Rudi’s View: Covid, Climate Change…Correction?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 22 2021

In this week's Weekly Insights:

-Covid, Climate Change... Correction?
-Conviction Calls
-Win A Book
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

Covid, Climate Change... Correction?

As per the old adage, experts in the share market are being paid to be optimistic, but those in bond markets are being paid to look out for the next worry.

Read any newspaper these days and there are valuable concerns everywhere. If it's not virus-related (now including Australia), then surely new concern relates to consequences of climate change turning Belgium, Germany, and other parts of Europe into submerged flood plains.

So maybe the divergence between the implicit messages coming from equities and bonds should not come as a huge surprise.

One looks at the prospects for ongoing strong recovery in corporate profits, and dividends, on top of capital management and corporate actions, while the other sees slowing growth, forecasts that may prove too optimistic, and potentially a delay in central bankers winding back extreme stimulus programs.

The problem with this divergence is that ultimately, financial markets are interconnected and sooner or later rallying bonds (lower yields) will have an impact on other markets, just like rising bond yields caused a quick flip-flopping in market positioning early in the year.

However, contrary to our grandfather's share market, assessing what the next action-reaction might look like has become a lot harder these days. Share markets have been posting gains for 11 out of the past 12 months prior to July, including seven out of seven post September, and there hasn't been even a mild pullback, let alone a temporary correction, since that speedy sell-off in February-March last year.

No surprise thus, the growing consensus among investors is that bonds are rallying because the economic recovery narrative is losing its shine, and dangers for disappointment are lurking. Equities, at face value, ar trading on valuations that seem rich by historical standards, so might this provide that trigger so many have been waiting for, maybe, possibly?

One problem with that line of thinking is that it ignores the fact that share markets nowadays are much more polarised, and what is negative for one group of companies works usually to the benefit of the opposite basket of stocks.

We all have our own observations and theories about what happens in markets, and why, but mine has been that flip-flopping from one group into the other, and back again, and again, has to date replaced the old sell everything and buy back in again that used to pull markets down by -5%, -10%, or even more.

Having said so, the latest concern regarding US equities is that indices are seemingly being supported by a shrinking group of positive large cap performers. All the while the participation of retail investors in US markets might be at an all-time high.

So maybe bonds globally are spelling trouble ahead. 1Tenyear yields in the US and Australia are below 1.30% while in Germany the comparable yield is back below zero. But there is an opposite view, in that maybe bond markets -for whatever reason- are simply over-stretching themselves, temporarily, into the chosen direction.

Bonds went too far in March, maybe they are now doing it again in the opposite direction?

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