The Bank of Japan held over $250 billion (28 trillion yen) in the Nation’s ETF funds, which represents 4.7% of the total market capitalisation. The Central Bank was among the top 10 for 49.7% of all Tokyo-listed enterprises. Should investors find this non-conventional monetary policy comforting?
The forex market has been abnormally stable since the beginning of the year. One of the best ways to observe the facts is to look at the evolution of the CVIX. Similarly to the well-known Chicago Board Options Exchange Volatility Index (VIX), which measures the implied volatility of equity markets, the Currency Volatility Index (CVIX) measures the implied volatility of currency markets. Thus, it is a measure of the market’s expectation of future currency volatility and can be used as a benchmark of risk. Recently, the currency volatility index fell sharply to its lowest level since 2014 in April (see chart 2). More specifically, the industry’s most traded EUR/USD pair is in its narrowest range recorded on a quarterly basis.
The biggest elections in history began on Thursday, April 11. They are taking place in India and will be held until May 19. Some 900 million Indians are called upon to choose the next government for this nation of 1.3 billion people, the most populous democracy in the world. These elections serve as a vote for or against the Conservative Prime Minister. Narendra Modi, 68, is running for a second five-year term with the Bharatiya Janata Party (BJP, Indian People’s Party).
While equity investor sentiment oscillates between, on the one hand, the euphoria of having the support of central bankers and their highly accommodating monetary policies and, on the other hand, the pessimism of a misguided global economic cycle combined with trade war and high valuation levels, there are independent investment themes. In a way that is far removed from these tricky issues, the US healthcare sector can outperform all the others (see Chart of the Week). The reasons are both structural and cyclical.
The profit season has begun, and it is usually a source of happiness for investors. Equities tend to fluctuate sharply after the release of earnings and this can be a lucrative opportunity. This time, many companies are beating expectations, helping to drive main indices to record levels. The most famous of them, the S&P 500 is approaching its historic high, where from 21 September 2018 it reached 2940.91 dollars (see chart 2). Hopes that it will break its psychological resistance, supporting the current bull market, is therefore high. On the other hand, for companies that published earnings below expectations, the punishment is more severe than usual.
European banks have been under pressure for a decade. They will continue to underperform due to several structural factors, ranging from tougher legislation to financial technology competition (fintech). These factors are there to last, but
in the shorter term, two other important phenomena will weigh on the sector: the debt crisis in Italy and the extension of negative rates.
The extraordinary monetary policies implemented by central banks over the past 10 years have brought interest rates to extremely low levels for an extremely long time. In their quest for returns, investors around the world naturally turned to more profitable asset classes. Of course, these include equities, but also illiquid assets such as real estate and private equity. These days everyone invests in private equity funds, not only individuals or banks, but also big pension funds or sovereign funds. CalPERS, the famous California Public Employees’ Retirement System, has just announced its intention to increase its private equity investments in order to boost its returns. On the other hand, asset manager BlackRock explains that more than half of its clients now want to reduce their exposure to the stock markets and increase their exposure to private equity.
Stocks have recently moved closer to their historical peak, particularly in the United States (see chart 2) while VIX and SKEW indices dropped substantially (see Chart of the Week). As a reminder, the Chicago Board Options Exchange VIX
reflects a market estimate of implied volatilities and is also known as the “fear index”. It declined from 36.2 in December to 12.4 recently. For its part, the Skew indicator is a measure of relative demand for protection against large swings in major global equities. Levels greater/less than 0 indicate more/less stress than is normal. It decreased from 1.15 at the end of the year to -0.57 last week.