The law of diminishing returns

Central banks to the rescue. We warned three months about a flock of doves re-turning to the markets. Their return has proved bullish for corporate bonds and equi-ties, as we expected, and vindicated our recommendation to cut exposure to cash.

  • Investment View

Highlights:

  • Central banks are about to press the ‘easing’ button again. But the likes of the ECB and BoJ are facing the law of di-minishing return, i.e. it is not clear that their actions will effectively re-anchor inflation expectations at higher levels. If, by cutting rates to negative and buying loads of assets they have not succeeded, why would they now?
  • With bond yields going lower for longer, investors too face the tough reality of diminishing returns. A record amount of bonds trade below zero (YTM), and the hunt for yield is raging. Except for those predicting a global downturn – we don’t – the investment choices are clear: equities and credit remain preferred habitat.
  • Most importantly the US economy is starting to wobble. This is both a concern and a blessing. As President Trump realises that tariffs are causing self-inflicted pain, he is likely to turn less aggressive as he prepares for the US presi-dential election, in just a bit more than one year. This, and reflation policies, should keep the global economy afloat.
  • If tariffs don’t work, why not trying a currency war? We are bearish the USD, and that should be good news to EM markets.

Download the full publication below

THE LAW OF
DIMINISHING RETURNS
DOWNLOAD
PDF
MORE INSIGHTS

RELATED INSIGHTS

READ NOW
COVID-19 FACTS & FIGURES
According to the IMF’s Managing Director, strong international cooperation on coronavirus vaccine could speed up the world economic recovery and add $9 trillion to global income by 2025. A WHO trial found that Remdesivir, Hydroxychloroquine, Lopinavir and Interferon have little or no effect on hospitalized Covid-19 patients. Gilead Sciences has questioned the findings of the WHO study saying data appeared inconsistent.
READ NOW
INCORPORATING QUANT SIGNALS INTO EU EQUITY SECTOR/STYLE STRATEGY: MAINTAIN A TILT TO CYCLICALS AND VALUE
We present an update of our proprietary equity valuation tool, based on quant models. It provides indications of over- or undervaluation for different sectors and styles of European equities, which is further enriched by our qualitative analysis. Currently, among European equity sectors, financials, energy, telecoms, and autos look undervalued while Pharma, utilities and software appear overvalued.
READ NOW
CHINA’S RECOVERY CONTINUED BUT A BIT SOFTER THAN EXPECTED
China's economic recovery continued in Q3 2020, although a bit softer than expected. Real GDP growth rose to 4.9% yoy, slightly below the Reuters consensus expectation of 5.2% yoy, but still a substantial upturn from the 3.2% yoy in Q2. On a quarterly base, growth dynamics softened to 2.7% qoq, after 11.7% qoq and -10% qoq in the two previous quarters.
MORE INSIGHTS