Greetings from a Millennium Trader to the Millennial Traders!
The second quarter of 2021 continued much of the same trends as the first quarter: Equities of small and mid-sized companies, as well as more cyclical industries and slow-growth segments (keyword “value”), outperformed. Shares of developing countries saw a strongly differentiateddevelopment: Shares of commodity exporters such as Saudi Ara-bia and Russia saw strong price gains, whereas Chinese shares could not reverse the negative trend since February and selectively even traded in the red. Even the celebrations for the 100th anni-versary of the founding of the Chinese Communist Party could not ignite any price fireworks here.
The “stay-at-home stocks” and shares of high-quality and less cyclical companies, which were neglected in the first quarter, saw strong price increases in May and June such that we can no longer speak of “hibernation” here. It would have been a big mistake to say goodbye to these stocks for short-term considerations, as they would now have to be bought back more expensively.
DFO Reflections Q3 - 2021
The 3rd quarter largely followed the developments of Q1 and Q2. Depending on the vaccination progress of a given country we can see higher or lower levels of normalisation in the economic activity. But overall, it appears that the global economy is on a recovery path. Most recently we could witness a spike in energy prices as well as transportation costs, which in some cases went up ninefold versus 2020.
All the above triggered an adjustment in inflation expectations as well as overall interest rate levels. Especially medium to long term interest rates adjusted upwards from less than 1% at the beginning of the year to about 1.5%, at this moment (reference: 10 Year U.S. Treasuries). In March we even saw 1.75% for 10 Year U.S. Treasuries.
While falling interest rates means rising bond prices, rising inte- rest rates always means the opposite: falling bond prices! Currently there’s a big discussion whether recent inflation spikes are temporary and will revert to historic CPI averages of close to 2% p.a.; or whether we need to brace ourselves for a permanent rise in consumer prices. Unfortunately, we will have to wait for a few more quarters to draw the right conclusions.