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Asset allocation highlights – A challenge to the reflation trade

Our medium-term scenario continues to favour risk and equities, given the fundamental factors and economic policy support.  This is an extract of our Asset allocation monthly – Dots matter Reading between the dots The latest ‘dot plot’ published…

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Our medium-term scenario continues to favour risk and equities, given the fundamental factors and economic policy support. 
This is an extract of our Asset allocation monthly – Dots matter
Reading between the dots The latest ‘dot plot’ published after the June meeting of the US Federal Open Market Committee (FOMC), showing the participants’ assessment of the appropriate future level for the federal funds rate, had 13 out of 18 FOMC members foreseeing a rate rise by the end of 2023. The median value indicated an increase by 50 basis points (bp). This was more than most market participants had expected: they had called for stable rates or only one rate rise by 2023. What was particularly interesting was that the 2023 rate dot moved, but the forecast for core inflation in 2023 did not. The message from the Fed seems clear: the central bank is more sensitive to, and more willing to lean against, the risk of too much inflation than investors are. That revelation posed a challenge to the reflation trade. In a sense, however, the market had anticipated the Fed would eventually conclude that policy rate increases were necessary, just perhaps not quite yet. Expectations for the level of fed funds in two years’ time had shown two 25bp increases since early March when the US Senate passed President Joe Biden’s USD 1.9 trillion stimulus package. Despite the Fed’s subsequent insistence that rate rises were more distant, the market’s expectations did not wane.

A relatively subdued reaction

The market reaction to the FOMC news was significant, but some of the initial moves have unwound. At the front end, the current level of the fed funds rate in two years is only 9bp above where it was in early April and is consistent with two rate rises. Further out, five-year real yields jumped and five-year break-evens fell, but both have more or less retraced those moves. However, not everything is back the way it was. Very long yields are down, and have continued to move lower, with the 30-year nominal yield below 2% at the time of writing, having been above 2.40% in mid-May.

US bond yields should rise

With the rally in yields that followed the Fed meeting, we saw an opportunity to implement a short position in US Treasury yields. We expect rising yields to be the primary driver of any nominal yield move and therefore we have also implemented a short in US real rates. Inflation expectations are not far from the post-Global Financial Crisis average, while real yields remain near historical lows despite the looming taper of the Fed’s quantitative easing (QE) programme and the message in the dots that the FOMC will respond to evidence of rising inflationary pressure.

Equity reflation trades

Even as rates rise, we anticipate ongoing gains for equities through the rest of the year, albeit at a slower pace than in the first half. It is worth keeping in mind that continued robust earnings growth, combined with more modest price gains, will inevitably reverse some of the expansion of the price/earnings (P/E) ratio that has occurred this year. How strong are the foundations of the reflation trades such as value versus growth given the new interest rate outlook? We are more confident that cyclical sectors, regions and countries (such as emerging markets and Japan) will continue to outperform given that the key driver is the global economic recovery as opposed to the level of interest rates. The relative performance of cyclicals has nonetheless been lacklustre over the last few months, though this is at least partly due to a lagging car sector, hindered by semiconductor shortages, while the traditionally more defensive healthcare sector has outperformed thanks to restored access to non-Covid related procedures. Value stocks have underperformed growth stocks recently by more than one would expect given that Treasury yields have in fact risen slightly. Since 11 June, the Russell 1000 value index has dropped by 1.7% while growth gained 4.2%. Value has been held back primarily by financials as the market anticipates higher funding costs for banks, but a more hawkish Fed and a rollover in leading indicators have also weighed on performance. The gain for growth shares, however, was very concentrated in technology in a way much more reminiscent of the performance of US equities before the pandemic when mega-cap tech accounted for the bulk of the broad index returns. While tech makes up about 50% of the growth index, it contributed more than two-thirds of the recent returns. We do not expect a return to the pre-pandemic equity return pattern quite yet. As longer maturity yields rise, value stocks should resume their outperformance. Valuations are still heavily in value’s favour; the z-score of the relative forward multiple of value versus growth is -1.1, which is not much higher than the peak discount level of -1.4 from last August. The earnings outlook remains supportive. Forward earnings-per-share (EPS) estimates for growth stocks are already 25% higher than pre-pandemic levels, while for value they are just 4% higher and momentum is good.

Our asset allocation

The market environment is now trying to reflect the timing of Fed tapering/tightening as well as the ‘peak data’ theme. Amid a debate on whether the focus should be on the level or marginal change in macroeconomic data, we have seen a rotation out of the reflation trade post-FOMC, through the outperformance of US equities through the growth part and a flatter US yield curve. The repricing of the Fed terminal rate to sub-2% levels is raising questions about the steady state for a US economic expansion, with lower potential GDP growth and longer-term inflation expectations implied by these levels. In our view, the loose stance of fiscal and monetary policy (notably in the US) should support risky assets and higher bond yields. Cyclically-sensitive assets have the potential to outperform in the second half of 2021. Growth in other major economies that have been hit by Covid (e.g., Europe and EM ex Asia) should accelerate as vaccinations lead to reopenings. Our medium-term scenario continues to favour risk and equities given the fundamental factors and the economic policy support. We have kept our allocation to risk broadly unchanged over the past month at the level of our long-term risk target. Our net equity exposure remains overweight versus our benchmarks via positions in US value, EM equities, Chinese equities and Japanese equities against an underweight position in EMU large caps. The regional equity exposure seeks to find a balance between the ‘growth/quality’ and ‘value/cyclical’ styles that helps insulate against interest rate volatility, while providing a diversified allocation. Elsewhere, we are overweight risky assets such as commodities and EM local debt, and we hold other positions to diversify portfolios such as long gold. For a full analysis of our latest asset allocation and the positioning in various asset classes, click here
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk. Writen by Christophe Moulin. The post Asset allocation highlights – A challenge to the reflation trade appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Government

Top Stories This Week: Gold Manipulators Go to Court, Silver’s Industrial Side in Focus

Catch up and get informed with this week’s content highlights from Charlotte McLeod, our editorial director.
The post Top Stories This Week: Gold Manipulators Go to Court, Silver’s Industrial Side in Focus appeared first on Investing News Network.

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The gold price held above US$1,800 per ounce this week, finishing the period around that level, which is down from last week’s July high point of around US$1,830. 

Marc Lichtenfeld of the Oxford Club is one market watcher who’s struggling to understand why gold isn’t doing better this year. We had the chance to speak this week, and he pointed to money printing, the impact of COVID-19 and inflation as factors that should be pushing gold to record highs.

So far in 2021 those elements have have failed to do the trick, and Marc said he sees a disconnect between the yellow metal’s traditional fundamentals and what’s happening in the market.

 

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“There just seems to be a disconnect between what are the traditional gold fundamentals and what’s happening out in the world … it’s really difficult to try to figure out what is happening with gold and why gold isn’t at record highs” — Marc Lichtenfeld, the Oxford Club

Of course, some would argue that price manipulation is the reason gold isn’t moving, and this week there was more news on that front. Chat logs were released in a spoofing trial for two former precious metals traders from the Bank of America’s (NYSE:BAC) Merrill Lynch unit, and they show one of the traders bragging about how easy it is to manipulate the price of gold. The trial isn’t over yet, but in its opening arguments that trader’s attorney said he stopped spoofing after he found out it was illegal.

Looking over to silver, I heard this week from Collin Plume of Noble Gold Investments, who thinks industrial demand will help push the white metal above the US$40 per ounce mark in the next 12 to 18 months. Silver has struggled to pass US$30 so far this year.

Solar panels are one of silver’s key uses, but it’s also found in other high-tech applications such as electronics and electric vehicles. Collin isn’t aware of any commodities that can replace silver in its end-use markets, and with demand “through the roof,” he expects to see shortages of silver by next year.

With silver in mind, we asked our Twitter followers this week if they think its industrial or precious side is driving the most demand right now. By the time the poll closed, about 70 percent of respondents said they think the precious angle is more important.

 

Uranium Soared Last Year While Other Resources Tumbled

 
What's In Store For Uranium This Year? Find Out In Our Exclusive FREE 2021 Uranium Outlook Report featuring trends, forecasts, expert interviews and more!
 

We’ll be asking another question on Twitter next week, so make sure to follow us @INN_Resource or follow me @Charlotte_McL to share your thoughts.

We’re going to finish up with the cannabis space, where there was a major announcement last week.

A group of Democratic senators headed by Senate Majority Leader Chuck Schumer introduced a draft of the Cannabis Administration and Opportunity Act, which among other things would remove cannabis from the Controlled Substances Act. The long-awaited bill will need 60 votes to get through the Senate, and opinion is split on whether that will actually happen.

INN’s Bryan Mc Govern spoke with Dan Ahrens of AdvisorShares Investments, who thinks it has “no chance of passing,” but remains optimistic about prospects for American cannabis companies.

“No one should expect US (cannabis) legalization anytime soon. We should expect reforms; they’re not coming as fast as anyone would like to see, but everybody agrees we’re going to get some form of banking reform in the near future … we’ll see baby steps” — Dan Ahrens, AdvisorShares Investments

Why? In his opinion, these stocks remain undervalued compared to their Canadian counterparts, and are operating well even without federal cannabis approval. Any legalization progress would be a bonus.

Want more YouTube content? Check out our YouTube playlist At Home With INN, which features interviews with experts in the resource space. If there’s someone you’d like to see us interview, please send an email to cmcleod@investingnews.com.

And don’t forget to follow us @INN_Resource for real-time updates! 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

 

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The post Top Stories This Week: Gold Manipulators Go to Court, Silver’s Industrial Side in Focus appeared first on Investing News Network.

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Economics

Top 5 Rubber Stocks to Buy in 2021

Here are some of the best rubber stocks to buy right now. Increased demand and supply chain disruptions are putting pressure rubber prices.
The post Top 5 Rubber Stocks to Buy in 2021 appeared first on Investment U.

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When it comes to investing, all the attention tends to go to healthcare, tech and increasingly renewable energy. But these aren’t the only stocks on the block, and some old mainstays can also add value to your portfolio. One of those old, reliable industries is rubber: it always has some level of demand, and that won’t likely change anytime soon. But recent economic conditions make rubber even more intriguing than usual. One of the biggest uses of rubber is car tires, and sharp economic recovery is likely to mean a sharp demand for new cars. Hence, we may also see a sharp increase in demand for rubber as many people head to the dealer to buy a new car. There’s more to it than just the auto industry, of course. CNBC reported that disruptions in the supply chain are also causing major disruptions. And we use rubber for many different essential items, including personal protective equipment and countless other items. With increased demand and supply chain disruptions, rubber stocks are poised for a rise. Here are some of the best rubber stocks to buy:
  • Goodyear Tire & Rubber (Nasdaq: GT)
  • Trinseo (NYSE: TSE)
  • Michelin (OTC: MGDDY)
  • Carlisle Companies (NYSE: CSL)
  • Protolabs (NYSE: PRLB)
If you’ve never invested in rubber stocks before, you might be wondering if they are a good investment. Let’s consider that question before looking at each stock more closely. And if you want to see how your investment portfolio might grow, check out our free investment calculator.

Is Rubber a Good Investment?

Rubber can certainly be a good investment because it is nearly ubiquitous; it is used in many different products, including tires, footwear, pharmaceuticals, textiles and many other products. As Zacks notes, rubber is among the most profitable industries when it comes to natural resources. But rubber isn’t exactly the most innovative product. Perhaps it was decades ago, but these days, it’s something most of us are just used to seeing. We don’t really demand rubber so much as the products that contain it. Hence, it’s only when demand for those products increases that the demand for rubber spikes. And as mentioned earlier, we are at a point right now where many people are looking to buy new cars, and rubber’s use in tires could cause a surge in demand. However, these things can be very cyclical. The Zacks page linked above highlights this very well. There, you can see the rubber tires industry has a YTD performance of 42.90% compared to 16.09% for IVV, an S&P 500 fund. But as good as that sounds, the 5-year performance for rubber tires is -33.71% compared to 112.67 for IVV. Given the downside risk, rubber is probably best used as part of a balanced portfolio containing more well-round assets, such as funds like IVV.

Rubber Stocks to Buy Now

If you want to “bounce” your returns upward with rubber stocks, here are some of the best rubber stocks to buy right now. Keep an eye on them as the situation with the auto industry progresses.

Goodyear Tire & Rubber

Goodyear Tire & Rubber is a tire manufacturer that makes tires for a variety of uses. Tires for automobiles are one of the biggest uses of Goodyear tires. However, they are also used on buses, trucks, aircraft, motorcycles, mining equipment, industrial equipment and farm equipment. In addition to the Goodyear name, it also has Dunlop and Kelly tires under its belt. Goodyear has been around since 1898 and was the first global tire manufacturer to enter the Chinese market. It produces a range of tires, rubber products and chemicals across the U.S. and Canada.

Trinseo

Trinseo is a global materials company that manufactures latex, plastics and synthetic rubber. Notably, it produces plastic for Lego. When it comes to rubber, Trinseo produces styrene-butadiene rubber (SSBR). This material is primarily used in high-performance tires. In addition to Legos, its plastic is used in automotive applications, LED lighting and medical devices. Trinseo is growing rapidly, with 17 manufacturing and 11 research facilities worldwide. In addition, it is already seeing healthy revenue increases as it continues to grow. Its website notes Trinseo is “dedicated to making a positive impact on society,” and it will support the “sustainability goals of our customers in a wide range of end-markets.”

Michelin

Michelin is another name that is big in the tire manufacturing business, and the demand for new cars places it squarely on this list. In addition to the Michelin tire brand, the company also owns BFGoodrich and Uniroyal. BFGoodrich is a premium tire brand for sports cars, offroad vehicles and light trucks. Michelin is the largest tire manufacturer in the US and the second-largest in the world. It has 34 plans in two countries and had over $8 billion of sales in 2020. Its revenue has been increasing, as has its stock price. As the situation with the auto industry evolves, it will be interesting to see how Michelin fares.

Carlisle Companies

Founded in 1917 and based in Scottsdale, Arizona, Carlisle Companies is about more than just rubber. It is more of an umbrella under which there are a number of different operations. Its products and services include healthcare, commercial roofing, aerospace and electronics, lawn and garden, agriculture, energy, mining and construction equipment, and dining. Of course, there are many uses for rubber and plastic across these industries. In 2018, Carlisle Companies released a plan called Vision 2025 in which it detailed how it will continue to grow over the next 100 years.

Protolabs

Protolabs is an intriguing company. It produces low-volume 3D printed, CNC-machining, sheet metal fabrication and injection-molded custom parts. These parts are then used for short-run production and in prototypes. The company describes itself as the “world’s fastest digital manufacturing service.” It also provides rubber, metal and commercial plastics. Given its business model, it was able to produce several items during the coronavirus pandemic, including face shields, plastic clips and items used in test kits. They were in turn used in Minnesota hospitals, where the company is based.

More Investing Opportunities

The rubber stocks above might produce some big returns for investors. Although, there are many industries and stocks to choose from. So, here are some more investing opportunities and research… If you’re looking for expert analysis delivered straight to your inbox, consider signing up for Profit Trends. It’s a free e-letter that’s packed with investing tips and tricks. Whether you’re new or already an experienced investor, there’s something for everyone. The post Top 5 Rubber Stocks to Buy in 2021 appeared first on Investment U.

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Government

Federal Court Rules CDC’s COVID-19 Eviction Moratorium Is Unlawful

Federal Court Rules CDC’s COVID-19 Eviction Moratorium Is Unlawful

By Jack Phillips of Epoch Times

A federal court on Friday ruled that the U.S. Centers for Disease Control and Prevention (CDC) overstepped its authority by halting evictions.

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Federal Court Rules CDC's COVID-19 Eviction Moratorium Is Unlawful

By Jack Phillips of Epoch Times

A federal court on Friday ruled that the U.S. Centers for Disease Control and Prevention (CDC) overstepped its authority by halting evictions during the COVID-19 pandemic.

The Cincinnati-based U.S. Sixth Circuit Court of Appeals unanimously agreed (pdf) with a lower court ruling that said the CDC engaged in federal overreach with the eviction moratorium, which the agency has consistently extended for months. Several weeks ago, the CDC announced it would allow the policy, which was passed into law by Congress, to expire at the end of July.

Dr. Rochelle Walensky, director of the Centers for Disease Control and Prevention (CDC), testifies during a Senate hearing in Washington, on July 20, 2021. (Stefani Reynolds-Pool/Getty Images)

“It is not our job as judges to make legislative rules that favor one side or another,” the judges wrote. “But nor should it be the job of bureaucrats embedded in the executive branch. While landlords and tenants likely disagree on much, there is one thing both deserve: for their problems to be resolved by their elected representatives.”

The ruling upheld one handed down by U.S. District Judge Mark Norris, who in March blocked enforcement of the moratorium throughout western Tennessee.

Under the moratorium, tenants who have lost income during the pandemic can declare under penalty of perjury that they’ve made their best effort to pay rent on time. The CDC claimed the measure was necessary to prevent people from having to enter overcrowded conditions if they were evicted, which would, according to the agency, impact public health.

Previously, the CDC’s lawyers argued in court filings that Congress authorized the eviction freeze as part of its COVID-19 relief legislation, while simultaneously asserting that the moratorium was within its authority. Those arguments were rejected by the three-panel appeals court on Friday.

Demonstrators call for a rent strike during the COVID-19 pandemic as they pass City Hall in Los Angeles, Calif., on May 1, 2020. (Frederic J. Brown/AFP via Getty Images)

“What’s the difference between executive-branch experts and congressional ones? Executive-branch experts make regulations; congressional experts make recommendations,” the appeals court wrote. “Congressional bureaucracy leaves the law-making power with the people’s representatives—right where the Founders put it.”

But last month, the Supreme Court in a 5-4 decision rejected a different plea by landlords to end the ban on evictions.

Justice Brett Kavanaugh had written in an opinion (pdf) that while he believes that the CDC had exceeded its authority by implementing the moratorium, he voted against ending it because the policy is set to expire July 31.

“Those few weeks,” he wrote, “will allow for additional and more orderly distribution” of the funds that Congress has appropriated to provide rental assistance to those in need because of the pandemic.

The CDC moratorium has faced pushback from property owners as well as the National Association of Realtors.

“Landlords have been losing over $13 billion every month under the moratorium, and the total effect of the CDC’s overreach may reach up to $200 billion if it remains in effect for a year,” said the organization in an emergency petition to the Supreme Court.

It’s not clear if the CDC’s attorneys will appeal the ruling. The Epoch Times has requested a comment from the agency.

Tyler Durden Fri, 07/23/2021 - 19:40

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