Market Musings 15/05/21: Banking the dividends from recovery

15th May '21 by Edmund Shing

7 comments 2597 reads

Banking the dividends from recovery

Summary

Podcast: Japan
Video: Investment Strategy highlights, May
An inflation air pocket hits markets
Is higher inflation really only going to be a temporary phenomenon?
Value stocks get help from higher inflation expectations
Banks lead the value charge higher

Podcast: Japan - the Land of the Rising Sun, Where are the hidden pearls?

The Land of the Rising Sun, where are the hidden pearls?

What economic challenges does Japan face in view of its atypical economy and demographics?
How will Prime Minister Suga carry out his reforms to spur growth?
The Japanese have managed the Coronavirus better than most and the figures reflect this. What is their secret?
Is the pledge to be carbon-neutral by 2050 feasible?
What industries do the Japanese particularly excel at?
Why do you like Japan from an investment point of view?

Investment Strategy Video: May highlights

BNP Paribas Wealth Management: Investment Strategy Video: May 2021

Inflation air pocket hits markets

We all knew that US inflation figures were going to leap this month, given the weak level of economic activity a year ago, the widespread shortages appearing as a result of delayed imports and also the effect of higher commodity prices (gasoline, food…).

But even armed with this knowledge, investors were still surprised by the strength of US inflation, with prices on average 4.2% higher than a year ago according to CPI.

US CPI hits 4.2%

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Source: St Louis Fed

The knee-jerk reaction to this higher inflation out-turn was a jump in long-term US bond yields to nearly 1.7%, and a sell-off in stock markets led down by growth stocks in Technology.

But if you look at the chart of long-term interest rates (10-year bond yields), the surge in yields since the beginning of this year is obvious, led by the US and UK which have historically been more inflation-prone economies. In the US, yields have risen by 1.4% over this period, while they have risen by 0.7% in the UK.

US, UK 10-year bond yields have surged since October 2020

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Source: tradingview.com

So far, the global economy has been able to absorb this rise in long-term interest rates due to the strong recovery growth currently in the pipe. In addition, do not forget that even after this rise in yields, that they…

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The Phoenix

15th May '21

Another great round up Edmund, re the labour market I have seen videos saying in the USA burger bars are offering sixteen dollars per hour to flip burgers as there are no takers as plenty prefer to sit at home watching Netflix on furlough.

Do you think we could see wage price inflation through to Sept this year when I think the main furlough safety net drops off in the UK & US ?

Thanks Andy

jwebster

16th May '21

If the wage inflation only lasted until September then the Fed would see that as transitory (their words!) and not underlying, thus largely ignore it. At least, that's what the markets are hoping for.

William K

Thanks Edmund as always. Mining seems to combine value with great growth prospects if we can rely on rising metal prices. Blackrock World Mining Trust (LON:BRWM) has a PE of 5, a dividend of 3% and Relative Strength over 1 year of 68%.Seems to tick all the right boxes at this moment in time. Plus giving at least a theoretical hedge against inflation.

Simon Rowan

Hi Edmund

Do you feel the spike in Jananese Covid and the fact they have only vaccinated 1% of the population will slow their economy for a period of time? It seems likely that the Olympics will now be cancelled, but partly for insurance claims purposes it seems they are waiting for the Olympic Committee to take that decision, which I gather is ultimately their responsibility to make the call. Obviously a lot of preparation and investment for the olympics in hospitality are going to suffer extreme losses. I would imagine it won't be as severe on technology based companies. This is clearly having some negative impact on the Nikkei already, but could also be providing an opportunity.

Still watching ACIN, actually I couldn't resit a quick in and out this week on placing news (one of the more complicated placings I have seen, complete with warrants).

I very much appreciate what they are trying to accomplish and the wider importance on the future of farming, global warming and possible control of pandemics. I don't doubt Mellon's belief in saying 'this could be the new Silicon Valley type investment.' Obviously going to be quite volatile and hard to value realistically for a while.

On inflation. We seem to have forgotten the boat stuck in the Suez and the knock on effect on the supply chain from that. My local timber store is bare and already doubled some prices, thanks to the Chinese and American's buying power. Again it looks like a combination of factors all hitting at the same wrong time!

Really appreciate you sharing your vast wealth of investing experience , particularly in areas that are not so familiar to me.

Edmund Shing

The big question Andy is whether or not people who have been discouraged and perhaps retired early, will come back to look for work or not. At the moment, the US labor participation rate is very low, suggesting that a lot of people have stopped looking for work, perhaps because they have made good gains on the stock market, crypto or on house prices. Clearly, in the short-term the unemployment insurance cash in the US and stimulus cheques have helped as well, but as you point out, this money will soon run out.

So by the autumn, we will get a better view of the job market once these distortions have disappeared.

Edmund

sady

17th May '21

Good morning,

There is always a solutions to problems.Inflation that eats into growth and savings.Interest rate increase can pop the property market.

So what's the solution, Bit coin ,something that can take away liquidity from the markets and economy without disturbing the balance of interest rate that everybody is so obsessed with. Maintaining the equilibrium can however be tricky.

Food ,oil inflation is temporary, once the virus scare subsides, the economy should recover.

Its just a thought ,maybe the central banks should look into this option.Bit coin.

Hi Simon, I feel that the Japan trade will probably pause for now, but still remains a good long-term cyclical value buy, once the worries over COVID/Olympics have calmed down. One indication that might help is looking at the premium/discount to NAV of the BGFD Baillie Gifford Japan trust. A very well-run trust, if it gets to 5%+ discount to NAVB, then I would have a look. Still at a premium ATM...