Posted inFSA Spy

The FSA Spy market buzz – 4 August 2023

Night trade says night night, Eastspring is bullish on Japan, Lombard Odier is seeing the wood for the trees, US interest payments shocker, politics shmolitics, Singapore’s birthday and much more.

Unless one has been living under a rock, the Fitch downgrade of US government debt has been the story of the week. As rating agencies are usually so slow off the mark, this news has raised an eyebrow or two. Spy’s take on the matter is: careful what you wish for. Those who despise America’s exorbitant privilege for being able to print dollars at will, often sell the most to America’s insatiable consumers. A strong dollar keeps Asian export markets humming. As Janus Henderson noted, “only a handful of countries in the world – nine to be exact – still hold a coveted AAA credit rating from all three major ratings agencies” and they usually run budget surpluses. America does not fit that bill by a country mile, “perhaps Fitch isn’t completely out of line in thinking it fits better in the AA+ crowd”. Spot on.

When a shiny new fund comes along, one of the first questions Spy asks himself is: does this strategy have enough utility and originality to gather enough assets to make it worthwhile? Too many fund ideas seem to be launched on a whim or some short-term fashionable idea. This is all the more so in the ETF world. Spy was not surprised to hear that two funds, specifically designed to capture the so called “night effect” of US large-cap and US small-cap equities, are closing down due to a lack of assets. The idea behind the night effect, that shares perform better in the evening, relative to the day session, largely due to evening corporate announcements, has some academic merit on the surface. However, the NightShares 500 ETF (NPSY US) and NightShares 2000 ETF (NWM 2000) both underperformed their day traded counterparts when put into practice. Markets are far too efficient in Spy’s experience to allow this micro-opportunity to last for long.

Is the land of the Rising Sun going to rise even further wonders Spy? Eastspring seems to think so. In a thought leadership piece out this week, Ivailo Dikov, head of Japan equities, argues that there is more room for outperformance, despite Japan seeing the highest inflows in 20 years. It is worth reading the piece in full, here. Salient points include the fact that Japan is a good location for “friendshoring” as firms de-risk some operations from China, a current tight labour market leading to wage inflation and rising tourism. So, while Japan may not be a bargain at the moment, there is more upside to come and any pullback in the equity market should be a chance to stock up. Kampai!

Spy loves a good stroll in a forest as much as the next rambler. He was pleasantly surprised to read in a new insight piece from Lombard Odier just how important forests are and what an opportunity they represent. As Alina Donets, a Lombard Odier portfolio manager writes, “Why do forests matter? Put simply, the global economy – and earth itself – cannot thrive without them. They are storehouses of biodiversity, sustaining 80% of the world’s known terrestrial species…Forests are also irreplaceable carbon sinks, capturing and storing 7.6 billion net metric tons of carbon – equal to 1.5 times the US’ total annual CO2 emissions.” Alina reckons we should be investing in firms that actively support de-forestation for both positive ESG reasons and good performance upside, too. Peachy. 

Do you want the good news or the bad news? Well, the good news for American savers is that US households are now earning $121bn more in investment interest income versus a year ago. Sounds great. What is the bad news? Those households are now paying $151bn more in interest on mortgages, credit cards and other loans. Ouch. Is anyone surprised that assets in money market funds have hit a record high of $5.5trn? With yields above 5%, expect more of this to come, putting pressure on growth funds to take even more risk.

Do you think politics plays a role in stock market performance? Perhaps it does in some parts of the world, some emerging markets or Europe, for example. However, in the driver of world growth, the United States, not so much. Spy was fascinated to see this chart of stock market performance versus political affiliation since the 1970s. It does not really matter who is in charge; US corporates manage to find a way to grow their earnings regardless. Ignore the shouty cantankerous noise.

Next week on Wednesday, Singapore will celebrate its National Day as the city-state turns 58. The tiny country continues, despite a current political scandal or two, to be a shining example for the rest of the world of what hard work, sensible policy and clean government can do. Mark Allen Group and Fund Selector Asia are proud to play their small part in the ongoing growth story of the world’s most unlikely economic powerhouse.

Until next week…

Part of the Mark Allen Group.