The thoughts that fundamentally shaped our worldview and investment strategy in the last quarter could be summarised with the following: ‘We believe that the high pricing and market operators’ optimism for the future together with their ‘confidence’ against risks (volatility priced in options, in other words, the expectancy for a greater change in currency rates, has never been so low in 2017), along with the increasingly rigorous monetary policy is a dangerous combination. […] If the central banks’ net purchasing position significantly decreases globally (which could even disappear by 2019), it could prevent the global asset-price increase. However, it could also happen that the bond and share prices will drop together.’
March was defined by a nervous, fluctuating capital market trade during which more and more asset classes and share markets (at both country and sector levels) started to perform worse. Bad news arose too. Trump has begun to realize his election manifesto, which increases the chance for a global trade war and a tenser USA-China conflict. Meanwhile, the global economy is slowing down and numerous macroeconomic indicators became weaker than expected. The costs of obtaining dollar (interbank rates), as the ‘world currency’, have been steadily increasing. The results of the elections in Italy – the extremist parties gaining ground – is the worst possible outcome for investors favouring stability. However, the fact that the dollar is the world’s worst performing currency of the year – despite its increasing interest advantage – somewhat aided the markets. Therefore, in the first quarter of the year, share and bond markets performed poorly – essentially, none of them was profitable. Moreover, the majority of shares, the developed market bonds and the Hungarian sovereign debt market too closed the first three months with a loss.
However, despite the falling share markets of the first quarter, shares have not become any cheaper. One of the most important factors that have an impact on the market this year is that central banks – even if slowly but certainly – are implementing more rigorous monetary policies. After the crisis, central bank interventions did not have a positive impact on the real economy but on the asset prices, so we expect that this process will be true but in reverse: if central banks are tightening, it will be bad for asset prices. Meanwhile, the Chinese risks did not disappear, the global economy is slowing down, there is a chance for an escalating trade war, and in numerous regions, the profitability of companies is threatened by the tight labour market. Mainly in the United States, where Fed (partially due to the relaxed budgetary policy) raises interest rates and is the net seller in the bond market. The price of the world currency, the dollar, is high. None of these is ideal for risky assets. It is better to remain cautious.
Original date of Hungarian publication: 20 April 2018