And finally, crash panic: After June was still going well on the stock exchanges, August was difficult, and prices came back in September. At the end of the past quarter, there was fear that the gradual collapse of the Chinese Evergrande Group could trigger a conflagration à la Lehman Brothers.
This danger has now eased, but the third quarter leaves us with mixed feelings. The most important developments – and what could result from them:
1. A newly recognized dependency: China’s real estate
US economist Kenneth Rogoff already stated in 2020 that 15 percent of China’s economy consists of the real estate sector and that this value rises to almost 30 if you include the dependent industries. These figures reached the awareness of the financial markets by mid-September at the latest. The impending insolvency of the China Evergrande Real Estate Group brought an already bumpy quarter to an uneasy final phase.
Source: Peak China Housing, Working Paper, Kenneth Rogoff and Yuanchen Yang, August 2020.
The financial markets now also know better who they are dealing with at Chinese real estate companies. For years, real estate companies have made money in advance sales for properties that have not yet been built in order to cover costs. Loans were taken out to pay interest and taxes. Head of State Xi Jinping’s stricter capital requirements last year put companies in a tailspin. Xi sees the real estate market as an unwelcome haven for inequality. Property in Shanghai is three times more expensive than in New York.
Xi will prevent a major crisis in China’s real estate sector. The Evergrande debacle shows, however, that China’s economic power has become more shaky. This will be one of the big topics of 2022.
2. A well-known dependency: the Fed
August is an unpopular month for stock market traders, and many fear September too. October could also be restless. But the very subjective monthly belief of the markets alone does not explain the turbulence. The Federal Reserve remains a major source of unrest, even if it intends to be exactly the opposite with its cautious communication.
The reduction in bond purchases – the so-called tapering is to begin in November – would only be the prelude to an interest rate hike. The “FedWatch Tool” of the Chicago Mercantile Exchange (CME) calculates the probability of an interest rate hike for the first time for June 2022 on the basis of forward transactions – albeit still a small one. For the first time, the tool calculates a probability of less than 50 percent for maintaining the current interest rate of 0 to 0.25 percent for November 2022.
For the meeting of the FOMC Open Market Committee on December 14, 2022, an interest rate hike of 25 basis points will be the most likely outcome.
When will the Fed raise interest rates and by how many basis points?
|November 2, 2022||48.5 percent||39.6 percent||10.6 percent||1.2 percent||0.0 percent||0.0 percent|
|December 14, 2022||24.4 percent||44.0 percent||25.1 percent||5.9 percent||0.6 percent||0.0 percent|
|February 01, 2023||21.0 percent||41.2 percent||27.8 percent||8.6 percent||1.3 percent||0.1 percent|
Expectation of interest rate hikes by the Fed (data: CME Group).
The nervous discussions about tapering and rate hikes at the end of 2022 or beginning of 2023 actually only show one thing: the markets know more than ever that they are living with the loose monetary policy with “borrowed time”. You will be able to calm yourself down for a long time with the assurance that the interest rate hike is not imminent. They are helped by the fact that inflation expectations have not yet shown any signs of panic despite the high inflation rates in the third quarter. The markets are not yet properly prepared for the actual moment of the rise in interest rates.
3. Swiss Stock Exchange in the third quarter: Is a great love cold?
Despite expectations of rising interest rates and a new rise in US bond yields to 1.4 percent, banks continue to focus on growth. At the end of the quarter, the UBS Chief Investment Office in Asset Management wrote that investors on the stock market should continue to focus on high-growth companies. In other words, companies with fast-growing markets that are on a strong expansion course and whose share prices can withstand high valuations – in normal times.
The yield on ten-year US Treasuries (chart: Ycharts).
The Swiss growth share par excellence is Logitech. However, this is also the weakest SMI share in the period from June to September and at the same time the most recent addition to the Swiss benchmark index. Logitech from western Switzerland replaced Swatch, also from western Switzerland, last week. After a hesitant forecast in July, home office winner Logitech fell out of favor with investors.
This makes Logitech an interesting entry-level stock: But the markets’ love for this once celebrated stock seems to have weakened significantly. Or at least the market isn’t so sure of his love right now. This is symptomatic.
The prices of SMI shares in the third quarter of 2021 (graphic: Bloomberg).
The three-month chart also shows that more cyclical corporations like Holcim and Richemont were heavily sold on the stock market. In the past few weeks, there has been considerable disagreement between investment managers, equity strategists and fund managers as to whether to bet on growth, value stocks or cyclicals.
It is currently difficult to read a pattern for the next few weeks and months from market movements. At least there is one thing in common: energy and raw material commitments are in greater demand again. And cautious analysts recommend going for lower valued and more “inflation-proof” stocks.
4. Cryptos: Bitcoin obscures the view of other coins less and less
Superficially, everything revolves around Bitcoin when it comes to cryptocurrencies. The introduction of Bitcoin as a means of payment alongside the dollar in El Salvador on September 7th was celebrated by fans as the triumph of decentralized cryptocurrencies. A new crackdown against cryptos in China in the last week of September also showed how suspiciously states and central banks look at Internet currencies.
With Bitcoin, however, the market share fell from over 70 percent to just under 50 percent within a year. There is more and more interest in cryptocurrencies that are backed by a network or a platform. With a lot of self-confidence, Ethereum founder Vitalik Buterin said in August that Ethereum’s open-source software had much better properties for a decentralized transaction system than Bitcoin. In a direct comparison, the Coin Ether 2021 has so far developed significantly better than the top dog cryptocurrency.
Bitcoin (red) and ether (green) prices over the past twelve months (chart: cash.ch).
The Ethereum network on which the Coin Ether runs enables smart contracts to be set up for a large number of applications. Ethereum and thus also the Coin Ether got a boost from the steadily increasing interest in decentralized finance (DeFi) and authenticity checks stored on the blockchain in the form of non-fungible tokens (NFT). Equipped with this advantage, Ether could over time eclipse Bitcoin as the most important cryptocurrency in the world.
Of the currently ten largest cryptocurrencies – Bitcoin, Ethereum, Cardano, Uniswap, Dogecoin, Binance Coin, Polkadot, Tether, Ripple and Bitcoin Cash – Uniswap and Binance Coin also run on the Ethereum platform. Cardano is trying to establish itself as an open blockchain for payment transactions and also wants to enable the use of smart contracts there. Polkadot, a multichain that aims to make various blockchains for transactions interoperable, has also aroused interest recently. Polkadot is set to become an alternative to Ethereum.
In terms of price development, however, the more innovative coins continue to resemble Bitcoin. Bitcoin fell from an interim peak at $ 52,550 on September 6 to $ 43,570. The total market capitalization of cryptocurrencies excluding Bitcoin has developed in pretty much exactly the same way. An exciting – but hardly predictable – development for 2022 would be if this were to be decoupled.