Market Matters

September 16th: Deeper Delve: the level of inflation and how bonds and equities perform in concert

Bonds and their role as portfolio hedges are pivotal to portfolio asset allocation decisions. However, bonds do not always rally, when equities fall, and vice versa. Instead, the relationship is a little more nuanced than that, and is significantly influenced by how high inflation is. As per the table above, when CPI is below 2% or even negative, stocks and bonds are negatively correlated - giving rise to the 60/40 portfolio and bonds acting as a “portfolio hedge”. When inflation is 2-3%, that relationship breaks down, but beyond that, in highly inflationary times, when inflation is >4.35%, stocks and bonds are positively correlated and it is very tough sledding for both.

The correlation of stocks and bonds depending on the level of inflation (as measured by the Consumer Price Index – CPI)

Source: Thundersaid Energy

September 9th: Global EV Outlook and Lithium Carbonate

It’s widely reported that EV sales globally are on a tear. Since 2019 indeed, every year has seen a significant increase. Only in the first quarter of the year, sales grew by 25% compared to the same period in 2023. Moreover, we're predicted to see 17 million in sales by the end of 2024. Electric cars could account for 20% of total car sales by then. The IEA sees a great growth potential, especially outside of the core markets of China, Europe and the USA.

However, prices for lithium carbonate, (and inevitably heavily influenced by supply), have been going in the other direction – might sales going forwards not be at such a blistering pace?

Chinese Lithium carbonate prices have collapsed

Source: Thundersaid Energy

September 2nd: Rolling correlation between stocks and bonds

Bonds have historically been the defenders in the football teams that are portfolios. When equities fells, typically bonds rallied, providing stability in returns. That was the case for 30 years at least, until recently for nearly 30 years. However, before that, we had a 30 year periods were by equities and bonds both rallied and fell together – and during a higher inflationary regime. The question is what is before us? Do we return to a positive correlation, or was Covid inspired supply chain shortages and commensurate inflation, a shorter term diversion.

August 26th: Energy and Carbon Intensity of everyday materials

Comparing the CO2 intensity and energy intensity of materials, many used in our daily lives appear to be ‘less expensive’ in terms of the resources they take to produce. That’s to say when measure in tons/ton of Co2, kWh/ton of electricity and kWh/ton of total energy, EV batteries,. Lithium can be very costly to produce when compared to methanol or concrete

Co2 intensity of materials

Source: Thundersaid Energy

August 19th: The best of times the worst of times

perhaps if the global slowdown was to be believed, then this would support it. As global consumer perhaps pulls in its horns, Kering SA, listed in the EU and owning brands such as Gucci and Yves Saint Laurent has a had tough time compared to Walmart in the US – a discount retailer known for its miserly prices.

year performance of Kering SA versus Walmart

August 5th: Lower Rates, higher commodities?

It’s often held that as interest rates are lowered by Central Banks, and particularly in respect of the US Federal Reserve and the green back, commodity prices rally – alongside other asset classes such as bonds and property. During the last three cutting cycles – show where the purple line is falling 2001, 2008 and 2020 grains, oil, metals and Gold have all responded differently. Of course, each cycle has had different rationales for lower rates. Most obviously gold seems to respond to lower interest rates most positively, yet oil and metals, tied to the economic cycle are less likely to benefit, as having fallen in each period of lower interest rates.

Grains, Metals, Gold and Crude Oil – performance in cutting cycles

July 29th: Nearing the end of the bull? Or significant gains Ahead?

Household stock allocations have reached an all-time-a clear sign that the bull market, ongoing sine 2009, may be in its absolute late stage.

July 23th: Digital Dominoes

Chart showing 2024 YTD price action and AMD, SMCI, NVIDIA and ultimately the Nasdaq topping in sequence.

Source: ARIA

July 15th: Historical Election Year Patterns

Historically, ‘Sitting President Running’ Election years are strong performers, and 2024 has been no exception. The seasonal pattern below confirms just that. However, with now a greater degree of uncertainty, it is very possible that we fall into the ‘open field’ pattern as recorded below as the Democrats look to switch their Presidential candidate.

Seasonal Patterns in Election Years

Source: Almanac Trader, ARIA

July 8th: Extreme relative overvaluation in tech versus defensive equity sectors

Such asset allocation changes include utilities and consumer staples sectors, which have been out of favour for some time. The below chart shows perhaps that that tide has turned, and specifically markets may for a period of time take on a more defensive leadership. A housing and retail led slowdown is long overdue.

Performance and valuation discrepancies between defensive and growth sectors is at an extreme

Source: ARIA, Bloomberg

July 8th: Extreme relative overvaluation in tech versus defensive equity sectors

Such asset allocation changes include utilities and consumer staples sectors, which have been out of favour for some time. The below chart shows perhaps that that tide has turned, and specifically markets may for a period of time take on a more defensive leadership. A housing and retail led slowdown is long overdue.

US Federal Reserve Balance Sheet as Percentage of GDP

Source: ARIA, Bloomberg

July 8th: Fed has completed its liquidity drain.

Whilst central banks have been reducing their post pandemic bloated balance sheets, it has been for governments and fiscal policy to do the stimulus heavy lifting. In fact, the US Federal Reserves’ monetary support, as a percentage of GDP, is now back to pre-COVID levels, although massive infrastructure spend has offset the removal of central bank’s monetary support, and kept nominal growth upbeat.

Source: ARIA

July 1st: Regime Change

Our forwards looking macro regime investing approach, which uses growth, inflation and liquidity as a macro compass, helps to determine which of the four quads or market regimes – goldilocks, reflation, deflation or decline, best describe the current market conditions. We then reflect in our portfolio’s, asset allocations sympathetic to which quad we sit in. Each quad as you can see below has historically favoured certain assets. Our data indicates a move from Reflation back to Goldilocks – although favouring defensive low growth sectors such as utilities, consumer staples.

Quad Positioning

Source: ARIA

June 24th: 2024’s AI mini boom now outshines the TMT boom of 2000

To what degree are we witnessing a ‘mania’? As the poster boy for the bull market, NVIDIA’s recent price action is parabolic and a trend ending signal. By some historical benchmarks, such as valuation metrics, the AI bubble is bigger than its TMT brethren in 2000. AI companies have raised billions, and have spent billions on a capex cycle, creating the demand for Nvidia’s chips. As we stand, many are still awaiting a product to match the capital committed to date.

Source: Bloomberg, Apollo Chief Economist, ARIA

June 24th: 2024’s AI mini boom now outshines the TMT boom of 2000

To what degree are we witnessing a ‘mania’? As the poster boy for the bull market, NVIDIA’s recent price action is parabolic and a trend ending signal. By some historical benchmarks, such as valuation metrics, the AI bubble is bigger than its TMT brethren in 2000. AI companies have raised billions, and have spent billions on a capex cycle, creating the demand for Nvidia’s chips. As we stand, many are still awaiting a product to match the capital committed to date.

Source: Bloomberg, Apollo Chief Economist, ARIA

June 17th: AI versus TMT Boom Analog:

To what degree are we witnessing a AI fuelled stock market ‘mania’? By some historical benchmarks, such as valuation metrics, the AI bubble is bigger than its TMT brethren in 2000. AI companies have raised billions, and have spent billions on a capex cycle, creating the demand for Nvidia’s chips. As we stand, many are still awaiting a product to match the capital committed to date.

Source: Bloomberg, Apollo Chief Economist, ARIA

June 10th: Africa's Decade

Whilst sub-Saharan Africa continues to struggle with massive energy deficits, it only accounts for approximately 2% of new renewables energy spend. A continent blessed with solar irradiation resources is particularly well positioned, and in need of, realising the transition as soon as it pragmatically can.

Source: ARIA, Bloomberg

June 3rd: Chinese Bull

There are more than a few reasons to suspect the Chinese stock market has seen an intermediate, and probably long term bottom. Not least the historic spike in short positions in the Chinese FXI ETF, suggests selling had reached an extreme.


Source: ARIA, Bloomberg

May 27th: The curious case of Gold and Bond Yields

Usually rising interest rates would at least cap Gold's price appreciation. In fact, often the two demonstrate an inverse relationship. However, in the recent past, even whilst bond yields have moved higher, Gold has appreciated nonetheless - in part no doubt driven by geo-political tensions perhaps.


Source: ARIA, Bloomberg

May 20th: The 'Mag 7''s increasing influence

US large cap tech, notably Nvidia in recent times, have often accounted for much of the wide US market's performance. However, rarely have they accounted for our 30% of the market's capitalisation.


Source: ARIA, Bloomberg

May 13th: US Construction Capex Drives Interest Rates

Biden's tenure has been characterised with three major pieces of legislation, including the Inflation Reduction Act, that has generated massive infrastructure spend. Such large government fiscal stimulus tends to lead higher interest rates, although the pace has begun to slow more recently, perhaps removing one tailwind for the 'higher for longer' narrative.


Source: ARIA, Bloomberg

May 6th: Historically Stretched US Tech Valuations Relative to Wider Global Equities

The outperformance of US tech is not new news, and much of it justified by earnings. However, relative valuations have reached levels where historically, the gap has then closed. US Tech will need to continue to deliver outsized earnings, or else mean reversion will likely set it.


Source: ARIA, Bloomberg