Multi-asset funding specialist Saxo Financial institution has in the present day revealed its This fall 2023 Quarterly Outlook for international markets, together with buying and selling concepts overlaying equities, FX, currencies, commodities and bonds, in addition to a variety of central macro themes impacting shopper portfolios.
As we enter the final section of the yr, Saxo believes that the general outlook is that spending is prone to sluggish, and the US fiscal cycle is popping from tailwind to headwind. The world might certainly have reached ‘peak charges’, says Steen Jakobsen, Saxo’s Chief Funding Officer, offering a once-in-a-decade alternative to go lengthy bonds.
“We’re both at a four-decade alternative to lock in charges at cycle excessive or at an inflection level the place we now have a full paradigm shift to a Schumpeter second of inventive destruction in financial coverage through authorities overreach.”
“In an financial setting the place actual charges are too constructive, there might be a fallout from sectors and customers with financing wants. It will notably influence inexperienced transformation corporations corresponding to offshore wind builders, as their initiatives’ financial worth goes deep into the pink beneath present rates of interest.”
- Commodity sector supported by peak charges, tight provide focus
Power within the commodities sector, forecast in Saxo’s Q3 Outlook, is ready to increase into the ultimate quarter of the yr, in response to Saxo’s Head of Commodity Technique, Ole Hansen. The weakening financial outlook in Europe and the US, and to a lesser extent China, continues to be greater than offset by provide considerations – not least within the vitality sector.
“The OPEC+ group of producers’ lively provide administration has confirmed terribly profitable, thereby creating an elevated and price-supportive stage of tightness throughout crude and fuel-based merchandise.”
In treasured metals, Hansen maintains a bullish view on gold, together with silver and platinum – with the yellow metallic “ultimately reaching a contemporary file within the coming months”. The timing of it will stay very depending on US financial knowledge, nevertheless. “As we watch for the FOMC to show its focus from price hikes to cuts, […] we’re prone to see continued uneven commerce motion.”
In industrial metals, “the dearth of massive mining initiatives to make sure a gentle circulation of future provide continues to obtain consideration from long-term centered buyers.” In flip, this “helps our structural bullish outlook, pushed by rising demand for inexperienced transformation metals, particularly copper.”
Lastly, focus within the agriculture sector over the approaching months “will flip to climate developments throughout the southern hemisphere, not least in Australia the place La Niña sizzling climate considerations are already on the rise, and South America, which more and more has changed the US as the principle provider of corn and soybeans to China, the world’s prime importer.”
- Equities: Greater price of capital is getting painful
The struggle towards inflation “has raised the price of capital to ranges which have triggered open cracks within the international economic system,” says Saxo’s Head of Fairness Technique, Peter Garnry. This, in flip, shines a highlight on the fragility of the inexperienced transformation – probably one of many greatest catalysts for decrease rates of interest exterior a weakening economic system, “as quick decarbonisation will solely occur beneath a decrease rate of interest setting.”
One sector that’s notably susceptible is offshore wind, as many initiatives within the international pipeline “had been negotiated on assumptions of completely low-interest charges and low-cost industrial metals.” Capital-intensive initiatives associated to the inexperienced transformation have been the toughest hit by the altering rate of interest panorama, and the three worst-performing theme baskets over the previous yr have been renewable vitality, inexperienced transformation, and vitality storage.
Elsewhere, Saxo’s synthetic intelligence theme basket – consisting of 20 AI-related shares – is valued at a ahead fairness valuation that’s 33% above the Nasdaq 100 Index, and nearly twice as costly because the MSCI World Index.
“If bond yields decline from right here because of a slowdown in financial development, then it’s not sure that this decrease low cost will assist AI-related shares, as their sensitivity is far bigger to the expansion outlook is far bigger and thus AI-related shares carry a number of the highest dangers in This fall.”
- FX: King greenback and its far-reaching repercussions
As most central banks seem like on the finish of their tightening cycles, FX markets might be ready to see which would be the first to change over to an easing cycle, and the way relative price minimize aggressiveness will play out.
Saxo Market Strategist Charu Chanana sees a number of dangers to the buyer within the fourth quarter, “with the erosion of pandemic financial savings and the beginning of scholar mortgage repayments weighing on family budgets. This weakening of the US economic system might convey price minimize expectations ahead from mid-2024 for now, weighing on the USD.”
Within the meantime, the USD continues to be robust, and “with the elevated stagflation dangers in Europe and the UK, mixed with a structurally weak Chinese language economic system hit by stability sheet recession dynamics, the USD might prolong its momentum, regardless of a pricing of ‘peak charges’ and price cuts in 2024.”
One indication that peak charges have been achieved is the rising market (EM) rate-cut cycle that kicked off within the third quarter of the yr – specifically in Brazil, Chile and Poland. The tempo of those cuts has been ‘an aggressive shock’ and, whereas sharp price strikes might destabilise EM currencies, “one would anticipate the speed cuts from right here to stay extra modest if the Fed continues to evangelise higher-for-longer.”
“Market contributors with a excessive publicity to USD belongings, however with a bearish view on equities and seeking to hedge their portfolios might contemplate being lengthy US greenback as a secure haven.” Nonetheless, “additionally it is value noting that the broad interest-rate differentials between the greenback and different currencies make hedging expensive for Asian and European buyers in the present day. The choice to speculate internationally in a well-diversified portfolio may very well be extra related for portfolios than the choice to hedge.”
- The highway to a bond bull market is paved, though challenges stay
In response to Saxo’s Senior Fastened Earnings Strategist, Althea Spinozzi, the final quarter of the yr will see stagflation deepening on either side of the Atlantic, whereas elevated inflation all through the remainder of the yr and into 2024 would require central banks to take care of a hawkish bias.
“Inside this framework, it’s secure to anticipate a steepening of yield curves by the final quarter of the yr on either side of the Atlantic, as markets contemplate how lengthy charges will be saved at present ranges earlier than the reducing cycle begins.”
Nonetheless, Spinozzi warns that whereas price cuts are bullish for short- and long-term bonds, the interval that precedes it, given the continuing, and unsure inflation outlook, is probably not as constructive for long-term bonds. Certainly, “longer-term sovereigns grow to be interesting as soon as inflation has no probability to rebound,” and “higher alternatives so as to add length to at least one’s portfolio will emerge in direction of the tip of the yr when central banks is perhaps compelled to ease the economic system.”
Inflation-linked bonds, in the meantime, supply ‘a wonderful risk-reward ratio’ in an setting characterised by charges which can be both too excessive or projected inflation that’s priced too low out there.
“The great thing about inflation-linked bonds is that they’ve twin publicity to inflation and charges. That implies that if inflation rises, their notional and coupon will improve. Nonetheless, if inflation reverts to its imply, linkers will achieve from a drop in rates of interest, regardless of paying smaller coupons and par at maturity.”
- Nobody’s indestructible
On 12 March 2020, the world of US Treasury securities all of a sudden discovered itself grappling with turmoil. Major sellers, the lynchpins of the US Treasury market, had been inundated with a deluge of Treasury gross sales.
“The US Treasury, the deepest and most liquid pool of secure authorities securities, skilled a seismic shift, illuminating a possible underlying danger to the monetary system.”
In response to this disaster, the Federal Reserve took extraordinary measures – extending large financing to sellers and initiating a considerable buy of Treasury securities. As time has handed, the US authorities has dramatically elevated its issuance of presidency bonds to help the USD 1 trillion in further fiscal spending by the Biden administration. On the similar time, the Fed faces mounting unrealised losses.
“If long-term bond yields proceed to surge because of Fed price hikes or elevated Treasury issuance, the Fed’s unrealised mark-to-market loss might develop even additional.”
Saxo Market Strategist Redmond Wong explains the capital constraints confronted by major sellers, the complexity of the US Treasury market and regulatory constraints might spark a liquidity occasion.
- Time to (re)contemplate bonds
Following the longest drawdown in US 10-year Treasury bonds in half a century, Peter Siks, Investor Coach at SaxoAcademy, highlights the advantages of integrating bonds into portfolios throughout an financial slowdown.
Throughout the ultra-low rate of interest interval, bond yields had been exceptionally low, and “weren’t the place to be as an investor”. Nonetheless, the tide has modified dramatically within the final two years, and the rate of interest panorama has reworked the outlook for bonds, “from a low-yielding asset class to an attention-grabbing alternative given the present efficient yields.”
With the vast majority of rate of interest hikes seemingly over – particularly within the US – there’s “restricted draw back danger for the value of bonds, and this makes the present yield enticing. And, within the situation the place rising rates of interest flip to declining rates of interest, the bond holding will even admire in worth.”
Siks notes that bonds can add crucial diversification and decrease volatility to portfolios, a secure revenue and principal safety, and also can stability out a number of the dangers related to equities. In flip, “elevated bond publicity in portfolios at this level provides an asset with a very good risk-reward ratio and a few hedging towards a slowing economic system.”