China is one of the few major countries where growth is strongly re-accelerating, inflation is falling and economic policy remains expansionary. Almost all indicators are in the green and the Chinese equity market is globally attractive.
The strong outperformance of European equities (Eurostoxx large) between the beginning of September 2022 and the beginning of March is quite impressive. In local currency, the EuroStoxx outperformed the S&P500 by almost 19%; the outperformance is even more marked in euro (25%) due to the appreciation of the euro over the period.
In the last newsletter, we pointed out that “the context at the beginning of the year is favourable for the markets, both equity and bonds, as it incorporates quite a favourable mix: continued disinflation, the prospect of an upcoming pause by the Fed and the expectation of a vigorous recovery in China following the end of the zero Covid strategy. In short, a Goldilocks-like outlook. At the beginning of the year, it is always tempting to extrapolate recent trends. Experience shows, however, that intra-annual developments are rarely linear. It is thus likely that economists will revise their inflation forecasts downwards and that the statistics for the coming months, fuelled by the Chinese recovery, will be more disappointing.”
The context at the beginning of the year is favourable for the markets, both equities and bonds, as it incorporates quite a favourable mix: continued disinflation, the prospect of an upcoming pause by the Fed and the expectation of a vigorous recovery in China following the end of the zero Covid strategy.
The link between global warming and greenhouse gas (GHG) emissions is not in dispute and the world’s public opinion has become aware of it. CO2 accounts for three quarters of GHG emissions, although the share of methane has been increasing in recent years.
Putin and Powell were certainly the 2 most important figures of 2022 and in a negative sense for the economy and the markets. Of course, we are not confusing the two figures. One is a war criminal and the other a central banker mired in probably the most complex situation in US economic and monetary history.
The “crisis” we are experiencing is an energy crisis (which primarily concerns gas and coal) and, more generally, a commodities crisis, not just an oil crisis (see graph below), with a certain tendency to stabilise in recent weeks.
The bond correction that followed the deflationary shock of the 1st wave of COVID started in the summer of 2020 and has continued almost steadily until now. The yield on the 10-year T-Note has thus risen from just over 0.50% in August 2020 to over 3.00% recently (with a sharp acceleration between early March and late April).
War is, regrettably, part and parcel of the history of mankind. As Carl von Clausewitz famously said, “war is simply the continuation of political intercourse with the addition of other means”.
The world that resulted from the reunification of Germany and the disappearance of USSR (1989/91), in other words the world of peace dividends, is well and truly over.
The impact of the war in Ukraine on the markets will depend on the duration and extent of the conflict, but also on the possible extension of sanctions. Indeed, History shows that if local conflicts have a limited effect on stock markets, this is no longer the case when they impact energy and commodity prices.