Summary
Dividends now; small caps later
Getting the investment ‘style’ right matters, by 31% this year, and is never easier. High dividends (@DividendGrowth) led pack, and our ‘U-shaped’ recovery focus. Momentum (MTUM) and ‘quality’ (QUAL) have lagged, but outlook is now better. Small caps (IWM) is the next focus, for the brave, when macro risks ease. We are focused on Value (IWD) over tech-heavy Growth (IWF).
Markets nerves return
Markets fell 5% with the ECB tilting hawkish as it preps to start raising interest rates next month, and US inflation remains stubbornly high. Offset good news from China’s reopening and easing back on tech restrictions. The ‘safer haven’ US dollar strengthened as US 10-yr bond yields rebounded over 3.1% again. See markets as consolidating in U-shaped recovery. Watch Fed this week. See latest presentation, video updates, and twitter @laidler_ben.
Anatomy of the growth slowdown
OECD club latest to cut global economic outlook, with still 3% ‘no recession’ growth forecast but sticky inflation, and big macro differences, from China (MCHI) to UK (ISF.L) stagflation.
ECB between rock and hard place
European Central Bank (ECB) is readying to raise interest rates for first time in decade. But harder than seems, with risks from recession to EU ‘fragmentation’. @EuropeEconomy.
Using robots to beat inflation
Lack of workers and rising wages boosting the structural growth of automation and robotics to raise productivity. Implications from China (CQQQ) to @5GRevolution.
The spreading price of carbon
Carbon prices consolidating after 2021 surge, but development still accelerating. Renewable boost but polluter issue. See KRBN.
Crypto regulation momentum
Bitcoin (BTC) slumped below its recent trading range, to $25,000, held back by heightened correlation to nervous equity markets. US Senators launched bipartisan crypto regulation plan. Chinalink (LINK) surged as the DeFi data oracle provider announced its staking roadmap.
Natural gas supply in focus
Another resilient week for commodities, led by Brent oil prices holding over $120/bbl., on low inventories and the China reopening. Lumber fell again as US housing market cools. Fire at massive Freeport LNG export terminal eased US Nat gas but boosted Europe prices.
The week ahead: Central bank overload
1) Fed (Wed) to hike interest rates 0.5% to 1.5%. 2) Bank of England also to raise, whilst Bank of Japan stays put at -0.1%. 3) China growth data as world no.2 economy emerges from lockdown. 4) ‘Quadruple-witching’ (Fri) a huge US volume day plus ORCL, ADBE big tech earnings.
Our key views: A ‘U-shaped’ recovery
Markets saw the biggest sell-off since 2020 covid crash. See a ‘less bad’ outlook of gradually easing inflation risks and slowdown but not recession driving a slow ‘U-shaped’ rebound. Focus on cheap and defensive assets to be invested in this ‘new’ world but manage high risks. See Value, commodities, alongside healthcare, and high dividends. We are cautious on bonds.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -4.58% | -2.50% | -13.61% |
| SPX500 | -5.05% | -3.06% | -18.16% |
| NASDAQ | -5.60% | -3.94% | -27.52% |
| UK100 | -2.86% | -1.36% | -0.91% |
| GER30 | -4.83% | -1.90% | -13.37% |
| JPN225 | 0.23% | 5.28% | -3.36% |
| HKG50 | 3.43% | 9.59% | -6.80% |
*Data accurate as of 13/06/2022
Market Views
Markets nerves return
- Big market ‘reality check’. ECB hawkish tilt preps to raise interest rates, and US 8.6% inflation stays frustratingly high. Offset good news from China economic reopening and easing back on tech restrictions. ‘Safer haven’ USD soars, JPY plunged, and US 10-year bond yields rebounded to 3.15%, hurting tech stocks. See markets consolidating in gradual U-shaped recovery. Page 6 for Resources guide of reports, presentations, videos, twitter.
Anatomy of the growth slowdown
- The rich-country OECD club is the latest to cut its global economic outlook. With slower 3% GDP growth, down 1.5 pts from Dec., and sticky ‘high for-longer’ inflation. Reiterates new investment world, of less growth and returns, and more inflation, interest rates, and volatility. See big macro differences, from China (MCHI) to UK ISF.L)
- We stay invested, looking for a sustainable U shaped upturn later in the year, as growth remains resilient and inflation peaked. But stay cautiously positioned, with risks still high. Focus cheap, defensive, ‘inflation-hedge’ assets, from commodities (XLE) to healthcare (XLV).
ECB between rock and hard place
- European Central Bank (ECB) is ready to raise interest rates for first time in a decade, at its July 21 meeting, as it faces a yawning disconnect of 8% inflation and -0.5% rates. But is riskier than it seems, and means less-hikes than forecast. Implications for EUR, equity (@EuropeEconomy) and ‘peripheral’ markets like Spain (ESP35).
- The constraints on the ECB are that 1) Europe is closer to recession than most, 2) It’s supply-side inflation is more intractable, 3) ECB’ $9.3 trillion balance sheet bigger and equals 66% GDP, and 4) ‘fragmentation’ risk is high, with widely different national debt and bond yield levels across the EU.
Using robots to beat inflation
- Lack of workers and rising wages are boosting the structural growth of automation and robotics to boost productivity. Is a big driver of company’ investment spending, especially with offshoring more difficult, as seek to defend profit margins. Wide investment implications from China (CQQQ) supply chain to @5GRevolution enabling tech.
- Industrial robot installations, for example, tripled the past decade, grew 27% last year, and in US by 28% in Q1 this year. The automation, robotics, AI industries are another segment seeing a silver lining of current macro pressures, like renewables and EV’s, despite the tech valuation collapse.
The spreading price of carbon
- Carbon prices consolidating after 2021 surge, but development still accelerating. Europe’ adoption leaders are expanding emission trading system (ETS) plans, with global implications. Latest data shows adoption building, but still a long way to go.
- Costing carbon will continue to broaden and rise, pressuring polluters (XLE) long term, and boosting renewables outlook (@RenewableEnergy). The ‘KRBN’ alternative commodity ETF tracks European and North American carbon markets, and performance is beating most assets this year.
Latest OECD GDP growth forecasts (Ordered by 2022)
Crypto regulation momentum picks up
- Crypto assets remain stuck in a tight multi-week range, with bitcoin (BTC) under $30,000, as equities still nervous and bond yields rising.
- US Senators Lummis and Gillibrand launched a bipartisan crypto asset regulation proposal titled ‘Responsible Financial Innovation Act’, with CFTC taking leading regulator role, alongside the SEC.
- 20th largest market cap. coin Chainlink (LINK) price surged as it announced its staking roadmap ‘Chainlink Economics 2.0’. LINK was founded in 2017 and is biggest data oracle provider in DeFi.
- We near July 6 deadline for SEC to rule whether the Greyscale Bitcoin Trust can convert into an ETF, potentially broadening access to crypto.
Natural gas supply in focus again
- Another strong week for commodities, led by energy. Oil prices boosted by low US inventories and China’s economic reopening. Whilst Natgas prices were whipsawed by the Freeport LNG fire (see below). Falling timber prices remained a leading barometer of the US housing market.
- Freeport’ giant LNG export plant in Texas caught fire and is out of action for 3 weeks. This cut US natgas prices back from 14-yr highs, on outlook for lower demand, as plant accounts for c2% US gas demand. By contrast, it boosted European natgas prices, as LNG imports have surged 50% this year as tries to offset Russian imports.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -5.91% | -4.06% | -27.86% |
| Healthcare | -3.55% | -0.76% | -14.30% |
| C Cyclicals | -5.75% | -3.19% | -29.46% |
| Small Caps | -4.40% | 2.18% | -19.82% |
| Value | -4.45% | -1.64% | -10.29% |
| Bitcoin | -1.82% | -7.72% | -38.93% |
| Ethereum | -4.36% | -29.14% | -55.30% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Central Bank overload
- All eyes on US Fed meet (Wed), to hike interest rates another 0.5% to 1.5%, and on way to over 3% as combat high and sticky inflation. Plus see FOMC ‘dot plot’ macro projections.
- The Bank of England also meets (Thu), and seen raising to 1.25%, whilst Bank of Japan (Fri) to remain the global outlier with unchanged – 0.1% interest rates – but with only 2% inflation.
- With China just starting to ease its zero-covid lockdowns, focus on still-weak May retail (-7%), industrial production (-1%), and investment (+6%) data from the world’s no.2 economy.
- US rare ‘quadruple-witching’ (Fri) futures and options expiry, to drive high volume, and often volatility. An overall light earnings week, but includes tech heavyweights ORCL and ADBE.
Our key views: A ‘U-shaped’ recovery
- Saw biggest sell-off since the 2020 covid crash. Concerns balanced between bond yields and valuations, and recession risk and earnings. See fundamentals stressed but secure, with slowdown not recession, on resilient corporates and consumer. But recovery U, not V, shaped.
- Focus on cheap and defensive assets, to be invested in ‘new’ world, but manage high risks.
- Value, commodities, and high dividends and healthcare. Cautious on bonds, and easing back on Financials given rising recession risk..
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 1.21% | 5.55% | 36.57% |
| Brent Oil | 0.70% | 9.63% | 56.44% |
| Gold Spot | 1.15% | 3.59% | 2.44% |
| DXY USD | 2.01% | -0.36% | 8.57% |
| EUR/USD | -1.88% | 1.01% | -7.52% |
| US 10Yr Yld | 22.34% | 24.54% | 164.94% |
| VIX Vol. | 11.94% | -3.88% | 61.15% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The winning investment styles
Getting the right investment style can matter, and has never been easier
Getting the investment ‘style’ right is important, with an annual average 29% performance gap between the best and worst performer, and 31% so-far this year. It has also never been easier with variety of style ETF’s. We prefer Value (IWD) vs pricier Growth (IWF) given valuation pressure and earnings growth uncertainty. Growth has been worst style performer (see chart) as higher bond yields crushed valuations. We stick with defensive styles like resilient high dividend for now, given still-high uncertainty and our ‘U-shaped’ recovery outlook. We have small caps on turnaround shopping list for when inflation risks, and therefore recession risks, ease later in the year. They are already at 2008 crisis valuation lows, despite still strong profits.
High dividends has led the performance pack this year, and our ‘U-shaped’ recovery focus
High dividends (HDV and @DividendGrowth) have continued to perform well this year and represent a dramatic percentage of long-term investment returns. They have benefitted from their sector focus on healthcare, energy, and consumer staple sectors that have all done well this year, with strong profits and shareholder pay-out’s. This has also helped markets like the UK (ISF.L), that have high dividend yields. Similarly, the low volatility (USMV) has modestly outperformed, benefitting from its focus on lower risk stocks and weight in ‘old’ tech segments like telecoms, as well as traditional defensives like healthcare.
Momentum and ‘quality’ lag the market, but outlook is now better
Price momentum (MTUM) strategies struggled early in the year, hurt by the sharp losses in the prior tech winners that dominated this style. Performance has since improved as holdings have rebalanced towards healthcare and energy outperformers. Quality (QUAL) factors have also not performed as well as hoped. They focus on seemingly secure high profitability, low debt, and stable growth companies. But the biggest sector weight by far has been tech, that has been hurt by plunging valuations, despite the quality fundamentals. With valuations how lower, and bond yields higher, we see this style coming into its own.
Small caps the next focus, for the brave, if and when macro risks start to ease
Most intriguing of the laggards this year are small caps (IWM). They have been hurt versus large caps (SPY) by rising recession risks, the outlook for higher interest rates, and the focus on cash flows today rather than in the distant future. Valuations have now fallen to 2008 crisis lows, discounting a much worse scenario than for large caps. This is an opportunity for the brave. Those with conviction that we are seeing a slowdown rather than recession. They differ from large caps a lot: more domestic revenue focused, on cyclical sectors (like financials and industrials), with more debt, and paying less dividends. There are also lot more of them! This makes them a lot riskier, but also with higher upside if macro risks ease as we expect.
US investment ‘styles’ performance year-to-date (%)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Geopolitical risks alongside the Fed hiking cycle is boosting uncertainty and weakening markets. We see this as slowly fading, the global growth outlook secure, and valuations more compelling. Focus on cheap cyclical and defensive assets within equities, like Value, plus commodities, crypto. Relative caution on fixed income and the USD. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing strong c4% GDP growth and resilient earnings growth outlook. Valuations have now fallen back to average levels, and are supported by peaked bond yields and high company profitability. Fed interest rate risks are now well-priced. See cyclicals and value catch-up, after lagging for a decade, whilst big-tech supported by structural growth outlook. See overseas markets leading in global ‘U-shaped’ rebound. |
| Europe & UK | Pressured lower by proximity and exposure to Ukraine crisis. Recession risks rising with Russia impacts and energy crisis. But 1) macro ‘buffers’ of rising fiscal spending (defence and refugees), zero-bound interest rates (‘dovish’ ECB), and weak Euro (50%+ sales from overseas). Equities helped by 2) greater weight of cyclical sectors, and lack of tech, 3) 25% cheaper valuations vs US, 4) decade of underperformance made under-owned. UK favoured over continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China outlook improving as cuts interest rates (opposite of rest of world) reducing slowdown and property sector risks, focuses on stability ahead of 20th Party Congress, and with valuations now 45% cheaper than US and market heavily out of favour. Will support EM, but is exposed to Fed tightening. China recovery also helps global sectors from luxury to materials. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | More attractive as macro risks rise and bond yields better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. But also sensitive to bond yields. Healthcare most attractive, with cheaper valuations, more growth, some cost protection. |
| Cyclicals | We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead performance. Are most sensitive to re-opening economies, resilient GDP growth, and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and been out-of-favor for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | In ‘sweet spot’ of robust GDP growth, ‘green’ industry demand, years of supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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