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Weekly View – Big Splits


US prices continue to rise, with the US consumer price index (CPI) for October coming in at its highest in three decades. President Biden made a boldly worded response as inflation becomes a growing focus among politicians with their eyes fixed on next year’s midterm elections. Oil prices fell on investors’ expectations that the US could free up strategic reserves to combat energy inflation. At the same time, bond yields rose on the back of the CPI release, but the yield curve flattened and real yields touched new lows. This suggests either that bond investors still consider the inflation spike as transitory or that they see possible monetary tightening (justified by the CPI numbers) as a policy mistake that would kill the recovery—or both. Whilst bond volatility has risen, lower real rates are helping keep the VIX equity volatility index down.

Chinese markets rebounded on the news that Evergrande has avoided default (so far) on its USD bonds but, more importantly, that some mitigation measures could help other property developers and stem contagion. We continue to favour developed-market over emerging-market equities. Elsewhere, despite uncertainty about the state of the economy, sales on China’s Singles Day, the world’s largest shopping event, smashed records, underpinning the health of the Chinese consumer. China’s new commitments at Glasgow to accelerate decarbonisation as well as France and the UK’s pledge to invest in nuclear power add support to our Green Marshall Plan theme. Adding further support to the theme, the market capitalisation of electric vehicle maker Rivian Automotive surpassed USD100 bn in the wake of its IPO, making it the second-largest IPO in US history.

The Q3 earnings season closes with more evidence of resilient profits overall, but also ongoing labour shortages and supply bottlenecks. We continue to favour pricing power companies. The future looks less dominated by big conglomerates, as the US’s General Electric and Johnson & Johnson and Japan’s Toshiba all face major split-ups. We prefer to play such events through alternatives. Finally, in geopolitics, risks are rising as tensions mount from Taiwan and China to Poland, Belarus and Russia and post-Brexit UK and the EU. We like gold, which should perform well should tensions escalate.

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Cesar Perez Ruiz
Cesar has more than 25 years’ experience running investment strategies in both wealth and asset management, with a strong bottom-up equity portfolio management track record and substantial multi-asset class investment strategy expertise.
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