June General Market Comments

“In the Summertime” – Mungo Jerry, 1970

Yes, it’s now summertime; a season supposed to be quieter for financial markets. But history suggests that it’s not necessarily the case and that, for whatever reasons, there can be significant spikes of volatility during the summer months. In Mungo Jerry’s song, it’s all about easy and pleasant choices to be made in summertime, while, for investors, choices can be tricky, especially after the very particular first half we’ve been through and the multiple possible troublemakers ahead, like US elections and the Democrat candidate debate, French elections, continuous geopolitical tensions, Central Banks policies, the Yen’s incredible weakness (is it hiding something serious?), and, of course, demanding valuations in equity markets which are more polarized than ever, with the spectacular dominance from AI-related plays and Growth versus the rest of the market, not to mention very tight credit spreads which are at relatively dangerous levels if we look at the past occurrences when it reached these lows.

June 2024 has been kind of a redux of the last 18 months for equities: the MSCI World Growth added 4.8% while the MSCI World Value lost more than 1%, this says it all. The dynamics around AI and especially Nvidia buoyed the Nasdaq again (+6.2%), and the S&P 500 benefited as well with a +3.5% return. European markets have been weak, with the French elections possibly jeopardizing an historical centre (left or right) oriented National Assembly: the Stoxx 600 lost 1.3% and the euro fell 1.24% versus the dollar. Sovereign spreads also tended to widen on the Old Continent. The Japanese Topix added 1.3%, the MSCI Emerging Markets 3.6% and the Chinese CSI lost 3.3%. When measured into USD, many markets struggle versus the S&P 500 year to date: Europe is 11% behind, Japan 10%, China 16% and EM 8%.

Long term Government yields receded somewhat with better inflation gauges, Credit was down, and Gold stayed flat while Oil added 5.9%, outstripping the shiny stuff for the year (+13.8% versus +12.8%).

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

May General Market Comments

“All eyez on me” – 2Pac, 1996

All eyes on who or what? Central Banks, geopolitics, US or European elections? No, all eyes on Nvidia, at least when it comes to equity markets.

Just to highlight how flabbergasting Nvidia’s impact has been this year (not even to mention 2023), the stock is up 121% year to date at the end of May, contributing to no less than 27% of the MSCI World’s performance for 2024 (just as a reminder, this index comprises 1’450 stocks). Even more eye-popping, if we focus on the US market, Nvidia alone has accounted for around 45% of the S&P 500’s 6% year-over-year earnings growth, excluding NVDA, the S&P’s earnings growth would fall to only 3.3%.

Such an outstanding performance from the – so far – big winner of the AI investing theme has allowed a vast array of Information Technology and Communication Services stocks to grind higher also, which drove us back to where we’ve been for the last 18 months or so, in other words an uber dominance from Growth versus Value. As the MSCI World has added 4.23% in May, its Growth component has soared 5.6% while Value “only” rose 2.8%. US equities logically led the march, with the S&P500 up 4.8% and the Nasdaq 100 up 6.3%. European equities fared correctly with the Stoxx 600 up 2.6%, while Emerging Markets struggled to add 0.3% and are only up 2.5% year to date, versus +10.6% for the S&P500. The lack of IT and Communication Services behemoths is being felt everywhere outside the US.

All eyes on Nvidia, yes, but some developments are worth mentioning elsewhere: with softer economic data, hopes that Central Banks will soon ease resurfaced, the US dollar fell 1.6% versus the euro and US 10 year yields receded by 18 bps. Gold benefited and added 1.8%, and a more pedestrian economic growth pushed Oil down 6%. Looming rate cuts favoured credit, with the Itraxx Crossover up 1.6%, and the Yen finally resisted somewhat and regained a modest 0.1% versus the USD.

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

April General Market Comments

“Superstition” – Stevie Wonder, 1971

Everybody knows the old market quip “Sell in May and go away”, which sounds like a superstitious motto, but, depending on which side of the pond you’re based, the timing for coming back differs significantly. In the US, that’s Labor Day (beginning of September), and on the other side of the Ocean, that’s Derby Day (Epsom horses races in the UK, beginning of June). This adage is simply based on historical observations: there is statistical evidence that equity markets returns are, on average, much better between November and April than between May and October. But the rationale behind this performance gap remains nebulous: the most common belief is that volumes tend to dry up as the sun becomes more present, investors swapping their prescription glasses for sunglasses and being more focus on sunscreen than desktop screens. That doesn’t sound very serious, but there is no other real explanation. “You believe in things you don’t understand”, as Stevie sings.

Well, in 2024, the selling season has started earlier, as April was pretty poor; is this an effect of Climate Change? Probably not: there is more and more evidence that inflation targets will prove challenging to reach, especially in the US, which questions the previously expected rate cuts by the Fed this year, some participants even suggesting a possible hike, something that was clearly not in the cards. As a result, long term yields shot up (+48 bps for the US 10 year, +28 bps for the 10 year Bund), the dollar rose with +1.66% for the broad DXY index, and most equity markets fell: the MSCI World abandoned 3.9%, the S&P 4.2%, the Nasdaq 4.5% and the Stoxx 600 1.5%. Some surprises to mention though: despite a strong dollar and rising yields, Gold shone and added 2.5%, Emerging Markets equities resisted and ended the month up 0.3%, and the Chinese CSI 300 index surged 1.9%.

Value and Growth were both weak (-3.6% for the MSCI World Value and -4.1% for the MSCI World Growth), but the Japanese Yen takes the cake for weakness with a 4% fall versus the dollar (-11.6% ytd), mitigating the apparent strong Topix performance: in USD terms, the Japanese equity index lags the S&P 500 by almost 150 bps year to date.

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

February General Market Comments

“Free Bird” – Lynyrd Skynyrd

Out of its cage, a bird is free to fly high, with no limits in sight; we’ve witnessed many market birds enjoying this experience in February 2024, with no less than 9 major equity indices breaking through their all-time highs: the S&P 500, the Dow Jones, the Nasdaq 100, the DAX, the CAC, the Swedish OMX, the Dutch AEX, the Japanese Topix, and, as a symbol, its Nikkei sibling, which finally bettered its 1989 mark.

As a consequence, the MSCI World also reached an all-time high.

The unabated optimism around AI continues to drive equity markets to the upside, thanks to the very convincing results and forecasts delivered by the thematic’s behemoths like Nvidia, Meta, Microsoft and Amazon; it is although worth pointing out that, at least up to now this year, the Magnificent 7 have lost three comrades-in-arms (Apple, Alphabet and Tesla are in negative territory) and have morphed into the “Fabulous 4”.

The earnings season being almost done, we can draw some conclusions out of it: results have mostly been very good, and very few companies showed serious concerns about the business in 2024. Although positive, the tone was nevertheless not exhilarating, apart for the majority of those companies very much involved in AI.

The steady performance of equities is even more eye-popping when looking at interest rates moves this year: 10 year yields have gone up significantly (almost 40 bps for the US and Germany), as rate cuts expectations get further delayed due to the strong economy and resistant inflation, especially in the US. This has translated into a steady USD (respectively up 2.2%, 6.4% and 1.2% versus the EUR, the JPY and the CNY) and sustained oil prices (+9.2% so far this year). Growth stomps on Value, again, and due to the incredible rise of the big Growth names, it is striking to see that the S&P 500 has performed roughly in line with the Nasdaq 100, whereas the MSCI World Growth outpaces the MSCI World Value by 370 bps year to date. But let’s not spoil the party and enjoy these good markets; “Won’t you fly, high, Free Bird, Yeah!” as the legendary Lynyrd Skynyrd song says.

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

January General Market Comments

“Knock on Wood” – Eddie Floyd, 1966.

This time it’s for real: many major indices have broken to the upside, touched all-time highs, or reached levels unseen for years during the month of January: the S&P 500, the Dow Jones, the Nasdaq 100 (but curiously not the Composite), the DAX and the CAC, among others, hit their historical highs, while the Topix has now its 1990 record in sight (still 13% to go, though) and the FTSEMIB is as high as it was in 2008, before the GFC. This rosy picture nevertheless gets a tad sober because of the Chinese CSI300, which, contrarily to the aforementioned indices, broke to the downside and is now 46% lower than its 2021 record. The Chinese rout dragged the broad MSCI Emerging Markets down 4.2%, just for January. Despite mixed returns recorded by the Magnificent Seven, Growth embarked 2024 the way it sailed during 2023, strongly and outpacing Value by 2.3%.

For once, fixed-income markets were relatively calm, with the US and the German 10 year yields barely up, but currencies and commodities had quite a volatile start of the year: the dollar rose 1.7% versus the euro, 3.8% versus the Yen and 1% versus the Renminbi, while Oil added 5.9% (buoyed by renewed tensions in the Red Sea as well as a possibly stronger global GDP growth, as confirmed by the IMF) and Gold receded by 1.1%.

“So goes January, so goes the year” says an old Wall Street quip; let’s then “Knock on Wood”, to paraphrase Eddie Floyd, and hope this proves true in 2024, with new highs in sight!

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

December General Market Comments

“Muy tranquilo” – Gramatik, 2010.

2023 has come to an end, “Muy Tranquilo” in December with, nevertheless, many interesting moves in key markets (more on that below). But the whole year was far from “Muy Tranquilo”: apart from the insatiable thirst from equity investors towards the famous Magnificent Seven, there has been several significant ups and downs for a lot of financial assets.

Let’s start with the most important one, US 10 year yield: it ironically ended 2023 more or less where it started (3.85%), but went as low as 3.25% and as high as 5.01%. That’s a 176 bps amplitude, more than 45% of the starting point! What about Oil, ranging from $65 to $95 for the WTI, or the Japanese Yen, down 16% at some point versus the dollar, falling to a 32 years low, or the Chinese CSI 300 equity index, up 10% in January to end the year 12% down. This list could expand further, but it is clear that inflation expectations, and consequently monetary policies, are one of the main reasons for these wild moves.

A more dovish, or less hawkish, Fed, pulled the trigger for a spectacular year-end rally: all major indices, barring the Japanese Topix (as usual struggling when the USD is weak), were on the rise. The S&P 500 added 4.4%, the Stoxx 600 3.8%, the MSCI Emerging Markets 3.7%, and the high-flying Nasdaq 100 5.5%. In a falling interest rates environment, the MSCI World Value surprisingly outpaced the MSCI World Growth (+5.2% versus +4.4%), while Oil, despite tensions in the Red Sea, abandoned 5.7%.

Interestingly, we have witnessed several All-Time Highs in December: the Dow Jones, the DAX, the CAC, the S&P 500 total return, the Nasdaq 100 total return, the Itraxx Crossover and Gold. Also worth mentioning is the Topix, which reached levels unseen since 1990!

Do not expect a “Muy Tranquilo” 2024: we will have to cope with high valuations for the market leaders, an economic slowdown (or a recession?), a difficult to tame inflation (favourable base effects are behind), continuous geopolitical tensions, which, added to the looming US presidential election, will maintain a heightened fear factor. But we nevertheless wish you a wonderful 2024, as “Muy Tranquilo” as possible!

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

«The Magnificent Seven» – The Clash, 1980

“Gimme Honda, gimme Sony, so cheap and, real phony” goes Joe Strummer in this legendary song from the Clash. We could transpose this into “Gimme Tesla, gimme Meta” today, as those two stocks stand among the magnificent seven performers of 2023 so far (with Alphabet, Microsoft, Amazon, Apple and Nvidia); the difference is that they don’t seem phony, and, for most of them, they’re far from being “so cheap”. In fact, these seven companies contributed to more than 55% of the performance of the S&P500 this year, which means that we could easily talk about a S&P 7 versus a S&P 493.

July 2023 has been a good month, again, for all risk assets: the MSCI World added 3.3%, the S&P500 3.1%, the Stoxx 600 2% (but the euro rose 0.9% versus the greenback), the Topix 1.5% (the Yen being up 1.5% versus the dollar after the change of tone from the BoJ regarding its yield curve control), and finally Emerging Markets caught up with a 5.8% return.

Styles reverted a smidgen on a global basis, with the MSCI World Value advancing more than the MSCI World Growth (3.7% versus 2.9%). One can still feel flummoxed when looking at the performance gap between both indices this year, Growth being up 30.2% versus a meagre 6.3% for Value. All hopes of a return to the mean between styles have been dwarfed in 2023.

July has also been very profitable for Credit, again, as the Itraxx Crossover added 1.5%, for Commodities (Gold up 2.4%, Oil 15.8%), which finally leaves Government Bonds as the only outliers with rising yields overall: +12 bps for the US 10 year, +10 for Bunds and +21 for JGBs.

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

May General Market Comments

“Steamy Windows”, 1989 – A tribute to the legendary and immortal Tina Turner.

Trying to decipher the messages sent by economies and markets feels like trying to guess what lies behind steamy windows; you have an idea, but it’s not precise. Not more than 1 year ago, consensus was that a recession was inevitable in Europe and highly likely in the US, whereas it’s far less certain today; meanwhile, if not done yet, the Fed seems close to end its hiking cycle. China reopening should have triggered a massive boom for its equity market and commodities, but it hasn’t. Debt ceiling fuzz saw the dollar rise while the last minute deal, avoiding a default, has been followed by dollar weakness. Beyond an unclear short term horizon, two gigantic long term investment cycles still prevail: Digitalization and Cleaner Energy.
The crazy hype around AI and Nvidia shouldn’t make us lose sight of the fact that there will be profound consequences in terms of productivity with the widespread use of AI.
May 2023 was one of these very complicated months for equity investors who, if they were not exposed to the happy few rising stocks, had good reasons to be frustrated; the S&P 500 was almost flat, but it would have significantly been down without the contribution from mega-IT components who, besides the S&P, propelled the Nasdaq 100 7.6% higher. The absence of IT behemoths has cruelly been felt by Europe and Emerging Markets (down 3.2% and 1.9%), while Japan rose (+3.6%) with a weak JPY. Growth unsurprisingly humiliated Value (+2.3% vs -5.0%), while the strength of the dollar weighed on the MSCI World, which ended up the month down 1.3%.
Fixed-income was mixed: US 10 year yield rose 22 bps, Germany was stable and Italy, a good gauge of risk aversion, saw its 10 year benchmark yield fall by 9 bps. Credit enjoyed another very good month (+0.7% for the Itraxx Crossover), while all commodities plummeted: Oil down 11.3%, Gold down 1.4% and the broad CRB Index down 5,3%.

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

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

Chart of the Month – Turbulence ahead… Buckle up!

Turbulence ahead… Buckle up!

us wages inflation Oil, natural gas, commodities, electricity, grain prices have become part of our daily lives during 2022. Some of these prices have dropped significantly from the peaks in April and May; for instance, Brent price tumbled 25% from early June to today. Why are capital markets and central banks still very worried about inflation? Wages may be the answer.

When we analyze the cost component of most goods and services, wages and salaries are more important than commodity prices. If we look at the USA (Chart above) we can see that US Average hourly earnings are growing at 5.20% as of 31-August, and the Employment Cost Index is increasing at 5.1% as of 30-June. The higher wages are pushing inflation higher and corporate margins lower. Even worse, wage increases tend to be more sticky than other components of inflation, so once you have salaries growing at 5%, it takes a while to convince unions and employees to accept lower increases in their incomes.

Why are salaries growing so fast compared to history?

The first and most obvious reason is that workers want to, at least, maintain their income in real terms. With headline inflation running at 8.5% in the USA, even with the current wage increases, they are losing money in real terms. If the market consensus is right, this pressure will diminish during the next 12 months.
The second reason is that demand for workers is very high in the USA, with an economy that has been booming since the lockdowns are over. We can see in the chart that job openings are very high with many companies willing to engage more workers. With the economy slowing down, we are seeing less job openings in some markets, but they are still at very high levels. Let’s remember that with a current unemployment rate of 3.7%, technically the US is working at full capacity (Powell estimates that 4.0% is full employment).
The third reason is that supply of workers is relatively low. The labour market participation rate used to be at about 63.0% before the pandemic, and with the latest August data, this participation is at 62.4%. What does this mean? There are between 1.1 to 1.5 million people in the USA who have quit the labour market, creating a lack of supply, so companies are forced to increase wages to attract workers. Fear of Covid, generous social programs and people willing to retire are the reasons mentioned to explain this lower participation rate. This ratio has improved a bit but it will be necessary to go to the previous 63% to better control the salaries.

In summary, the evolution of wages is key to control inflation, to maintain interest rates lower and to maintain corporate margins at high levels. For the time being, the FED tightening will diminish the demand for workers but we need some improvement on the supply side to be able to come back to wages growing at 3%, which will be more consistent with the overall FED target of inflation at around 2%. Buckle-up for this ride!

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.