Five insights in five minutes
US rates and growth
Our macro team works deep into the night on its forecasts for US output. With markets obsessing about Wednesday’s bumper inflation number and ten year treasuries near 1.7 per cent again, it pays to remember why old fashioned growth also matters so much. At stake is the direction of real interest rates. Right now they’re negative in America because although nominal rates have drifted upwards, inflation is higher still. You can go blue trying to predict the latter. In their latest report, our strategists offer intriguing US scenarios based on what happened in the 1950s and 60s. Ultimately, standard economic textbooks say that short-term real interest rates are positively related to the growth rate of potential output. Basically, the price of money goes up as investment demand rises and savings fall – and vice versa. Of course, open economies muddy this relationship and other factors can overwhelm it too. As you can see in our chart, however, US real yields have tracked output growth closely over the past 35 years.
Themes: global fixed income and equities, all asset prices
Chinese tech wobble
China’s regulatory body has approved the launches of seven onshore ETFs that will follow the Hang Seng Tech index. A much needed piece of good news for Hong Kong’s newly minted benchmark, which is down one-tenth year to date. Technology stocks have struggled globally over recent weeks. They are particularly sensitive to the outlook for inflation and interest rates as the bulk of their valuations reflect cashflows discounted decades into the future. In addition, Chinese tech is also facing some uncertainty as Beijing aims to regulate the sector more firmly. But don’t let these issues distract you from what matters: Hang Seng’s tech index gives you exposure to the biggest, fastest growing technology plays on earth for a third of the price-to-book ratio of the Nasdaq. The Chinese e-commerce market, for example, is now three times larger than America’s and shows no sign of slowing down – actually it’s accelerating.
Themes: China equities, Asia equities, technology
Sometime around now, perhaps as you are reading this sentence, global assets in exchange traded funds will pass through the nine trillion-dollar mark. A record USD460 billion has already flowed into ETFs so far this year and at this rate we will be measuring the sector in 14 digit numbers by Christmas. Don’t conclude for a moment that ETFs are mature. They still only have a seven per cent share of Europe’s regulated assets, 11 per cent of Asia’s and a fifth of America’s. That’s less than 15 per cent of world-wide funds under management. Which raises an interesting question. Given the remaining up-side, why isn’t there an ‘ETF’ ETF – geared to the success of the product itself? Five in Five would buy that in spades. The closest funds available are financial services or capital markets focused, which include beneficiaries of the ETF boom. Unsurprisingly, most of these have almost doubled over the past year.
Themes: ETFs, thematic investing
As can be seen in our chart, the low-tech S&P Global Timber and Forestry index has left the Nasdaq deep in the woods over the past year as lumber prices have tripled since 2019. A post-pandemic boom in housing tells the demand side of the story. However, supply limitations in North America, which dominates global production of wood products, include longer term issues related to climate change. For example, a two decades long outbreak of bark-eating beetles has ravaged forests across the west of the continent, affecting 27 million hectares of woodland – an area almost the size of Germany. Warmer winters create thriving conditions for beetle buffets, while hotter, dryer summers have worsened the impact by making trees more vulnerable, as well as magnifying forest fires. So what does this mean for clients? There is a clear need for greater investment into nature’s assets, or natural capital. Opportunities abound for both returns and solutions that protect valuable resources.
Themes: Climate change, natural capital, alternative assets
Just as Britain is finally ushering in a summer, the pound has also warmed itself nicely this week against major currencies. Sterling is up versus the euro by around one per cent, marking the highest trading level in a month, and has enjoyed a 1.2 per cent rise on Monday against greenbacks. As ever, currency experts have attributed this outperformance to a slew of reasons – though surprisingly not the weather. Most cite a reduced risk of Scottish independence after the failure of the SNP to secure a full majority in recent elections, as well as the success of Conservative candidates in parallel local voting. A crystal ball is yet to be manufactured for exchange rates, so until then we’ll settle with purchasing power parity and bond yield differentials, both which suggest the pound trading at a slight premium, as per the chart below. That said, analysts reckon lockdown easing and the path to recovery leaves room for future pound gains.
Themes: pound sterling, UK
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