Earlier this year, Finance Magnates spoke to Stavros Lambouris, CEO of the globally recognised multi-asset brokerage, HYCM International, to reveal his main predictions for 2021. Now, we meet again to catch up and discuss the key trends currently shaping the markets.
It seems like a completely different world from when we spoke at the beginning of the year. Reflation was on everyone’s mind back then, whereas now, inflation seems to be the dominant theme. How do you view the current situation?
I wouldn’t say it’s a completely different situation; the reflation trade may have had further to run last year, but the underlying issues were similar. Whether inflation proves to be transitory or not, I don’t think there are many people left who refuse to accept that inflation is here in some shape or form.
The issue that markets are trying to digest at the moment is whether inflation in a slowing growth environment will lead to a 1970’s style stagflationary scenario or whether reflation is still the order of the day with its resultant crack-up booms as inflation and growth peak side by side.
Indeed, that’s what we’ve seen equity markets wrestling with all year; a risk-on reflationary mood, or alternatively, a risk-off inflationary mood informed by various fears including coronavirus concerns, slowing growth, and increased tensions with China among other things.
Of course, the most pressing part of this question is if and when central banks will raise rates in order to counteract the effects of inflation if, indeed, they even can.
At the moment, there’s definitely a palpable fear of sending markets tumbling as a result of policy error and the recent dovishness we've seen from the UK, EU and US central bankers certainly plays into this.
At HYCM, we’ve seen this reflected in the surging popularity of metals trading. From March to August, precious metals were our most traded asset class, accounting for 36.6% of our trading volume.
From September to October, this increased to 39.8%, with gold being the most-traded metal throughout.*
What do you make of the fears of China’s economy slowing down? How is this affecting broader markets?
This story has been unfolding throughout 2021 with many economists now expecting Chinese growth, not just to miss consensus estimates of around 8% for 2021, but also to continue to slow down further in the New Year.
The most negative estimates see Chinese growth dropping below 5% in 2022. If you count last year as an outlier, this will be the greatest slowdown in the world’s second-largest economy in over 30 years.
Additionally, the Evergrande debacle looms large, as well as the question of how that debt will be dealt with and how it spills out into the broader Chinese property market.
The government’s present focus on deleveraging China’s property market is likely to weigh on growth, as is the ongoing drive to decarbonise its economy.
These two factors were recently highlighted by Goldman Sachs in its recent lowering of Chinese growth expectations for 2022 from 5.6% to 5.2%.
Another thing to keep in focus is the fact that surges in producer prices have not yet been matched by consumer prices. The difference between Chinese producer and consumer prices have recently reached record levels.
While these figures are likely to be massaged, the trend is there. The hikes in the prices producers are paying are leading to margin compression for global corporations, which you would think has to be felt by consumers eventually.
Add to this, the recent energy crunch, which can only further add to the supply chain disruptions the global economy has been experiencing, and you have several stiff headwinds facing the Chinese economy.
As you may know, the AUD is traded as a proxy for the Yuan. Therefore, what’s good news for China, is also good news for the AUD. This is also true in reverse; what is bad for China, is bad for the AUD.
The AUD has been heavily sold over the last few months, so the key question is if further AUD downside will continue or if the worst is now behind for the AUD.
At HYCM, we have recently updated our spreads to as low as 0.1 to offer better trading terms to our clients, so traders can immediately take advantage of this trading concept.
What about so-called “green” metals and renewable energy? Are these potential sources of returns for investors with so much current focus on the green revolution?
The past few years have seen a great acceleration in the drive to decarbonise the global economy.
When you have a country like China that tends to play by its own rules, also making decarbonisation a crucial part of its own roadmap, you know that the tide is turning on this issue and that something resembling a global effort is underway.
This obviously has many varied knock-on effects for the markets. The green energy momentum that many traders are organising their strategies around has many components, from the raw materials, the production, storage and transmission of green energy, to the green energy and EV companies currently working to bring about this new reality.
A recent survey of 857 UK-based investors conducted on our behalf discovered that, despite only 45% of participants answering that sustainable investing is important to them, younger investors (60%) and those with larger portfolios are comparatively optimistic about sustainable and ESG investing and are considering this as a keen focus in their strategies.
At HYCM, we recognise this as an emerging trend and offer our traders exposure to the renewable space through commodities and ESG stocks such as Tesla, General Motors, and copper, which is expected to be more in demand as we build a greener future.
Corporate giants like Microsoft and Nike will be keen to establish their ESG credentials as well.
However, one of the things many investors may be underestimating is just how much non-green energy this transition will require.
Whether it's the mining of the above raw materials, their transportation, refinement, and use in manufacturing, or whether it’s the overhauling of power stations and electricity grids or the task of replacing every fuel tank with high-performance battery cells, it’s a Herculean effort that will certainly be costly in terms of fossil fuels.
So, I don’t believe that traditional energy markets will be going anywhere for a while; in fact, oil is one of the top-traded commodities at HYCM.
How about post-Brexit Britain? Do you think it has been harder for the UK to navigate its way out of the pandemic due to Brexit?
It’s definitely been a double-edged sword. At the height of the pandemic, the UK was able to pursue its own path rather than toeing a broader European line, but economically speaking, it’s difficult to argue that it hasn’t been harder.
The Bank of England’s recent dovish turn (after preparing the markets for an interest rate hike) may be due to bringing its policies in line with other global central banks.
The Federal Reserve, for instance, has also attempted to sound hawkish while being limited to policy decisions that, at least for the moment, are merely less dovish rather than anything else. But the UK’s position is somewhat unique as there are other factors dragging on the British economy.
The lack of migrant workers has recently been highlighted as a Brexit-related disruption that’s been weighing heavier on the British economy than on its counterparts on the continent or across the pond.
A recent opinion poll conducted by The Observer revealed that the majority of respondents believe that Brexit is having a negative effect on salaries and wages, the ability to import goods from the EU, prices in shops, their personal financial situations, and the UK economy as a whole.
In some ways, Britain had the best of both worlds by being in the EU while still maintaining its own sovereign currency and central bank. The post-pandemic world has certainly highlighted some fragilities in the UK economy post-Brexit.
If the UK does have to re-open negotiations with the EU, then HYCM traders have to watch out for EURGBP downside.
One thing that’s not all that different from last year is a US stock market at all-time highs led by the performance of growth stocks. How do you see this trend continuing?
As long as we continue to see balance sheets being expanded and asset prices inflated, we’re also likely to see growth outperforming. This is despite valuations already being quite stretched.
In fact, we’ve seen the tech sector become so strong that it’s risen when two assets it’s normally negatively correlated with have also gone up.
On more than one occasion this year, we’ve seen tech stocks rising with the dollar index as well as with 10-year treasury yields.
It’s clear that growth stocks are not just trading on expectations of future cash flows like we were taught in finance class.
As we’ve seen since March of 2020, tech stocks are attracting investor capital by being the safest risk going, particularly when the market has developed such a dependence on the support it’s receiving from central banks.
Can this continue? I think it can, as long as the support is there, and I think this is also the risk that many investors knowingly take in this market.
They know that nothing can keep going up forever, but they’re also losing purchasing power by standing on the sidelines and not being invested in growth.
Some of the growth stocks that we offer for trading at HYCM include Microsoft, Alibaba, Facebook, Netflix, Amazon, Shopify, Square, Salesforce, and JD.com.
What about crypto? How do you see the future of this nascent asset class unfolding?
Well, if equities are the safest risks in town, then crypto is one of the riskier risks. You know, what’s most interesting about crypto is that it touches at least two of the above questions; 2021 revealed that bitcoin performed as advertised as an inflation hedge and has consequently taken some of the shine from the precious metals inflation trade.
Some have also drawn attention to the correlation between US equity market performance and crypto. I think part of this story is that the technology behind crypto is gradually finding its way into the wider world.
In many ways, crypto is big tech and big tech is crypto, or will be eventually. Facebook’s Diem and recent rebranding to Meta is a case in point (Diem is Facebook’s attempt at its own digital currency and metaverses already exist in the crypto world).
We can even look at the China question from a crypto perspective. I think China’s negative stance towards crypto and its actions to rein in the Chinese tech space are part of this same story.
The CCP is more than aware that these two areas are extremely difficult to control due to their very disruptive nature, and the fact that they are fundamentally antagonistic to top-down governmental control.
The way the West contends with both crypto and big tech’s ability to transcend national and regulatory boundaries will be a big part of this story going forward.
For our part at HYCM, we always aim to provide our traders with access to all the currently popular markets.
This is why we offer trading on major crypto pairs** and have also recently launched a feature so that international clients with USD accounts can fund their accounts using BTC, ETH, USDT, LTC, and other cryptocurrencies.
*The data is derived from the trading statistics of all of HYCM's clients via its platforms.
**Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and Henyep Capital Markets (UK) Ltd.
About HYCM
HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.
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