Midyear mumble 🌞🚴♂️🥐
Appoaching peak summer, world on the brink, EM to eclipse US, donut economics explained and the Tour de France
2023 is amost 50% loaded … how do we feel about that?
Happy thursday to the newsletter coming at you faster than a Mark Cavendish lead-out train! More on that later but first…
I need ideas for what a 42 year old dad can legitmately wear to a one day music festival in 2023 that I and Mrs M are going to later in July. I’ve had to put a lot of potential ideas so far into the too trendy camp. Genuine and banter answers both welcome.
We’re two out of five on the peak summer “monuments” scoresheet by my count: Glastonbury has been headlined and we’ve lost to the aussies in the cricket, Next up: Wimbledon, the Tour de France and the British Grand Prix. Markets wise we’re facing peak midyear outlook territory (you love to see it) and the Glasto of central bankers is happening over Pasteis de Nata with the CB GOAT lineup on a panel session yesterday.
Pass the pimms, grab the strawberries, lean into those statement sunglasses and lets dig in …
Midyear outlook:
While the Bank of England has kept on reminding us of the old saying about prediction being difficult, the industry has of course been queuing up to provide that all-important mid-year outlook. The standard mumble is to be expected: “cautious something something, active management something, buy alternatives” I joke, I joke (well kind of but not really) … there are some useful things to be taken away
Here’s links to a good handful of them (and can we just take a minute for that post - 4k likes on linkedin for a list of outlook links, bravo!) if you want to really dig in, my quick summary would be:
The most anticipated recession ever has not yet happened but probably still will, kinda.
But investors who positioned for it have lost out (so far).
Strategists are scrambling to find vague and noncommital terms to describe the possiblity of a recession in the second half without committing to it actually being that bad. Goldman’s continue to be on the optimistic side of this - they recently downgraded their recession probability to just 25% (more detail in their markets podcast here). Morgan Stanley appear to be on the other side: they see stock earnings per share in the US falling to $185 (vs $222 consensus).
Scenarios can be a good thinking tool but a lot of the outlooks could more or less be distilled down to - stocks could go sideways down or up but bonds yield good. THEY ARE TELLING IT LIKE IT IS HERE!!
Credit where it’s due - the nowcast
I want to give JP Morgan a bit of credit here for getting a lot right in their start of year forecast: “a better year for markets, a worse year for the economy” … well, they only got 50% of that right so far, but it was the half that matters. And I remember this as being fairly out-of-consensus at the time.
And just dwelling on that for a second - because I think it’s important - if you dig into the JP Morgan outlook from late last year, it wasn’t even really a forecast that was at the heart of it, more of a “nowcast” that recession was then priced in to stock markets.
And I think that’s actually the core reason why talking about macro might be slightly useful - understanding what’s priced in.
JP Morgan’s mid year outlook is here and has some good charts summarising where we’re at.
Central bankers speak - come for the custard pies stay for the higher rates
The mood music at the Sintra central bank shindig yesterday seemed to be “higher for longer” (summary from Axios here). Jerome Powell was talking up more rate hikes in the US. BoJ governer Ueda’s quip about the monetary policy in Japan working on a 25-year lag seems to have been the moment of the day (a joke, apparently).
Markets mumble
Stocks have dropped a few percent since mid-June, but your global stocks are still up around 12-14% ytd in $, a bit less in £. The UK market is struggling along with EM.
UK bonds are also not in great shape with the UK 2 year yield jumping to the highest level in 15 years. Sticky inflation and a bumper interest rate hike will do that to you. It’s spurred a lot of talk about the monetary policy transmission and what effect these hikes are actually having. Good analysis from Schroders showed that only 26% of people are homeowners with a mortgage and that subgroup is rolling off the fixed rate mortgages gradually.
UK longer dated rates are back close to the highs of Sept/ Oct last year, with the diverging monetary policty situatons resulting in a yield premium of about 0.6% to US treasuries (4.4% vs 3.8%).
3 things I'm reading
The Most Important Number in Investing - Duncan Lamont Schroders (link)
I agree with Duncan that the equity risk premium (or expected return) is probably the most important number in investing, but attempts to pin it down over short or medium periods can be tricky - but to help with asset allocation and investment planning I think we do need to come up with some kind of number - how??
This is a neat piece that explores three possible ways of doing it. To be honest I have long wanted to write something similar so I’m glad to see Duncan has done a good job of it! I often think that individual firms or teams focus in too much on one chosen one of these ways and it’s easy to forget about the merits of the other approaches
Between the lines - like many things in modelling it’s not necessarily the question of what’s most “right” but what’s most useful, and one lesson I’ve learnt is that sophisticated market-driven estimates of future returns can become unhelpful when time lags are introduced into decision making.
Ray Dalio says the world is on the brink of great disorder (Time - link)
I’ve struggled to engage loads with Ray Dalio’s more recent stuff as it all just seems very long and verbose, but this Time article neatly cuts it down to a manageable size an seems a good jumping off point. Still, I am not sure what the “so what” really is (I guess I do need to read the longer version).
He sees a number of forces coming together to create potentially bad things. He sees things as mid-cycle in the short-medium term business cycle and late-cycle in the long-term debt cycle (is this a cop-out or a useful insight?). Plus populism, plus inequailty plus geopolitics.
I am not sure there is anything really radically new here? Although his style is to be evidence-driven which is good. Weaving all this together into one coherent narrative would be a real tour de force but I feel like he’s stretching and falls slightly short of that.
Goldman Sachs research thinks Emerging Markets market cap will overtake the US by market cap before 2030 (link)
Some thought provoking stuff here which at first glance my instinct is to push back on quite firmly but on reflection, we know things do shift quite a lot over long time periods, so why not?
Explained: GS research have brought together estimates for growing GDP, market cap to GDP ratios and valuation multiples as they vary by development as represented by GDP per capita. EM is set to grow a lot faster which matters hugely over long time periods, India being a big beneficiary.
Between the lines: the basic thesis seems to be that equitization of corporate ownership and deepening of capital markets goes hand-in-hand with development, whereby the family owned businesses driving growth at lower development stages give way to large listed firms as countries grow richer.
But there’s a catch
If market cap in EMs is growing faster than in DMs, does that mean those markets will also outperform today’s advanced economies? Not necessarily. Daly and Gedminas expect the equitization of corporate assets to be the major driver of the shift in global market cap. “This does not have a clear implication for the performance of equities themselves,” they write. That said, our economists expect EM equities to outperform DM stocks in the longer run because of stronger long-run earnings growth and valuation multiple expansion as risk premia fall.
I think there’s definitely reasonable putbacks to this such as the fact that despite the name emerging economies in general have not “emerged” in the way that prior forecasts would have.
2 things I’m listening to
A super description of why we should prioritise thriving and be agnostic about growth (in a world that has clear planetary boundaries). A super clear thesis and some very good challenging questions from Rory and Alastair on top form which allowed Kate to address a lot of the common putbacks. A must listen. Also recommended in the same series: the two part interview with former prime minister Sir John Major.
James is always worth a listen, here he covers his “mea culpa” on why he got corporate profits, and therefore US stock returns wrong a decade ago, his general dislike of forecasting and why the Kalecki equation is the “one ring to rule them all”. He rolls out a great Voltaire quote very relevant to investors - ““Uncertainty is an uncomfortable position. But certainty is an absurd one.” Words to live by!
Grab bag
Blackrock has filed for a Bitcoin ETF and it seems to have given it a price bump (link).
Apparently Larry fink isn’t saying ESG any more (link)
Looks like Ryan Reynolds market cap is also hitting new highs with a diversification into F1 (link)
And I want to talk about the Tour De France.
It’s given us some great storylines in recent years (who could forget this finish and reaction from 2021).
This year sprint legend Mark Cavendish announced his retirement at the end of the season, so the setup is he starts this year’s TDF tied for the all-time stage wins on 34 with 1970s uber-legend Eddie Mercx, the scriptwriters are having field day.
There’s maybe 6 sprintable stages where Cav could potentially move into clear water ahead of Eddie. There’s no sure thing though in sprint cycling but if we know one thing it’s that the Manxman knows how to find his way to a finish line - I’ll be cheering for him! He’ll have to make it over some tough mountains though this year’s route has 56,000m of climbing vs 48,000 last year, and only one individual time trial, so it’s one for the climbers. Strangely the route lacks those grandstand mountaintop finishes, but does take in the Tourmalet near the start and the Cormet De Roselend + Col de la Loze in a big day in the alps fairly late on which could be a decisive one.
It’s my last week at LCP, I start at People’s Pension in September, so looking forward to a bit of family time splashing around in French rivers over the summer. Stay tuned for waterski progress updates. Will probably do one more of these then sign off for the summer. Have a great one whatever you’re up to.