Global markets have picked up as trade and productivity continue to recover. Major economies are back at pre-pandemic levels and the global investment outlook continues to be strong heading into the last quarter. Asset prices have increased as investment sentiment heats up in Q4. This also reflects in the rising price of assets such as property, which is back at its 2019 levels in Dubai and digital Assets, where most majors are at, near all-time highs and recouping from the Q2 sluggishness.
This year 2nd half commenced with the Delta-Variant threatening a solstice of choppy recovery. But vaccines allayed fears as it remained effective and economies continued to print steady recoveries. Global economic fundamentals remain strong with corporate and retail savings going up year on year despite higher consumer and capital expenditures such as real estate continue a sharp turnaround, as demand for asset hedging increases.
As the world regains growing back steadily with global trade and supply chains being reactivated and expanded, the potential of blockchain technology to revolutionize global business is at the forefront of many investors’ minds. We have seen almost doubling in the global digital asset market cap this quarter and blockchain adoption on an institutional level is exponentially accelerating. Major financial institutions like JPMC have launched their own blockchains and almost most fund managers are now offering investors exposure to digital assets.
For the adventurous, focus may be to invest in forward-thinking industries such as supply chain blockchains and leveraging in identifying and anticipating future trends to gain on consistently above-average returns albeit with relative risk exposure initially at least.
US stocks recorded close to all-time highs. Wall Street started the first trading day of November on a strong note following an overall upbeat earnings season. Investors remained optimistic ahead of the all-important Fed meeting scheduled for later this week, which is expected to give an indication of when the central bank plans to commence its bond tapering. After a tough September, which is historically the worst month of the year for financial markets, SPX surged around 7% in October. All three major indices settled at record highs last month with the benchmark index and the Nasdaq 100 delivering their strongest months since November 2020. Gains last month were mostly driven by a strong earnings season with companies reporting robust profits despite supply chain issues. Around half of SPX firms have reported their quarterly results so far, of which more than 80% have exceeded market expectations. Earnings from SPX firms have surpassed market views by 10% for the latest quarter. UBS Global Wealth analyst Solita Marcelli said in a note to clients, that she expects the index to reach 5000 by December 2022 which translates to netting around 45% on the SPX. It has raked in 25% this year as this article goes to print.
On the economic data front, the ISM (Institute for Supply Management’s) manufacturing index declined to 60.8 in October, from 61.1 a month ago, but exceeded expectations of a reading of 60. The IHS Markit final PMI reading for October declined to 58.4 from an initial reading of 59.2. Although both readings declined slightly in October, they remained above the 50 level, indicating an expansion in activity and supporting investor sentiment. Stocks related to an economic rebound traded in the green overall with airlines and retailers closing mostly higher. Tesla, which crossed the $1 trillion market valuation last week, continued to record gains, with shares spiking sharply.
The Dow breached the 36000 level for the first time earlier in a session. The SPX reached 4613, hitting a record intraday level of 4620. The Nasdaq settled at 15905. The small-cap benchmark Russell 2000 jumped 2.6% to record its best day since August 27.
Investors will focus on another busy week of earnings reports, Friday’s NFP report and a major Fed meeting. The Federal will start its 2 day policy meeting today and announce its policy decision this week. The country’s central bank is widely expected to start unwinding its monthly bond purchases and end the process by the middle of 2022. With inflation hitting a 30 year high, markets also expect the Fed to issue comments on its benchmark interest rate.
The British currency edged lower, hitting its weakest level in over two weeks against both the US dollar and the euro. Uncertainty over the BoE’s stance on its monetary policy will keep the sterling under pressure this month. Although markets expect the BoE to hike rates twice by year end, concerns around the country’s GDP growth restricted any gains in the Cable. A disagreement between the UK and France over fish grabbed the headlines. The UK issued a warning saying that it will take action if France does not withdraw its “completely unreasonable threats” in an escalating issue around post-Brexit fishing rights.
On the economic data front, the IHS Markit/CIPS manufacturing PMI for the UK rose to 57.8 in October, from a preliminary reading of 57.7. The figure came in above the seven-month low of 57.1 recorded in September. The sterling fell to its lowest in more than two weeks on Monday, with the GBP/USD forex pair closing at 1.3665. The pound settled at 84.95 pence versus the euro, after hitting its lowest level since October 13 earlier during the session. Traders will keep an eye on the ongoing tensions between London and Paris. Another round of earnings this week and the central bank’s decision will also remain in focus.
Closer to home, Dubai exceeded expectations in Q3 with strong demand in the RE arena with many high end deals signed for land banks.
While many countries contemplate reopening their borders and implemented strategies to resuscitate their economies, Dubai was forging ahead in its preparations to playing host to the world in launching EXPO 2020. The astute management shown by the government of UAE resulted in the highest percentage of vaccinations per capita worldwide allowing the country to deal with the repercussions of the pandemic more swiftly than any other nation. Dubai is thriving and ready to welcome the world in Q4. Results are visible as the real estate markets have returned to pre-pandemic levels. The demand for Dubai properties increased sharply, specifically in the off-plan sector where developers are providing investors with lucrative investment opportunities.
Although the global economy is still recovering from the deepest economic contraction since the Great Depression, many governments have unleashed a massive fiscal and monetary stimulus effort that’s included lump sum cash payments, zero interest rates and enhanced unemployment benefits. Inflation has surged to around 5% and shows little sign of abating in the short-term. It appears like central banks worldwide are finally going to start pulling back on their financial support shortly. The Fed is in the particularly tricky spot of figuring out how to balance promoting further economic growth with controlling inflation. They may be forced to choose one or the other and it’s not clear how much they can do about it even if they wanted to. While there’s no justified comparison from history with which to work, I think the 2018 mini-bear market may not be that far off. That also featured a tightening of monetary policy, the risk of an economic slowdown and concerns about equity valuations.
For the two-year period from 2016-2017, stocks were chugging along. SPX was up 38% during that time, while the Russell 2000 has gained 40%. Even emerging markets stocks were outperforming having returned 55%. The first jolt to the system came in Feb 2018 when volatility-linked products blew up and took stocks down with them. The VIX entered the year in the single digits, among the lowest levels the indicator had ever seen. Investors were making large bets on the short volatility trade and it worked until it didn’t. When short-term sentiment turned bearish, the VIX went from 12 to more than 50 in a matter of days. Short VIX products, in some cases, lost more than 95% of their value and some were eventually liquidated altogether. The impact of this sent SPX and Russell 2000 down 10% in under two weeks. Investors shrugged this off pretty quickly though. Most of the losses were erased within about a month and stocks pushed back to new all-time highs later in the year. By September, however, things started looking shakier, first for small-caps and then for large-caps. This last paragraph is a reminder for the readers to take cognizance of what could potentially happen. Not to mention this is the last month where investors can possibly eke out returns before profit taking starting next month. Happy winding down, safely.
About the Author
Geoffrey Muns is an Independent Financial Advisor and Planner certified from the UK, US and UAE based
out of Dubai for the past 25 years. He also works in the PE/VC space and is a seasoned investment banker
having worked with international banks and investment firms in the region.
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