The central banking pantomime

Ned Naylor-Leyland, Head of Gold & Silver, comments on the dynamics in monetary metals markets, as a central banking pantomime has so far had a suppressing effect on gold and silver prices.


Over the last year some of the key factors have been in place for a bull market for gold and silver, with inflation rising to 7% in the US and rates barely moving. Yet the reality worked out quite differently. I remain bullish on the outlook for monetary metals, however.


So why didn’t gold and silver rally hard in 2021? Isn’t gold in particular supposed to be an inflation hedge? How I’d answer those questions is by pointing out that monetary metals trade in large, liquid FX markets with no physical attached, and while the market is about real interest rates to an extent, it’s most importantly about 5-10 year rate curve expectations. What everyone thinks about is whether they want to hold their local domestic currency long, or are they worried about purchasing power and want to hold gold. Over much of the last 12 months the consensus expectation was that inflation would fade away and rate hikes were coming.


Today, however, Jerome Powell looks increasingly stuck threatening to raise rates without it seeming like the Fed can be actively hawkish without simultaneously risking market stability. It’s a central banking pantomime, as Powell shouts “I’m going to raise rates!” and bond investors call back “Oh no you’re not!”. I think it’s the market that is right, and that it isn’t feasible to do anything like the full raft of rate rises that have been suggested for this year and next.


Away from macro, the merger and acquisition wave among listed monetary metals companies, which we’ve been expecting, is very much upon us now. One of the sub-trends within this is a bias in this activity towards Canada, to the benefit of investors like us who know individual locations and risk profiles well. Perhaps Australia will be the next place to ride the M&A wave? The gold price in Australian dollar terms is about where it was a year ago, but many of the Australian gold mining stocks have seen their share price halve over that time, which suggests there is plenty of opportunity from here.

Will 2022 be China’s year?  

Salman Siddiqui, Fund Manager, Global Emerging Markets Focus, assesses the prospects for China in 2022.


Emerging markets equities have so far begun 2022 much better than US equities. China’s underperformance during 2021 was caused by a liquidity crisis in its property market, by anti-monopoly regulation – particularly in the internet sector – and by China’s zero-tolerance Covid policy, which stifled consumption. All three negative factors were self-inflicted: they were largely due to government policy.


At the end of 2020, when the Chinese economy was very robust, its government grabbed what it saw as a window of opportunity to introduce hard-hitting, long-term structural reforms. Anti-monopoly regulation and the property market had been two key priorities at the Chinese government’s main annual policy setting economic conference in December 2020. Interestingly, at the same conference in December 2021, anti-monopoly regulation and property were no longer mentioned as key priorities. While that doesn’t mean that these headwinds have gone away, peak regulation and peak property tightening may now be behind us.


China needs to take action to reinvigorate economic growth if it is to meet its long-term annual GDP target of 5%. Last week there were early signs it was doing just that. The Chinese central bank cut one year and five-year policy rates and hinted at further easing to come. This sounds very much like a more pro-growth message.


Inflation in China is still running below 2%. While the rest of the world is worrying about high inflation and central bank tightening, China appears to be moving in the opposite direction.


Prospects for China could therefore be very interesting this year. The main thing that makes us cautious about China, at present, is its zero-tolerance Covid policy. We believe that at some point China will have to soften this stance, but given several big events in the calendar, including the Winter Olympics in February, and the Party Congress in the autumn, China could continue with stringent lockdowns, mass testing and strict travel restrictions for some time yet. 

Financial credit fundamentals remain strong, volatility on the rise 

Paul Pulickal, Credit Analyst, Fixed Income, discusses the outlook for financial credit and contingent capital.


2021 was a strong year for banks, both on the credit and equity side. Coming into 2022 bank investors are having to wrangle with the fact that, while most fundamentals remain very strong, we now have rising rates which, accompanied with lower deposit volatility due to the excess savings that remain in the banking system, should be a tailwind for earnings.


Investors have to square that with valuations that, despite a pullback in Q4 2021, are looking very stretched — especially in the context of receding fiscal support, expiry of loan moratoria, potentially weaker capital positions after the lifting of dividend ban on banks, and perhaps more aggressive central bank withdrawal of support.


These are factors that that we don’t necessarily think will impair the fundamental investment case for banks, or for contingent capital, but they don’t appear to be discounted by the market, suggesting further volatility ahead and something that we’ve already seen play out in January so far.


We think it makes sense, in light of these considerations, to favour the short end of duration and to stand ready to take advantage of situations where bouts of volatility offer compelling upside.
In terms of credit risk, we remain confident that fundamentals should remain strong, backstopped by monetary, fiscal and regulatory authorities who have clearly shown their willingness to support the economy in the event of stress. 

The value of active minds: independent thinking

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