Five insights in five minutes
Asian equity rebound
As Five in Five goes to press, the MSCI Asia ex Japan large cap index has notched up nine out of ten positive trading days, including every session this week. ‘Bout time, you’re probably thinking. Since the end of February, for context, the equivalent small-cap benchmark has outperformed its heftier cousin by 18 per cent. A difference in country composition explains half of the difference. The large-cap Asia index has 50 per cent of its weight in mainland China, which has been struggling this year, whereas small-caps have it fourth, behind Taiwan, India and South Korea. And as can be seen in the chart below, better returns from smaller companies explain the rest of the outperformance. Although this so-called ‘small-cap premium’ is well documented in America, it’s hard to spot in Asia of late. In fact, the Asia small-cap index has underperformed large-caps by 30 per cent in the five years to 2020. Also, with large cap earnings multiples now trading in line with small caps, versus three points higher in January, investors have no reason to ignore the former.
Ways to play: Asia equities, Asia large caps, Asia small caps
UK interest rates
In a normal hiking cycle, the Fed raises interest rates before the Bank of England. This was true in 1986, 1994 and 2015. The go-to reason for this is that America is bigger, while the UK is a small open economy. So far the US recovery has been stronger than the UK’s, so why are futures markets anticipating the BoE will shoot first this time? The simple answer is that with consumer price inflation expected to rise temporarily to four per cent in the last three months of the year, Governor Andrew Bailey said last week that the central bank “will have to act” to contain inflationary pressures. Investors reckon that means as soon as November. As a result, short-dated UK government bonds slumped, with two-year gilt yields climbing over 40 basis points to 0.71 per cent in just a month – almost double their US peers. Indeed, that now makes the UK one of the few developed countries offering a positive income on short-term bonds.
Ways to play: UK fixed income, short-term funds
The most recent Intergovernmental Panel Climate Change report revealed that greenhouse gas emissions from human activities are responsible for approximately 1.1 degrees Celsius of warming since the beginning of the last century. If you want to point fingers, look no further than infrastructure. Indeed, the sector is responsible for a gigantic 80 per cent of total greenhouse gas emissions globally, according to a report from the United Nations Office for Project Services, with the largest sources, per our chart, including energy, transport and buildings. So it makes sense that infrastructure will also play a huge part in helping society adapt to the impacts of climate change in the future – almost 90 per cent of forecasted global adaptation costs, in fact. For every one dollar allocated to infrastructure that prioritises future-focused resilience, low and middle-income countries alone could benefit from a four-dollar return, the report says. And the trillions of dollars of additional infrastructure spending needed over the upcoming decades to meet key emissions targets presents a massive investment opportunity.
Ways to play: ESG strategies, infrastructure debt and equity, alternatives
It’s one of those odd compound words coined by economists. And it’s become the talk of the town lately. Fears of a period of stagnant or low economic growth and high inflation, or stagflation, have risen to the forefront of financial media. But most major economies remain far off this scenario, as shown in the chart below from our strategists. Moreover, the IMF projects global growth will be a solid five per cent next year – hardly stagnant or even low. And while India may look lonely at the far right of the chart, the rest of the region isn’t far behind in terms of growth, with over six per cent expected from emerging Asian economies next year. On the inflation front, the debate rages on around the transitory nature of higher readings today. What we do know is that companies generally pass on higher input costs to their customers. Thus, owning equities, particularly in growing economies, offers a sensible approach to protecting against inflation – transitory or not.
Ways to play: Global equities, Asian equities, emerging equities
Health is wealth, as the saying goes. Sadly, this typically means misfortune for those with less means. For example, the poorest 52 countries make up over a fifth of the world’s population but only four per cent of Covid vaccinations, according to Bloomberg data. Meanwhile, healthcare spending in wealthier countries was already booming before the pandemic, accounting for a fifth of G7 budgets and outpacing economic growth. Yet this spending is unsustainable. Elevated post-pandemic debt levels, shown in the chart below, will further restrain it. In a previous Five in Five we highlighted a breakthrough Alzheimer’s treatment priced at budget-busting levels. Accordingly, access to the treatment has been limited to roughly 100 patients, negatively impacting millions of others and the financial performance of the drug’s creator. This is becoming more commonplace. The healthcare industry has many long term drivers – as evidenced by its 90 per cent outperformance of global equities over the last decade. However, picking tomorrow’s industry winners means understanding how companies impact cost sustainability.
Ways to play: Sustainable healthcare equity funds
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