There’s an interesting few observation in a note on Asian equities from the SocGen quant team today. They note that even in Asia, “as equity markets march ahead, we see realized volatility remaining elevated, running almost 20 points higher than the levels seen earlier this year. Even as newsflow becomes more promising across the world, the higher risk still rings a warning bell prompting us to be cautious.”.
Next up they observe that as expected earnings revisions are moving downwards in Asia, with only three to carry a positive median earnings revisions ratio. “Most regions are running negative revisions on average, with Japan being the worst and North America being the (relatively) best. In terms of Asian countries, we find Philippines, India and Indonesia at the bottom with Taiwan (the only country running positive), New Zealand and Australia at the top….The combination of uncertainty at the price level (as exhibited by the higher volatility in markets) and at the fundamental level (as exhibited by persistent negative revisions) keeps us cautious on this rally. We still believe, to reiterate our earlier stance, that this is a rally driven by liquidity rather than fundamentals. And if fundamentals do not catch up to liquidity, we can and will certainly see bouts of rising risk aversion.”
That’s as good a summary as anything I’ve seen – and usefully explains why investors might want to be cautious as we head even further into the summer!
And lurking in the background of these short-term debates is the spectre of inflation. As I have consistently argued, all we need is for the consensus of inflation expectations to move towards a surge for investors to start worrying. Again, what worries investors is not only increasing inflation rates – or the fear there of – but any surprise upwards revisions. So, to be precise we need a double whammy – increased worry about increased inflation plus actual surprise upwards inflection in the inflation rate. Of this, market crashes are made.
Analysts at asset management firm DWS correctly suggest that current inflation rates are low and getting lower. Without taking into account the energy component, which, thanks to the oil price, fluctuated wildly in 2020, the inflation rate in the Eurozone was 1.3% in June. That is exactly the same level as at the beginning of the year, observes the note from DWS. But the challenge is the supply curve which remain stuck to the left of its old level, even as the demand curve shifts to the right again, as consumers and businesses start to spend more. “The rising economic output would then be accompanied by a significantly higher price level. Fears of such a scenario may already be reflected in the bond market.”
The chart below shows, the difference in yield from nominal to real U.S. government-bond yields suggests that inflation expectations have risen quite a bit since their lows in March.
“It is quite conceivable that unlike the economy, inflation could perhaps see a V-shaped recovery”, suggests the DWS report, at which point worries about inflation could intensify!
Last but by no means least I couldn’t help but point to new research from eToro based on “Google AdWords to discover which alternative investments Brits are most frequently inquiring about online during Covid-19”. This reports that property is still “the alternative investment that Brits are most looking into during Covid-19, with 9,900 online searches”. Some of the search terms are not surprising, such as precious metals (where searches increased 91%) and rare coins (3600 online enquiries), but there were the inevitable left field ideas. Whisky seemed to be popular (1600 online queries) while interest in Lego increased 53%. This last category is a new one for me – I was aware that Lego was popular in the second-hand market but not THAT popular!
The table below nicely sums up what I think is a sensible user generated hierarchy showing how people regard alternative investments – in passing I note the complete absence of stamps!