Euro Pacific Bank

Portfolio Commentary: Strong year for equities ends with gains

Published: January 14, 2022

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Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Market overview

Most stock markets gained ground in December to wrap up a year, in which equities went from strength to strength while bonds and gold lost value. The S&P 500 rallied a staggering 27% during the year, European and UK market gained over 15% while China was the standout underperformer, sliding 5% after Chinese regulatory clampdowns raised investor concerns about the world’s second largest economy.

Stimulus and vaccines have sent stocks to record highs. Source: Source: Refinitiv Datastream.

US companies had strong third quarter earnings and the fourth quarter is expected to be equally impressive. Earnings growth for the year is expected to be 45%, significantly greater than the 22% growth anticipated a year ago. However, with the S&P500 price to earnings ratio at 28.9, the jury is out on whether similar increases can be achieved this year.

The sectors that outperformed in 2021 were energy – which had a runaway streak from mid-September – financials, real estate and information technology. According to Bank of America, about 65% of the Nasdaq’s gains can be attributed to five tech stocks – Microsoft, Google, Apple, Nvidia and Tesla.

S&P 500 sectors performance. Source: Standard & Poor’s.

Macroeconomic concerns remain

The stellar stock market increases occurred against an uncertain macroeconomic picture, which has faced global supply challenges, rising inflation and central bank moves to start withdrawing trillions of dollars of liquidity that have been propping up the financial markets and buoying investor sentiment.

A significant rise in consumer demand for goods, Covid-related bottlenecks caused by port shutdowns in China and other logistical hiccups led to supply constraints which fed rising prices. These also saw microchips in short supply, with the impact felt across the manufacturing sector and auto companies the hardest hit.

Inflation took over as public enemy number one after initial hopes that supply would catch up with demand after a few months. Considered transitory by most mainstream economists and the Federal Reserve for most of the year, US Federal Reserve Chairman Jerome Powell formally put the term out to pasture in early December, acknowledging that inflation was likely to remain higher for longer.

As a result, the Federal Reserve is increasing the pace of its monetary policy tightening to ensure inflation expectations don’t become entrenched and set in motion a self-fulfilling cycle. The central bank began tapering in November and now expects the process to be over earlier than its original June target date. Chairman Powell also indicated that financial markets could expect up to three rate hikes in 2022.

Global inflation surged in 2021 . Source: Refinitiv Datastream.

In the UK, the Governor of the Bank of England guided the financial markets to expect a rate hike in November but did not deliver, causing significant bond market volatility. Interest rates were raised in December. The European Central Bank remains more dovish.

Central banks will have to maintain the delicate balance between keeping inflation expectations anchored and allowing for a supportive environment for economic growth. As negative supply shocks push inflation higher, they threaten to set off a self-fulfilling cycle of ever higher inflation, which could begin to chip away at demand.

While the global economic recovery continued, the World Bank raised concerns about the uneven rates of recovery, as shown in the graph below. High income countries have managed to recover at a healthy rate and are expected to continue on their upward trajectory. In contrast, low income countries have lagged.

Global economic recovery is expected to be uneven. Source: Global Economic Prospects, 06/2021.

The OECD expects a rebound in global economic growth to 5.6% this year and 4.5% in 2022, before settling back to 3.2% in 2023, close to the rates seen prior to the pandemic.

Omicron’s appearance in December raised economic concerns but hopes that that measures to limit the spread may be more restrained than for previous variants meant financial markets recovered ground and the oil price, which came off $10 a barrel on the day Omicron hit the news, recovered rapidly.

Gas prices rise due to shortages

Since Autumn, gas prices have spiraled in response to global supply shortages. Record high natural gas prices in Europe and Asia were spurred by significant demand ahead of the northern hemisphere winter and unanticipated shortfalls in existing renewable energy production. They were also affected by the geopolitical forces stemming from what is seen as Russia’s attempt to force Europe’s hand by restricting supplies so that it will approve the Nord Stream 2 gas pipeline.

Europe relies significantly on natural gas from Russia and now has to compete with South East Asia for liquid natural gas exports from the US, where there is pressure to halt exports. Most economies, including China, are likely to transition to gas in their journey to becoming net-zero economies and thus demand is only likely to intensify over the next decade.

Energy prices and food prices have risen sharply since the COVID-19 pandemic begins. Source: World Bank Commodity Market Outlook. Note: Data for 2021 and 2022 are forecasted.

Portfolio Actions

Despite December gains, we think markets will be under pressure going to the first quarter of 2022. A few media camps have discussed about the possibility of a market correction in January. We think the possibility of such event’s occurrence is low.

The portfolios’ composition remains unchanged for the month, while we are currently maintaining a comfortable degree of cash in all portfolios (<10%) in case investment opportunities arise. Our December and annual performance are as followed:

Fund Name Performance (December) Annual Return
International Balanced 1.74% 0.62%
International Growth 2.19% 3.83%
Natural Resources 1.42% -0.19%
Gold & Precious Metals 2.06% 20.80%


Euro Pacific Advisors Management Team

Portfolio Commentary: Markets Shaken by V.F.I.

Published: December 07, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Market overview

In a month which saw the emergence of a new acronym: VFI (Variants, Federal Reserve and Inflation), stock markets were volatile, achieving new highs early in the month before being knocked back by US inflation coming in at a 31-year high, and then slumping as news of the new Covid-19 Omicron variant emerged. The S&P 500 Index slipped marginally into the red, while the Dow Jones Industrial Average and Nikkei 225 fell 4%. The UK FTSE 100 Index and the Euro Stoxx 50 both declined a little over 2%. All developed equity markets remain in the black for the year to date, though, while most bond markets are weaker.

US inflation at 31-year high. Source: Refinitiv.

Equity markets remain underpinned by corporate earnings growth, with Macy’s, Kohl’s and Nvidia the most notable advances after posting market-beating numbers. Overall, growth indicators remain positive.

Meanwhile, energy concerns abated as President Biden indicated that the US may release more reserves, and pressure built on OPEC to add supply to the market. The retracement in prices accelerated as news of the Omicron variant became public and countries began shutting their borders.

5-year Brent Crude Oil chart. Source:

Fed timetable for tapering asset purchases

The main policy development came with the Federal Reserve announcing it would begin tapering its asset purchases with a view to completing the process by June next year.

The chart below indicates the pace of tapering as anticipated at the meeting in early November, although subsequent comments indicated this may be accelerated. Equities and bonds responded positively but then became concerned about whether persistently high inflation would prompt the central bank to start raising interest rates more aggressively than their guidance suggested. There is a danger that, with demand still buoyant, supply issues exacerbated by new restrictions to prevent the spread of the new Covid-19 variant will further fuel rises in inflation.

Current FED plan of asset tapering. Source: Federal Resource Open Market Committee (As at 3/11/2021).

Carbon credit markets in focus after COP26

The UK hosted the 26th UN Climate Change Conference (COP26) in early November and this gave new life to the carbon credit market with a number of agreements made on the rules that govern it.


The carbon credit market has its roots in the 1997 UN Kyoto Protocol, the first time the world’s governments agreed on the need to cut carbon emissions. Called the Clean Development Mechanism, it facilitated the reduction of industry and country emissions through the trading of carbon credits. Today, there are two markets: the voluntary exchange of carbon credits and the involuntary carbon compliance market.

The former allows companies and individuals to buy carbon credits to compensate for their carbon emitting activities. These credits are then invested into carbon-catching activities aimed at reducing the level of emissions by planting forests and other activities. The global standard is that one carbon credit represents one ton of carbon dioxide equivalent (CO2e) removed from the atmosphere.

How it works

The carbon compliance market is otherwise known as the cap-and-trade market. Governments set caps on the amount of CO2e companies in high-emitting sectors (e.g., oil, energy, transportation) are allowed to emit before they are required to buy carbon credits. The intention behind this is to help companies make a gradual transition to a sustainable, carbon-free future, avoiding the disruption and cost (to company and economy) that overnight change would cause. Emitting companies have time to transition their business, while the projects in which the carbon credits are invested balance the equation, capturing carbon and neutralizing the emissions impact of the company buying the credits.

When companies reach their cap, they can buy and sell carbon credits on regulated exchanges. According to the World Bank, there are around 64 carbon compliance markets currently in operation, the largest of which are in the EU, China, Australia and Canada. The US has no overarching federal approach to requiring companies to comply by reducing emissions. Instead, states have been free to take an independent approach, with California the only one with a formal cap-and-trade market.

Strengths and weaknesses

The current cap-and-trade system is vulnerable to fraud, double counting and greenwashing. In the early days of the carbon credit market, white collar criminals took advantage of tax loopholes by fraudulently claiming VAT receipts through complex arrangements of companies in different jurisdictions.

More recently, companies have been found double counting the carbon credit, once in the country in which they operate and again in the country where the credit is bought. There is little oversight of projects that are supposedly reducing emissions. For instance, some tree planting projects have been found to cut down the trees after gaining the credit.

To reduce the likelihood of nefarious schemes, regulators are eager to globalize the carbon credit market. However, there are challenges in agreeing parameters such as time frame, pricing, measurement and degree of transparency.


Notwithstanding the challenges, the future for the carbon credit market looks bright. According to a September report by Ecosystem Marketplace, in the first eight months of 2021, voluntary carbon markets had already posted a near-60% increase in value from last year to more than $1 billion. With market volumes and value rising strongly, more speculators are purchasing credits. This then becomes a source of finance for green projects around the world. A tightening of processes and rules at COP26 could open the door to billions of dollars of investment over the next decade.

A recent Visual Capitalist infographic highlights the potential 15-fold growth in carbon offsets by 2030:



VFI (Variants, Federal Reserve and Inflation) will continue to have influence over market sentiment and price action in the medium term as they have always been since the beginning of this year.

In the medium term, we think the equity market will remain buoyant with the support of solid corporate earnings growth and the likelihood of a strong shopping season in December despite supply chain shortage remains a concern.

The carbon compliance market, which is projected to grow to 50 billion dollar by 2030, is a lucrative investible opportunity that needs attention from savvy investors. We will explore this topic further in future commentaries.

The portfolios’ November performance is as followed:

Fund Name Performance
International Balanced -1.44%
International Growth -1.87%
Natural Resources -4.39%
Gold & Precious Metals -2.22%


Euro Pacific Advisors Management Team

Portfolio Commentary: Equities recover but challenges lie ahead

Published: November 09, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Market overview

Most equity markets rebounded in October despite a multitude of concerns. Quantitative easing is still going at a pace unimaginable a few years ago and trillions of dollars of new stimulus measures look set to pour fuel onto an inflationary fire running at an annualised 5.4% in the USA. Supply chains are squeezed as never before in peacetime and wages are rising rapidly, probably far faster than the official figures.

And yet, the S&P 500 is at an all-time high, a third higher than it was before the pandemic. Many believe the S&P 500 is expensive – despite a good third quarter earnings season. The US bond market is, arguably, also expensive (although cheaper than it was) because there are mounting expectations that the Federal Reserve will begin raising interest rates sooner rather than later despite continuing to forecast that the pick up in inflation is transient. Global benchmark US Treasury bond yields increased to 1.6% and the US Federal Reserve is still expected to begin its tapering program in November.

UK gilts signaling sharp rate hikes

Following September Monetary Policy Committee meeting’s narrative, The Bank of England appears decidedly more hawkish. Governor Andrew Bailey has warned that interest rates must soon rise to stem inflation currently running at 3.1%. However, there is clearly a political desire for wages to rise as part of a “high wage, high growth economy”.

The London money markets are pricing in a rate hike to 0.25%, from 0.1%, at the Bank’s next meeting on November 4th, and the price movement in gilts reflects expectations of a further move to 1% by May. This seems like an overreaction, but may reflect the fear that the Bank of England is on the brink of a policy error.

Assuming the Bank of England does raise interest rates to 0.25% this week, does the market really believe that it won’t wait to see the impact on the consumer in the run up to Christmas as well as the effect on the housing market?

The Bank of England’s message also throws up another problem which goes against current market expectations. The conventional wisdom was that, long before there was ‘talk about talking about’ interest rate hikes, quantitative easing stimulus would be wound down. At the very least, the market expected a timetable for stimulus easing.

U.S corporate earnings growth remains resilient

Valuations in developed world stock markets remain extended but market analysts are generally confident that equities will continue to gain ground on strong earnings performance.

S&P 500 P/E ratio remains historically elevated. Source: S&P Global Market Intelligence.

S&P 500 EPS growth YOY. Source: S&P Global Market Intelligence.

Financial companies was the first sector to announce third quarter earnings. Prospects for the sector are viewed favorably — alongside energy — with commodity prices, particularly oil and gas prices, having gained considerable ground in recent weeks on worrying shortages.

Brent crude oil $/barrel. Source: Bloomberg.

The vast majority of S&P 500 companies that have so far reported have exceeded profit expectations with 88% of financial companies beating forecasts by a wide 21% margin.

Supply shortages and slowing growth dampen optimism

Europeans are bracing themselves for a cold winter based on gas shortages and sky-high prices. In the UK, panic buying of fuel by drivers has resulted in price increases and China has had to contend with a significant shortage of coal, which has necessitated energy rationing in the industrial sector and some residential blackouts.

Supply shortages and delays continue to dog the transport of goods to where they are needed, affecting sectors such as electronics, autos, meat, medicines, and household products. Several US companies have warned of rising costs due to supply chain disruptions, admitting these could have an impact on earnings. Companies that have been least affected include those that have wide product margins and pricing power, including tech and healthcare companies.

The supply constraints stem from a mix of transport restrictions related to the pandemic but also under investment in transport infrastructure and electronics production and a reluctance of workers to return to high-risk Covid-19 sectors.

An emerging concern has been evidence of a slowdown in growth in some of the developed markets production come in much weaker than the market was expecting. This was attributed to hefty declines in the mining and utilities sectors due to one-off weather-related factors.

China’s GDP also came in well below expectations and it is likely to remain under pressure given its energy challenges. The world’s second biggest economy has also seen a rise in Covid infections. These factors may dampen economic activities should they continue.

Real GDP Growth Baseline Forecasts: 2019-2023. Notes: (1) Regional real GDP growth using PPP weights; (2) figures for 2021 onwards are forecasts; forecasts updated 4 October 2021. Source: Euromonitor.

Inflation revisited

A lack of shipping containers, port closures and delays, a shortage of truck drivers, lack of computer chip production capacity, electricity shortages in China and India, and rising global commodity prices are all likely to contribute to global inflation rising by 1.5 percentage points in Q3 2021, according to OECD estimates.

Euromonitor forecasts global inflation to reach 4% in 2021 before falling back to 3.6% in 2022. In our opinion, a positive year for equity and bond markets in 2022 depends on any further increase being limited.

Inflation Baseline Forecasts: 2019-2023: 2019-2023. Note: (1) Regional inflation using PPP weights; (2) figures for 2021 onwards are forecasts; forecasts updated 4 October 2021. Source: Euromonitor.


UK rate hikes

Raising the prospect of hiking interest rates before any discussion of the Bank of England’s plans for quantitative easing sends a confusing message to markets. Is inflation temporary? Would higher interest rates be temporary? We all know that the Bank of England can, if it wants, afford to be nimbler than her US cousin, whose policy turns like a fully laden oil tanker. Is this part of their thinking? If it is, then the bond market may have got it wrong in pricing for aggressive UK rate hikes.

Slowing economic growth

Euromonitor research shows that Covid-19 remains the primary economic concern going forward. It ascribes a 28% probability to a pessimistic Covid-19 scenario in which more infectious and vaccine-resistant variants result in multiple economic lockdowns in 2022.

It also points out that global economic growth has deteriorated since mid-2021. Euromonitor expects global real GDP to increase by 5.7% in 2021 (a 0.2 percentage point downgrade since July) and has significantly downgraded 2021 growth expectations for US, China, Asia Pacific economies, although its expectations for the Eurozone are up.

The portfolios’ October performance is as followed:

Fund Name Performance
International Balanced +2.87%
International Growth +3.38%
Natural Resources +4.26%
Gold & Precious Metals +7.13%


Euro Pacific Advisors Management Team

Portfolio Commentary: Markets Decline Under Pressure in Q3

Published: October 11, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Market overview

September witnessed the reversal of third quarter’s gains as turbulent equity and bond markets suffered declines due to a broad range of factors:

  • Concerns about global growth waning due to the highly infectious Delta Covid variant
  • Broadening and deepening supply bottlenecks
  • Rising inflation and hastening interest rate rises
  • Numerous negative developments in China seen as posing downside risks to financial markets

Evidently, the Citi Economic Surprise Index, shown below, highlights the extent to which negative economic surprises are now exceeding positive surprises.

Source: Bloomberg.

For the month, the S&P 500 Index declined by 4.9% and the NASDAQ by 5.3%, while the FTSE all-share Index retreated by 1.1% and the Eurostoxx 50 by 4.7%.

In the U.S., sector rotations continue to play a large part in investor strategy. According to our observation, nearly 90% of S&P 500 constituents have experienced at least a 10% correction during the year but the index has not drawn down by more than 5% at any point.

Contrastively, pockets of emerging markets performed better, such as the MSCI India index which registered a 2.0% gain. Nevertheless, all major stock markets remain in positive territory year-to-date except for China’s CSI 300 Index, which has declined almost 7%.

Elevating pressures from Central Banks

This year, investors have been focused on the impact of the looming debt ceiling deadline and the US Federal Reserve’s tapering intentions. For a brief period, the prospect of a government shutdown and the worst-case scenario of a sovereign debt default and downgrade suggested that the Fed may have to move out its tapering timeline. However, the U.S. Senate eventually announced a deal which avoided shutting down on October 1st and extended government spending until December 3rd of 2021.

Meanwhile, tapering looks set to begin based on the Federal Open Market Committee’s (FOMC) post-meeting comments in late September. The committee judges that a moderation in the pace of asset purchases may soon be warranted and Chairman Jerome Powell opined that “a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”

Another major concerns by investors is rising interest rate. The majority of FOMC members see the first US interest rate hike happening in 2022, a shift from June’s meeting when the majority expected it in 2023. As a result, the 10-year US Treasury yield has bounced off its lows and is trading at about 1.5% — a level investors were expecting only later this year.

Source: FactSet, CNBC.

Across the Atlantic, the minutes from the Bank of England’s September Monetary Policy Committee meeting also highlight increasing concern about the durability of inflation. Some commentators now expect two interest rate rises next year with the first coming as early as the spring.

UK gilts have reacted to the changes in interest rate expectations even more strongly than US treasuries with a 50 basis points increase in 10-year yield since mid-August. This trend may has further to run as inflation continues to surpass the Bank of England’s expectations. It now forecasts consumer price inflation to peak above 4% at the turn of the year (well-ahead of the 2.1% forecast it issued in February) and not to fall back to its 2% target until the second half of 2023.

Source: Bank of England, Refinitiv.

China sentiment further deteriorates

Evergrande crisis

In addition to slowing Chinese economic growth and government crackdown on the tech sector and online education industry as discussed on a past commentary, the news that Chinese property giant Evergrande was facing a debt crisis derailed market sentiment further. The property developer amassed mountains of debt, predominantly domestically, when it expanded from housing into a range of other ambitious initiatives including electric vehicles, sports, and theme parks.

The crisis came to a head in late September when Evergrande failed to meet a debt payment. It has 30 days to settle and avoid triggering a formal debt default. Investors are on edge, waiting to see whether the government will back the debt, whether it will be rescheduled or whether the company will default and become akin to a “Chinese Lehman Brothers.” In dealing with this issue, the Chinese government is not expected to bail out the company, but it has been adding liquidity to financial markets to avert broader contagion.

Source: CNN.


Evergrande’s situation has broader ramifications for China and, to an extent, global economy because the Chinese property sector contributes almost a third to Chinese GDP. As a result, a slowdown in the Chinese economy would not bode well for the rest of the world, which has relied on the vibrant recovery in China to provide tailwinds for their own economies.

We can perhaps gain some comfort from the commitment of the Chinese government to reducing speculative activities in the economy and implementing regulations to prevent excesses from building up. The intention is to introduce more balance into the Chinese economy and promote “common prosperity”. The success will depend on whether the regulators can steer the private and public sector without too many missteps.

Despite sentiment in Chinese markets is currently weak and government policy is putting the brakes on growth, the year’s final quarter is historically strong for Chinese equities with prices moving up on average by 3.6% in October alone.

Historically, Chinese equities perform well in Q4. Source: Bloomberg.

Portfolio Actions

Our Chinese equity exposure is balanced between infrastructure and technology sectors which, notwithstanding recent interventions, offer huge growth prospects at relatively low valuations. Furthermore, we have no direct exposure to Evergrande so concerns over the company’s default risk is very low on our table. From both a short and longer term perspective, we think it is not the time to withdraw from investing in the world’s second largest economy.

On the other hand, with interest rate hikes and the FED’s tapering coming possibly later this year or next year, our International Balanced and International Growth fund are well-diversified to withstand any potential short-term market volatility. Tactically, we are also holding less than 10% of our funds’ weight in cash to take advantage of any potential market’s pullback.

The portfolios’ September performance is as followed:

Fund Name Performance
International Balanced -2.62%
International Growth -2.54%
Natural Resources +0.96%
Gold & Precious Metals -11.47%


Euro Pacific Advisors Management Team

Portfolio Commentary: Buoyant Markets Amidst Fizzling Growth

Published: September 08, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Market overview

August saw stock markets continuing to march higher to a record-beating earnings season, despite the far-reaching spread of the Delta variant raising concerns that global growth may have reached its peak, and we could fall back from here.

In the U.S., the Dow Jones Industrial Average advanced 1.5% while the S&P 500 was up 2.6% and the Nasdaq lead the way by gaining 3.1% for the month. The S&P 500’s forward P/E, which captured investor expectations 12 months down the line, remained elevated at 20.9, indicating that investors continued to anticipate strong earnings growth.

Across the Atlantic, the FTSE 100 and the Euro Stoxx 50 experienced similar increases of 1.7% and 2.5% respectively. In the Pacific region, China’s CSI 300 Index managed to eke out a 0.4% gain during the month notwithstanding the regulatory clampdown, that sent its technology and online education stocks spiraling lower in the previous months. For the year, it is one of the few stock markets that is still in the red, down by almost 8% year-to-date.

US, Europe stocks brush off China risks, trade near record. Source: Bloomberg.

State Street is less confident than Wall Street

While US stock market indices marched higher in August, U.S. consumer confidence took a big knock in the same period.

Are consumers less confident than Wall Street about economic growth? Source: Refinitiv Datastream.

A cause for concern is that zero-COVID economies such as China, Singapore, Taiwan, Australia, and New Zealand, which have tried to completely stamp out the virus, have seen a renewed rise in infections. This event has undermined many investors’ confidence that the virus will ever be completely vanquished.

A growing pool of expert opinion suggests that COVID is likely to become endemic, much like the seasonal flu, and that we will have to learn to live with it.

Fizzling momentum, waning mood

The impact of the Delta variant started to be felt during October of last year, with the rollover of the purchasing managers’ index (PMI) and Citibank’s Global Economic Surprises Index, which reflected whether economic activities were outperforming or underperforming forecasts. To note, the Global Economic Surprises Index has turned negative for the first time since mid-2020. This indicator highlighted waning investors’ mood due to the US and international data releases were missing forecasts at a noticeable rate.

Whether this news has any impacts on future markets returns is unknown, studies has shown that 1% surprise in quarterly GDP growth is associated with 0.7% change in quarterly U.S. equity returns in the last 30 years.

Economic surprises indexes weakens as economic activity slows. Source: Refinitiv Datastream.

On the other hand, recent PMI data released by the National Bureau of Statistics also showed that China, where outbreaks of the virus have been strictly managed, has experienced economic activity slowdown. The country’s service sector PMI data has also fallen below 50 for the first time since the first quarter of last year, signaling a contraction. Its manufacturing sector and export orders declined in tandem.

Non-manufacturing gauge contracted for the first time since March 2020. Source: National Bureau of Statistics.

US Government debt revisited

Relationship between yield and sentiment

Yield changes highlighted the sensitivity of rates to prevalent investor sentiment. In the first quarter of this year, yields rose on inflation fears. In the second quarter, they fell on concerns of slowing growth. Two months on and investors are still harboring concerns about growth and investors still seem appeased by Powell’s commitment to address inflation as and when needed.

A hot summer for US Treasuries

The perplexing decline in US bond yields continued into August, with the US 10-year Treasury yield remaining below 1.4%, having traded at 1.75% at the end of March. During August, the world’s benchmark interest rate started out at 1.17%, reaching a high of 1.367% around mid-month before ending August below 1.3% again.

10-year Yield slides from 2021 peak. Source: Bloomberg.

The dip in yields was attributed to concerns about slowing growth and uncertainty about whether the US Federal Reserve will begin tapering off its bond buying programs by the year’s end or next year. At the much-anticipated Jackson Hole Symposium towards the end of the month, FED Chair Jerome Powell managed to keep investor sentiment on an even keel by acknowledging that tapering may begin later this year but that it would be conducted cautiously and carefully.

US equity investors took the news in their stride with stock market indices again reaching new highs by the end of the week, while the US Treasury Yield ticked up from its mid-month lows. Expectations of the 10-year treasury yield reaching 2% by year-end were no longer commonplace, although some market commentators thought that it was still possible. According to FactSet data which showed the average forecasts of analysts last month, the 10-year yield was expected to rise to 1.8% by the year-end from 1.31 %. However, Goldman Sachs and JP Morgan have both cut their 10-year yield forecasts to 1.6% and 1.75% by the end of 2021. Citigroup, in contrast, still expected the yield to come in at 2% for the same period.

Portfolio Actions

Despite the fall in yields, there are widespread expectations that inflation is not going away quickly. With investors’ sentiment and PMI reading on a declining trend into August, whether the current stock markets’ growth momentum can be maintained remains a question mark.

Additionally, a market discrepancy that we have noticed is despite improving labor markets booming US economy, interest rates at present levels are not compatible to the current market conditions. What is even more important for investors is the inflection point, in which interest rates are raised to match with the corresponding economic conditions. This event can potentially bring intense volatility to both equity and bond investors’ portfolios. Regardless of the outcomes, our portfolios remain diversified to prepare for such market events.

The portfolios’ August performance is as followed:

Fund Name Performance
International Balanced +1.09%
International Growth +0.95%
Natural Resources +0.64%
Gold & Precious Metals -6.27%


Euro Pacific Advisors Management Team

Portfolio Commentary: Cross Current Buffet and Chinese Stocks Sell Off

Published: August 06, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Financial markets buffeted by cross currents

July witnessed a variety of cross currents at play in the financial markets. They are the following:

  • The spread of the more highly contagious Delta Variant and potential economic impact due to measures that may be needed to prevent its further spread.
  • Worries that the global economy may have reached peak economic performance which may lead to plateau or slip from now.
  • The ongoing debate about inflation, with more support for it likely to be transitory than turning into 1970’s high inflation.
  • Supply shortages, which saw the prices of commodities and other items rise as demand continued to outpace supply and delivery of goods remained slow.
  • Tense US-China relation, which was viewed as likely to translate into even further decoupling with huge ramifications for the global economy.
  • China causing havoc in the tech sector and broader stock markets by coming down hard on promising Chinese tech companies due to what it defines as data privacy issues.

Surprisingly, investors seem to shrug off these concerns and the US stock market made further progress with the broad-based S&P 500 rising 2.4% during July, ahead of the Dow Jones Industrial Average’s 1.3% gain.

Across the Atlantic Ocean, the main European and UK indices saw little changes but like all the major US indices have provided double-digit gains year-to-date. Meanwhile, Japan’s Nikkei slipped 5%, reducing the index’s year-to-date gains to 0.2%.

Delta Variant and the global economy

In the UK, the nervously anticipated Freedom Day on 19 July went ahead despite the rise in delta variant-related infections. Prime Minister Boris Johnson defined the opening as a move away from legal restrictions to personal responsibility.

So far, the reopening has had a favorable, but relatively muted, impact on the economy, with less movement and activity than expected – probably a result of cautious attitudes as a result of the rise in infections. Towards the end of July infections began to ease off, which bodes well for the world’s economy to shift towards more normal activities.

Source: and GISAID- Last updated August 3, 2021.

With the COVID-resurgence-fear simmered in the background, the latest World Economic Outlook, released by the IMF, has highlighted the still growing divergence between advanced and emerging market economies with the latter expected to outperform until 2022.

At a global scale, the IMF projection maintained its forecast 6% growth rate for the world, while upping the rate of growth expected from advanced economies and reducing it for emerging markets, particularly emerging Asia. The change seemed to be influenced by rates of vaccinations as having a big impact on the different macro-economic experiences across the world.

Source: IMF, World Economic Outlook- Updated July 2021

In the US, GDP growth came in at 6.5% for the second quarter – two percentage points lower than economists’ projections but seen as a solid performance for the world’s largest economy. The shortfall was ascribed to the clogged supply chains that are slowing down inventory rebuilding as we are seeing one of the lowest Global PMI Suppliers’ Delivery Times Index reading in 21 years.

Sources: IHS Markit, JPMorgan.

As an indication of the buoyant demand that is resulting in supply constraints, consumer spending soared for the second quarter, with spending on goods up 11.6% and services, including restaurants and airfares, 12% higher.

On the other hand, spending levels are being underpinned by the trillions of federal rescue money that has been introduced into the US economy.

Chinese stock market woes

The CSI300 Index continued to suffer from the surprising clampdown on technology companies, with the Chinese government citing data privacy concerns. Sentiment was also hit by the announcement of a complete regulatory overview of the $100 billion online education industry, one of the favorite sectors among foreign investors.

As a result, Tencent saw its share price sell off by 9% in its worst day in a decade, erasing $100 billion from the company’s market capitalization. Other notable company hurt in the sell-off was Meituan, a food delivery firm, which lost 18% in one day. Alibaba and JD’s stock price were no exception to the market trend either.

Investors’ favorite Chinese stocks were among the recent regulatory campaign’s casualties by the Chinese government. Source: Bloomberg.

The Chinese government has also announced that she is exploring various measures to contain the rapid expansion in these technology companies, including anti-monopoly investigations, new laws, and direct communications with top executives. While these measures and what they entails are unknown, the uncertainty it creates will keep investors away from the market in the short-term.


Despite fears of a new wave caused by the highly infectious COVID-19 Delta Variant, we foresee the global economies continue its track to recovery with growth divergence skewing towards the emerging markets in the next year.

While Chinese stocks experienced a beat down in the last months, the Chinese government’s surprising and far-reaching shifts in market regulation has highlighted that they were more concerned about managing the capital markets than scaring off foreign investors.

Historically, the Chinese tech sector has suffered from sharp reversals in the past and it has recovered strongly. Furthermore, their valuations are no higher than those of US counterparts despite growth trends and prospects remaining stronger while anticipation of monetary easing in China is growing. This is supportive of equities in the long-term.

Portfolio Actions

We want to maintain our portfolio’s current composition but be very responsive to critical changes in the market. Hence, we are tactically holding less than 10% of the portfolios’ weight in cash while refraining from adding new investment ideas to the portfolios.

The portfolios’ July performance is as followed:

Fund Name Performance
International Balanced +0.64%
International Growth +0.29%
Natural Resources +0.16%
Gold & Precious Metals +1.09%


Euro Pacific Advisors Management Team

Portfolio Commentary: Successful vaccine rollout fuels further growth optimism

Published: July 06, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Vaccination progress

Around three billion doses of COVID-19 vaccines have now been administered in what has become a race against ever-emerging variants of the virus.

The success of the vaccination campaign in the United States has resulted in it now taking top spot in the Bloomberg Covid Resilience Ranking with many travel routes opening up to those vaccinated.

Source: Bloomberg.

However, the Delta variant has become a particular cause of concerns in the UK, Europe and South Africa. The highly contagious variant is responsible for upwards of 90% of new infections in the UK.

Europe is divided on opening travel to other regions, with southern nations eager to participate in the usual summer tourism trade and northern countries, particularly Germany, loathe to risk another upsurge in infections.

Overall, the progress in vaccination campaigns combine with strict border control policy by governments have made a positive impact in controlling the infection rate. However, it is reasonable to remain cautious about the danger of new COVID variant emergence, which can surprise and cause panics in the markets.

How is the global economy recovering?

The path to full economic recovery continues apace. Vaccine progress has fed through to the uneven growth prospects of developed versus emerging economies, with Africa a particular laggard in this respect. While global growth prospects have been repeatedly upgraded this year by the likes of the IMF, World Bank and the OECD, the overall 4% plus growth this year belies an increasing divergence in growth across the globe.

The strength of the global recovery is largely attributable to a handful of major economies. The US and China, for instance, are each expected to contribute more than 25% of global growth this year and the US’s contribution is outsized relative to recent history – almost three times its 2015 to 2019 average.

Estimates for growth in Europe are also increasing. SP Global has upgraded its forecast for the Eurozone to 4.4% this year and 4.5% in 2022, noting the recovery now extends from industrial production to services as most restrictions are lifted and households start spending again.

Despite the anticipation of a strong recovery, the World Bank still expects 2022 global output to remain about 2% below pre-pandemic projections.

Corporate earnings remain resilient

Corporate earnings continue to beat expectations, contributing to upbeat forecasts for the year as a whole. Although base effects are magnifying the numbers, with the second quarter increase likely to be most pronounced, earnings growth would still be positive versus 2019 even without the base effect.

Q2 marked the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since 2016. Source: FactSet.

Based on the extent of the upside earnings surprises in the first quarter, for the year as a whole, earnings are expected to increase 35% after declining 13.1% last year – a considerable recovery.
Thus, while concerns have grown about whether an equity market meltdown may be in the offing, given the sky-high valuations, stocks could continue to rise if these earnings expectations are met.

Anyhow, our International Growth & Balanced Funds remain diversified to anticipate any unexpected market moves in the short and long-term.

Reflation trade paused, commodities saw mixed results

June saw a dialing back of the reflation trade, as concerns about inflation eased off towards month end and the technology sector once again outperformed.

This shift is evident in the Nasdaq’s 6.4% gain versus the Dow Jones Industrial Average, while the FTSE, and Japan’s Nikkei ended the month broadly unchanged.

India’s stock market put in its best performance of the year to date. There are some concerns about extended equity valuations, but the improvement in the country’s economic outlook during June as lockdown measures were removed, vaccinations continued apace and the economy opened for business again, served to sustain investor optimism.

The sectors that have taken the lead are materials and industrials, which are seen as offering the best performance potential during a cyclical economic revival. There are also opportunities in real estate, such as new generation technology parks (India has 75% of the world’s digital talent) and infrastructure.

The steep upward march in commodity prices for the first five months of the year plateaued during June, with the Bloomberg Commodities Index slipping 0.15%.

Oil prices remained strong, with the Brent Crude price gaining 8.2% to end the month above $75 a barrel. Gold lost ground as risk appetite remained in force.

The precious metal ended the month below $1,800, down some 7%, while copper’s record rally also lost ground during the month, with the price coming down 8.8%.

Will outflows from Cash support further market upsides in the third quarter? Source: BoFA Global Investment Strategy, EPFR global.

Don’t take your eyes off inflation yet

All eyes remain on any signs of inflationary pressures that could prove more entrenched than the central banks think likely. US inflation figures were higher than expectations and opinion remains divided on whether inflation will become a problem or prove transitory once the dust has settled. Federal Reserve Governor Jerome Powell called for patience, saying it wasn’t the time to make hard predictions in such unprecedented times.

However, a slightly more hawkish tone did appear in the Federal Open Monetary Policy Committee statement, with the dot plot bringing forward interest rate increases. Powell indicated that the bank would be talking about asset purchases in the meetings to come but warned against interpreting the dot plot as a forecast of interest rate moves. He stressed that any decisions around tapering would be well telegraphed and thus would be no surprise to investors.

In the immediate aftermath of his comments, markets sold off and US Treasury yields spiked. Subsequently, stock markets have rallied to end the first half of the year on a positive note.

Portfolio Actions

For now, the market has shrugged off any concerns about rising rates. However, volatility will likely return as we get close to the next Fed’s meeting in July, or at least until year’s end.

Our fund managers are therefore tactically allocating less than 10% of our portfolios’ value in cash to take advantage of any short-term opportunities arising in the future.

The portfolios’ June performance is:

Fund Name Performance
International Balanced +2.93%
International Growth -0.10%
Natural Resources -3.26%
Gold & Precious Metals -10.68%


Euro Pacific Advisors Management Team

Portfolio Commentary: Inflation continues to dominate financial markets

Published: June 08, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Monthly recap

Stock markets, commodity prices and cryptocurrencies all experienced a volatile May, first climbing strongly and then selling off sharply as inflation fears surged and then subsided.

Headline US consumer price inflation came in at 4.2%, well above the US Federal Reserve’s 2% average target. Cars and food were the main inflation drivers with the 10% month-on-month increase in the price of used cars contributing one third to the overall increase in the Consumer Price Index (CPI).

The steep increases in commodity prices have also contributed to upward price pressures globally, with the Bloomberg Commodity Index 17.2% up for the year to date. The copper price has seen the highest gains of the commodity basket due to its use in renewable energy solutions although it did retreat from highs achieved earlier in May.

Semiconductor-pull inflation?

Central bankers and economists are convinced that supply shortages in key areas of the economy are behind many of the price increases. While these may continue into the third and fourth quarters, their view is that these will not have a persistent effect on prices as manufacturers adapt to post-COVID-19 demand levels.

Chip shortages is predicted to affect GDP growth negatively

The most acute supply shortages have been in semi-conductors. The shortage has affected a broad swathe of manufacturers in industries ranging from autos to smartphones to white goods such as washing machines. Contributing to the rising price of semiconductors is the hoarding of chips by manufacturers eager to ensure they have sufficient supply in a period of uncertain demand.

As worries about supplies have mounted, so have concerns about chip production, the bulk of which occurs in a limited number of countries and by a handful of suppliers. With shortages expected to last for at least the next few months, Goldman Sachs has estimated that at least 169 industries have faced disruption with a potential 1% negative impact on US GDP this year.

Will increasing chips’ prices add upward pressure to inflation in the upcoming months?

Uncertainty in the cryptocurrency market


The assets dominating the news and proving most volatile in May were the cryptocurrencies, with Bitcoin (BTC)* holding the highest profile.

BTC price in April had shot up to almost $65,000 when Elon Musk, the CEO of Tesla, Inc., went public about making a $1.5bn investment into the world’s largest cryptocurrency. The coin then crashed after he criticized the energy consumption associated with its mining interests and announced that Tesla would be suspending payments using the Bitcoin token.

After selling off to below $32,000, the price recovered a little to end the month at around $38,000. It remains more than 350% higher than a year ago.

Causes of crypto volatility

Elon Musk has been one of the main causes of BTC’s volatility this year.

Besides Musk’s unpredictable commentary, Bitcoin’s fortunes were adversely affected by the tough regulatory stance adopted by the Chinese government when it warned financial services companies that they were not allowed to accept Bitcoin payments. China also reiterated its commitment to positioning its Central Bank Digital Currency as the digital payment of choice.

While many believes that price movement in the crypto space are indicators of future stock performance, we are skeptical about this thinking’s merit but we are open-minded about the possibility of correlation between these two asset classes.


Events in May highlighted that, until the global economy and financial markets have come out the other side of the pandemic, sentiment will remain extremely volatile.

For the rest of the year, global economic growth, which is showing very little sign of waning, may well remain a fundamental underpin for stock markets. One cloud on the horizon for corporate earnings is the impact of President Biden’s proposed tax increases, but for now the focus is elsewhere.

Portfolio Actions

The month of May witnessed positive performance by all of our funds:

Fund NameMay's Performance
International Balanced+1.44%
International Growth+1.74%
Natural Resources+3.70%
Gold and Precious Metals+10.95%

Our portfolio managers increased the cash position slightly in May. The portfolios tends to keep a small cash element, also known as the Tactical Element, to take advantage of short term opportunities in the market. Beyond that, we continue to ensure that our core strategies are well-diversified and our commodity funds track their respective benchmarks.


Euro Pacific Advisors Management Team

*Note that our funds do not hold cryptocurrency. If you are interested in trading Contracts for Difference (CFDs) that tracks BTC and ETH, you can sign up for a free MetaTrader 4 demo here.

Portfolio Commentary: Should investors be worried about inflation?

Published: May 11, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

April summary

As vaccine rollouts move forward at a promising pace in Europe and the US, and economies open up, optimism is translating into increased forecasts for 2021 economic growth. Meanwhile, the US Central Bank maintains that it is in no hurry to withdraw monetary stimulus. Consequently, many major equity indices have climbed to all-time highs and safe-haven assets such as treasuries and gold have stabilised after the steep declines of Q1.

The FTSE 100, undeterred by a large financial sector and lingering worries about Brexit, has surpassed the level at which it began last year. It is also worth noting that markets greeted the 18.3% rise in first quarter Chinese GDP with nothing more than a shrug. Coming in May, the base effects from a summer in lockdown are bound to be spectacular for equity outperformance.

Earnings season update

Most companies that have reported on the first quarter have announced their earnings per share (EPS) far above estimates – a performance attributed to both better-than-expected business performance and last year’s low EPS estimate as a result of the onset of the COVID-19 pandemic.

84% of the US companies reporting by the third week of April have beat EPS estimates. The average upside surprise was 24% – significantly above the five-year average of 7%.

Meanwhile, the majority of European companies have also reported earnings above market expectations and better sales growth than consensus estimates. Earnings surprises were delivered across various industries, with financials, consumer discretionary, materials and healthcare reporting the highest earnings growth. The industrial and energy sectors were the only ones to report year-on-year earnings declines.

It’s important to note that after three successive quarters of companies outperforming estimates, the surprise element and consequent positive impact on share prices has also diminished. In many cases, companies reporting earnings in line with expectations are now being penalized by the market. So, we remain cautious about investing in overvalued and low-quality stocks.

The base effect from a Summer in lockdown may elevate many companies to outperform high market expectation. Source: MacroOps, I/B/E/S Data from Refinitiv

What’s next for equities?

Elevating market expectation

Companies will need to continue along their current upward trajectories for increasingly optimistic analyst expectations to be met. Concerns about overvaluations and stock markets moving into bubble territory have raised the risks of an adverse event having an outsized impact on investor sentiment and global stock markets. As a result, management of volatility in investment portfolios remains as important as ever.

A stimulus-driven bull market?

If we consider the almost unimaginable size of the US stimulus package so far, the $2 trillion in unspent household savings and the additional $1.9 trillion stimulus to come, a period of roaring 20’s type-economy would seem a racing certainty. Much of the stimulus is targeted at the consumer and the lower-paid and is effectively “helicopter money” putting dollars directly into the bank accounts and pockets of individuals. As such, it is unlikely to be spent on property or the stock market which is where so much cheap money ended up during the recovery from the Great Financial Crisis in 2008.

The Fed & inflation

If stock markets were looking for an excuse to take profits, one would have thought that the prospect of an inflationary scare pushing up bond yields would provide it.

To note the recent rise in bond yields is probably an acknowledgement that there are going to be some shockingly large economic numbers coming down the road which, under any other circumstances in almost any period in history, would greatly effect equities. After a surprising move to the upside in February and March which caught bouts of stock sell-offs, 10-year US treasury rate has stabilized for now.

It is the reaction of the Fed in response to a big headline inflation figure that is really what has been bugging bond investors rather than the stock market. Fed Chairman Jerome Powell, appears to be reassuringly relaxed about the coming boom and willing to tolerate a spike well above the 2% target rate if the evidence suggests it is no more than a passing moment of economic giddiness. If the Fed can look through an inflationary boom, so can investors. As proof, major US stock markets have all touched or surpassed their February levels, shrugging off any inflation fears.

Lastly, a willingness to keep rates low by central banks in the US and UK would add even more tailwinds for equities to outperform in May and onwards.

Q1 ’21 witnessed record inflows into equities. Will the rally continue?
Source: BofA Global Investment Strategy, EPFR Global

Biden’s tax hike

The impact of the proposed US corporate tax increase is certainly a concern for some investors but we think a stable and predictable stance from the central banks may promote a longer-term commitment to equities from investors along with a renewed focus on the long-term compounding benefits of dividends in a low interest rate environment.

In the UK for example, the ongoing resumption of normal dividend payments, across companies of all sizes, will make them more attractive – particularly to foreign investors who may have been absent for a few years due to Brexit uncertainty.

Nevertheless, we will continue monitoring this event to remain cautious about its potential long-term impacts on our equity holdings. Any reactions of the market due to this new tax plan may affect our portfolios’ performance in the short-term but the long-term impacts should be limited due to our diversification.

Portfolio Actions

International Balanced & Growth Fund

Sell iShares Gold Producers (IAUP) and replace with WisdomTree Enhanced Commodities (WCOA)

This new ETF provides exposure to a broad basket of commodities including precious metals, industrial metals, energy and soft commodities such as cocoa, sugar and cotton. It uses an optimization strategy to enhance the return when rolling futures contracts.

The inclusion of industrial metals and energy makes the holding more sensitive than the precious Metals Basket to the benefits of the economic recovery and, in particular, may show a greater positive response to inflationary pressure.

A resurgence in infrastructure spending will increase the demand for many commodities over coming years but a dearth of investment in raw materials extraction is likely to see supply remain tight. Furthermore, production yields on several agricultural commodities have been falling while consumption has risen. Recent weather patterns may provide further tailwind for agricultural commodities. The safe haven attributes of gold have diminished since the US election and the rollout of vaccines, while the gold price continues to respond negatively to steepening of the US bond yield curve. Although the new holding does retain an element of gold exposure, it is reduced.

Traditionally, commodity benchmarks have been limited to the extent that they have adopted a pre-defined schedule to manage the rolling of futures contracts, failing to account for particular seasonality and suffering significant negative carry returns associated with the front end of commodity futures curves when markets are in contango. They have also missed out on potential positive carry in backwardated markets. In the Wisdom Tree Enhanced Commodity UCITS, the optimised methodology has led to commodity carry being a primary source of alpha in comparison to the traditional approach.

Note that we retain our exposure in gold miners through L&G Gold Mining (AUCO).

Add iShares Euro STOXX SmallCap (DJSC)

The purchase will provide our portfolios with exposure to small-cap Eurozone equities, which are set to benefit from the consumer boom as the vaccination rollout gathers pace and the economic recovery in Europe continues to accelerate. To add, The Euro area’s business activity indicators (PMI) improvement for a second month while low interest rate expectation serve as tailwinds for small businesses in the area to outperform in the upcoming quarters.


Euro Pacific Advisors Management Team

Portfolio Commentary: Stocks Have Momentum in Q2

Published: April 11, 2021

euro pacific advisors fund manager portfolio 

Relevant Strategies

  • International Balanced
  • International Growth
  • Natural Resources
  • Gold and Precious Metals
  • Peter Schiff

Our Commentary

Now that Spring has sprung, there is a palpable sense of optimism in the air. The hope is that the dark days of winter will prove to have been the peak of the COVID-19 pandemic in the US and Europe, and that global growth will surprise on the upside this year, buoyed by the promising pace of vaccine rollouts and economies opening up.

Vaccine progress

The race to administer vaccines to curb spiraling infections and, in particular, hospital admissions was a feature of the quarter. Globally 15 million doses have been administered but most countries have barely started. Nonetheless, the US and the UK have seen infection rates coming down significantly.

Progress in the EU has been slower. The region is battling to roll out vaccine programs fast enough and infections are rising steeply again, particularly in France where hospitals are filled to capacity.

Irrespective of regional differences, it is clear that the global impact of the pandemic will continue to impact daily life for some time. Governments will attempt to reopen their economies depending on the infection rate’s improvement.

Will Bulls prevail over Bears?

After a turbulent February and March, the US stock market has staged a full recovery and continues to hit new highs. The S&P 500 index climbed past 4,000 for the first time in its history, while the FTSE 100, hindered by a large financial sector and lingering worries about Brexit, has recovered to within 10% of the level at which it began last year.

Cyclical stocks that were hardest hit by the pandemic last year, as well as emerging market assets, have been the primary beneficiaries of the reflation trade that has prevailed during the quarter. The cyclically adjusted price-earnings ratio is now the second highest it has ever been which could be evidence of a speculative bubble. It is, however, usually the pre-emptive tightening of monetary policy that bursts a bubble, we see no sign of that coming any time soon.

Sectors with ties to the economy are poised to outperform in the upcoming quarters. Source: Columbia Threadneedle Investment.

While equity investors’ sentiment is still bearish, their worry is nothing new. A chart of the US stock market recovery from the financial crisis in 2008 looks like one continuous worry-free bull market. Even the eurozone crisis of 2012 barely registers more than a blip. In reality, we know that throughout that decade things certainly didn’t feel so calm. Looking back, there was always a long list of dreads demanding the attention of financial pundits, investors, and global asset allocators. One of them is rising treasury yields.

A closer look into bond markets

In recent daily press, the stock and bond markets have been way ahead of the mood, especially bonds.

Throughout most of the recovery, sovereign yield curves were firmly positive, forecasting a rise in interest rates that never came. Instead, they fell further to nearly zero, providing fuel for the rising stock, bond and property markets.

In the US, UK and even in Germany, bond yields have risen to where they were in January 2020. The direction of travel has been similar across all developed markets. But that is where the similarity ends. The US 10-year Treasury now yields 1.7% whereas the UK 10-year Gilt yields less than half that. The German bond is still in negative territory, yielding -0.3%. This is a big difference.

Combined with the continued strength of the US dollar, some analysts believe treasuries could yet again prove to be a tempting target for asset allocators while only a minority are anticipating the rise in yields to directly precipitate a bear market in equities.

Central Banks will keep rates low…for now

Inflows from the rest of the world would ultimately act to put upward pressure on the US dollar. This, in turn, would alleviate inflationary pressures in the US – which is what everyone seems to be worrying about.

Perhaps this explains why the US Federal Reserve appears to be so sanguine about its own inflation targets? The European Central Bank, perhaps fearing a sell-off in its own government bonds, has stepped up its bond-buying program to keep yields down. While the US can seemingly prosper with relatively higher borrowing costs, clearly the concern of the ECB is that the eurozone cannot.

The Fed Reserve doesn’t appear to worry about inflation surprises that many investors are fearful about. In March 18th’s FOMC meeting, the Fed has decided to keep rates near zero until 2023 despite the fact that the central bank now sees inflation running to 2.4% this year, above its previous estimate of 1.8%. Core PCE inflation for 2022 is now expected at 2.0% and 2.1% in 2023. Source: Bloomberg.

In addition, because rising 10-year yields push up expectations of future rate rises, the UK could also have a problem with its sensitivity to rising base rates. This is because the payments for UK mortgage borrowers are linked to short rates in a way that those of US borrowers, linked to 25-year rates, are not. The Federal Reserve may be reluctant to raise base rates back up to 1.5% but for the Bank of England it is almost unthinkable.

Whatever directions that bond yields may go, our international funds are well-diversified to be resilient against the current market’s volatility and fears.

Precious metals

Will gold rally again in April?

The prospect of inflation that so bugged investors actually came in the form of rising asset prices rather than in the cost of living. The gold price doubled in the years following the financial crisis and while there has been some profit taking since the US election, gold retains many attractions, from being a potential inflation hedge to a safe haven.

We retain exposure to the gold price as inflation, rather than Covid-19, appears once again to have been investors’ main concern since the start of the year.

Stock market outlook

Economically-sensitive stocks should continue to perform well, albeit they remain susceptible to bouts of volatility sparked by movements in bond yields. The $1.9tn US fiscal package, continued monetary policy support, rising vaccine supply and distribution, and significant amounts of corporate and consumer cash waiting to be deployed are tailwinds of equity values.

Earnings continue to beat consensus analyst estimates and conservative company guidance with earnings momentum greatest in energy, materials, financials and information technology.

Technology remains within the top five earnings momentum plays, even though mega-cap technology stocks were the most affected by the reflation trade and rise in bond yields during the first quarter. Economically-sensitive sectors, including cyclical stocks and reopening plays, could surprise further to the upside.

Moreover, after a decade of over-predicting inflation, central banks will require strong evidence of wage growth before reducing stimulus this time. This is supportive of positive stock performance in the future.

Portfolio Actions

Historically, April has been bullish for US stock markets. Despite the devastating impact of COVID-19 to the global economy, we have seen bullish sentiment remaining resilient in many stock markets. However, rising treasury yield remains a threat to Tech stocks that we cannot undermine.

We believe that our funds with exposure to US stock markets are currently well-diversified so that an unexpected performance of either the stock or bond markets may become a neutral factor to our portfolios’ performance.

Despite the Fed’s reassurance of keeping inflation under control, investors still fear that inflation may surprise to the upside in the short-term. Hence, we maintain our exposure in gold to capture both shot term and long term price appreciation of precious metals, which are affected by current easy monetary policy and expansionary fiscal policy of governments to jump start their COVID battered economy.

Lastly, we will continue to identify new trends and seeking exceptional investment opportunities to add to the growth potential of your portfolios.


Euro Pacific Advisors Management Team