With the backdrop of a slowing down growth momentum, the word “stagflation” is starting to crop up in the news.
Tactical Asset Allocation
The October ECB meeting brought no major surprises. Main refinancing rate was left unchanged at 0.00% and bond buying will be continued at a “moderately lower pace” until at least March 2022. Christine Lagarde noted that recovery has been strong in the Euro area, although momentum is weakening. She insisted, that no rate hikes are planned for next year, but markets did not appear convinced. While before the speech, a single hike of 20 basis points in December 2022 had been priced by money markets, after the speech the anticipated hike timing was moved to October. Preliminary October Eurozone CPI figures showed year-on-year growth of 4.1% instead of the forecasted 3.7%. Inflation in the region has been above the average target of 2% since August. ECB’s President noted the rising inflation, saying, that it is likely to stay elevated longer than expected. She also emphasized, that inflation should decline throughout 2022, when such contributing factors, as the recent rise in energy prices, reopening-related supply-demand mismatch, and base effects will no longer be affecting price growth pace.
After the highly anticipated Fed’s meeting in the first days of November, the central bank is expected to announce the timing of tapering. Analysts believe that a gradual decrease in $120 billion monthly asset purchases should conclude by the middle of next year. While there should be no surprises about the QE withdrawal pace, Fed’s position on inflation is of particular interest to the markets. Jerome Powell acknowledged at a virtual conference in October, that so far inflation has proved more persistent than expected, and noted, that supply bottlenecks might pose a further risk for prices. Nonetheless, Powell maintained his view, that inflation will likely weaken next year and noted, that job market in the US still has some room for improvement, and so it is still too early for rate hikes.
US 10-Year Treasury yield continued to climb up in October and reached 1.70%, the level unseen since May. However, the progress was erased in the last week, and the yield ended the month flat at 1.557%. A decrease in yield has been observed generally for the long-dated government bonds in major economies, while shorter-maturity yields increased, flattening the yield curves. Several factors have been suggested as possible explanations: from purely technical analysis and month-end rebalancing to stagflation concerns and a hawkish shift in monetary policy across the world. This situation is developing days before the highly anticipated Fed’s meeting. Investors are uneasy about the possibility of an aggressive policy tightening by central banks in light of the unexpectedly persistent inflation. A policy mistake now would mean lower long-term growth, the fear of which could be the driver behind the yield curve move. At the same time, such a rapid move might signify investors’ overreaction to heightened inflation. If the inflationary pressures indeed subside next year, yield curve should steepen again – tapering, naturally, should help as well
In our portfolios, we stay underweight in fixed income, overweighting credit and keeping duration low.
Equities had quite a positive month: major US indexes were up over 5%, Europe showed a strong performance as well. This optimism was in part driven by strong corporate earnings reports, which should continue to support the market in the near future.
Emerging markets were also up in October, but suffered in the second half of the month, so they ended up lagging behind advanced economies. Several issues in China – namely, energy crunch, property sector difficulties, ongoing tensions with the US, and others – have affected Chinese equities in particular and emerging markets in general.
Historically, November is a positive month for equities, and the market is still supported by the central banks, thus there is further upside potential for equities. At the same time, some volatility might be seen around the Fed’s November meeting, as investors are anticipating any shifts in the central bank’s tone.
Thus, we are keeping the neutral positioning in equities, but implement a slight tilt with switching from low-beta names to higher beta names e.g. change from IT to Energy and Growth to Cyclicals.
EURUSD pair was volatile in October. It broke to new month’s highs, just under 1.17, after Christine Lagarde’s speech. However, positive surprises in US economic data the next day (namely, personal spending, PMI, and consumer sentiment), erased the gains, and the pair ended the month in red, under 1.16. Further price development will be influenced by the outcome of the Fed’s November meeting: if investors hear more hawkish undertones, than they are expecting, the dollar will likely strengthen.
Gold price unsteadily grew in October but again failed to stabilize above $1800 per ounce and ended the month around $1780, up 1.4%. investors are waiting for the Fed’s meeting results before deciding on the further gold price trajectory. Elevated inflation and slowing down growth provoke concerns about an unlikely, but dangerous stagflation scenario. These concerns should make gold an attractive hedge and potentially support the prices. However, a much more realistic hawkish tilt in monetary policy across the globe makes the metal less attractive.
Oil prices continued to grow in October: both WTI Crude and Brent Crude ended the month around $83 per barrel. OPEC+ is supposed to meet on November 4th and is expected to maintain production cuts, which is supporting the prices. A downside risk for the prices is coming from the possibility of Iranian oil entering the market, as negotiations on Iran nuclear deal are about to resume.
Overall, we believe, alternative investments as an asset class for the time being offer an attractive risk-return combination in the current environment. However, we reduce our exposure to commodities and therefore reduce our tactical asset allocation in Alternative Investments to neutral.
Note: This report is published by Clarus Capital Group AG
Roger Ganz, Head Asset Management, Clarus Capital Group AG
Dejan Ristic, Partner, Clarus Capital Group AG
This document has been prepared by Clarus Capital Group AG ("Clarus Capital"). This document and the information contained herein are provided solely for information and marketing purposes. It is not to be regarded as investment research, sales prospectus, an offer or a solicitation of an offer to enter in any investment activity or contractual relation. Please note that Clarus Capital retains the right to change the range of services, the products and the prices at any time without notice and that all information and opinions contained herein are subject to change.
This document is not a complete statement of the markets and developments referred to herein. Past performance and forecasts are not a reliable indicator of future performance. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. This document and the products and services described herein are generic in nature and do not consider specific investment objectives, financial situation or particular needs of any specific recipient. Investors should note that security values may fluctuate, and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Individual client accounts may vary. Investing in any security involves certain risks called non-diversifiable risk. These risks may include market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.
Clarus Capital does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon, either in general or with reference to specific client's circumstances and needs. Recipients should obtain independent legal and tax advice on the implications of the products and services in the respective jurisdiction before investing. Certain services and products are subject to legal provisions and cannot be offered world-wide on an unrestricted basis. In particular, this document is not intended for distribution in jurisdictions where its distribution by Clarus Capital would be restricted. Clarus Capital specifically prohibits the redistribution of this document in whole or in part without the written permission of Clarus Capital and Clarus Capital accepts no liability whatsoever for the actions of third parties in this respect. Neither Clarus Capital nor any of its partners, employees or finders accepts any liability for any loss or damage arising out of the use of all or any part of this document. Source of all information is Clarus Capital unless otherwise stated. Clarus Capital makes no representation or warranty relating to any information herein which is derived from independent sources. Please consult your client advisor if you have any questions.