Fynsa
Financial markets have performed very well this year, with the S&P 500 up 14% and the Nasdaq up 30%, but with the Dow Jones up just over 2%, illustrating how the real economy and the banking sector have continued to struggle amid the high interest rates that central banks have had to maintain in an effort to control inflation. Although we are nearing the end of the central banks’ tightening cycle, core inflation remains under pressure, with the main drivers of inflation being energy and food prices—all while these economies are at or near full employment.
There are still risks of inflationary resurgences that could change this outlook; fortunately, these risks are more on investors’ minds than on their buy buttons, with portfolios remaining very conservative given the tremendous risks we’ve just weathered—especially in the banking sector, where we saw authorities go “all in” from the start to prevent another 2008. For now, we remain in a calm mode with the VIX hovering around 13—levels not seen since before the pandemic.
China was one of the market’s top picks for this year, but it has failed to gain the necessary momentum, with weak economic data driving the yuan to 7.20, a 4% depreciation so far this year, with its decline accelerating since April as the investment thesis failed to unfold at the expected pace.
For their part, emerging markets excluding China have performed well, with Latin America standing out but not so much Emerging Asia; it is noteworthy that, although China is the main catalyst for these economies, they have decoupled in this way. One explanation that comes to mind is the fact that current governments’ approval ratings are at record lows, which has led to lower country risk across the board. Brazil, for example, when measured by 5-year CDS, started the year at 260 and is currently in the 178 range—the lowest levels since 2021. In the case of Chile, the 5-year is currently around 72, having fallen from around 170 in October of last year. This explains the dramatic shift both in terms of fixed-income spreads and the IPSA’s outlook; although the index has already risen 9.5%, it still appears quite undervalued, which bodes well for its performance for the remainder of the year. In Colombia’s case, the shift was even more dramatic, with the 5-year CDS falling from the 350 it peaked at in March to its current level of 237—and it appears there is still considerable room for further decline, given that the government there is also struggling to implement the most radical reforms, as is evident at the local level.
Given that the central banks’ tightening cycle is nearing its end, and considering how underweight investment portfolios remain, it is quite likely that we will see strong performance in the second half of the year in terms of returns on investment portfolios—both fixed-income and equity—where the recommendation would be to continue buying on price dips during periods of rising volatility—which, of course, will continue to occur but should be viewed merely as buying opportunities. The only thing that would change this outlook would be an energy or food shock, but as long as that does not happen, we stand by this thesis.
