Eran Peleg, Chief Investment Officer     It Ain’t Inverted Till It’s Inverted     There has been much discussion about the slope of the US yield curve. And for a good reason -- the yield curve has flattened considerably in recent years and is now only slightly positively-slopping. An inverted (negatively-slopping) curve, if we were to get there, has historically been a good predictor of economic recessions. Therefore, the concerns are legitimate, the risk is real.         Having said that, the curve is still positive and has yet to invert.…
            Eran Peleg, Chief Investment Officer     “In a world deluged by irrelevant information, clarity is power.”          This is the brilliant opening sentence of Yuval Noah Harari’s new book, 21 Lessons for the 21st Century.    Sapiens, Harari’s first bestseller, focused on the past. Homo Deus, his second, investigated the distant future. Now, through a collection of essays, many of which are built on articles previously published in the media (the New York Times, Bloomberg, etc.), his new book sets out to examine the present.    The book not only…
              Eran Peleg, Chief Investment Officer    All is Fair in Love and War     Since arriving in Office, US President Trump has adopted a confrontational approach to foreign policy. International cooperation -- that has increasingly dominated the world order since World War II -- has been thrown out of the window. As we have written before, this is a general cause for worry.   However, when it comes to current trade tensions with China, it is easy to understand why the US has been adapting its approach. China’s economic success over the past…
              Eran Peleg, Chief Investment Officer      Wealth Concentration Can Be Hazardous     General Electric (GE), once the world’s most valuable company and the last 19th Century member of the Dow Jones Industrial Average, was just removed from the well-known market index. Wow -- the end of an era!   It is a well-known phenomenon that wealth is significantly reduced or destroyed in the 2nd or 3rd generation of wealth owners. According to a study conducted by Williams Group Wealth Consultancy, 70% of wealthy families lose their wealth by the second generation and…
              Eran Peleg, Chief Investment Officer      A Balancing Act             Global investors have been nervous and financial markets have been volatile. Investor concerns have focused on rising interest rates, global trade wars and somewhat softer economic activity data. But, in recent days, companies have started to release their Q1 financial results – and they are pretty good.   In the US, with 53% of the S&P 500 companies reporting actual results for Q1, 79% of companies had a positive earnings-per-share surprise, beating expectations. This rate, if it holds,…
              Eran Peleg, Chief Investment Officer      Something Completely Different       You could have expected a completely different outcome.   Given the equity market sell-off, concerns about trade wars and rising US rates, you might have expected emerging market stocks to significantly underperform their developed market peers. Each of the above factors alone would typically be particularly negative for emerging market assets. Here we got them all together. Could not be a good thing.   And yet, emerging market equities have held up very well. Since January 26th, when the equity market…
              Eran Peleg, Chief Investment Officer      The Name is Bond…     The word ‘bond’ reflects binding security, firm assurance. For this reason, Dictum Meum Pactum (‘My Word is my Bond’ in Latin) was historically the motto of the City of London, the capital’s financial center. The Latin expression appears on the London Stock Exchange’s coat of arms. It originates from back in the days where financial transactions were made with no written pledges, no documents, and no contracts. The financial instrument ‘bond’, an instrument of indebtedness, is normally considered to be a safe,…
              Eran Peleg, Chief Investment Officer      Sweden’s Housing Market – A Sign of Something Bigger?         Prices of many real and financial assets around the world have been going up in recent years. They have been fueled by the zero interest rate, ‘easy money’, economic environment. Housing prices have been no exception. As most people are aware, housing prices in many markets, especially in the larger cities, have become quite pricey.   Sweden’s economy is not subject to much media or research analysis. However, it is worth noting that after…
              Eran Peleg, Chief Investment Officer      For investment professionals, the year-end holiday season comes with an additional ritual. Perhaps it is not as fun as some others, but nonetheless it is often quite fascinating. I am talking about reading the annual investment outlook reports issued by global financial institutions and asset managers. In recent weeks, I have received and read several of the ‘2018 Investment Outlook’ strategy reports. They are all fairly optimistic about the current economic environment and what it means for growth-oriented financial assets. They mention the fact that for the…
              Eran Peleg, Chief Investment Officer        Investing is the act of committing money or capital to an endeavor (a business project, real estate, etc.) with the expectation of obtaining an additional income or profit.  (Investopedia Definition)       In the Eurozone, low-risk investments, like cash and short-dated bonds, are in negative interest-rate/yield territory. German government bond yields are negative out to seven year maturities. The truth is that nominal yields don’t really matter – it is real, inflation-adjusted, returns that investors should care about.   REAL YIELD = NOMINAL YIELD –…
 Eran Peleg, Chief Investment Officer         With S&P 500 trailing price-earnings multiple around 20x (on an operating EPS basis. On a reported GAAP basis, it is around 24x), equity market valuations are around the levels witnessed when US Federal Reserve Board Chairman, Alan Greenspan, made his famous ‘Irrational Exuberance’ speech during the late 1990s tech bubble.   Equity valuations, especially in the US, are fairly high. However, it is worth noting that as far as ‘exuberance’ warnings are concerned, these tend to be fairly bad market-timing indicators. Greenspan, for example, made his comments in December 1996, while…

London Calling

06.11.2017
 Eran Peleg, Chief Investment Officer       The ice age is coming, the sun's zooming in Meltdown expected, the wheat is growing thin Engines stop running, but I have no fear 'Cause London is drowning, and I live by the river -        “London Calling”, The Clash   The Bank of England raised rates for the first time in a decade. The last time it did so was in July 2007, just before the Great Financial Crisis. Interest rates were very low since due to the deflationary, weak growth environment we have been in.     On the face of…
 Eran Peleg, Chief Investment Officer     Prior to World War I (WWI), the world’s largest, richest and most dominant imperial power was Great Britain. The British Empire famously occupied one quarter of the globe. British colonial possessions in the late 1800s included Canada, India, Ceylon (Sri Lanka), Burma, Australia, New Zealand, Hong Kong, several Pacific and Caribbean Islands, South Africa, Rhodesia, Egypt and other parts of Africa. After the Great War, the world began to change and the Empire started to lose ground (ultimately, it lost its Superpower status at the end of World War II).   World War…
 Eran Peleg, Chief Investment Officer   In case you haven’t noticed, things have changed. We are witnessing a global growth upswing that we have not experienced in several years. In previous years, growth was very meager. Some countries were in or near economic recession. Corporate earnings were dropping in many regions, including in the US. But growth – of the more powerful, globally-synchronized kind – is back. The OECD is now forecasting that the global expansion will accelerate this year and next, to 3.5% and 3.7%, respectively, the fastest pace since 2011. In addition, for the first time since 2007,…
 Eran Peleg, Chief Investment Officer Land of Confusion   I must've dreamed a thousand dreams Been haunted by a million screams But I can hear the marching feet They're moving into the street.   Now did you read the news today? They say the danger's gone away But I can see the fire's still alight There burning into the night.   There's too many men Too many people Making too many problems And not much love to go round Can't you see This is a land of confusion….   From “Land of Confusion” - Genesis     Price volatility in…
 Eran Peleg, Chief Investment Officer   When the Pessimism of Others Becomes Your Friend   In recent weeks, a new fad has emerged amongst market strategists, hedge fund managers and media market commentators – everyone seems to be warning against a looming major market correction.   In contrast to moderate market pullbacks, that can happen anytime for the most trivial of reasons (especially in an overbought market), major market corrections are less frequent and will occur when market participants least expect them. They are sharp because market participants do not see them coming. They are not prepared for them. A…
 Eran Peleg, Chief Investment Officer Passive versus Active Management: A False Dichotomy   2016 was a record year of inflows into index-tracking, passive, funds -- over $430bn -- and the share of US equity assets held through ETFs and index funds rose to more than a third of the total, thus doubling their share over the past ten years.   It is not a coincidence that one of the most heated investment debates today centers on active versus passive investing. Passive strategies usually come in the form of index-tracking exchange-traded funds (ETFs) or mutual funds, charge lower fees and aim…
 Eran Peleg, Chief Investment Officer French Presidential Election: What Will Happen if Two Euro-Sceptic Canidates Make it to the Second Round?   The first round of the French presidential election is scheduled for Sunday.   If you examine the recent evolvement of opinion polls, you will notice a significant development: Melenchon, the far-left candidate, has strengthened considerably. See the rising red line in the chart below.                                                                     …
 Eran Peleg, Chief Investment Officer Europe is Doing Better Than You Think      In recent months, there has been much focus on the improving outlook for the US economy. Prices of US growth-oriented assets have move up swiftly to reflect this rosier scenario.   But the reality is that economic activity is looking better outside the US as well – a prime example is Europe.   The European region suffers from many structural problems which put a lid on the long-term trend rate of growth. However, this does not mean that it cannot enjoy cyclical upswings in economic growth.…
   Tsvi Mark, Analyst Green Bonds: A Win-Win     Finance has been growing greener and greener. The sprouting of green finance is probably best displayed in the budding world of green bonds. Green bonds are not named such because they come in a different color, but rather because they are issued to back environmentally-friendly initiatives or firms.  To receive the label of a Green Bond, the issued bonds must either come from a “green” company (companies focused exclusively on environmental issues – for example, one that builds and installs solar panels for homes and business) or from a company…
 Eran Peleg, Chief Investment Officer Are Investors Too Compacent About Fed Rate Increase?    Economic activity and inflation data have been on the rise recently. Not just in the US, but more globally. On several occasions recently, Fed officials have made it clear that they are looking to increase rates. However, investors, who are probably looking mainly in the rear-view mirror, do not believe them. Fed Funds futures (market participants' future expectations) currently reflect a shallower path of rate rises than Fed officials are predicting. In the short-term, for example, interest-rate markets are reflecting only a 40% probability of a…
 Eran Peleg, Chief Investment Officer The Writing Is On the Wall     The Berlin Wall came down in 1989. Since then, we have enjoyed a relatively stable geo-political environment. We have had wars from time to time. However, these tended to be regional in nature and did not involve or result in significant tensions between the leading global powers. In reality, there was really only one global power – the United States of America.   Things may be changing. China and Russia are increasingly challenging the position of the US. A few days ago, at an international conference, Mr.…
 Eran Peleg, Chief Investment Officer The Odds Are Stacked Against a Trump Re-Election in 2020     I am not a political analyst. However, I am the student of economic history. And at least as far as economics go, the odds seem stacked against a Trump re-election in 2020.   How is that? The argument runs as follows:                                                                                                                                                                                                                                          In recent US history, an economic recession typically occurs every 5-10 years. In the 50+ years observed (see table below), we never had more than 10 years passing between two subsequent recessions. It has now been nearly 8 years since the…
 Eran Peleg, Chief Investment Officer Is the Russian Bear Now a Bull?     The Russian equity market and the Ruble have strengthened considerably in 2016 – up around 30% and 15%, respectively. That said, from a very big picture perspective, the Russian equity market has been down in recent years, underperforming its global counterparts. The main factors driving it down have been:   Geopolitical considerations / economic sanctions Declining growth and rising inflation Low commodity prices   Russia (in USD terms) versus global equities over 10 years:                        …
 Eran Peleg, Chief Investment Officer When is the Pound Cheap?     The British Pound has dropped significantly in recent months, since the Brexit vote at the end of June. But is it actually cheap?   Economic models can guide us in establishing whether currencies are cheap or expensive. According to Purchasing-Power-Parity (PPP) models (https://en.wikipedia.org/wiki/Purchasing_power_parity), the answer is YES.                                                                                  …
 Eran Peleg, Chief Investment Officer The Risks of Complacency     The VIX index stands at 11.4%.   The VIX is a measure of the implied volatility of S&P 500 index options. It reflects investors' forward-looking expectations of US stock market volatility. When investors expect high volatility and are nervous, VIX rises. When they are calm, it falls.                                                                                    …
 Eran Peleg, Chief Investment Officer Higher Bond Yields: Are We There Yet    First some illustration from the Simpsons: https://youtu.be/a8k1eTEw4rQ   Bond yields have risen recently on the back of increased growth, inflation and interest rate expectations. The benchmark 10-year US Treasury bond yield has shot up to 2.59% from as low as 1.37% in July. Around a third of this move, up to around 1.8% yield, was an unwinding of the overbought conditions that prevailed after the June-end Brexit vote when investor fear drove up prices of safe-haven assets. However, the remaining two-thirds (from 1.8% to around 2.6%) occurred…
 Eran Peleg, Chief Investment Officer Will the Italian Referendum Deliver Another Shock to Financial Markets? A constitutional referendumwill be held in Italy on Sunday, 4th December, 2016.Voters will be asked whether they approve of amending theItalian Constitutionto reform the appointment and powers of theParliament of Italy, as well as the partition of powers of State, Regions, and administrative entities. Should the voters approve the bill, it would achieve the most extensive constitutional reform in Italy since the end of the monarchy. In accordance with Article 138 of the Constitution, a referendum was called because the constitutional amendment had not been…
  Eran Peleg, Chief Investment Officer   “Volatility is a statistical measure of the dispersion of returns for a given security or market index… Commonly, the higher the volatility, the riskier the security.” (Investopedia Definition)   After a quick July rebound from the Brexit vote sell-off (the referendum took place on June 23rd), financial markets settled back into their range-trading, low-volatility, state. This has been the state of the market for two years now, since the summer of 2014 -- only to be interrupted at times by swift, fairly unexpected, sell-offs. Volatility should be a reflection of the level of certainty (or uncertainty) about…
Cybersecurity is everywhere. Hardly a day goes by without another security breach being reported. Large retailers, small municipal governments and even individual private citizens are all equally targeted by computer hackers. It has become so common that the smaller breaches are often relegated to the back pages of the news. Many serious breaches get no coverage by the mainstream media at all, and are left for the bloggers and the tech news sites to cover. It seems that only the largest scale cybersecurity breaches and leaks make it to the front page.    The increasing number and frequency of these events…
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