Opinion

Although inflation has made its comeback in Western economies after decades of oblivion (the great moderation), in public discourse on the housing market, the impact of current inflation levels is quite often ignored. In particular, people talk about the nominal price level of the housing market without looking at the real price level. 

As might be expected, the US 10-year - 3-month yield curve has also turned negative. This inversion means that the two traditional yield curves with the longest and most reliable track record as recession predictors are now negative. By itself that’s is no reason to sell equities, or any asset class for that matter.

The data leaves no doubt about it. This year is a tough one for investors everywhere. It’s very clear in the numbers reported this week, both for Europe and for Luxembourg, the domicile for about 10.000 Ucits funds, about one third of all such funds in Europe. Luxembourg’s loss of total fund value this year now is roughly equivalent to the size of an economy like Taiwan. At a European level, the losses can be compared to an economy the size of Canada.

In an earlier column here I defended Liz Truss. I expressed support not so much for the content of her policies as for their intention. Truss wanted to promote the growth capacity of the UK economy and ensure that working would pay more. My support for Truss went completely against the consensus as virtually everyone I heard about her was scathing.

Corporate profits will not fall even if economic growth declines, because of inflation. That is the thinking many investors have when it comes to expected earnings growth for the next 12 months, which is still positive. But I think we are now past the stage where profits are still driven by inflation.

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.

The ISM Manufacturing Index is not only an important indicator of future growth, but is also highly correlated with market returns. What many investors overlook: it’s not just correlated with equity returns, but also bonds.

By using indicators that say something about the direction of the ISM Manufacturing Index to define different ISM scenarios, you can derive implied returns for each asset class.

In-house valuation teams, with experts for every asset class, will become a standard feature among Alternative Investment Fund Managers, known as AIFMs, write Universal Investment’s Gerard van Vliet and Krzystof Czerner in today’s contribution as knowledge experts to Investment Officer Luxembourg. “Fair value calculations are not only necessary to pass regulatory audits, but also to provide a value-added to investors and their relationship with the AIFM.”

European financials are in the spotlight again. And once again, it is not because of anything good. The CDS spread on Credit Suisse has spurted up over the past few days. Is this just the tip of the iceberg? Many “investors” and “gurus” are eager to point out possible systemic risk. At least as far as I can see, there is none of that right now.

UK financial markets are in “turmoil”. This somewhat CNBC-esque opening, however, covers it well. And it has resulted in a chart that usually belongs to an emerging economy on the verge of collapse. The British pound is falling despite rapidly rising interest rates.