Rietumu Asset Management experts: “healthy economic data, excellent earnings season”
22-Aug-2017, 16:49 / Products & Services The specialists of Rietumu Group have prepared an overview on the return of the investment funds of Rietumu Asset Management (RAM) for July.
Along with information on the structure and dynamics of the funds, the review contains the traditional analysis of the current political events and key economic factors that exert an influence on financial markets.
“Noteworthy that a possibility of nuclear war on Korean peninsula caused just a few percentage points market correction,” note RAM experts in the review. In their opinion, such reaction means that investors’ perception of risk is distorted taking into account significantly heightened risk of real military escalation. Moreover, it seems that investors from the Old World do not assign any probability for a worst-case scenario.
In July inflation in the U.S. disappointed both market participants and the Fed. Inflation pace is still running below the Fed’s target of two percent. As a result, the third interest rate hike in this year is under the question, especially, if inflation will not accelerate. Trump’s failure to unite the Republicans and pass promised health care reform bill together with subdued inflation decreased value of the dollar. Almost unanimous vote for new sanctions against Iran, North Korea and Russia showed the parliament mistrust of the president. Moreover, new sanctions have a structure that makes them hard to dismantle. As the history showed, such sanctions could last for decades, – say RAM experts.
European Union GDP growth rate for the second quarter of 2017 exceeded both economists’ forecasts and the U.S. growth rate. Strong growth in Europe and in China helped American companies to show outstanding results. Revenue of S&P 500 companies increased by 5%, while earning grew by 10% comparing to the same quarter last year.
Worth mentioning is investors’ extraordinary appetite for risk taking. Yield on high yield bonds in the euro area exceeds yield on the U.S. treasury notes by just a several dozen basic points. Remember that we are speaking about the debt of companies that might disappear in five years and the debt of a country that has been the world hegemony during last decades.
Current environment could be best illustrated by Tesla. Recently the company, famous by its revolutionary electric cars and charismatic leader, issued $1.8 bln bonds. Tesla is also known as a company that had recorded positive profit just twice in its entire history. Credit agencies also have low opinion about creditworthiness of the company. For example, Moody’s assigned credit rating to Tesla that is five notches below investment grade (B-). Analysts and investors can discuss about upside potential of Tesla stock, but they all should admit that bonds do not have upside and have full downside by definition. Therefore, it’s extremely weird to see solid investor demand for bonds with a yield of 5.25 per cent. For those investors, the whole difference between credit risk of Tesla (B-) and United States of America (AA+) can be compensated by mere three percentage points. Bear in mind that those investors won’t get any additional penny, if Tesla become new Apple.
“Therefore, in the current environment, it is extremely important for investors to keep in mind fundamentals and how much they are paying for them,” note RAM experts.
The review on RAM and the current comments of the specialists can be found here.
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