attractive at times
when it makes the least sense. Moreover, the popularity of
index-tracking combined with a growing interest in socially
300
responsible investment means that many portfolios are
invested in the same stocks, notably the US technology majors
250 since these have a high weighting in the indices and often a
good ESG rating (for Environmental, Social and Governance
200 criteria). While the markets are rising, this is not a problem,
but the question is, who will be the buyers for these stocks
if the portfolios that currently hold them had to sell them?
150
100
50
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Bloomberg
N ° 16 9 — 4 th q u a r t e r 2 0 2 1 FINANCIAL MARKETS 11
1.5
1.0
0.5
2016 2017 2018 2019 2020 2021
Source: Bloomberg
5
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
-1
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Japan World ex Japan
107.5
105.0
102.5
2016 2017 2018 2019 2020 2021
Source: Bloomberg
2.50
2.25
2016 2017 2018 2019 2020 2021
Source: Bloomberg
N ° 16 9 — 4 th q u a r t e r 2 0 2 1 FINANCIAL MARKETS 13
GOLD PRICE So far, 2021 has not been a particularly good year for
gold. Since the start of the year, the gold price has fallen
2100 by nearly 7%. This decline may come as a surprise in a
context of rising inflation and a further fall in interest rates
2000 in real (inflation-adjusted) terms. As a general rule, the gold
price is negatively correlated with real interest rates (a rise/
1900
fall in real rates leads to a fall/rise in the gold price). This
1800 is logical for an asset that does not offer a recurring return.
The relative lack of interest from investors can be explained
1700
by various factors: doubts about the permanence of the rise
in inflation, the strength of the dollar, and preference for
USD
1600
other commodities, particularly oil. Gold's weakness in 2021
1500 should also be seen in perspective, given that the price of
the yellow metal rose by 18% in 2019 and 25% in 2020.
1400
1300
1200
1100
2016 2017 2018 2019 2020 2021
Source: Bloomberg
Gold expensive
1
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: Bloomberg
-100
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Gold Gold-mining companies index
Source: Bloomberg
Summary
Every decade has its big winners who are rarely the winners in
the following decade. In recent years, the US market, driven by
a rapidly-growing technology sector, has strongly outperformed
other markets. In the future, the pendulum might well swing East.
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returns.
No.169 – 4th quarter 2021
Perspectives
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