November 2021 - The beginning of the end is sometimes a fresh start
Last month equity markets made up for September’s losses, and as said in the previous letter, the worst month of the year represented a buying opportunity to enter the market for what, so far, has been the best month of this year.
On the other hand, bonds continued to sell off across the board.
During ECB’s October meeting, Chairwoman Lagarde announced that the Pandemic Emergency Purchase Program will end by March 2022. However, the ECB will continue to purchase assets within the general plan (APP), including maintaining accommodative measures, like Targeted Long-Term Refinancing Operations etc.
Today, the Fed meeting will be the main event, although the outcome is already known and well-priced into the markets by now. What’s more important than tapering details, will be the comments on inflation since that’s the major factor which could change the rate hike prospects. Indeed, the inflation rate is still at its highest levels in decades in most of the developed countries, with the largest contributor to that being energy prices. Also, demand remains strong and supply chain issues are not yet resolved.
In China, during the last month, a few property developers defaulted on their bonds, and regulators are now busy dealing with the contagion effects of Evergrande on the whole real estate sector. While they are trying to set up some metrics in order to limit the leverage of the companies in this industry, the other sectors recently impacted by harsh regulations, like the tech sector, are enjoying a little breath – after all the ups and downs, the Chinese tech sector ended the month flat.
October also marked the start of the earnings season for the third quarter. So far 82% of S&P 500 companies have reported better than expected EPS, which is above average. Tech companies however whose results usually exceed expectations and are above estimates, were split this time. Among the giant techs, only Microsoft surprised on the upside and replaced Apple as the world’s most valuable traded company. After a record quarter in all measures, Tesla joined the very select group of trillion market cap companies. Finally, Facebook had a hard time last month: after a whistleblower testified to the Senate on the “toxic” effects deliberately spread by the company’s apps, the social media faced an outage that cut off all its apps for six hours. Then after, when the company reported its earnings, it missed estimates for the third quarter. By the end of the month, as if he wanted a fresh start after this unfortunate period, Zuckerberg revealed Facebook’s new brand name: Meta.
Finally, the month ended with meaningful events: the G20 in Rome, where an international tax agreement was signed. We also saw the opening of the COP26 in Glasgow, the two weeks’ climate change conference which should deal with the timeline of net zero carbon emissions.
With now half the world vaccinated against COVID-19 and kids soon to get vaccinated as well, the pandemic seems to be slowly coming under control and a kind of normalization is occurring. But this comes with some consequences such as constant high demand and not enough supply, caused by shortages in both goods and labor. We don’t think this situation will improve in the near term and that’s why the first concern would be to stay protected against stagflation. For that matter, we stay overweight equity and on the fixed income side we stay focused on short duration high yield bonds which give a sufficient protection against inflation together with a limited correlation to rate increases.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
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