View from the EDGE

October View from the EDGE®

View the PDF version here. [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/10/08213426/View-From-the-EDGE-October-2021.pdf] [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/10/08213234/Oct-Risk-Chart.png]Equities: The outlook for U.S. equities has improved somewhat – though not uniformly so.  Valuations continue to be near all-time highs for large-cap growth U.S. equities, which have benefitted from an extended regime of ultra-low interest rates. However, cyclical, value-oriented stocks offer more compelling valuations. In addition, should interest rates continue to rise, these stocks could prove to be less vulnerable to a somewhat higher interest rate environment and could perform well.  At the next FOMC meeting in November, the Fed may announce the timing and scale of its tapering of asset purchases.  For now, markets have seemingly taken the Fed's presumed course of action somewhat in stride. However, as with prior tapering announcements, markets could still sell-off on this news.  3EDGE’s model research will focus on any signs of a regime shift driven by potential changes in inflationary expectations and monetary policy over the coming months. Japanese equities enjoyed a sharp rally in September on the heels of the resignation of Prime Minister Yoshihide Suga, as market participants had been hoping for a fresh face with a different approach to handle the stalled economy and lackluster coronavirus response.  Instead, in a surprise result, Fumiko Kishida, a former foreign minister, won the election and he has begun to discuss policies unfavorable to the stock market, such as higher capital gains taxes.  Consequently, Japanese equities have suffered another setback.  However, the new leadership may still tackle these issues more effectively, and it is also possible that the Bank of Japan may add additional stimulus measures to the Japanese economy. The outlook for European equities has softened somewhat. As Europe experiences its fastest increase in prices in over a decade, risks from increasing inflation may result in more dramatic tightening by the ECB to control inflationary pressures, thereby reducing monetary stimulus, which could negatively impact European equities. In addition, Europe could be facing a brutal winter with the potential for shortages of natural gas leading to spikes in energy costs – further exacerbating their inflation problem. India equities continue to exhibit positive investor psychology alongside favorable economics, most notably the steepening of the yield curve measure.  Accommodative monetary and fiscal policies are expected to continue heading into the upcoming elections. The outlook for China equities remains unfavorable. Recent policy restrictions by the Chinese government have increased investor uncertainty.  In addition, insolvency issues with the Chinese property development firm Evergrande and other Chinese real estate developers have impacted the cost of borrowing for many Chinese companies. Recently, China’s high-yield bond rates exceeded 15%, higher than during the financial crisis of 2008 and well above the U.S. high-yield rate of roughly 4%.  While the Chinese government has begun to explore approaches involving asset sales and debt restructuring, the repercussions could further weaken an already slowing Chinese economy. Fixed Income The risk/return trade-off in U.S. Treasuries remains uncompelling as the entire Treasury yield curve continues to yield less than the expected inflation rate.  The recent rise in yields underscores the risks associated with longer duration fixed-income investments.  Also, any rise in the 10-year U.S. Treasury yield, possibly driven by higher inflationary expectations or Fed tapering, would result in the depreciation of bond principal. With credit spreads near all-time low levels, the yield associated with investment grade and high yield corporate debt markets present unattractive risk-return trade-offs.  Not surprisingly, corporations have taken advantage of the extraordinarily low interest rate environment to issue more debt.  For example, $786 billion of junk bonds have been issued in the U.S. thus far in 2021, surpassing the previous record for an entire year set in 2008.  Should the global economy slow from here, corporate spreads could widen, causing painful losses. Although Gold has struggled thus far in 2021, it remains relatively attractive and continues to be supported by negative real yields (nominal yields less expected inflation). In addition, concerns regarding peak growth and an uneven recovery in labor markets could delay the Fed's plans to taper.  However, should inflation prove to be more persistent than transient, the Fed will have to perform a delicate balancing act to solve for their dual mandate, i.e., monetary tightening to control rising inflation may slow growth while continued loose policy to encourage growth may raise inflationary expectations. Commodities maintain a somewhat positive outlook.  Global supply shocks continue to push prices higher across the commodities complex, thereby increasing the upside risk to the global inflation outlook. The price of a barrel of oil recently reached its highest level since 2014, and surging natural gas prices have also raised the prospect of increased demand for oil products as winter approaches.  At the same time, a potential slowdown in China may somewhat counteract this surge as China's demand for raw materials has been a significant growth engine for the global economy. VFE_Backpage_Sep2021 [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/09/10210141/VFE_Backpage_Sep2021.png]The post October View from the EDGE® [https://3edgeam.com/october-view-from-the-edge-2/] appeared first on 3EDGE Asset Management [https://3edgeam.com].

September View from the EDGE®

View the PDF Version here. [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/09/10152537/View-From-the-EDGE-September-2021.pdf] [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/09/08210947/Asset-1.png]Equities: The outlook for U.S. equities remains mixed. Valuations continue to be stretched to historically high levels, sparking comparisons to bubbles that have occurred throughout market history. While the Fed insists that recent inflationary pressures will prove temporary, inflation could last longer and become more problematic during the remainder of 2021 and beyond.   The U.S. equity market appears to be driven by continued Fed-driven liquidity and a continuing flow of cash and margin dollars from retail investors in a wave of momentum-based investing.  Concerns regarding the timing and size of the Fed’s tapering of its $120B per month of bond purchases (quantitative easing) and the corresponding market reaction highlight risks for U.S. equities. Japan equitiesrecently reached a five-month high and are continuing to benefit from relatively attractive valuations, positive investor behavior and market momentum. These positives may have manifested as a result of the recent announcement that Prime Minister Yoshihide Suga will not seek a second term, since he has been criticized for his handling of the COVID-19 pandemic in Japan.  Lastly, there exists a real possibility that the Bank of Japan may feel compelled to add additional stimulus measures to the Japanese economy. European equities which have rallied year-to-date continue to be supported by monetary stimulus from the ECB and positive investor behavior.  However, a risk to this outlook is the continued upward pressure on European inflation which may result in the ECB changing tack by tightening their policies sooner than previously anticipated. The outlook for China equities remains mixed.  There is a good deal of uncertainty among investors about recent policy decisions by the Chinese government and the potential negative effects that such policies may have on both the Chinese and the global economy. However, much of this may already be priced into Chinese equities and steepening yield curve measures could be a positive sign for the region. India equities which recently reached record highs, continue to be bolstered by positive investor psychology, declining short-term interest rates and a commensurate steepening of the yield curve.  Accommodative monetary and fiscal policies are expected to continue heading into the upcoming elections. Interestingly on the geopolitical front, the situation in Afghanistan could bring the U.S and India closer together since Pakistan is an ally of the Taliban. Fixed Income: The risk/return trade-off in U.S. Treasuries remains uncompelling as the entire Treasury yield curve continues to yield less than the expected rate of inflation. Credit spreads remain near all-time low levels – risks of a rapid unwind combined with the very small extra yield pick-up relative to Treasuries suggest an unattractive risk/reward profile for corporate bonds. In addition, should the global economy slow from here, it could cause problems in the high yield bond markets, and we could see high yield spreads widen. Real Assets: Although Gold has struggled thus far in 2021, it remains a relatively attractive asset class and continues to be supported by negative real yields (nominal yields less expected inflation). In addition, concerns around the Delta variant, peak-growth and an uneven recovery in labor markets could delay the Fed’s plans to taper and lead to higher gold prices. Commodities are now less attractive than they have been in previous months amidst an increase in negative investor psychology towards the asset class.  Investors may also be concerned about the recent restrictive government policies in China which may slow the Chinese and overall global economy thereby decreasing demand for commodities.  However, commodities remain attractive in the medium to longer-term since they remain relatively undervalued particularly compared to U.S. equities. About 3EDGE 3EDGE Asset Management, LP, is a multi-asset investment management firm serving institutional investors and private clients. 3EDGE strategies act as tactical diversifiers, seeking to generate consistent, long-term investment returns, regardless of market conditions, while managing downside risks. The primary investment vehicles utilized in portfolio construction are index Exchange Traded Funds (ETFs). The investment research process is driven by the firm’s proprietary global capital markets model. The model is stress-tested over 150 years of market history and translates decades of research and investment experience into a system of causal rules and algorithms to describe global capital market behavior. 3EDGE offers a full suite of solutions, each with a target rate of return and risk parameters, to meet investors’ different objectives. VFE_Backpage_Sep2021 [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/09/10210141/VFE_Backpage_Sep2021.png]The post September View from the EDGE® [https://3edgeam.com/september-view-from-the-edge-2/] appeared first on 3EDGE Asset Management [https://3edgeam.com].

August View from the EDGE®

View the PDF Version here. [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/08/13005105/August-View-From-the-EDGE-1.pdf] [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/08/06161838/August-VFE-Chart-01.png]Equities: U.S. Equities: By our measures the U.S. equity markets remain significantly overvalued as they continue to hover around all-time highs which is indicative of lower expected returns on average over the longer-term. While Fed Chair Powell indicated at the June FOMC meeting that the time had come to begin to consider tapering the Fed’s current $120 billion in monthly bond purchases (a potential negative for the markets), he also indicated that it was too early for the Fed to consider raising short-term interest rates. Continued easy monetary policy may be supportive of further gains in U.S. equities. However, weaker than expected growth in the second half of the year due to continuing supply chain disruptions, labor shortages and the recent surge in the coronavirus Delta variant may collectively prove to be a net drag on the economic rebound. Flattening yield curve measures and a recent widening of our high yield credit spread measures heightens the risk of an equity market correction in the near term. Japan Equities: Based on our current valuation measures Japanese equities remain relatively attractive on a longer-term basis. However, a recent deterioration in our high yield credit spread measure alongside the potential for negative investor psychology has indicated that Japanese equities are currently somewhat less attractive. European Equities: The European equity markets remain relatively undervalued, particularly in comparison to U.S. equities. Moreover, monetary and fiscal policies in Europe continue to be highly accommodative helping to bolster the region’s economic rebound making European equities somewhat more attractive. China Equities: Chinese equity markets were shaken recently by the Chinese government’s crackdown on technology companies and the large private for-profit educational tutoring sector. Negative investor psychology, recent flattening of the yield curve, and widening of our high yield credit spread measure are negatives for the Chinese equity market. India Equities: Our model research continues to indicate that India equity markets remain attractive on a projected risk-adjusted return basis. The steepening yield curve and low interest rate environment in India are both positive contributors. India is also making better progress on vaccinating their population although this is a huge task which will take time. As noted previously, upcoming elections should encourage continued highly accommodative monetary and fiscal policies for an extended period and leave room for economic improvement once vaccinations ramp up. Two areas of concern in India are increasing inflationary pressures and the potential for widening credit spreads which we continue to monitor. Fixed Income: Bonds: Even though the recent decline in interest rates has helped to somewhat boost the outlook for bonds, at current extraordinarily low yields the risk/return trade-off for U.S. Treasury securities is not compelling. In addition, U.S. Treasuries continue to maintain deeply negative real interest rates, meaning that yields are well below inflation expectations. Credit: The outlook for credit remains mixed. While there has been some widening in high yield and investment grade credit spreads recently, investors' seemingly insatiable search for yield in today’s low-rate environment could continue to be supportive of corporate bond markets. However, any trouble in the credit markets could lead to a rapid widening of credit spreads which could prove to be a decidedly negative event for corporate bond holders. Real Assets: Gold: The recent decline in real yields (nominal yields less inflation expectations) has improved the relative attractiveness of gold. In addition, although current investor consensus is for inflationary pressures to be transitory, should inflation prove to be more persistent and instead economic growth perhaps more transitory, the U.S. economy could face the prospect of stagflation, which is characterized by slowing economic growth and rising prices (i.e., inflation). Gold represents an asset class that could benefit from potential stagflation. Commodities have enjoyed strong year-to-date performance, but may face shorter-term headwinds as market participants become more concerned about economic growth prospects particularly in China. In addition, the current consensus among investors that the threat of inflation may have receded somewhat has led to some profit taking in commodities. However, Commodities remain attractive in the medium-term due to their longstanding relative undervaluation versus equities as well as the continued prospect for a strong global economic recovery in the second half of 2021. About 3EDGE 3EDGE Asset Management, LP, is a multi-asset investment management firm serving institutional investors and private clients. 3EDGE strategies act as tactical diversifiers, seeking to generate consistent, long-term investment returns, regardless of market conditions, while managing downside risks. The primary investment vehicles utilized in portfolio construction are index Exchange Traded Funds (ETFs). The investment research process is driven by the firm’s proprietary global capital markets model. The model is stress-tested over 150 years of market history and translates decades of research and investment experience into a system of causal rules and algorithms to describe global capital market behavior. 3EDGE offers a full suite of solutions, each with a target rate of return and risk parameters, to meet investors’ different objectives. Screen Shot 2021-08-06 at 12.21.15 PM [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/08/06162142/Screen-Shot-2021-08-06-at-12.21.15-PM.png]The post August View from the EDGE® [https://3edgeam.com/august-view-from-the-edge-2/] appeared first on 3EDGE Asset Management [https://3edgeam.com].

July View From the EDGE®

Subscribe [https://3edgeam.com/lets-stay-in-touch/]Download the PDF version here. [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/07/08192108/July-View-From-the-EDGE.pdf] [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/07/08191436/July-VFE-Chart-01.png]Equities: U.S. Equities: While Fed Chair Powell was able to assuage fears of inflation taking root in the shorter term, concerns regarding more persistent inflation in the U.S. remain. Should this manifest in a more meaningful way it may signal a tighter Fed monetary policy including the potential for reducing their bond buying program (so-called ‘tapering’) and/or a hike in their interest rate policy earlier than the market currently anticipates. Investors are also concerned about whether the global economy may currently be at or near “peak growth.” Risks also remain regarding the inability of Congress and the Biden Administration to take the current infrastructure package over the finish line. A further concern is that U.S. equity market valuations remain near all-time highs by our measure. However, the potential for further upside remains should these risks abate as the backdrop of positively sloped yield curve measures along with their steepening sets up the economy for continued economic growth. Overall, a mixed outlook. Japan Equities: While Japanese equities have had neutral year-to-date performance, on a currency hedged basis they have performed much better. Peak-to-trough through the first half of this year, the Japanese Yen suffered a sizable loss of over 8%. Given Japan’s heavy reliance on exporting, this currency depreciation should augur well with a lag on the equity component of the economy as foreign buyers of Japanese goods and services are able to buy more product with their respectively stronger currencies. Japan equities are also on the cusp of a behavioral breakout whereby if the market continues to climb it could attract further capital into the region in a virtuous cycle. European Equities: As Europe slowly emerges from the global pandemic behind the U.S., it is expected that growth will pick up as it did in the U.S once vaccinations reach key levels. The European monetary authorities continue to aggressively stimulate the region with few signs of that abating. This should help bolster the region. A key risk to the nascent recovery is the recent uptick in inflation measures which while still fairly well-behaved have a much lower threshold compared to other economies with regard to risks of an abrupt change in monetary programs. China Equities: The outlook for China equities remains favorable in the medium-term, given the strong economic ties between China and the U.S. However, concerns regarding the prospects for a more persistent rise in U.S. inflation cloud the shorter-term outlook in China. This is compounded further by recent moves by Chinese authorities on geopolitical matters regarding Taiwan and Hong Kong. India Equities: India equity markets continue to be evaluated favorably by our model research. While slow, progress on vaccinations and a reduction from peak case rates is encouraging. As noted previously, upcoming elections should encourage continued highly accommodative monetary and fiscal policies for an extended period and leave room for economic improvement once vaccinations ramp up. An area of concern is the potential for widening credit spreads which we continue to monitor. Fixed Income: As noted for sometime, the risk/return trade-off in rates is unattractive with the vast majority of the Treasury curve yielding less than the expected rate of inflation. However, the recent decline in yields alongside the strengthening U.S. dollar with respect the Yen and Euro have helped boost the rates outlook to mixed. The outlook for credit remains mixed. While there has been some widening in high yield and investment grade credit spreads recently, this has been minimal. Credit spreads are near all-time narrow levels and the risks of a rapid unwind, i.e., widening of these spreads, could be damaging to credit holdings and outweigh the benefits of the extra yield pick-up in the shorter-term. Real Assets: Gold suffered a setback in June with inflation believed to be short-lived alongside a strong rebound in the U.S. dollar. Behaviorally, gold may face shorter-term headwinds; however, gold continues to be supported in the medium-term by negative and declining real interest rates (nominal rates minus inflation expectations). Like Gold, Commodities may similarly face shorter-term behaviorally-driven headwinds as market participants believe the threat of inflation has receded somewhat. However, Commodities remain attractive in the medium-term due to their longstanding relative undervaluation versus equities as well as the continued prospect for a strong global economic recovery in the second half of 2021. Continued U.S. dollar strengthening would be a headwind for real assets. About 3EDGE 3EDGE Asset Management, LP, is a multi-asset investment management firm serving institutional investors and private clients. 3EDGE strategies act as tactical diversifiers, seeking to generate consistent, long-term investment returns, regardless of market conditions, while managing downside risks. The primary investment vehicles utilized in portfolio construction are index Exchange Traded Funds (ETFs). The investment research process is driven by the firm’s proprietary global capital markets model. The model is stress-tested over 150 years of market history and translates decades of research and investment experience into a system of causal rules and algorithms to describe global capital market behavior. 3EDGE offers a full suite of solutions, each with a target rate of return and risk parameters, to meet investors’ different objectives. Screen Shot 2021-07-08 at 3.15.42 PM [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/07/08191601/Screen-Shot-2021-07-08-at-3.15.42-PM.png]The post July View From the EDGE® [https://3edgeam.com/july-view-from-the-edge-2/] appeared first on 3EDGE Asset Management [https://3edgeam.com].

June View From the EDGE®

Subscribe [https://3edgeam.com/lets-stay-in-touch/]Download the June View From the EDGE® here. [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/06/04193755/3EDGE_June_View-From-the-EDGE.pdf] [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/06/04193430/Screen-Shot-2021-06-04-at-3.34.09-PM.png]Equities: U.S. Equities: The U.S. equity market outlook is a bit more neutral currently given the tug of war between the positive impact of the global economic rebound and concerns about whether robust economic growth will prove to be inflationary, thereby prompting the Federal Reserve to withdraw its extraordinary monetary policy support sooner than anticipated. At the same time, equity markets in general, including the U.S., are continuing to benefit from accommodative central bank policies, narrowing credit spreads, and steepening yield curves. India Equities: Our model research currently finds the India equity market to be attractive. Current struggles with the pandemic and the upcoming elections should encourage highly accommodative monetary and fiscal policies for an extended period and leave room for economic improvement once vaccinations ramp up. Additional factors that enhance the prospects for the Indian equity market include the potential for future economic growth as indicated by a steepening yield curve measure, a benign interest rate environment, and favorable long-term demographic trends. Japanese equities remain attractive and should continue to benefit from narrowing high yield spreads, steepening yield curve measures, and positive investor psychology. In addition, the global economic recovery from the coronavirus pandemic should benefit many of Japan’s largest corporations since they tend to export their products all over the world, including into the U.S. European Equities: European companies should also continue to benefit from the sustained and extraordinary monetary and fiscal stimulus required to support the region because of a slower recovery from the coronavirus pandemic and inconsistent progress on vaccinations. In addition, a continued rotation from growth equities to the stocks of more cyclical companies that benefit more from the ongoing global economic recovery should continue to be positive for Europe. Early signs of increasing inflation in the Eurozone will need to be monitored. China Equities: The model outlook for Chinese equities is currently neutral. While Chinese companies benefit from accommodative monetary policies as reflected in the favorable price momentum we’ve witnessed recently, the recent uptick in U.S. inflation, elevated U.S. Treasury yields, and strengthening of the Chinese Yuan neutralizes the overall outlook in the short-term. Fixed Income: The bond market has been relatively stable recently, even in the face of economic data indicating signs of inflationary pressures throughout the economy as the U.S. emerges from the pandemic. U.S. Treasuries represent an unattractive risk-return trade-off at current yields as they continue to yield less than the market's expected inflation rate across nearly all maturities. Caused in part by investors searching for yield, expectations for economic recovery, and the Fed's continued tacit support of the credit markets (corporate bonds), credit spreads - the difference between high-yield and investment-grade bond yields – have continued to narrow and junk bond issuance remains strong. However, with record amounts of corporate debt outstanding and with historically low yields for high-yield bonds, there is a heightened risk that any accident in the financial markets could cause credit spreads to widen abruptly. Real Assets: Gold has now recovered most of the declines that it suffered earlier in 2021 and continues to be supported by negative real interest rates (nominal rates minus inflation expectations). Gold could also benefit from future inflation prospects, particularly if the Fed maintains its stance on inflation being transient and sticking to its stated timeline on interest rate policy and bond-buying programs. Commodities remain attractive due to the longstanding relative undervaluation of real assets and the prospect of a robust global economic recovery in the second half of 2021, as well as the prospects for a weaker U.S. dollar. Other factors positively impacting real assets include; appreciation of the Chinese Yuan, narrowing credit spreads, steepening global yield curves, and positive investor psychology. About 3EDGE: 3EDGE Asset Management, LP, is a global, multi-asset investment management firm serving institutional investors and private clients. 3EDGE strategies act as tactical diversifiers, seeking to generate consistent, long-term investment returns, regardless of market conditions, while managing downside risks. The primary investment vehicles utilized in portfolio construction are index Exchange Traded Funds (ETFs). The investment research process is driven by the firm’s proprietary global capital markets model. The model is stress-tested over 150 years of market history and translates decades of research and investment experience into a system of causal rules and algorithms to describe global capital market behavior. 3EDGE offers a full suite of solutions, each with a target rate of return and risk parameters, to meet investors’ different objectives. Screen Shot 2021-06-04 at 3.35.39 PM [https://threeedgemarketingwebsite.s3.amazonaws.com/wp-content/uploads/2021/06/04193555/Screen-Shot-2021-06-04-at-3.35.39-PM.png]The post June View From the EDGE® [https://3edgeam.com/june-view-from-the-edge-2/] appeared first on 3EDGE Asset Management [https://3edgeam.com].