Novum Alpha - Weekend Edition 20-21 November 2021 (10-Minute Read)
U.S. stocks were on the backfoot on Friday on the prospect of a more hawkish U.S. Federal Reserve that may ratchet up the tapering of asset purchases as soon as this month, which ushers in the prospect of interest rate hikes being brought forward next year.
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A wonderful weekend to you as markets wind up a mixed bag at the end of a choppy week of trading.
In brief (TL:DR)
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In today's issue...
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Market OverviewU.S. stocks were on the backfoot on Friday on the prospect of a more hawkish U.S. Federal Reserve that may ratchet up the tapering of asset purchases as soon as this month, which ushers in the prospect of interest rate hikes being brought forward next year.
Economically more sensitive sectors such as energy, financial and industrial shares fell into the weekend, while technology outperformed on the prospect of a fresh wave of lockdowns headed into the northern hemisphere's winter.
Austria has become the first western European country to reimpose widespread restrictions while parts of Germany closed non-essential businesses, as Covid-19 infections soar across the eurozone.
In the U.S., healthcare officials are warning that the country could face a dreaded fifth wave, with the impact being felt hardest in states with low vaccination rates.
In Asia, markets were mixed Friday with Hong Kong's Hang Seng (-1.07%) down, while Tokyo's Nikkei 225 (+0.50%), Sydney’s ASX 200 (+0.23%) and Seoul's Kospi Index (+0.80%) were up headed into the weekend.
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1. Rising Inflation is Opening the Door for Faster Tapering
“You taper if you want to, this Fed’s not for tapering.”
Or at least that was the refrain until this month, when the world’s foremost central bank announced that it would be paring back its package of US$120 billion-a-month emergency pandemic asset purchases of Treasuries and mortgage-backed securities.
To be sure, investors had months to prepare for the Fed’s eventual purchasing of assets and when the time came to dial down its fiscal support, many were relieved to see that the pace of such withdrawal would be glacial.
In all, the U.S. Federal Reserve reduced its purchase of assets by just US$15 billion in total but stubbornly high levels of persistent inflation may force the Fed’s hands to accelerate that pace of cutting asset purchases.
With U.S. consumer price index data recording the fastest pace of price increases since 1990 last month, as well as headline inflation exceeding 5% for the past 6 months, pressure has increased on the Fed to act, if not to raise rates, then at least to consider paring back asset purchases.
On Friday, the typically dovish Richard Clarida said that the powerful rate-setting Federal Open Market Committee “could” consider discussing the pace of another round of tapering at its upcoming policy meeting in December.
The Fed is already on track to remove stimulus purchases by the middle of next year, and any decrease in asset purchases this month will accelerate the end of pandemic-era quantitative easing.
But a faster-than-forecast withdrawal of asset purchases could pave the way for an earlier interest rate increase given that Fed chairman Jerome Powell has said that the central bank would probably avoid adjusting rates while still buying bonds.
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2. Is there such a thing as being too cautious with investing?
It’s been a tough few years for bears. From meme stocks to cryptocurrencies, despite every traditional metric for asset valuation being taken to task, everything still keeps rising.
Despite being right about many aspects of inflation, monetary policy and the persistence of the pandemic, bears who were expecting any of the myriad factors available to put a meaningful end to the apparent madness have repeatedly left disappointed and nursing losses.
The benchmark S&P 500 is up over 25% this year alone, even in the face of increasing inflationary pressures.
Wall Street’s soothsayers have all been warning investors to brace themselves for an inevitable slowdown in the 20-month bull market in stocks, which have seen valuations stretch, growth forecasts slow, and a Fed which appears to be dialing back stimulus.
Yet despite all of the warnings, earnings have continued to surprise, consumer spending and sentiment remain resilient and stocks show no sign of taking a breather.
An unexpectedly robust rebound has wreaked havoc with forecasts, despite many analysts expecting supply chain snarls to stymie growth.
Instead, American retailers are bragging about their ability to build inventories ahead of the peak holiday shopping season.
Against this backdrop of unbridled optimism, strategists are struggling to make predictions in the pandemic era.
Even the policymakers most in tune with the heartbeat of the economy are getting things wrong – so-called “transitory” inflation is now in its sixth straight month of over 5% headline inflation, with prices in October rising at their fastest rate in over three decades.
Average estimate earnings per share among analysts are regularly being beaten by unprecedented margins and short sellers are looking more like stock pickers.
It’s been said that when the last bear becomes a bull, the market is ripe for a correction, yet by now, even the most pessimistic strategist will be starting to question their projections.
Nonetheless, being wrong about the pace of recovery this year hasn’t turned all forecasters into optimists, with a common thread amongst those peering into their crystal balls to predict that economic growth will slow next year just as the Fed’s tightening cycle looks set to begin.
The Fed is widely expected to hike rates for the first time since the pandemic started sometime next year and with so much future growth priced into equities, the market has become ultra-sensitive to any subtle shifts in interest rates.
But what these models don’t also reflect is that much of the buoyant economic mood derives from the performance of the markets and just as the Fed can raise rates to reign in inflation, it can just as quickly reverse those rate increases where necessary to prevent a sharp correction.
Even so, the consensus view is that 2021 has been a unique year with the performance of equities unlikely to be repeated anytime soon.
Helping fuel an unprecedented US$12 trillion stock market rally this year has been a string of corporate earnings that have defied all concerns from supply chain issues to labor shortages, commodity inflation to logistic and manufacturing costs.
With profits up more than 40% in each of the first three quarters of this year, based on S&P 500 companies which have reported, it’s been profits, rather than price-to-earnings multiples that have commanded the narrative for equity gains.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan... |
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3. Boomers Don't Get Crypto, Literally
Despite the skepticism when it comes to all things digital, there is a small and growing group of pensioners and retirees who are making their first forays into the realm of cryptocurrencies.
Given the abundance of time and the ease of access to online educational materials, more in their golden years are increasingly looking at cryptocurrencies which they suppose will help protect their retirement nest eggs against the destructive forces of inflation.
But while these individual retirees and pensioners may be exploring the realm of digital assets, the pension plans that are responsible for their meager payouts are staying well away.
Even as the Commonwealth Bank of Australia starts looking to offer cryptocurrency services to its customers, the country’s massive US$2.4 trillion pension fund industry remains wary of dabbling in the digital asset realm.
In an interview with Bloomberg, Ross Barry, who oversees US$19.54 billion as Chief Investment Officer of superannuation fund Spirit Super considers cryptocurrencies “too risky to be considered for institutional portfolios” adding,
“It’s still volatile and there are still significant governance risks around things like even down to how do you have custody. I don’t think it’s fit for purpose for superannuation funds.”
As if confirming such views, bitcoin shed almost 20% over the past two weeks before rebounding into the weekend and double-digit percentage swings in a single day are par for the course with the nascent asset.
And while cryptocurrency traders and hedge funds may be accustomed to the big swings, often unfazed by sharp pullbacks, not all pension funds can stomach the volatility.
To be sure, some pension funds globally have committed relatively small amounts to cryptocurrencies, typically buying bitcoin and holding it via more familiar institutional vehicles such as Grayscale Bitcoin Trust, but they remain the exception rather than the norm.
And although surveys such as the recent one conducted by Fidelity Investments suggests most institutional investors are interested in cryptocurrencies and plan allocations by 2026, the inherent volatility of the asset class will most likely make them thing twice.
Bitcoin surged to a record of almost US$69,000 earlier this month, boosted by the launch of the first U.S. bitcoin ETF, albeit one that is based on CME Group’s bitcoin futures.
For pension funds and other institutional investors, these regulated cryptocurrency ETFs can fit into a multi-asset portfolio with a lot more transparency and within the ambit of their investment mandates, as well as risk management and compliance requirements.
Low yields and rising inflation are proving to be a double-whammy for pension funds which are increasingly looking to more risk-on assets to provide for growing retirement obligations to members.
Private equity funds and even venture capital are starting to see more flows from pension funds as assumptions such as a 6% yield on a 30-year U.S. Treasury have given the ghost.
As a result, pension funds are looking to see how they can best provide for their members amidst a backdrop of rising inflation, increasing obligations and health care costs and muted returns.
While the stock markets have done well, low interest rates and depressed yields have put pressure on pension funds which typically rely on fixed income which is considered safe, for the bulk of their yields.
Even Spirit Super’s Barry hasn’t written off cryptocurrencies completely,
“It would be remiss of us not to keep a weather eye on the potential for cryptocurrency to become a more relevant part of the global currency system. We’ve just taken the view that it’s just still too untested.”
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Nov 20, 2021