Han Dieperink

The big difference between bonds and equities is that cash flows in bonds are fixed in advance. It makes inflation the great enemy of bonds. With equities, the effect of inflation is more complex. Companies that raise prices often realise higher sales as a result. But with a lag, inflation, in the form of rising wages and rising interest rates, creates margin pressure, as do rising energy prices.

Over the past 12 months, the yield on corporate bonds has been as much as minus 22 per cent. As a result, the effective yield on investment grade corporate bonds has now risen to 5.5 per cent at a duration of just over 6 years. This is in line with the return earned on investments according to the tax authorities, on which 31 per cent tax has to be paid this year.

At the same time, most banks still do not give interest on current account balances, but that is not subject to tax these days.

This will probably be the worst but also the best year for bonds ever. Rising interest rates and credit spreads are causing hefty price losses. Inflation is a bond investor’s worst enemy and it is skyrocketing. The fact that interest rates and credit spreads are rising fast is good for bond investors in the long run. Panic and volatility always create opportunities.

Low-risk stocks do better in the long run than high-risk stocks. For the record, this story equates risk with movement or, in stock market jargon, volatility. In itself, this is not the correct definition of risk. The flip side of risk in the form of volatility is opportunity.

The US equity market has rebounded some 15 percent from its low in June, helped by hopes of a Fed turnaround, better-than-expected corporate results and investors who were gloomy but invested.

The June low remarkably coincided with the peak in earnings expectations for 2022 and 2023. This means the entire price recovery can be attributed to higher valuations, made possible by lower interest rates. The fact that corporate earnings were better than expected, however, says more about expectations than about the underlying earnings trend.

European gas and electricity prices break records almost daily. The effect of energy on an economy is often underestimated. Almost all economic activity consists of energy, but in a different form. 

The value of a currency is based on trust. The Russian sanctions have not helped the status of Western currencies. Yet crypto currencies also have difficulty escaping Western sanctions. The digital currency issued by China’s central bank, also known as the e-yuan, is succeeding. It may gradually gain market share from the dollar.

Forty years ago this week the bull market started in the United States. Not just any bull market, but the biggest bull market ever. Despite the crash of 1987, the dotcom graveyard, the attacks of 11 September 2001, the Great Financial Crisis and the Covid pandemic, this bull market continued to rise, fuelled by structurally falling interest rates, higher valuations and sharply rising profits.

The Dow Jones bottomed forty years ago on 12 August 1982 at 777 points, the same level as in January 1964. 

Three things come into play when forecasting future inflation. First of all, the difference between supply and demand. At macro-economic level, an estimate is often made of the output gap, or the tightness of the labour market. In addition, the current inflation level also plays a role. Inflation is reasonably inert, well-anchored and responds slowly to changes. It takes time for a different inflation level to sink in with consumers and producers.

For the first time since 2002, the euro trades at parity with the dollar. In the summer of 2008, one euro was worth as much as 1.6 dollars. But with the eurozone on the front line in the war in Ukraine and the ECB simultaneously cautious about raising interest rates because of fragmentation risks, the euro seems to have only one way to go and that is down. The rapid decline of the euro is a harbinger of the next euro crisis.