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Key take-aways

  •  After lots of macroeconomic worries and political jitters, investor focus moves to corporate earnings. The pace of growth there is slowing but corporate strength is unbroken.
  • We trim our enthusiasm for emerging market debt, see some consolidation in stocks of energy price takers such as DAX index, but continue to favour financials.

It seems that everybody wants to go back to normal by avoiding alarmistic headlines. Perhaps we are slowly moving from ‘unprecedented’ to ‘unusual’, as some things about the current situation still differ from previous recoveries.

Emerging markets
Take emerging markets (EM) for instance: whenever the US central bank printed dollars to stem against a crisis in the past, a large chunk ended up in emerging markets. This was either directly via capital flowing there or via higher commodity prices (as EM are notoriously commodity-rich). This time around, the motor seems to be stuttering. Yes, energy prices are soaring but emerging markets are still facing headwinds. This is where ‘unusual’ comes into play: the delay in rolling out vaccines and limited fiscal leeway delay the recovery. Even worse, leading economies such as the US seem to be recovering earlier than in any previous recession. This means that the window of low US interest rates and cheap dollars is potentially closing for EM. We still like EM credit, as it pays decent yield pick-ups considering the risks, but it is time to cool the enthusiasm, as the best is behind us from a bondholder’s perspective.

Conclusion for investors
As for the headlines, the odds are good that we will see a shift from rather soft macroeconomic numbers to corporate numbers that are still going strong. Here again, the general tenor is moving from ‘unprecedented’ to ‘unusual’, as the growth rate of quarterly earnings is moving from galactic to something more like stratospheric (see number of the week). This should not keep stocks from performing after a difficult month of September. However, the thrust will likely move away from markets affected by higher energy prices, such as the DAX, to sectors benefiting from higher rate prospects, such as financials.

Number of the week

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