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Five insights in five minutes

Five in Five: Omicron, Asia HY, Europe, transitory inflation, ETFs
03 December 2021

    OMG Omicron

    It would be interesting to ask the 50 companies listed on Bloomberg called Omicron if they still believe that all publicity is good publicity. Okay, so they named their firms an anagram of moronic, but they’re not the only ones blindsided by the b.1.1.529 coronavirus strain. Japanese equities are down six per cent in five days. The ratio of US stocks hitting 52-week highs versus lows has plummeted to depths not seen since the dark days of the pandemic. Eurozone real-time economic activity indicators are ugly. Nor did fixed income traders see this coming. Bond volatility across the US curve jumped a fifth in five days – ten-year treasury yields are back to 1.43 per cent. Less than a fortnight ago, 1.7 per cent was on the cards. Will central bankers have to swallow their hawkish words of late? Market-implied odds of a UK rate hike by the end of the year, for example, have dropped to 55 per cent from 90 per cent a week ago. One person who must be quadruple jabbed is Federal Reserve Chairman Jerome Powell. He hinted on Tuesday that a faster taper would be announced in December, and clearly cares not a jot if US treasuries post two negative return years in a row – something unseen for half a century, as can be seen below.

    Conversation starter for… global equities, fixed income, multi-asset

    OMG Omicron   For illustrative purpose only. 

    Asia (very) high yield

    With prices down by more than a tenth since the end of June, Asia high yield has been in rough water recently, mainly due to waves buffeting some Chinese real estate issuers. But as Beijing shows signs that it will take steps to mitigate the risk of contagion, the asset class seems to be calming a bit lately. Don’t deflate your buoyancy vest quite yet though, volatility could well continue into the near future, considering the sector’s demanding maturity profile in 2022. That said, there is no getting away from the fact that Asia high yield now has spreads 800 basis points above US high yield. To put things into perspective, the five-year average is around 170 basis points. Investors have reacted to this by increasing their holdings of Asia high yield ETFs. Another approach is to trust in active management and credit selection when bottom fishing in rough seas.

    Conversation starter for…Asia high yield, emerging market fixed income

    Asia (very) high yield   For illustrative purpose only. 

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    Euro stocks

    Why aren’t European shares dramatically impacted by soaring energy prices, supply chain bottlenecks and Omicron? That’s because companies in the region are in good shape. This is what the European central bank says in its November Financial Stability Review. Central to this view is that immediate solvency concerns over listed firms have been lessened by the impressive increase in their profitability after last year’s recession. Indeed, companies that have been (or still are) impacted the most by restrictions, such as the travel and tourism industries, are lagging behind those who benefited from the situation (see below). But overall, corporate earnings have now returned to pre-pandemic levels. And it obviously encourages investors to remain optimistic. Published this week, a Reuters’ survey of strategists, brokers and fund managers has consensus expecting the recent recovery of profits to push European stocks to new records next year, with the Stoxx 600 index forecast to reach the 500 points mark by July. That would mean a mid-single digit jump from current all-time highs, reached after a 20 per cent gain in a year. This is what faith in fundamentals looks like.

    Conversation starter for… European equities, global equities

    Euro stocks   For illustrative purpose only. 

    Transitory inflation

    The Federal Reserve chair caused a stir this week when he told US Senators that inflation may persist well into next year and the Fed would at least consider tapering its asset purchases a few months sooner than previously indicated. This further unnerved investors on the back of the Omicron variant news. Two-year treasury yields immediately jumped by a quarter, while global equities went red across the screen (see note above). Of course, new lockdown fears may prove short-lived. Yet the question remains: will inflation prove to be transitory? Jerome Powell is keen to distinguish the difference between time and a shift in the long-run level of inflation when it comes to the word ‘transitory’. The latter is the more important. For comfort, our strategists observe that half of US inflation still comes from two areas particularly hard hit by supply shocks amidst rebounding demand – vehicle and energy prices. While the emergence of new variants is a warning that economies remain vulnerable to supply chain disruption, where there is demand, supply generally finds a way – hence the expected path in the chart beneath.

    Conversation starter for… all asset classes

    Transitory inflation   For illustrative purpose only. 

    European thematic ETFs

    From disruptive tech to green finance, 2021 has seen its fair share of megatrends. And it’s only natural that investors would scramble to capture these opportunities. In fact, European thematic ETFs now have €40 billion assets under management, according to Bloomberg, a 60 per cent increase on last year (see chart). To put this into further context, since Five in Five last wrote about Europe thematic ETFs in October 2020, their share of the European exchange-traded product market has tripled. Themes such as artificial intelligence and robotics, cyber security and (big surprise) clean energy take the medals this year, making up around half of thematic assets. Though the thematic ETF space is experiencing promising growth, let’s remember this is still only three per cent of the European ETP market – plenty of potential to go around.

    Conversation starter for… thematic ETFs, Paris-aligned ETFs

    European thematic ETFs   For illustrative purpose only. 


     


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