A General Market Overview with Julius Baer
Gulf Insider interviews Mark Matthews, Head of Research in Asia at Swiss Wealth Manager Julius Baer.
Markets are on a rollercoaster ride. Where do you see this heading?
Lower – and I think the roller coaster will continue. So, how much further down really is contingent on the economy? What I mean by that is do we get a recession or not? We can look back in history and see that since World War II, there were eight bear markets that were not accompanied by recessions, and there were nine that were. For the eight that were accompanied by recessions, the average decline was 24%. That’s only about 5% below where we are now. If you were to exclude the Flash Crash of 1987 which was a 37% decline, the average is only about 20%.
So, if we’re not going to get a recession, I’m comfortable saying that we shouldn’t go down that much more, maybe around 5%. However, if there’s a recession, then we’re looking at a big fall in earnings.
The Fed issued the biggest rate hike in 22 years. What is your view on how it will impact financial markets? Do you think this will help in taming inflation?
The interest rate hike you’re referring to was big, but it only took the Fed funds rate to 1% which is about half of what the Fed funds rate is averaged over the last 30 years. So, on its own, it’s not impactful, but I would say that monetary policy is as much of an art as it is a science. And what the Fed has been artfully doing is a lot of communication to the market since December about how they’re going to tighten. Those comments have had a big impact on the market determined interest rates, particularly the treasury bonds, which are what most commercial loans and mortgage rates are priced off of. So since the beginning of the year, the 10 year treasury bond yield has gone from 1.5% to 3%, and that in turn has brought up a lot of other interest rates.
Now we’re seeing prices falling in cities like Chicago and Los Angeles, from where they were at the beginning of the year. That’s important because housing is about 40% of the consumer inflation basket. I think that these higher rates will help to bring house prices down.
There are other aspects that are more challenging, such as food and transportation. Their prices are high, and it’s not so much because interest rates were low before. It’s about geopolitics. Food and transportation are about 30% of the CPI baskets. So, that is more challenging to bring down with interest rates.
What are your views on the role of China as a global giant economy and how does/will this impact the rest of the world? What are your predictions about both India and China in this context?
At least right now, unfortunately it looks like China’s disengaging itself somewhat from the rest of the world. For example, what I’m reading is that they are no longer allowing any travel in and out of the country unless it’s for essential reasons. So it’s difficult to know how much of that’s related to COVID. And I would note that China and Russia signed a no limits friendship agreement during the Olympics. As you know, there’s a world that the US has been portraying since the invasion of Ukraine, which is the democracies versus the autocracies – and with this no limits friendship, China has obviously been lumped into the latter camp. So combined with the demographics, the average age is getting much higher every few years. I think the rate of growth will be very slow compared to what we were accustomed to before.
In India, it’s the opposite. The demographics are very positive, the working age population is now larger than the dependent aid population and will remain the case until about 2055. That’s very positive for growth. I just remember for the last 30 years, all investors wanted to hear about was China and they were largely shunning India. Now it’s the other way around. So, if this proves to be a longer lasting trajectory, then I would expect a much higher rate of growth coming out of India than China.
What does the future hold for crypto assets, and do you recommend them as an investment?
I’m not the first person to say that a very good thing to compare them with is the process of maturity of the internet. If you remember, the internet in its infancy back in the 1990s – we all knew it was going to be something really big and become part of our lives. But we just didn’t know in what way. And it has turned out to be a very big thing, but I would say few of the original internet companies, the so-called dot coms, are really still around today. Most of the giants are companies that either didn’t even exist or weren’t listed yet back in the 90s. Google and Facebook didn’t list until the 2000s.
What I’m trying to say is that with crypto assets we had a bubble, it’s bursting, very much the same as the dot coms. And like the dot com, some Phoenix will arise from the ashes of the current implosion. But what it looks like, I can’t say.
To answer the second part of your question – we do recommend investors to take some exposure, but small. And the purpose of that would be to begin familiarising yourself, learning about the asset class, following it as it matures, and, really having that first person experience yourself. Because one thing I am confident in saying is that it isn’t going away. It will be a big thing, just like the internet has become.
What is your advice to investors in such a tumultuous market environment? Would you recommend to stay invested?
I would say there’s no long-term gain without short term pain. And the best example I can use of that is over the last 30 years, the S & P has given a 10% annual return including dividends, which is fantastic. In that 30-year period, there were two bear markets where the market went down 25% or more. And there were two that were even worse than that, where the market went down 50% or more. Yet, even including those four bear markets, you still made 10% per year. So, I think the S & P is like a very good fund manager. It naturally pushes the best companies to the top, and it naturally pushes the worst companies right out of the index. I think that’s just the way to go – buying and holding the S & P index.
Finally, how does that compare with the current rate of inflation?
The current rate of inflation is 8%. Obviously, the stock market is down 18% this year. So, it has been terrible. But as I said, we will have these bear markets periodically. Much more often than not, the market will go up and not down. And so, buying and holding is really key. But I don’t think the current inflation rate of 8% will stay that way. I think it’ll come back down to about 3-3.5%.
For more information on Julius Baer, visit their website.