Market in the calibration phase of business results and financial conditions in general in the face of the announcement of the beginning of the end of monetary and budgetary stimulus, and the path of associated interest rate rise to contain inflationary pressures, with the pandemic (at least apparently) under control
Index
Performance of financial markets
Executive summary
Performance 3Q21: Stock markets in developed countries close to historic highs with volatility close to lows as a result of good business results and strong accommodative economic policies
Status Covid-19: Pandemic more controlled, as a result of those with high percentages of vaccination in developed countries, although underdeveloped countries are far behind in this process and the number of deaths worldwide is still very high.
Macro Context : Very high economic growth rates, accompanied by high inflation rates and lasting longer than expected.
Micro Context:Key instantaneous and advanced economic indicators in slight decline after the historical records reached in the second quarter.
Stock markets: Stock markets close to historic highs in developed countries with low volatility, with strong earnings growth per share and high net investment flows due to excess savings and low interest rates.
Bond markets: Fixed yield markets performed more volatilely due to fluctuations in long-term sovereign interest rates, but with pressure of credit spreads due to decreased bankruptcy risks.
Main opportunities: Higher growth in business results than analysts expected due to increased global control of the pandemic (passing the endemic) and an increase inconsumption.
Key risks: Persistent inflation and faster rise in INTEREST RATES in the US, delays in resolving supply chain bottlenecks and worsening weaknesses in some more indebted economies.
This transition phase of the cycle, with good levels of economic growth and changes in economic policies to a less expansionary register, continues to favour the stock markets over interest and credit markets.
Performance of financial markets 3Q21
Stock markets in developed countries close to historic highs with volatility close to lows as a result of good business results and strong accommodative economic policies
U.S. and European stock markets close to historic highs and volatility near near lows due to good growth in business results and strongly expansionary but emerging economic policies with negative performance
Bond markets were stable in the quarter, although with some interim fluctuations stemming from long-term interest rate movements, particularly in the US.
The total stock market capitalization of the recovered cryptocurrencies has returned to the value of 2 billion dollars.
Status Covid-19
Pandemic more controlled, as a result of those with high vaccination rates in developed countries, although underdeveloped countries are lagging behind in this process and the number of deaths worldwide is still very high
The Covid-19 virus has already surpassed 240 million infected and 4.8 million dead. 4.5 billion doses of vaccines have already been administered.
Pandemic more controlled mainly in developed countries and as a result of high vaccination rates (but with some worsenings such as that of the UK and Eastern Europe deserve attention), in contrast to delays in underdeveloped countries, but the number of deaths is still at very high levels.
Most developed countries have already decided to administer a third dose of the vaccine to older people (over 65 years of age) due to their loss of efficacy in this population from 90% to 50% after 6 months.
Merck announced the discovery of the first treatment that reduces the severity of the disease in 50% of cases, the results of which are being analyzed by health authorities, which alongside vaccination could mean a huge advance to change the disease risk paradigm.
Source: WHO, Oct, 17, 2021
Macroeconomic context
After an economic contraction in world GDP of -3.1% in 2020, growth of +5.9% and +4.9% in 2021 and 2022 are expected respectively, recovering from -4.5% to +5.2% and +4.5% in advanced economies, and from -2.1% to +6.4% and +6.1% in emerging economies, respectively, according to the imf’s latest October forecasts.
This yo-yo movement was observed in all countries, but with different intensities, having been more favorable in the USA and less in India.
The high vaccination rates in developed countries have enabled the return to normal economic activity and the consequent resumption of employment.
Inflation remains above the reference levels of the US and European central banks and should remain for a longer period than initially anticipated by the authorities.
Source: OECD, Economic Outlook, September 2021
Source: OECD Database, October 2021
Micro-economic context
The Global Composite Output reached 53 points in September, a slight rise from 52.6 in August and with contributions from both the industry and services sector, but down from the 58.5-year high of the last 15 years reached in May.
It was the 15th consecutive month of expansion, conditioned by supply chain limitations and inflationary pressures.
Emerging markets had a strong recovery in September, moving into expansion after the August contraction, led by China.
The u.S. labor market remains robust.
Business and consumer confidence in OECD countries has fallen slightly.
Economic policies
Developed countries are beginning to put an end to budgetary stimulus programmes to support extraordinary recovery of activity and employment.
The EDF has indicted the likely start of the withdrawal of monetary stimulus for November, admitting a reduction of 120 billion purchases of monthly assets, but a rise in official interest rates only to the mid-next year, although inflation remains close to 3%. The remaining central banks, ECB, Bank of Japan and Bank of England, say they will maintain expansionary monetary policy for some more time.
These policies resulted in a sharp increase in the excess of households’ savings, more than US$3.5 trillion in the Us between March 2020 and the end of the first half of 2021. This increase in excess savings has benefited wealthier households, as the richest 20% accounted for more than two-thirds of the total, according to a study by Oxford Economics.
Since March 2020, monetary creation has been more than $4 billion in the US and $2 billion in the Eurozone, largely financing the budgetary needs of these economies.
Source: Major Central Bank Total Assets, Yardeni Research, Oct, 15, 2021
Source: World Economic Outlook, IMF, October, 2021
Source: OECD Economic Data, October, 2021
Source: World Economic Outlook, IMF, Oct 2021
Source: The richest 20% of America are the real pandemic supersavers, Yahoo Money, Jan, 28, 2021
Financial conditions remain positive in developed countries and as a result of the actions of governments and central banks around the world and the good performance of financial markets, and negative in China by the degradation of asset risks
In developed countries financial conditions remain favorable due to rising stock prices, low interest rates, compression of credit spreads and rising house prices.
In emerging countries financial conditions remained as the contraction in monetary policy nullified gains in financial asset prices.
In China, there was a deterioration in financial conditions associated with the loss of the value of financial assets.
Source: Global Financial Stability Report, IMF, October, 2021
Evaluation of stock markets
The U.S. stock market fell less than 3% from June’s highs as European and Japanese markets rose.
The companies showed excellent results in the first half, resulting from very favorable financial conditions.
The normalisation of economic activity in 2021 has benefited value shares (banking, energy, among others) than growth shares (e.g. technological ones).
The valuation of the global shareholder market and in the various regions is above the long-term average. The PER of 21.1x for the US had a slight decline, but remains well above average. The PER’s of 15.5x in the Eurozone, 14.6x in Japan and 12.5x in emerging markets are also above average.
The S&P 500 valuation is excessive in terms of multiples, but contained in terms of rate methods that compared it to attractiveness with bonds.
This year there has been a large influx of net funds to shareholder markets in all geographies, and particularly in the US with an annual value that is already higher than the sum of the last 20 years (according to Bank of America data), largely due to the investment of excess savings (centred on the wealthiest households, investment) and low interest rates.
U.S. results per share already far exceed prepandemic levels in the U.S., but estimates for next year have been revised lower, especially as the tapering began.
The third quarter u.S. earnings season that began last week and will last for the next 3 weeks (in Europe starts at the end of the month), will be important to validate and stabilize projections and evolution of earnings per share.
Source: Global Index Briefing: MSCI Forward P/Es, Yardeni Research, Oct, 7, 2021
Source: Global Index Briefing: All Country World MSCI Yardeni Research, Oct, 15, 2021
Assessment of bond markets
Fixed yield markets performed more volatilely due to fluctuations in long-term sovereign interest rates, but with pressure of credit spreads by decreasing bankruptcy risks.
The increase in the inflation rate in the US and the Eurozone has led to a rise in interest rates on medium and long-term sovereign debt that extended to other bonds, with the consequent loss of their value.
The announcement of the end of the edf stimulus, which is likely to begin in November, will reinforce this movement.
Medium and long-term interest rates on treasury bonds are at very low historical levels.
In 2021 there was no such significant increase in non-compliances as expected due to government support for the support of the activity.
Source: Market Briefing:Global Interest Rates, Yardeni Research, Oct, 17, 2021
Source: Global Financial Stability Report Update, IMF, Oct 2021
Source: Global Financial Stability Report Update, IMF, Oct 2021
Key opportunities
The acceleration of the ongoing vaccination process around the world and especially in the later countries could anticipate group immunity globally, increase international trade, consumption and the product.
Main risks
Although monetary policies remain very accommodative, with very negative real rates, there is a risk that these rates will rise sharply in the coming years due to inflation, which would result in a deterioration in financial conditions, decreased capital flows and pressure on the more indebted countries.
Possible delays in resolving bottlenecks in supply chains could reduce levels of global economic growth.
Some vulnerabilities remain in some economic sectors, such as transport and tourism, with the increased risk of solvency of these companies.
Financial conditions in China have worsened, particularly for companies that have a lower rating due to the default of large real estate companies (Evergrande, among others)
Source: OECD, Economic Outlook, September, 2021
