April General Market Comments

“Jump around” – House of Pain, 1992.

Should we “Jump Around” as the classic House of Pain’s song recommends? Perhaps, because looking at most financial markets’ year to date returns gives many reasons to jump around, especially in the highly uncertain economic and geopolitical environment investors have to face in 2023; even more if we go back at the end of 2022 when the investment community looked forlorn after such a poor year.

At the end of April 2023, the MSCI World is up 8.96%, the S&P500 8.59%, the MSCI Europe 10.08% and the Topix 8.76% (the only laggard in equities being the MSCI Emerging Markets but it’s still up 2.16% year to date); Credit also glows, with the Itraxx Crossover up 4.79% for the year so far; Government bonds have their say, with US 10 year yields down 45 basis points in 2023, German 10 year 26 bps and Italian 10 year 70 bps. What about Commodities? It’s not as straightforward: some rise, like Gold (+9.1% year to date), some fall, like Oil (down 4.34%).

With these numbers we can draw a logical chain of events: economic activity is expected to slow down, hence a probable peak in Central Banks’ hawkishness quite soon, with long term yields coming down. The latter have a huge impact on valuations, which, unsurprisingly, are on the rise again; to wit, the more expensive MSCI World Growth humiliates the cheaper MSCI World Value in 2023 so far (+16.58% for the former, +1.94% for the latter). Slowing economic activity and lower yields favours Gold, at the expense of Oil, which explains the opposite fate of the two commodities.

Finally, the market seems to selectively worry about a possible banking crisis in the US and its ripple effects across the globe. Financials underperform but don’t collapse overall.

“Jump up, jump up and get down” says the song; we hope markets don’t drive us down too much anytime soon!

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

March General Market Comments

“Prisencolinensinainciusol” – Adriano Celentano, 1972.

In his 1972 legendary « Prisencolinensinainciusol » hit, the mighty Adriano Celentano sings an entire song in an unknown language he invented on that purpose, which is intended to sound like English, while those listening believe it’s an English song and can repeat the lyrics, with the impression of singing in English. An extract of said lyrics goes: “In de col men seivuan, Prisencolinensinainciusol ol rait”, just to give an example.

With all these things happening in the economy, markets and on the geopolitical front, Central Banks pretends they speak like Central Banks, but are they? And we pretend we clearly get their message and understand their language, but are we? We could be in a « Prisencolinensinainciusol » situation, as all the moving parts we, and Central Banks, have to deal with, prevents their message from being clear, and allow us to extract what we want out of it: before this crazy March 2023, it seemed that the only way was up for interest rates in the US and in Europe, at least until real and durable progress was made on the inflation front. Past the SVB and Crédit Suisse debacles, it sounds less clear, although we still hear a lot about rising interest rates and inflation, but with a pinch of salt due to the possible aftermaths of last month’s turmoil.

The resistance of financial markets in general has been surprising: the MSCI World rose 2.83%, the S&P 500 3.51% and the MSCI Emerging Markets 2.73%. Europe fell 0.48%, but this has to be put in the context of a strong euro and the fact that Financials are an important part of European indices. The most striking fact last month was the steep decline in long term bonds (-45 bps for the US 10 year, -36 bps for the 10 year Bund), which highly impacted equity styles: the MSCI World Value lost 1.06% while the MSCI World Growth jumped 6.8% (not to mention the Nasdaq 100, up 9.46% in March and 20.49% year to date). Credit did well (+0.59% for the Itraxx Crossover), and Gold unsurprisingly soared 7.79%, aided by a weak dollar (-2.25% for the DXY) and falling yields.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

August General Market Comments

« You gimme fever, and a cold sweat » – James Brown, 1970

Like in the 70s, markets are giving us cold sweats on a regular basis since the beginning of the year. And fever sometimes, when they rebound sharply. August was a perfect illustration: after a red-hot July (+7.9%), the MSCI World roared until mid-month, adding more than 3.7% at some point, but miserably tanked thereafter to close the month with a -4.3% return.

Forget about what’s happening on the ground in Ukraine: it’s all about politics, from Governments and Central Banks. The politics of Energy, with Russia clearly willing to clamp down gas supplies to Europe and the panic this triggers on Electricity prices; the politics of Trade, with the US putting more and more limits for US corporations to deal with China when it comes to sensitive stuff (semiconductors for example); the politics of Climate, with countries all around the world thriving to reduce their carbon emissions; and, perhaps more importantly, the politics of Central Banks, with the Fed deliberately freaking out investors by announcing pain down the road, as its monetary policy will be tougher for longer.

A relatively pleasant earnings season has vanished very quickly in people’s minds, the focus being now on the consequences of Jerome Powell’s stubbornness. Soft landing? Soft recession? Deep recession? The worst situation for markets in general is when there are big uncertainties; among these, the first and foremost is the magnitude of the hiking cycle by the Fed: when will they stop, and at what level?

All this is too much for markets to stand still. The second half of August was painful, to say the least, and all major assets were down at the end of the month: as mentioned, the MSCI World lost 4.3%, more or less like the S&P 500 (-4.2%), the MSCI Europe was down 5.2%, World Value 3.3%, World Growth 5.4%. The Japanese Topix rose 1.2%, but the Yen tumbled a further 4.1% versus the USD, and is down a whopping 20.5% this year!

No respite on Government bonds, as the US 10 year rose 54 bps and the 10 year Bund 72 bps, while credit weakened again: the Itraxx Crossover fell 2.6%. Gold lost 3.1%, Oil suffered its worst drawdown this year with the WTI down 9.2%.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

July General Market Comments

« Whose Side Are You On? » – Matt Bianco, 1984

Are you on the optimists’ or the pessimists’ side? Or rather on the side of those who have no idea?

So far, 2022 tends to plead in favour of the pessimists, but optimists could argue that July 2022 was the best month for the S&P 500 since November 2020 (when Pfizer-BioNTech announced they had a vaccine against Covid), and those who have no idea could point out that finally markets were roughly flat for June-July 2022, as June was a dreadful month.

There are many things to factor in, and all of them give arguments to one side or another: inflation is high, but expected to normalize, especially since Central Banks seem keen on tackling it rapidly; geopolitics are a mess with not only the conflict between Russia and Ukraine, but also the heightened tensions between the US and China regarding Taiwan; corporate and private debt does not seem to be a source of problems today, but Government debt across developed markets is immense; earnings reports have been surprisingly good so far, but they are expected to slow down significantly going forward; commodities do not move in sync, but there seems to be a growing threat from Russia about gas deliveries in Europe for this winter, triggering skyrocketing gas prices. With all this happening at the same time, it is not easy to choose your side and it’s not surprising to see numerous experts change their minds, depending on the most recent events.

Buoyed by convincing earnings releases and some more risk appetite, equity markets soared in July: the MSCI World gained +7.86%, the S&P 500 +9.11%, the Nasdaq +12.55%, the MSCI Europe +7.52% and the Topix +3.71%. The only detractor was Emerging Markets, down 0.69%. As nominal and real yields fell, Growth outperformed Value with a +11.51% return for the MSCI World Growth versus +4.44% for its Value counterpart.

In such a risk-prone month, Credit also rose (+3.06% for the Itraxx Crossover), and Government yields fell (-36 bps for the US 10 year, -52 bps for Germany); Gold and Oil receded by 2.29% and 6.75% respectively, and the Euro fell further against the dollar (-2.51%), weakened by the possible looming energy crisis in Europe and an unfavourable interest rate differential.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

June General Market Comments

« I want to know » – Adriano Celentano

I want to know… we all want to know: are we headed into a recession, or a slowdown? Have valuations sufficiently shrunk for this type of economic environment, or should we expect more pain ahead? Are fixed-income markets right when they bet on inflation coming back to 2.5% five years from now, or is core inflation higher and stickier? Are Central Banks still behind the curve, or ahead now that economic activity seems more fragile? Will Russia and Ukraine agree one some kind of ceasefire soon, or will this conflict last for years as many military experts warn?

So many questions and so little clear answers indeed. We would like to know, but we don’t.

Uncertainty is the biggest handicap for financial markets to perform correctly and/or to behave smoothly; this is the reason why markets are so challenging and frustrating this year. The only strong message we receive from equity markets is that a severe slowdown, or a recession, is underway: only defensive sectors resist to the meltdown, and recently we have seen Energy and Materials, two good sectors so far this year, crack as well. Fixed-income markets indicate a mixed outlook: Government bonds yields are still quite high (read: low probability of a recession), but Credit suffers, as witnessed by the Itraxx Crossover which lost 5.2% in June, and this is a signal of economic trouble ahead. Commodity markets are difficult to interpret: if a recession was due, they should crater, but they don’t, due to obvious supply constraints.

The MSCI World sank 8.8% in June, the S&P 500 8.4%, the MSCI Europe 7.9% the MSCI Emerging Markets 7.2%, and if Japan seemed to resist with a 2.2% drawdown for the Topix, this has to be mitigated by the dismal performance of the Yen (down 5.5% versus the dollar in June, 17.9% year to date!).

Oil fell 7.8%, more or less like Equity markets, Gold abandoned 1.6%, and Government bonds yields rose again: +17 bps for the US, +21 bps for Germany and +14 bps for Italy.

That’s it for this month’s Market Comments, stay tuned, markets never skip a beat.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Chart of the Month – Shifting gears in the equity markets

Shifting gears in the equity markets

The two main drivers of equity markets are liquidity (provided by the Central Banks) and earnings (provided by corporations). When both drivers are favourable, equity performance is extremely good. In the graph above you can see two very good periods reflecting this:

(ORANGE): Earnings recovered very fast after the Global Financial Crisis of 2008 and also after the initial stages of the Covid pandemic.
(BLACK): FED rates tumbled to almost 0% after the Global Financial Crisis of 2008 and again during the Covid pandemic.
(BLUE). The SP500 performed extremely well when the two tail winds blew in the same direction: 16.5% CAGR during the 2009-13 period, and 30% CAGR since April 2020.

But the party cannot last forever, and Central Banks will start tightening and withdrawing liquidity once the economy recovers. The graph shows this situation during the period of Jun13 to Dec18 when the FED started tapering, and then hiking rates. This was an earnings driven market where profits continued to increase while liquidity was reduced by Central Banks. Still the equity market managed to achieve a respectable 9% CAGR performance.

Where are we now? Thanks to the combined efforts of the scientific world (vaccines), Central Banks (rate cuts + bond purchases) and Governments (huge fiscal packages) the world economy has recovered well, so the economy no longer needs assistance from Central Banks. They have either started to reduce liquidity (Bank of England, Norway…), or will do so during 2022 (FED, ECB, …)

WHAT CAN WE EXPECT FOR 2022?

(BLACK): The FED will gradually stop buying bonds by April 2022; during 2022 the FED rates will likely increase 3 times, by 0.25% each time. This will be a headwind for the market. Remember the old saying: “Don’t fight the FED”.
(ORANGE): Earnings have recovered very fast in 2021 and will continue to increase in 2022 and 2023, but at a lower rate of 10% according to IBES estimates, which is much less than the 25% increase that we enjoyed in 2021.
(BLUE). The SP500 will likely rise again in 2022 but with the headwinds from the Central Banks and the lower EPS growth, the market will probably shift down a gear to deliver a return of 5% to 10% performance during 2022.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only.

References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document.

This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.

Additional information is available on request.

© NS Partners Group

Chart of the Month – Shifting gears in the equity markets

Shifting gears in the equity markets

The two main drivers of equity markets are liquidity (provided by the Central Banks) and earnings (provided by corporations). When both drivers are favourable, equity performance is extremely good. In the graph above you can see two very good periods reflecting this:

(ORANGE): Earnings recovered very fast after the Great Recession of 2008 and also after the initial stages of the Covid pandemic.
(BLACK): FED rates tumbled to almost 0% after the Great Recession of 2008 and again during the Covid pandemic.
(BLUE). The SP500 performed extremely well when the two tail winds blew in the same direction: 16.5% CAGR during the 2009-13 period, and 30% CAGR since April 2020.

But the party cannot last forever, and Central Banks will start tightening and withdrawing liquidity once the economy recovers. The graph shows this situation during the period of Jun13 to Dec18 when the FED started tapering, and then hiking rates. This was an earnings driven market where profits continued to increase while liquidity was reduced by Central anks. Still the equity market managed to achieve a respectable 9% CAGR performance.

Where are we now? Thanks to the combined efforts of the scientific world (vaccines), Central Banks (rate cuts + bond purchases) and Governments (huge fiscal packages) the world economy has recovered well, so the economy no longer needs assistance from Central Banks. They have either started to reduce liquidity (Bank of England, Norway…), or will do so during 2022 (FED, ECB, …)

WHAT CAN WE EXPECT FOR 2022?

(BLACK): The FED will gradually stop buying bonds by April 2022; during 2022 the FED rates will likely increase 3 times, by 0.25% each time. This will be a headwind for the market. Remember the old saying: “Don’t fight the FED”.
(ORANGE): Earnings have recovered very fast in 2021 and will continue to increase in 2022 and 2023, but at a lower rate of 10% according to IBES estimates, which is much less than the 25% increase that we enjoyed in 2021.
(BLUE). The SP500 will likely rise again in 2022 but with the headwinds from the Central Banks and the lower EPS growth, the market will probably shift down a gear to deliver a return of 5% to 10% performance during 2022.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only.

References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document.

This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.

Additional information is available on request.

Chart of the Month – Shifting gears in the equity markets

Shifting gears in the equity markets

The two main drivers of equity markets are liquidity (provided by the Central Banks) and earnings (provided by corporations). When both drivers are favourable, equity performance is extremely good. In the graph above you can see two very good periods reflecting this:

(ORANGE): Earnings recovered very fast after the Great Recession of 2008 and also after the initial stages of the Covid pandemic.
(BLACK): FED rates tumbled to almost 0% after the Great Recession of 2008 and again during the Covid pandemic.
(BLUE). The SP500 performed extremely well when the two tail winds blew in the same direction: 16.5% CAGR during the 2009-13 period, and 30% CAGR since April 2020.

But the party cannot last forever, and Central Banks will start tightening and withdrawing liquidity once the economy recovers. The graph shows this situation during the period of Jun13 to Dec18 when the FED started tapering, and then hiking rates. This was an earnings driven market where profits continued to increase while liquidity was reduced by Central anks. Still the equity market managed to achieve a respectable 9% CAGR performance.

Where are we now? Thanks to the combined efforts of the scientific world (vaccines), Central Banks (rate cuts + bond purchases) and Governments (huge fiscal packages) the world economy has recovered well, so the economy no longer needs assistance from Central Banks. They have either started to reduce liquidity (Bank of England, Norway…), or will do so during 2022 (FED, ECB, …)

WHAT CAN WE EXPECT FOR 2022?

(BLACK): The FED will gradually stop buying bonds by April 2022; during 2022 the FED rates will likely increase 3 times, by 0.25% each time. This will be a headwind for the market. Remember the old saying: “Don’t fight the FED”.
(ORANGE): Earnings have recovered very fast in 2021 and will continue to increase in 2022 and 2023, but at a lower rate of 10% according to IBES estimates, which is much less than the 25% increase that we enjoyed in 2021.
(BLUE). The SP500 will likely rise again in 2022 but with the headwinds from the Central Banks and the lower EPS growth, the market will probably shift down a gear to deliver a return of 5% to 10% performance during 2022.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only.

References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document.

This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.

Additional information is available on request.