Five insights in five minutes
Last weekend the G7 announced a ‘historic’ deal on tax, whereby big and profitable multinationals will be required to pay in the countries where they operate, rather than where they are headquartered. The principle of a global minimum rate of 15 per cent was also agreed. What is the right way for investors to react? First, remember that potentially higher corporate taxes – like all taxes – must be paid by people in the end, either via lower shareholder returns, more expensive products and services, or reduced wages. That’s because companies don’t really exist the way politicians think they do, but are rather a series of trade-offs between owners, customers, suppliers and employees. That said, academics are utterly divided on how changes in tax are distributed among these stakeholders. Some studies reckon investors suffer most; others show that workers tend to bear the brunt. Even if the former is right, the G7 move is mostly an American issue – with US equities accounting for two thirds of companies globally that paid less than 15 per cent tax last year, as can be seen in the chart below.
Themes: global equities
China’s producer price inflation number for May was nine per cent, beating the previous month’s then-jaw-dropping figure of seven per cent. But there was no spill over to consumer prices, which rose a meagre one per cent. Readers may think we are wearing out the record, but the hot tune of inflation has been topping the investor charts for multiple weeks, so please let us play you Another Reason Not To Worry one more time. The chart below shows, rather surprisingly, that China’s ten-year government bond yield remains remarkably stable at around three to four per cent, despite the ups and downs in CPI inflation. Moreover, if you are a foreign investor who finds negative ten-year real yields (minus 90 basis points for treasuries and double that for bunds) none too pleasing to the ear, maybe it’s time to consider adding Chinese bonds to your collection.
Themes: China, bonds
The FDA approved a new treatment this week that is hoped to slow the progression of Alzheimer’s, an illness that affects 50 million people globally. Unfortunately, it retails for USD56,000 per year on top of USD10,000 in diagnostic tests. While global healthcare costs for Alzheimer’s are estimated at over $1 trillion today, treating all patients with this new drug would cost an impossible USD3 trillion (for example, fully reimbursed access in the US means a 50 per cent increase to the country’s Medicare budget). High prices may seem attractive for companies in the short-run, but putting a drug out of reach of most patients will inevitably trigger access restrictions, which is in nobody’s interest. Per our previously published "Sustainable healthcare, healthy returns”, this underlines the need for pharma to stay incentivised to continue their R&D efforts. With luck, the next Alzheimer’s drug can be priced responsibly to maximise clinical and financial impact. Knowledgeable investors can participate in these solutions.
Themes: Sustainability, thematic equities
The long-awaited ECB meeting on Thursday revealed exactly what the markets were expecting (and hoping for) by maintaining a high pace of bond purchases under the pandemic emergency purchase programme scheme. Do note the key role that the central bank has played in anchoring long term core yields and sovereign spreads at low levels since it began its asset purchases in 2015. Take German bunds. As can be seen below, the ECB has been reducing the stock of benchmark government debt held by the public, which is 45 times lower than before. For peripheral countries such as Italy, it has absorbed new debt issuances for the past six years. Despite the reluctance to officially utter the ‘tapering’ word just yet, the mixed dovish and hawkish stances of the Governing Council do nothing to clarify the longer-term guidance. But with eurozone deficits still high and inflation expected to remain below target, our economists reckon this suggests that the central bank’s monetary policy stance should remain accommodative for the foreseeable future. Good news for risk assets.
Themes: Euro assets
Growth and equities
The global prevalence of V-shaped recoveries is all very welcome, but the fact is that if something drops ten per cent and then rebounds ten per cent, it ain’t back to where it started. And while second quarter GDP is forecast to be higher than pre-pandemic levels for China, Australia, South Korea and the US – that’s about half of global output – no economy is likely to surpass where the OECD expected it to be at this point. In other words, the world remains below pre-Covid potential trend growth. This is a common transition for investors to navigate: moving from euphoric bounces to the hard work of economic recovery. Our strategy team shows this nicely in the chart below, by breaking down the components of returns for the S&P 500 over numerous market cycles back to 1973. In the restoration phase, more than all of the 45 per cent average return comes from multiple expansion, with earnings growth mired in the red. But as reality catches up, multiples contract and earnings struggle to compensate – resulting in still-attractive, but lower returns.
Themes: all asset classes, global equities
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