By Emily Gustafsson-Wright, Sarah Osborne
As we enter the third calendar year of COVID-19, the world continues to grapple with the social and economic havoc that the pandemic has wrought on communities and individuals around the world. Our most vulnerable populations continue to be the most at risk of dire negative outcomes, and the need for targeted social services continues to rise. At Brookings this past year, we have been researching the impacts of the COVID-19 pandemic, collaborating with other stakeholders around the world, and more broadly exploring the importance of data for achieving outcomes.
We also continue to follow the global impact bonds market, which feeds into the Brookings Global Impact Bonds Database, and produce research outputs, such as our key series on measuring the success of impact bonds. Below we share our research from this year and the trends we have observed in the market.
The impact bonds market
As of January 1, 2022, there are 221 social and development impact bonds in 37 countries around the world, including 21 in low- and middle-income countries (LMICs). The leading sectors globally continue to be social welfare (75) and employment (68), while in LMICs employment (8) and health (6) lead the way (Figure 1).
As the world adjusted to the new normal of the pandemic, impact bond projects continued to be launched to address social service needs, though at a slower rate than in years past (Figure 2). This year there was a particular focus on employment—in particular in LMICs such as Colombia and India, which marked their third and fourth new impact bonds, respectively (the most for any LMIC). The India Skills Impact Bond aims to train around 50,000 individuals over the course of the program, with around 1,200 people already enrolled. Additionally, a development impact bond (DIB) specifically targeting economic resilience through entrepreneurship for refugee populations was launched in Jordan and Lebanon.
The pandemic and helping vulnerable populations
Much of our research in 2021 focused on the impacts of the COVID-19 pandemic, and the implications for outcomes-based financing. Throughout the year we conducted research on the effects of the pandemic on impact bonds in LMICS, which demonstrated that, in times of crisis, service provision and monitoring and evaluation were flexible to adjustments as needed; however, despite the pandemic, outcome targets were still likely to remain fixed.
We also looked forward to a post-pandemic world and considered impact bonds and outcomes funding as a tool to aid cash-strapped governments in building back better and for curing “social long COVID.” Because complex problems require complex solutions, a focus on outcomes can ensure that multipronged social services programming addresses the many different needs of vulnerable populations as the pandemic rages, and that these populations see meaningful improvement in outcomes.
Collaborating with others
While we have missed gathering in person, a silver lining of our current global crisis is the additional virtual collaboration that has been enabled with colleagues around the world. We were pleased to collaborate with many partners last year on events and research, such as considering the future of partnerships for public purpose with colleagues at the Education Outcomes Fund and exploring the importance of outcomes-based financing for education and the labor market at the Global Steering Group for Impact Investment Summit.
We were also excited to launch our “Voices from the Field” series, which highlights the experiences of those directly involved with impact bond programs around the world. The series kicked off with fantastic contributions on mainstreaming an outcomes mindset with Instiglio and the experience of a pre-K program in the U.S. during the pandemic with the organizations Maycomb Capital and First 8.
Work on data for outcomes
In addition to our research following the global impact bonds market, we delved deeper into the different types of data necessary to achieve outcomes, with a particular focus on outcomes for education. Our research on digital tools for real-time data collection on performance and outcomes will lay the groundwork this spring to create a typology of such tools—and a searchable interactive allowing users to find a tool that fits their organization’s needs.
We have also continued to advance our work on cost data for education and early childhood development (ECD). Improved and expanded access to cost and cost-effectiveness evidence allows for more informed investments given scarce resources and serves as a basis for outcomes pricing for outcomes-based financing projects. We are working to tackle both supply- and demand-side barriers to cost data through the development of an online, user-friendly costing tool for ECD, the Childhood Cost Calculator (C3), its accompanying cost database, and the formation of the Global Education and ECD Costing Consortium (GEECC) in partnership with the ECD Action Network (ECDAN).
In 2022, we are excited for our colleagues’ launch of new outcomes-based financing programs—in particular, the Education Outcomes Fund basic education programs in Ghana and Sierra Leone, and the India Back-to-School Outcomes Fund for Education. In addition, there are some promising developments from Colombia where the highest planning authority in the government has issued a document calling for the adoption of payment by results as a public policy, including a dedicated outcomes fund. This would ensure the sustainability and transcendence of this movement across different elected governments for 2022 and beyond.
We’ll also be following the results from impact bonds that are closing out, such as the Village Enterprise Graduation Model DIB whose final results are expected early this year, and the Quality Education India DIB, which is wrapping up service provision in a few months and is expected to announce results later this year.
We look forward to continuing to share our research and that of our colleagues going forward—please stay tuned to learn more. Later this year, specifically be on the lookout for the public launches of our work on data for outcomes, including our C3 resource and research on digital tools for real-time data collection and analysis in education and ECD.bonds pandemic covid-19 india
Japanese yen remains directionless
The Japanese yen has posted slight gains on Tuesday. In the North American session, USD/JPY is trading at 129.32, up 0.17% on the day. The US dollar pummelled…
The Japanese yen has posted slight gains on Tuesday. In the North American session, USD/JPY is trading at 129.32, up 0.17% on the day.
The US dollar pummelled the yen in the months of March and April, but the yen has held its own in May. Still, USD/JPY remains at high levels and the 130 line, which has psychological significance, remains vulnerable. If there is a line in the sand for the Japanese government or the BoJ to intervene and prop up the yen, it certainly is not the 130 level, as the dollar broke through this line without a response. The yen is extremely sensitive to the US/Japan rate differential, and with the BoJ demonstrating that it will tenaciously defend its yield curve, the yen is at the mercy of Powell & Co.
Japan releases GDP for Q1 on Thursday. The markets are braced for a decline of 0.4%, after a respectable gain of 1.1% in Q4 of 2020. Investors never like to see negative growth, and a lower-than-expected GDP report will put downward pressure on the yen.
US retail sales within expectations
Over in the US, retail sales for April came in at 0.9%, just shy of the consensus estimate of 1.0%. Core retail sales rose 1.0%, above the forecast of 0.7% and close to the 1.1% gain in March. The numbers were not spectacular by any stretch, but were respectable, given that consumer confidence has weakened – the UoM Consumer Sentiment index fell to 59.42 in May, its lowest level since October 2011. US households continue to spend, despite a deterioration in consumer confidence. Wages are not keeping up with the cost of living, but consumers appear to be using savings which accumulated during the Covid pandemic.
- USD/JPY is testing resistance at 1.2938, followed by resistance at 1.3123
- There is support at 1.3000 and 1.2918
consumer sentiment pandemic yield curve us dollar testing gdp japan
Best Stocks to Buy in a Bear Market: Your Complete Guide
To protect your portfolio this year, keep reading to find the best stocks to buy in a bear market and how they can still earn you a profit.
The post Best…
Stocks fell again last week, making it six straight weeks of fallout. Everything is slipping from its highs between stocks, bonds and the latest victim, crypto. With this in mind, if you wish to find the best stocks to buy in a bear market, there are several factors to consider first.
For one thing, the Federal Reserve is committing to using all the tools necessary to bring down the price of goods. Although the pace of inflation is slowing, prices are still on the rise.
The latest Consumer Price Index (CPI) reading shows prices rose another 0.3% in April. Furthermore, as the fed works to get inflation under control, Chairman Jerome Powell is warning there could be more pain ahead.
Several analysts are cutting their economic predictions as a result. For example, Former Goldman Sachs CEO Lloyd Blankfein suggests a recession may be in the works. On CBS’s “Face the Nation,” he mentions “there’s a path” to a recession, and taming inflation will be tricky. If you wish to protect your portfolio this year, keep reading to find the best stocks to buy in a bear market and how they can still earn you a profit.
What Are the Best Stocks to Buy in a Bear Market?
The first thing to consider is not all bear markets are the same. They can appear out of nowhere, often caused by a black swan event such as the pandemic.
At the same time, bear markets are a natural part of investing. In a way, they can help correct valuations, allowing investors to build long-term wealth. For example, the S&P 500 (SPX) P/E ratio is around 20, down from 38 in December. Yet the value is still higher compared to its historical average of 15.
However, they can also be detrimental if you are not prepared. There are a few things to look for to find good stocks to invest in during a recession, such as…
- Sales Growth
- Free Cash Flow
On top of this, how the stock performs relative to its peer can help you identify leaders. If a stock is trading above its 200D SMA while its peers are slipping, it’s generally a sign of strength and momentum. To get your portfolio ready for what’s next, check out the best stocks to buy in a bear market.
No. 4 Consumer Defensive
When inflation is high, it makes goods more expensive, reducing consumers’ purchasing power. Although this is true, people still need their essentials. With this in mind, the consumer defensive sector consists of companies that make essential goods such as household essentials, tobacco and food.
Kroger (NYSE: KR)
Kroger is one of the largest food retailers in the U.S., with close to $138 billion in sales in 2021. Despite growing inflation and wage pressure, the grocer continues growing at an impressive rate. Lastly, with many locations having pharmacies and fuel centers, Kroger’s margins shouldn’t see too much pressure as food and wage prices continue climbing.
Boston Beer Co. (NYSE: SAM)
Sticking with the theme of industry leaders, Boston Beer is a top brewing company in the U.S. with brands such as Sam Adams, Twisted Tea and Truly. Although the brewer saw sales decline in the first quarter, its positioning itself for future growth with younger-generation favorites such as Truly hard Selzer.
Companies in the consumer defensive sector are some of the best stocks to buy in a bear market. However, as employees seek higher wages to offset inflation, we could see some short-term pressure. With this in mind, both companies are fundamentally solid while positioned for future growth.
No. 3 Healthcare Stocks
Healthcare is an investor’s favorite industry when the economy is slowing. For one thing, healthcare is an industry with stable demand. To explain, consumers have healthcare plans, and people will still get sick. Not to mention patients still need to take their medication.
One of the last things people will cut out of their budget is healthcare. As a result, the industry sees relatively stable earnings. That said, the Health Care Select Sector SPDR Fund (NYSE: XLV) is down 6% YTD compared to the SPDR S&P 500 ETF (NYSE: SPY), down 15%.
CVS Health (NYSE: CVS)
During the pandemic, CVS transformed its business to meet the changing industry needs. By providing affordable, convenient, and personal care, CVS is seeing the results pay off. In Q1, health care benefits, pharmacy sales, retail, and store visits rose significantly as a result. Even more, the company is raising guidance for 2022.
Mckesson (NYSE: MCK)
As the largest pharmaceutical distributor in the U.S., Mckesson plays a critical role in healthcare. Although exiting international markets may slow growth in the short term, an aging U.S. population and more access to healthcare should promote higher sales.
Both CVS and Mckesson have strong free cash flow, pay dividends, and are trading above their 200D SMA.
No. 2 Materials and Miners
Materials and mining companies are some of the best stocks to buy in a bear market with tangible value. Mining companies extract resources such as metals, selling them to be made into goods. Other materials firms can include chemicals, packaging and agricultural goods.
Mosaic (NYSE: MOS)
One of the largest fertilizer nutrient producers looking to fill the supply gap left by the war in Ukraine. Furthermore, a tight agriculture market is driving prices higher, resulting in over 300% operating earnings growth. Lastly, crop prices are likely to remain elevated this year with growing sanctions and lack of supply.
Alcoa Corp. (NYSE: AA)
The world’s largest bauxite miner plays a vital role in the aluminum market. Bauxite is used to produce alumina, then used to make aluminum. With demand for aluminum expected to remain elevated (especially as automakers pick up again), Alcoa rewards shareholders with a new dividend and increased buyback program.
Another key thing to consider is the Infrastructure Investment and Jobs Act intended to rebuild and replace America’s roads, bridges, etc. Many of these projects will require significant resources such as steel, iron, and other construction materials. With this in mind, the bill states these materials must be domestic.
No. 1 Best Stock to Buy in a Bear Market: Energy Stocks
This year, energy stocks are outperforming the market, and it’s not even close. The Select SPDR Trust Energy ETF (NYSE: XLE) is up 48% so far in 2022. Yet the sector doesn’t look to be slowing anytime soon.
Devon Energy (NYSE: DVN)
The number one performing stock in the S&P 500 last year looks to continue its reign. With oil prices over $114 a barrel, Devon Energy is seeing profits soar as operating cash flow rose another 14% in Q1 to $1.8 billion. With this in mind, the company is returning profits to investors through a record $1.27 dividend (nearly 8% yield) and a massive $2 billion share buyback.
Chevron (NYSE: CVX)
The second-largest oil company in the U.S. (behind Exxon) is ramping spending to boost production. After several smart partnerships and acquisitions, Chevron is investing in growth. So far, the strategy is paying off as the company becomes more efficient and profitable. Lastly, Chevron’s focus on a lower carbon future with renewable energy investments will likely prove to be a smart bet in the long run.
As many nations look to phase out Russian oil, other companies are stepping up to increase production and fill the supply gap. The economy is largely dependent on oil and gas to continue running smoothly. People will still need gas and oil to power their homes, get to and from work, etc.
Given these points, energy stocks are on the top of my list of best stocks to buy in a bear market. Even though energy is outperforming this year, they have more room to run. To explain, energy makes up only about 4.5% of the S&P 500, even after running up this year. However, it’s still relatively low compared to its historical average of around 10%.
The post Best Stocks to Buy in a Bear Market: Your Complete Guide appeared first on Investment U.bonds pandemic sp 500 stocks etf crypto oil
A central bank digital euro could save the eurozone – here’s how
By changing the rules around bank lending, you can make a huge cut to national debt.
The European Central Bank and its counterparts in the UK, US, China and India are exploring a new form of state-backed money built on similar online ledger technology to cryptocurrencies such as bitcoin and ethereum. So-called central bank digital currencies (CBDCs) envision a future where we’ll all have our own digital wallets and transfer money between them at the touch of a button, with no need for high-street banks to be involved because it all happens on a blockchain.
But CBDCs also present an opportunity that has gone unnoticed – to vastly reduce the exorbitant levels of public debt weighing down many countries. Let us explain.
The idea behind CBDCs is that individuals and firms would be issued with digital wallets by their central bank with which to make payments, pay taxes and buy shares or other securities. Whereas with today’s bank accounts, there is always the outside possibility that customers are unable to withdraw money because of a bank run, that can’t happen with CBDCs because all deposits would be 100% backed by reserves.
Today’s retail banks are required to keep little or no deposits in reserve, though they do have to hold a proportion of their capital (meaning easily sold assets) as protection in case their lending books run into trouble. For example, eurozone banks’ minimum requirement is 15.1%, meaning if they have capital of €1 billion (£852 million), their lending book cannot exceed €6.6 billion (that’s 6.6 times deposits).
In an era of CBDCs, we assume that people will still have bank accounts – to have their money invested by a fund manager, for instance, or to make a return by having it loaned out to someone else on the first person’s behalf. Our idea is that the 100% reserve protection in central bank wallets should extend to these retail bank accounts.
That would mean that if a person put 1,000 digital euros into a retail bank account, the bank could not multiply that deposit by opening more accounts than they could pay upon request. The bank would have to make money from its other services instead.
At present, the ECB holds about 25% of EU members’ government debt. Imagine that after transitioning to a digital euro, it decided to increase this holding to 30% by buying new sovereign bonds issued by member states.
To pay for this, it would create new digital euros – just like what happens today when quantitative easing (QE) is used to prop up the economy. Crucially, for each unit of central bank money created in this way, the money circulating in the wider economy increases by a lot more: in the eurozone, it roughly triples. This is essentially because QE drives up the value of bonds and other assets, and as a result, retail banks are more willing to lend to people and firms. This increase in the money supply is why QE can cause inflation.
If there was a 100% reserve requirement on retail banks, however, you wouldn’t get this multiplication effect. The money created by the ECB would be that amount and nothing more. Consequently, QE would be much less inflationary than today.
The debt benefit
So where does national debt fit in? The high national debt levels in many countries are predominantly the result of the global financial crisis of 2007-09, the eurozone crisis of the 2010s and the COVID pandemic. In the eurozone, countries with very high debt as a proportion of GDP include Belgium (100%), France (99%), Spain (96%), Portugal (119%), Italy (133%) and Greece (174%).
One way to deal with high debt is to create a lot of inflation to make the value of the debt smaller, but that also makes citizens poorer and is liable to eventually cause unrest. But by taking advantage of the shift to CBDCs to change the rules around retail bank reserves, governments can go a different route.
The opportunity is during the transition phase, by reversing the process in which creating money to buy bonds adds three times as much money to the real economy. By selling bonds in exchange for today’s euros, every one euro removed by the central bank leads to three disappearing from the economy.
Indeed, this is how digital euros would be introduced into the economy. The ECB would gradually sell sovereign bonds to take the old euros out of circulation, while creating new digital euros to buy bonds back again. Because the 100% reserve requirement only applies to the new euros, selling bonds worth €5 million euros takes €15 million out of the economy but buying bonds for the same amount only adds €5 million to the economy.
However, you wouldn’t just buy the same amount of bonds as you sold. Because the multiplier doesn’t apply to the bonds being bought, you can triple the amount of purchases and the total amount of money in the economy stays the same – in other words, there’s no extra inflation.
For example, the ECB could increase its holdings of sovereign debt of EU member states from 25% to 75%. Unlike the sovereign bonds in private hands, member states don’t have to pay interest to the ECB on such bonds. So EU taxpayers would now only need to pay interest on 25% of their bonds rather than the 75% on which they are paying interest now.
Interest rates and other questions
An added reason for doing this is interest rates. While interest rates payable on bonds have been meagre for years, they could hugely increase on future issuances due to inflationary pressures and central banks beginning to raise short-term interest rates in response. The chart below shows how the yields (meaning rates of interest) on the closely watched 10-year sovereign bonds for Spain, Greece, Italy and Portugal have already increased between three and fivefold in the past few months.
Mediterranean 10-year bond yields
Following several years of immense shocks from the pandemic, the energy crisis and war emergency, there’s a risk that the markets start to think that Europe’s most indebted countries can’t cover their debts. This could lead to widespread bond selling and push interest rates up to unmanageable levels. In other words, our approach might even save the eurozone.
The ECB could indeed achieve all this without introducing a digital euro, simply by imposing a tougher reserve requirement within the current system. But by moving to a CBDC, there is a strong argument that because it’s safer than bank deposits, retail banks should have to guarantee that safety by following a 100% reserve rule.
Note that we can only take this medicine once, however. As a result, EU states will still have to be disciplined about their budgets.
Instead of completely ending fractional reserve banking in this way, there’s also a halfway house where you make reserve requirements more stringent (say a 50% rule) and enjoy a reduced version of the benefits from our proposed system. Alternatively, after the CBDC transition ends, the reserve requirement could be progressively relaxed to stimulate the economy, subject to GDP growth, inflation and so on.
What if other central banks do not take the same approach? Certainly, some coordination would help to minimise disruption, but reserve requirements do differ between countries today without significant problems. Also, many countries would probably be tempted to take the same approach. For example, the Bank of England holds over one-third of British government debt, and UK public debt as a proportion of GDP currently stands at 95%.
The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.bonds pandemic bitcoin ethereum blockchain currencies euro
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