MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

A Busy Week for European Politicians

Editors’ Note: MarketMinder Europe favours no political party nor any politician. We assess political developments for their potential economic and market impact only.

When it comes to European politics right now, if headlines in the financial publications we follow are any indication, most of investors’ attention is focussed on Ukraine and the prospect of a Russian invasion. Yet there are also some fresh developments on the traditional political front, which we think are contributing to elevated early-2022 stock market uncertainty. Italian lawmakers have now gone through four rounds of presidential voting and are no closer to selecting a (somewhat ceremonial) head of state. Portugal holds a snap election Sunday. France’s late-April presidential contest is heating up. All three, in our view—along with Australia’s upcoming general election—could very well contribute to stock market jitters in the near term, but we think they probably also create opportunities for falling uncertainty to be a tailwind for markets in much of the developed world later this year. Let us explore further.

Inside Italy’s Stalemate

Read More

On the Bump in German Bund Yields

Hear ye, hear ye—a momentous event occurred Wednesday: Germany’s 10-year bond yield turned positive! Just barely, and not for long—it ticked back down to -0.013% a short while later.[i] But the brief blip above zero was enough to spur warnings from several financial commentators we follow that rising German yields would suck money out of US Treasurys, sending American long-term interest rates higher—and hurting stocks globally in the process. However logical that chain of events might seem, we think it has little grounding in reality.

For one, we think arguing a German bond (known in Germany as a bund) yielding a whisker more than nothing will pull capital away from a US Treasury note paying 1.83% focuses too much on yields’ direction.[ii] All else equal, our research shows money flows toward higher-yielding assets, which amongst the largest and most creditworthy nations, remains US Treasurys. The gap is wide enough that even if bund yields are positive, European investors can likely still buy US Treasurys, hedge for currency risk and come out ahead. If you were managing a European pension fund and trying to balance long- and short-term obligations, which would you choose? We suspect many, if not most, would likely pick the higher-paying option.

Then again, yields aren’t static. Suppose Germany’s barely positive yield did attract a flood of buyers, who sold their US Treasury bonds. If markets are at all efficient—which we think they are—it stands to reason that German yields would swiftly fall back below zero as buyers bid prices higher (bond yields and prices move in opposite directions). Our research shows bonds move on supply and demand, after all, and German bond supply is extremely tight, so we think it wouldn’t take much of a demand increase to tug yields lower. Meanwhile, we think the world would likely see a chance to buy Treasurys on the cheap, quickly bidding prices up and yields down and leaving everyone wondering what all the fuss was about.

Read More

Don’t Extrapolate Slow Chinese Q4 Economic Growth

Stocks’ choppy January continued Tuesday, with several indexes globally in the red.[i] The potential for a US interest rate hike once again got most of the blame from financial commentators we follow, but headlines also dwelled on another bit of news: Chinese gross domestic product’s sharp Q4 slowdown. (Gross domestic product, or GDP, is a government-produced measure of economic output.) Though 4.0% year-over-year growth modestly beat expectations, it was the weakest expansion since lockdowns induced an economic contraction in early 2020, and many commentators we follow warn new regional lockdowns could cause further damage from here.[ii] That is possible, and it won’t shock us if weak Chinese data weigh on sentiment for a while, contributing to the grinding returns we think are likely in the first half (or so) of this year. Yet we also think China is likelier than not to continue contributing to global growth, eventually rendering fears false.

Under the hood, economic trends remained largely unchanged from prior quarters. Exports and manufacturing continued driving growth, with the former up a whopping 20.9% y/y in December.[iii] But personal consumption remained lacklustre, with retail sales crawling just 1.7% y/y higher in December and property investment contracting for the first time since early 2020’s lockdowns.[iv] In our view, it is important to consider that this weakness appears largely self-inflicted, stemming from the government’s zero-tolerance COVID approach and efforts to reduce leverage in the property sector. This is key because, new lockdowns aside, we see some evidence of these policies softening at the margins. The government is already reportedly going easier on less-distressed property developers, and monetary policy officials cut interest rates on Monday, which we think is likely to help cushion them further.

Lockdowns and the zero-COVID policies are wild cards, especially with the Beijing Olympics looming. However, political considerations suggest to us that a hardline policy stance is unlikely to last indefinitely. Based on all of the political reporting we have monitored, President Xi Jinping still appears to be intent on securing an unprecedented third term at this autumn’s National Party Congress. According to our analysis, this makes ensuring social stability paramount, so ensuring economic stability seems vital to us. If policies impact growth materially from here, we think officials will likely do whatever they can within reason to shift course and stoke the economy.

Read More

Bad Breadth Likely Won’t Stop This Bull Market

Amongst financial commentators we follow, a common theme has begun emerging: Fewer and fewer stocks are performing well—so-called narrowing market breadth—which they argue means this bull market is fragile. Don’t buy it—in our view, this is faulty logic. Our research shows narrowing breadth is normal as bull markets (long periods of generally rising equity markets) mature, and there is no preset level indicating the bull market’s end is near. To us, it is just another sign this less-than-two-year-old bull market is acting late stage.[i] However, we think widespread alarm over typical bull market behaviour is yet another indication stocks likely have more room to run.

There are several different ways to measure market breadth. Some observers look at the number of stocks hitting new 52-week lows, which are currently far outpacing new highs.[ii] Others track the “advance-decline line”—the ratio of rising stocks to declining ones. Last week in America, some commentators we follow touted the fact daily decliners on the New York Stock Exchange and Nasdaq outnumbered advancers by about four to one.[iii] Our preferred measure is the percentage of stocks outperforming the index average. Using the S&P 500 for its long history, Exhibit 1 shows this jumped to 61% in early 2021 amidst optimism over mass vaccine rollouts and global economic reopening. But it has steadily declined since last May, with only 44% now beating the index on a rolling 12-month basis.

Exhibit 1: Narrowing Market Breadth Doesn’t Always Spell Doom

Source: Clarifi, as of 13/1/2022. Percent of S&P 500 stocks beating the trailing 12-month S&P 500 total return, 12/1/1976 – 12/1/2022. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.

Read More

The Rise and Fall of UK Political Uncertainty in 2022

Editors’ Note: MarketMinder Europe favours no political party nor any politician. We assess political developments for their potential economic and market impact only.

As 2022 dawns, we see no shortage of political theatre—and no shortage of uncertainty. Some of it is electoral, with national contests looming in France and Australia and Americans voting in Congressional elections in November. Some relates to shaky coalition building, which may soon be reality in Italy if Prime Minister Mario Draghi gets tapped as president later this month. And some is just good old fashioned scandal and parliamentary revolt, which happens to be the situation in the UK. Yes, Prime Minister (PM) Boris Johnson is—once again—facing calls to resign over some Downing Street socialising during 2020’s lockdowns. We have even seen speculation from some commentators we follow that a police investigation could lead to formal charges for violating lockdown rules. We won’t hazard a guess on whether Johnson’s days in office are numbered, but we do think this is a textbook example of how high uncertainty early in the year is likely to fade gradually into political gridlock—which we see as a likely tailwind for stock markets later this year.

Leaked reports of Downing Street gatherings occurring during lockdowns have stalked Johnson for over a month now, but the situation has escalated this week thanks to a leaked email from one of his senior aides inviting over 100 staffers to “make the most of the lovely weather” and “bring your own booze” on 20 May 2020, a time when normal people weren’t allowed to gather in groups larger than two—even outdoors.[i] As you might expect, people on social media are now posting videos of police breaking up gatherings the same day, along with pictures of dying relatives they weren’t allowed to visit. Labour leader Keir Starmer (who was once photographed having an indoor tipple with Labour staffers when indoor gatherings were off limits) is urging Johnson to resign, which we don’t think is earth shattering—but Scottish Conservative leader Doug Ross is also calling for his head.[ii] So, from what we have seen, are several backbench Members of Parliament (MPs), a broad swath of the public and some Conservative-leaning columnists.

Read More

On Inflation, Trust the Market

If we could pick one word to sum up the collective reaction to the December US inflation rate report, it would be ouch. The US Consumer Price Index (CPI, a government-produced measure of goods and services prices across the broad economy) accelerated to 7.0% y/y—the fastest rate since 1982.[i] Many commentators we follow warn elevated inflation will pose problems for US stocks, affecting global returns given the US represents nearly 70% of MSCI World Index market capitalisation and US stocks have a high correlation with stocks outside America.[ii] Yet they also said this last year, even as global markets rose much faster than consumer prices.[iii] In our view, this is critical to remember as inflation warnings remain in headlines.

We have observed that inflation has morphed into a hot button political issue globally. So please understand that when we discuss inflation and its stock market implications, we aren’t making ideological or political statements. Our research shows stocks don’t view things in terms of good or bad in the absolute sense. In our view, that debate is squarely in the human, societal realm. For stocks, we think the question is at once more simple and more complex: Is there any material trouble left that markets haven’t already priced in, or incorporated into share prices? Is there any negative surprise power left? A strong likelihood of a bad outcome that investors haven’t already considered?

That last question is the key, in our view. We realise it is almost cliché to say markets are efficient and forward-looking, so please don’t get annoyed with us for going there. But overwhelmingly, our research has found that in any sufficiently liquid market, be it stocks, bonds or what have you, prices generally reflect all widely known information at any given time. Information includes facts, figures and data. It also includes interpretations of those facts, figures and data, and the hopes and fears that emerge from that analysis. Moreover, it includes forecasts, which, in our view, are really just opinions on how said facts, figures and data will likely evolve in the future—and, perhaps, what that evolution could mean for asset prices.

Read More

The Euro at 20

Twenty years ago last weekend, people across Continental Europe started handing euro notes to shopkeepers and café servers—and a new physical currency was born. To many economists we follow, this began an experiment playing out in real time: How could low-inflation northern European countries share a currency and monetary policy with higher-inflation southern Europe, especially if the bloc wasn’t a fiscal transfer union? (A fiscal transfer union is a political entity that shares tax revenue and debt service obligations, like the United Kingdom.) Commentators we follow have warned about this north-south divide dogging the currency ever since—and it still hogs headlines we read today, despite the euro surviving a trial by fire in the past decade’s regional debt crisis. Yet since the regional bear market (typically lasting, fundamentally driven decline exceeding -20%) that accompanied said crisis, we think this existential question—and the long-running, slow-moving efforts to solve it—have largely faded into the background, with little sway over stocks for good or ill.[i] In our view, this is helpful to keep in mind as commentators we follow once again warn the euro could split and send markets reeling: Stocks are very familiar with the euro’s structural issues, and there is little surprise power left.

The threat euro critics we read still see: The north-south divide is too wide to surmount, in their opinion. At the heart of the debate, according to our observations, is whether one monetary policy—the European Central Bank’s (ECB’s)—fits all, especially with German Consumer Price Index inflation hitting a 30-year high in December.[ii] (The Consumer Price Index is a government-produced measure of goods and services prices across the broad economy.) We have seen many commentators claim the ECB’s winding down its pandemic-spurred emergency monetary policy programmes will prove too early for many countries still struggling (southern Europe). Or they say it will be too late, risking overheating and runaway inflation in others (northern Europe).

Our analysis of financial history suggests this isn’t just a theoretical fear. The collapse of the European Exchange Rate Mechanism (ERM) in the early 1990s—and the subsequent European recession (broad-based decline in economic activity)—we think illustrates the risks.[iii] Back then, Germany’s Bundesbank was keeping rates high to quell inflation after reunification, forcing all other participants in the region’s fixed currency exchange rates peg to do the same.[iv] That didn’t work well for southern European nations, which needed lower interest rates to support the recovery from their economic contractions in 1990 – 1991.[v] As countries first defended, then discarded the fixed currency exchange rates, it brought monetary chaos and a true double-dip recession.[vi] (A double-dip recession is a broad-based economic contraction that ends but resumes after a very brief period of economic growth.)

Read More

Look Beyond 2022’s Rocky Start

Editors’ Note: Our commentary is politically agnostic, as we prefer no party nor any politician. We assess political trends for their potential economic and market impact only.

One week in, and 2022 might feel a lot different from 2021. After finishing rising nicely in December’s last 10 days, stocks have stumbled in the young New Year.[i] Where markets appeared to enter 2021 in a blaze of optimism, sentiment now seems more muted, with potentially fear-inducing headlines dotting many financial publications we follow. Our advice: Take a deep breath. For whilst we think this bull market (long period of generally rising stock markets) is very likely to continue and deliver solid full-year returns for broad developed-world stock markets, we also think the bulk of those returns are likely to come later in the year, with much more of a grind early on. For long-term growth investors needing market-like returns to meet their goals, we suspect patience is the watchword.

Note: This doesn’t mean the early part of the year is destined to be bad, or that the recent sentiment-driven swings are indicative of how it will play out. As we will show you shortly, America’s “midterm” congressional election years (widely named as such because they occur in the middle of a president’s term) are routinely back-end-loaded, with the S&P 500 index in US dollars averaging small positive returns early, with more variability, before a second-half surge.[ii] In our view, this is likely a key driver of global returns, as America represents nearly 70% of developed-world stock markets and US markets typically have a strong correlation with developed-world markets outside the US—meaning they move together much more often than not.[iii]

Read More

Amidst Early-Year Interest Rate Rise Fretting, Stay Cool

The new year is off to something of a rocky start, particularly for Tech stocks, with many wagging an accusatory finger at the US Federal Reserve (Fed)—which sets monetary policy in the country that represents nearly 70% of the MSCI World Index’s market value, making its moves and words widely watched globally.[i] No sooner had the world finished digesting the monetary policy institution’s plans to double the pace of tapering its quantitative easing (QE) asset purchases, then minutes from the December meeting suggested monetary policymakers determined the economy has largely met their self-imposed criteria for hiking short-term interest rates. Moreover, they said “it may become warranted to increase the federal funds sooner or at a faster pace than participants had earlier anticipated.”[ii] Now many Fed watchers we follow say the first rate hike could come in March, when QE is scheduled to end, and they are pinning the blame for the S&P 500’s -1.9% drop Wednesday on this development.[iii] Perhaps—our research shows negativity can strike for any or no reason, and Fed pronouncements often get what we consider undue attention. But we suggest investors seeking long-term portfolio appreciation not dwell on short-term reactions. Over more meaningful stretches, historical market returns show the first in a series of rate hikes doesn’t automatically hurt stocks.

Our analysis focuses on the Fed and America’s S&P 500 returns in USD due to daily availability. However, this remains quite relevant to investors globally, in our view, due to both the high correlation between US and non-US stock and bond markets, as well as the US’s large position in global markets.[iv] Exhibit 1 shows the history of S&P 500 returns surrounding the first rate hike in all Fed rate hike or tightening cycles since 1971. As you will see, returns were positive in the first year after the rate hike 7 out of 10 times. Returns over the next two years were negative just once. Nothing here screams that rate hikes inherently cause bear markets (typically deep, lasting broad market declines of -20% or worse with fundamental causes).

Exhibit 1: S&P 500 Returns Surrounding Initial Rate Hikes

Read More

Your 2021 Stock Market Scorecard

Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no politician nor any political party and assess political developments for their potential economic and market impact only. Additionally, MarketMinder Europe does not make individual security recommendations. The below merely represent a broader theme we wish to highlight.

Ah, another year over, a new one just begun.[i] We will publish our stock market forecast for 2022 in due time, but first things first: With the final results in, let us take a look back at the year that was. Which categories within the MSCI World Index did best and worst in 2021, and what lessons can investors learn?

Best Sector: Energy. Yes, headlines throughout financial publications we follow seem preoccupied with the biggest Tech and Tech-like stocks, which also did quite well last year. But Energy outpaced the competition with its 41.4% return, well ahead of second-place Tech’s 31.0%.[ii] Our research shows Energy stocks tend to move with oil prices, with oil producers’ earnings depending more on the price of crude than on production volumes. After getting hit hard in 2020’s lockdowns, oil prices bounced back sharply in 2021.[iii] Crude surpassed its pre-pandemic price in March and continued rising for much of the year.[iv] Autumn’s Europe-led natural gas crunch added more fuel to the fire, as it spurred demand for alternate energy sources, including oil. This all drove a smashing recovery for Energy companies’ earnings, which were abysmal in 2020.[v] But don’t let this give you fear of missing out if you didn’t have a huge Energy weighting in your portfolio last year. Energy began the year as just 2.7% of MSCI World Index market capitalisation, so anyone making great fortunes on the sector last year may not have been adequately diversified.[vi] (Market capitalisation, which is share price multiplied by number of shares outstanding, is the total market value of a company or index.) Taking big sector risks might look nice when they pay off, but they can also be severe setbacks when things don’t go as you anticipated.

Read More

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.