Rudi’s View: Real Market Support Is Invisible

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 | Apr 07 2022

In this week's Weekly Insights:

-Real Market Support Is Invisible
-Conviction Calls
-All-Weathers: Steadfast Group
-At The AIA Conference
-Presentations in April

By Rudi Filapek-Vandyck, Editor FNArena

Real Market Support Is Invisible

Sometimes it's what we cannot see that is most important.

Now that global equity indices have staged a strong comeback rally throughout March, a lot of head scratching and tea leaf reading is occurring. How to explain this explosive turn in sentiment when the war in the Ukraine is still raging, bond markets are flashing warning signals and forecasts for inflation are on the rise, still, while forecasts for economic growth (and thus corporate profits) are declining?

Amidst all the finger pointing at technical trading, short covering, the US options market, and a continuation of buy-the-dip strategies -that all made their contribution, no doubt- one most interesting piece of research has been released by the global strategy team at Citi led by strategist Robert Buckland.

On the team's analysis, global equities continue to be supported by the fact that 'real' bond yields ('real' meaning corrected for inflation) are still negative, irrespective of the rapid rise at face value in 2022, and Citi's house view remains that real yields will likely remain in the negative throughout 2022.

What this means, explains the team at Citi, is that every time investors move into cash, they rather quickly draw the conclusion there is no viable alternative other than equities to put that cash back to work. Commodities can only absorb so much, and they remain highly volatile. Bonds are still selling, carry a negative 'real' return and the curve is flat as a pancake, if not negative (i.e. inverted with less yield farther out).

The past years have seen so-called alternative assets gain in popularity but as Citi rightfully points out, alternative assets are illiquid and current pricing suggests they are expensive. Inflation protected bonds, or TIPS in the US, still guarantee investors a negative real return.

So where does one put money to work once the cash on the sideline starts feeling impatient?

In a negative real yield environment, Citi argues investors come to realise equities are, in essence, a real asset, just like commodities and real estate. Hence the logical reflex is to continue to buy-the-dip, because There Is No Alternative (TINA).


Historical data-analysis seems to support Citi's thesis, with the team identifying five previous periods when real yields were negative, and all but one witnessed equities posting a positive return.

-1971-1972 - S&P500 price return was 11%
-1975-1978 - 17% price return
-1982-1983 - 38% price return
-2011-2013 - 35% price return

Thus far in 2020-2022 the S&P500 price return has climbed to 40%. Note no returns from dividends were included in those calculations.

The one exception is the period 2007-2008 when real returns sank into negative territory because of a global recession and deeply entrenched financial crisis with the return from equities sans-dividend falling to -37%.

Given the above analysis, investors might be inclined to think buy-the-dip remains the most solid, superior risk-adjusted strategy when it comes to equity markets, as long as no recession or financial crisis awaits on the horizon, but the team at Citi offers an alternative angle.

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