What does the chart show?
 
This chart shows the five-year return of the MSCI World Socially Responsible Investment (SRI) Index against the MSCI World Index. The MSCI World Index covers the performance of large and mid-cap stocks across 23 developed markets. Covering about 85% of the market capitalisation of those markets, it is used as an indicator for the overall market performance of stocks in developed countries. The MSCI World SRI Index has the same geographical coverage but provides additional exposure to companies with good Environmental, Social, and Governance (ESG) ratings while excluding companies that have a negative environmental or social impact. This involves the exclusion of companies involved in areas such as fossil fuels, gambling, and weapons production. The performance of the two indexes has been closely linked given their similarities. However, over the past five-years the World SRI Index has outperformed the World Index by 11.5%.

 Why is this important?

 ESG investing has seen a significant growth in popularity in recent years, as investors become more aware of environmental and social issues such as climate change and labour practices. This has led to a shift in investor practices towards strategies that more closely align with their values. As ESG investing has grown in popularity, a common misconception has emerged alongside it, which is that investors need to sacrifice financial returns in order for their investments to have a positive impact. However, studies are increasingly showing that companies and strategies that include an analysis of ESG factors tend to outperform those that do not over the long run. There are several reasons for this outperformance which is expected to continue. Firstly, incorporating considerations for ESG factors in an investment strategy can help investors avoid certain risks that may result in a share price decline, such as environmentally harmful accidents or reputational damage. An ESG analysis can be considered as just another layer of risk analysis rather than an entirely different strategy. Furthermore, as markets and governments encourage more sustainable practices, exposure to areas such as green energy production enables investors to capture upwards secular trends within more ESG friendly industries. Although ESG strategies can experience periods of underperformance, including last year when rising energy prices saw fossil fuel companies achieve record levels of profit, the nature of ESG themes mean that they are inherently long-term and so can deliver substantial returns over time.

What does the chart show?
 
This chart shows the results of the latest quarterly Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) combined with recessionary periods in the US. The survey is completed by senior loan officers at 80 US commercial banks and at US branches of 24 foreign banks. It aims to provide information on the availability and demand for credit and loans in the United States. The results show the net proportion of officers that are tightening standards for various types of loans. The latest survey results show that a net 46% of respondents were tightening standards for commercial and industrial loans for large and medium businesses, with 46.7% tightening standards for small businesses since the last survey in January. Consumers also faced tighter credit conditions with 30.4% of respondents tightening the standards for credit card loans for consumers. Over the past 30 years, significantly tighter credit conditions have coincided closely with economic slowdowns and recessions. 

 Why is this important?

 Although the earliest stages of the US banking crisis occurred around two months ago, its effects are still being closely monitored. Credit conditions have already come under pressure from the Federal Reserve’s aggressive rate hikes last year and so there were hopes that the slowing rate of hikes might ease some of the tightness in credit markets. However, the results of the latest SLOOS have shown that the increased caution among major US lenders after the crisis has instead tightened conditions further. Comparisons with similar scenarios in the past are easy to make, with the rapid credit crunch expected to cool activity and lead to a recession as it has done in the past. The US economy has shown signs of cooling with Gross Domestic Product (GDP) growth of 1.1% in the first quarter of 2023, marking a deceleration from the 2.6% GDP growth seen in the last quarter of 2022. The concern is that this growth was almost entirely driven by consumption which grew by 3.7% and helped offset the cooldowns in the more interest rate sensitive areas of housing and business investment. The question now is how long consumption can continue to be the sole driver of growth. Consumer credit card debt reached an all-time high of $989 billion at the end of April despite credit conditions tightening just as much for consumers as they have for businesses. Indicators such as rising credit card delinquency rates suggest that the vast reserves built up over the COVID-19 pandemic may be starting to run dry, but the levels remain comfortably below what they were before the pandemic. Despite numerous indicators pointing towards an impending recession, the unwavering resilience of US consumers continues to fuel economic growth, exhibiting remarkable endurance and showing minimal signs of halting their contributions. 

What does the chart show?

This chart shows the number of initial public offerings (IPOs) that have occurred each month in the United States (US) on either the New York Stock Exchange or the NASDAQ. An IPO is the process by which a private company raises capital from investors by issuing stock to the public for the first time. When the COVID-19 pandemic first struck in March 2020 IPO numbers fell sharply. However, during the pandemic, private companies saw the extraordinarily high valuations as an excellent opportunity to raise capital leading to a record 473 IPOs in the US in the first quarter of 2021. Rising uncertainty and diminishing valuations have meant that the quantity of IPOs has fallen steadily since then. In Q4 2022, only 12 companies went public in the US. However, the latest figures may potentially show a reversal of this trend. IPO numbers rose in Q1 2023 to 34.

 Why is this important?

 An IPO represents a major decision for private firms. Although going public provides a company with a new source of capital, it also exposes the company’s operations and finances to intense government and public scrutiny which can expose problems. Undertaking an IPO itself can also be a long, difficult, and expensive process. Therefore, for a company to go ahead with an IPO, they must not only be completely confident about the state of their finances, but also confident about future economic and market conditions. The quantity of IPOs can therefore be an excellent indicator of corporate sentiment, with a better outlook being matched by higher numbers of IPOs. Last year’s economic and geopolitical turmoil meant that corporate sentiment was at close to all-time lows going into 2023. With the recent turmoil among banks, as well as ongoing fears of a recession, it may be hard to believe that firms have anything to look forward to and with IPO numbers still below their pre-pandemic levels, it’s clear that many are still taking a risk-off approach. However, for a decision as important as an IPO, companies, just like investors, must ignore the noise and consider a longer-term outlook. For some, the prospect of an economic environment that may have looser monetary policy, less supply chain pressure, and a labour market more favourable for hiring, is clearly enough to spur a recovery.  

What does the chart show?

This chart shows the market-weighted average price to earnings (P/E) ratio of major equity indices in the US, UK, and Europe, as well as the Morgan Stanley Capital International (MSCI) World index, which is made up of holdings across all developed market equity markets. The P/E ratio divides a company’s share price by the company’s earnings per share to give a valuation metric that can be compared across industries, countries, and over periods of time. Ratios will change as investors’ expectations of future earnings change. A high P/E ratio does not necessarily mean that a company is overvalued but may instead indicate that investors have high expectations for future earnings. Ratios in developed markets have been climbing steadily over the past decade before rising sharply during the pandemic due to loose financial conditions. The significant deratings in equity markets in 2022 brought P/E ratios down from record levels but in the US, valuations remain elevated relative to historical levels. A more pessimistic outlook for Europe and the UK has meant the P/E ratio has fallen to as low as 10. During the market lows of the 2008 Financial Crisis, P/E ratios fell as low as 7.5 and 6.4 in the UK and Europe respectively. 

 Why is this important?

 The aftermath of periods of difficulty in equity markets have provided excellent opportunities for those in search of undervalued stocks. Large equity deratings are often followed by bumper returns as shown by the 20% average one-year return for the S&P 500 in periods after which it has fallen by 25% or more. Following the difficulties seen across all developed equity markets in 2022, there may be some cause for optimism as investors hope for a rebound from a market bottom. Trying to time these market bottoms is inadvisable, but an analysis of historical lows reveals a number of similar characteristics. Newspaper reports around the date of lows paint pictures of fear and desperation throughout markets and valuation metrics such as P/E ratios sit well below long-term averages. Investors hoping to catch the rebound from lows would struggle to find similarities in today’s economic climate. Sentiment indicators remain strong and the falls in P/E ratios have simply returned to levels closer to their long-term averages from levels that were considered excessively high, rather than collapsing to historic lows. However, P/E ratios for certain markets have fallen to levels that can offer excellent opportunities to value investors. As stability returns to markets, it is these opportunities that will enjoy the bumper returns that investors seek. 

What does the chart show?
 
This chart shows the performance of the Invesco Additional Tier-One (AT1) Bond Exchange Traded Fund (ETF). The ETF tracks the performance of a global universe of AT1 bonds, a form of debt issued by banks that can be converted into equity when the issuer is in distress. If a bank’s capital ratio (which measures a bank’s financial health by comparing its capital to its level of risk) falls below a certain threshold, then banks can recapitalise by converting such debt to strengthen their balance sheet. However, the higher risk of being converted into equity in a distressed situation, when equity valuations are likely depressed, means that investors require higher yields on AT1 bonds than they would otherwise. However, the recent turmoil in the banking sector has led to investors abandoning this particular type of asset, with the AT1 ETF down over 15% over the past two weeks. 

 Why is this important?

 The higher yields offered by AT1 bonds are because it is the riskiest form of debt within a company’s hierarchy of bonds. Other bondholders are protected from losses by the existence of the AT1 layer of debt. However, before even AT1 bondholders suffer losses, equity investors are the first to be wiped out if a bank were to go under. This hierarchy of claims was disrupted this week when Credit Suisse was sold to UBS. $17bn of Credit Suisse AT1 bonds were wiped out by the Swiss authorities while Credit Suisse shareholders received a payment for their shares, albeit at a large discount. This sudden disruption to the normal hierarchy has put the spotlight on the $260bn AT1 market. Fearing similar scenarios for other banks, investors have offloaded AT1 bonds as seen by the poor performance of the AT1 ETF. Investors are fearful of an asset class that they feel they cannot trust. However, it is possible that these fears are baseless. Other financial regulators such as the European Central Bank and the Bank of England have been quick to reassure investors that the hierarchy of risk is still the same as normal under their regimes. Despite this reassurance, AT1 bonds now sit at valuation levels not seen since the early days of the COVID-19 pandemic. As is often the case, an emotional reaction in investing rarely yields positive results. Instead, investors who are able to use tried and tested processes to look through the noise and emotion are those who are most likely to benefit.

What does the chart show?
 This chart shows Global Exchange-Traded Fund (ETF) flows across a variety of asset classes and time periods. These flows are given as a proportion of current holdings and indicate which asset classes are most popular with investors. Over the past year, the majority of major asset class ETFs have seen inflows, with only commodity ETFs seeing outflows. Fixed Income ETFs and Alternatives ETFs, which give investors exposure to hedge funds, have seen the largest inflows over the past year of 14.9% and 18.60% respectively. More recently Fixed Income and Alternatives ETFs have also received the largest inflows, with Alternatives ETFs seeing a 4.70% inflow. Over the past month, ETFs in all major asset classes have received net inflows. 

 Why is this important?

 ETF flows can provide an interesting insight into how investors have reacted to changing market conditions and their future expectations. The inflows seen across almost all major asset class ETFs over the past year might suggest that investors were full of confidence. However, data released by BlackRock showed that while inflows were positive in 2022, they were almost 28% lower than what they were in 20211. Where these inflows went may be of more interest. After several years of artificially suppressed Fixed Income yields, the large inflows into Fixed Income ETFs reflected the market’s strong appetite for the improved yields on offer as interest rates rose sharply over the past year. However, the combined fall in bonds and stocks also saw investors scrambling to find other sources of returns, as shown by the large flows into Alternatives ETFs. Alternative investments such as trend-following strategies have a low correlation with markets and performed well over the last year. Investors held back in 2022 in the face of extreme uncertainty, but the net positive inflows across all asset classes since the beginning of the year suggests an improved outlook for 2023, as confidence among investors begins to return.  

What does the chart show?
This chart shows the year-on-year change in the level of Personal Consumption Expenditure (PCE) in the US and the savings rate of US individuals. US PCE is used to reflect changes in the behaviour of consumers. PCE growth tends to fluctuate around 2% during periods of economic stability. However, during the recessions of 2008 and 2020, PCE growth was significantly weaker. After the pandemic, PCE growth rebounded sharply and has since remained high as pent-up demand from the pandemic was released and inflation forced consumers to spend more for the same goods. The savings rate, which shows the personal saving of disposable income by US households changes as consumers react to changing levels of economic uncertainty. During the uncertainty of the 2008 and 2020 recessions, there were spikes in the saving rate as households chose to better prepare themselves against economic headwinds. However, since April 2021, the savings rate has consistently fallen with the rate, reaching an almost record low of 2.4% in September 2022. Since then, the rate has risen slightly to 3.4%.

Why is this important?

 Although the data provides an interesting insight into the behaviour of consumers during periods of uncertainty, we may be able to learn more from this chart by applying it elsewhere. The most significant changes to consumer behaviour came both during, and in the aftermath of the pandemic lockdowns. The savings built up during lockdowns were released as a wave of pent-up demand, as savings and consumption habits reversed. China, which reopened late last year, has already been through the first phase of this process. Estimates of the level of excess savings among Chinese households sit at around $2 trillion. By comparison, the Fed estimates that US households accumulated about $2.3 trillion in savings through 2020 and the summer of 2021. Of these excess US savings, about 25% of these were then decumulated in the post-pandemic consumption surge. While this spending was credited with helping support Gross Domestic Product growth in the face of aggressive rate hikes, it was also partly to blame for the soaring inflation that necessitated the hikes in the first place. If Chinese households follow the example of US consumers, we can expect a similarly sized surge of demand for goods and services. 
 
The reaction to China reopening has been an improvement in the outlook of major economies that were convinced of an imminent recession just months ago. However, inflation expectations have not been similarly reflected in this change. Two-year inflation expectations have barely risen, and markets are still expecting a cut in the Fed base rate by the end of the year. However, the effects of other 2022 inflation drivers have significantly eased. The Fed Supply Chain Pressure Index is down 78% from its peak and the cost of shipping between the US and China has fallen by 93%. The inflationary impact of the war in Ukraine has also fallen significantly, with natural gas and wheat futures down 75% and 44% from their respective peaks. Investors must be careful not to forget the lessons learned last year, but China’s reopening could likely be a welcome boost to a flagging global economy. 

What does the chart show?
 
This chart shows the Momentum Global Investment Management Risk Aversion Index over the past five years. The Index combines several different measures, such as global credit spreads, and forex and equity implied volatility to gauge what the current level of risk aversion is in markets. Risk aversion can be used as a measure of how tolerant investors are to taking on risk, given current and expected economic and financial conditions. During the early stages of the COVID-19 pandemic, risk aversion levels rose significantly. Since then, the Index has fluctuated as fiscal and monetary support provided stability throughout the pandemic before rising inflation fears, followed by the war in Ukraine, saw risk levels rise in H2 2021 and remain high for most of 2022. Since then, the markets appetite for risk has improved to levels not seen since early 2021.

 Why is this important?

 Risk appetite affects all asset classes differently and understanding how assets react to different types of risk is an important skill for any investor to have. The most volatile assets are the most sensitive to changing risk appetite levels, with excess returns during periods of economic stability and security being matched by excess losses when conditions change for the worse. During the pandemic, the ultra-loose monetary policy that was implemented by central banks allowed for highly risky assets, such as non-profitable tech stocks and cryptocurrencies, to post extraordinary returns in a short period. For those expecting a recession in 2023 after a difficult 2022, the falling levels of risk aversion come as surprise. This highlights just how unpredictable many aspects of financial markets can be. However, rather than trying to predict levels of risk, investors can take steps to protect themselves against it. With a good understanding of how risk affects different securities, an investor can build a portfolio of assets with a diverse range of responses to changing economic conditions. With diversification comes protection and outperformance during periods of uncertainty and volatility. 

What does the chart show? 

This chart shows the yield of Japanese 10-year government bonds versus the yield on 10-year Japanese Yen swaps over the past two years. Currency swaps such as these allow for investors to be exposed to a foreign currency and its interest rates. They are indicative of the market’s expectations for the yield on government bonds and are normally closely linked to the yield of the bonds themselves. Since 2016, the Bank of Japan (BoJ) has used bond purchasing programs to keep the yield on its 10-year bond artificially low to try and stimulate a stagnant and deflationary economy. The ceiling for the 10-year rate was set at 0.25% up until December last year (2022), when it was shifted upwards to 0.50%. Although the BoJ has persevered stubbornly with its yield curve control (YCC), market expectations for the yield, as seen in the swaps market, currently sits significantly higher at 0.93%.  

Why is this important? 

Over the last year, rising global rates have heaped huge amounts of pressure on the BoJ’s YCC program. Despite slightly raising the ceiling last month, the BoJ is continuing to purchase billions of dollars of government debt with $72 billion spent on Thursday and Friday of last week alone. As inflation in Japan has ticked above 3%, wages have begun to show signs of growth, and the swap rate has climbed higher, speculators have placed huge bets on the YCC program coming to an end. If the program was to come to an end or even just eased further, the results could be dramatic. The Yen has already shown signs of strengthening and would be expected to spike higher as money poured back into the country. The risk would be that the glimmers of wage growth and inflation that Japan is currently seeing would grind to a halt. Some onlookers expect an end to the program as early as this week as the cost becomes too much, but with Governor Haruhiko Kuroda’s term ending in April, there are those who believe the program may not end until then. The bank has faced pressure of this type before, but with the desired outcomes of inflation and wage growth finally emerging, we can expect a big decision on the future of the policy sometime soon.

What does the chart show?
 

This chart shows the levels of inflation across five major global economies as measured by year-on-year Consumer Price Index (CPI) growth. A combination of factors such as pent-up consumer demand and easy monetary and fiscal conditions from the pandemic; supply chain pressures; and record high gas prices caused by the Russia-Ukraine conflict saw inflation in the US, UK, and Eurozone economies reach significantly above-target levels in 2022. US inflation reached 9.1% in June, and in the UK and Eurozone, levels are only just showing signs of peaking at 11.1% and 10.6% respectively. Even Japan, which historically has struggled more with deflation than inflation, has seen year-on-year CPI growth of 3.8%. As these major economies struggle to tackle rising levels of inflation, China has stood out as an exception. Inflation did not rise above 2.8% last year and is currently lower than what it was before the pandemic.    

Why is this important?

The global response to the inflation crisis has been an aggressive tightening of monetary policy, except for Japan, which has only gone as far as relaxing some limits on their yield curve control mechanism. The Federal Reserve increased its headline rate by 425 basis points last year and the European Central Bank hiked rates above 0% for the first time since 2016. The effects of this have already begun to be seen. Interest rate sensitive industries, such as housing, have suffered as mortgages have risen and there is now an expectation that there will be a recession in 2023, as economic activity cools. China’s inflation, which has remained subdued due to strict COVID-19 restrictions and difficulties in the Chinese property market, means that the country has not been forced to aggressively tighten monetary conditions. Instead, with COVID-19 restrictions easing, China is now in a position where it can use monetary and fiscal measures to help stimulate its own recovery from the pandemic, while other economies continue to tackle high levels of inflation. There is likely to be significant pent-up demand from Chinese consumers and businesses alike but with global activity cooling and energy prices falling, the country may not face the inflationary pressures that other economies did last year. After three years of difficulties tackling the pandemic, China may well be emerging at just the right time.