It’s (Nearly) All About Money

Monetary policy is firmly in the spotlight as central banks around the world acknowledge higher than expected inflation and lay out plans for tightening – mostly only slowly. That’s not the only area where money is in focus. In the US, the House finally passed a $1.2 trillion infrastructure bill, with 13 Republicans joining with most Democrats to pull the bill over the finish line. Legislative wrangling over President Biden’s social spending bill continued, with moderates insisting on an official costing by the non-partisan Congressional Budget Office before supporting the bill. Money is also at least a part of the story behind the news in Friday’s jobs report that a surprising number of Americans of working age are still on the sidelines, even as the economy ramps up. Strikes—continuing at Deere and now at Kellogg and other companies—show that workers want a bigger share of the pie.  
Source: Bloomberg, RockCreek

Money – and technology

In Glasgow, Scotland, money is also on the agenda. Discussions at the big climate summit have moved from policy promises to funding – specifically: who is going to finance which measures and where, in order to combat the rising threats from climate change? Rich countries have pledged to help raise finance for emerging and poorer countries. But the amounts likely to come from government budgets pale beside those expected from private investors. While there was a lot of enthusiasm around announcements of cutting methane emissions and re-forestation, the greater concern is moving from pledges to action. Younger activists took to the streets of Glasgow by the tens of thousands, decrying what they see as leaders making speeches then speeding off on private jets, while a new Oxfam study estimates that the richest 1 percent are set to emit 30 times more carbon emissions than the entire global per capita level by 2030. And the 1-percenters already account for 16 percent of the world’s carbon consumption. Former President Obama is jetting in to join the discussions—as are other celebrities—today. Action not words is what is needed. 

At RockCreek, we have been participating in COP26 and holding discussions with experts who tell us that, apart from money, the world is looking for technological breakthroughs to achieve climate goals that some see as almost out of reach. We continue to invest in early stage and growth climate opportunities. 

Marshalling private capital was an area of optimism at COP26. The Glasgow Financial Alliance for Net-Zero (GFANZ) announced that it had reached more than 450 financial institutions which, combined, represent more than $130 trillion in capital committed to net-zero. “Even as governments step up with these commitments, it needs to be just the beginning,” GFANZ Advisory Panel Chair Nili Gilbert told RockCreek Senior Advisor Caroline Atkinson. “There is not yet enough private sector capital to be able to achieve our long-term goals by 2050, and we need to keep the pressure on. But on the other hand, GFANZ now represents $130 trillion in capital, all committed to the net-zero transition across the entire capital base by 2050…We feel like we are actually getting there.”   

Science has been more successful on today’s other global threat: the Covid pandemic. Last week, almost a year to the day after the announcement of a safe and effective vaccine, Pfizer followed Merck with the news of a safe and effective home treatment for mild to moderate Covid cases. This breakthrough comes none too soon. New infections are beginning to rise yet again in Europe, particularly where vaccination rates are low. A resurgence in the US and elsewhere would put a damper on growth, just picking up after the summer pull back. And no one wants a worsening of pandemic-related bottlenecks that have led to shortages of a wide range of goods and inputs. As Nobel prize winning economist Michael Spence points out, the global supply chain has too little slack to adjust to shocks that disrupt previous patterns. Comparing these complex systems to weather patterns, Spence calls for an international push for better, shared data and more sophisticated modeling, likely powered by AI. 

With climate shocks also likely to disrupt production along supply chains in the future, building more resilience makes sense. Investors must look at their portfolios in light of such new risks. “We need to ask ourselves, what climate are we incorporating; what risk are we incorporating?” sustainable investor Divya Seshamani told RockCreek CEO Afsaneh Beschloss last week. “We need to be focusing, not backward-looking as an investor group just on pure emissions…but to really be forward-looking and focus on resilience and adaptation.”

Tranquil Taper

Monetary tightening is underway. But, apart from Canada, major central banks are taking it slowly, and markets are mostly going along with that. In the US, Federal Reserve Chairman Jerome Powell and colleagues kicked off an expected six month tapering of the extraordinary asset purchases begun in the pandemic turmoil of March 2020. Powell’s careful communications have tranquilized markets. Far from throwing a tantrum, bond traders laid down quietly. Last week ended with yields down—and prices up—all along the curve. With the rally slightly stronger in the front end, the 5s30s part of the curve steepened. Strong, but not too strong, jobs numbers (more below) helped to soothe investors.

Things did not go as smoothly across the Atlantic in the UK, where pre-meeting communications had led markets to price in a rates lift-off. Instead, Bank of England (BoE) Governor Andrew Bailey and the Monetary Policy Committee (MPC), kept policy rates unchanged. Yes, inflation is higher than expected, Bailey said. But it is too soon to declare the economy solidly on the mend given uncertainty about employment. He pointed out that by the next MPC meeting in mid-January 2022, officials will have another two labor market reports to go on and some more indications on the likely path for prices. On inflation uncertainty, the BoE noted that if crude oil prices fall more quickly than current futures prices suggest, inflation will be back to the 2 percent BoE target in a little over a year – just when tighter money would be kicking in if interest rates had been raised this month. These are reasonable points. What is less reasonable is Bailey’s apparent view that surprise is good: he joked that central banks must be like the “unreliable boyfriend.” BoE governors used to relish the lack of transparency surrounding the gilts market, making the comment a throwback to the—bad—old days in more ways than one.

Powell was more straightforward. Commenting that, “We would not want to surprise markets,” Powell said that the FOMC focused on the taper decision this month and did not even discuss the timing of interest rate liftoff, given continued shortfalls in employment. Look for this to change in 2022. If employment continues to climb at the October pace of half a million plus, Powell hinted that a rate rise could be appropriate by the second or third quarter next year. Inflation hawks would like the Fed to move sooner, given that headline inflation is still running well above target, with an annualized change in headline prices of 3.7 percent between August and September 2021, on the PCE (personal consumption) measure. The Fed chair acknowledged that today’s price increases—including for food, groceries, and gasoline—are hurting American families. He went so far as to say that right now inflation was “not at all consistent with price stability.” But until employment is closer to a “maximum” level, the Fed still believes that patience is called for.

Jobs…at the Fed 

Powell has also been patient amid uncertainty about his own future. Many expected President Biden to have announced before now his decision for when Powell’s term expires in February next year. Movement now seems likely. The President met last week with both Powell and Governor Lael Brainard – the main rival for his position as Chair. Senators were also reportedly asked to meet with Powell. Unclear if it is worth his having more conversations with Senator Elizabeth Warren, who called him a “dangerous man” at a recent hearing and favors Brainard, who has staked out tougher positions on regulatory issues. One option favored by some is to move Brainard to be Vice Chair, with responsibility for bank supervision. 

Jobs…economy wide

There was a sigh of relief at the October jobs report, released last Friday. After disappointing payroll numbers in August and September, employment grew by a solid 531,000 last month. And with upward revisions of almost a quarter of a million to the August and September numbers, the picture is better than expected. Unemployment has now fallen to 4.6 percent, considerably lower than projected at the beginning of the year and a drop of more than ten percentage points from the pandemic high.

So – is the labor market tight, even overheating? By many indications, the answer would seem to be yes. Companies across the board are reporting labor shortages. Quit rates hit a record high in the summer. There are more job openings than job seekers. And wages are rising steeply now, at a 4.9 percent annual rate in October, catching up with the pace of price increases in the last couple of months, while still down on the year. But the jobs story does not end there. 

It seems that Americans are more reluctant than usual to come back to work. The record quits data shows that workers are confident enough to leave their jobs for something better. That is not surprising and should be a healthy sign. But at the same time, it seems that fewer unemployed workers have come off the rolls for a new job than would be expected based on historical patterns. And instead of a steady increase in the number of Americans joining the labor force as jobs become more plentiful, labor force participation remains stubbornly low. At 61.6 percent in October, it has oscillated between 61.4 percent and 61.7 percent since June 2020 when the unemployment rate was 11.1 percent. Typically, in recessions, the labor force declines as depressed workers stop looking for work. But recovery pulls them back in. The pandemic seems to have led to a paradigm shift. It is too soon to know whether higher wages will eventually attract more job seekers, if we also need to get the pandemic firmly behind us, or if other factors are at play. About a quarter of the 1.7 percentage point reduction in the labor force can be explained by economic conditions. Another quarter seems related to early retirements, as older workers who lost their jobs or quit because of health concerns during the pandemic stopped looking for work. That still leaves much to explain. Not surprising that the Fed wants to ponder a while longer on whether its “maximum employment” goal is met.
Observations and takeaways for investors:
Equity Markets

Outside of emerging markets, developed equity markets got off to a fast start in November with the S&P 500 and Nasdaq Composite gaining 2 percent and 3 percent, respectively, for the week. An active earnings week created a great deal of volatility under the surface. For instance, recent moves by Avis Budget Group (CAR) and Bed Bath & Beyond (BBB) showed what can still happen to heavily shorted stocks when they get confronted with positive news and attract the attention of retail investors. Avis Budget has been soaring due to rapidly improving fundamentals for the rental car market and had gained 365 percent year-to-date through the end of October. On Tuesday Nov 2, the company reported a nearly 100 percent year-over-year jump in revenue and adjusted EPS of $10.74, versus Street estimates of about $4.06. The shares surged as much as 213 percent before settling down to a 105 percent gain for the day. Just under 20 percent of the company’s shares were shorted and the massive earnings beat caught short sellers by surprise, however, it was a boon for hedge fund manager SRS Investment Management which held a 27.7 percent stake in the company and other investors who were bullish.

Bed Bath & Beyond also led a meme stock resurgence with a 54 percent spike on Wednesday after the company announced a series of moves to turn around its business, including a partnership with grocery chain Kroger. About 27 percent of its shares had been sold short at the time and short squeezing also contributed to its rapid ascent.

While CAR and BBB were more extreme examples of negative sentiment running into positive news, there were plenty of examples of disappointing news resulting in large price swings in the other direction. Zillow’s failed speculation in the housing market drove its shares down 37 percent for the week and Peloton’s inability to meet its lofty sales expectations led its shares to shed about 35 percent of their value on Friday. In the current market environment, security selection matters.

Emerging Markets

Emerging markets have less room to maneuver. In 2013, many blamed US tapering fears for a tantrum that hit vulnerable countries from India to Brazil, Turkey, and elsewhere. This time around, central bankers in key emerging economies are making decisions based on their domestic conditions. Markets have continued to be volatile given these dynamics. The weekly seesawing between Chinese equities and the rest of emerging markets continued last week, with India, the EMEA region, and the smaller markets of Latin America all leading with positive returns. India, in particular, saw a return to form after a few weeks of muted performance. The MSCI India index is up over 28 percent year-to-date, outperforming most of the world’s major markets across EM and developed markets. 

We expect the momentum behind Indian equities to continue, led by a healthy pipeline of tech IPO’s. Indeed, tech IPO’s outside of China in Asia are having a record year, including the likes of Zomato Ltd., an Indian on-line food-delivery and restaurant platform; PT, an Indonesian e-commerce agency; and KakaoBank Corp., South Korea’s first internet-only lender. More is yet to come before year end, with India’s payments juggernaut Paytm and Indonesia’s Mitratel adding to the impressive tally.

Tech IPO’s Outside of China
Amounts Raised in India, South Korea, and Southeast Asia ($ millions)
Meanwhile, China’s regulatory crackdown has cooled investor appetite for Chinese IPOs, and Chinese companies have canceled plans for listing in the US and in some cases are even considering suspending domestic listings. Investors have seldom had stronger incentives to diversify their bets in the world’s fastest growing region.

Chinese Companies Suspending or Canceling US Listings

Expected IPO Proceeds ($ millions)

The sheer relative weight of China in benchmarks such as the MSCI EM Index is prompting investors to treat China as a separate asset allocation decision from the rest of emerging markets. As technology companies outside of China come to market, we could see tectonic shifts in the composition of industry benchmarks, the way we saw the MSCI EM Index evolve over the last decade. After all, only two of the top ten names in the MSCI EM Index ten years ago remain today, in large part due to China technology companies making inroads. Investors getting ahead of this trend in markets like India and Southeast Asia could prove profitable, especially given the relatively low level of foreign ownership.

Top Ten Names Evolution – MSCI EM Index
Top Ten Names Evolution in the next Ten Years – MSCI India
RockCreek Update
With COP 26 kicking off in Glasgow, RockCreek participated in the Summit and hosted a series of discussions from the summit with leading investors and climate experts who are helping shape the future of climate policy. 

Founder & CEO Afsaneh Beschloss spoke with sustainable investor Divya Seshamani, who also serves as a sustainable business and net-zero advisor to the UK government, about assessing risks beyond emissions and the need to invest much more in resilience and adaptation. Watch the discussion here

Senior Advisor Caroline Atkinson spoke with Nili Gilbert, Chair of the Advisory Panel of Glasgow Financial Alliance for Net Zero (GFANZ), an alliance of more than 450 financial institutions that, combined, control more than $130 trillion of assets committed to transforming the economy for net-zero. RockCreek participates in a number of net-zero alliances, and the team is hard at work to invest in climate opportunities. Caroline and Nili discussed marshalling finance to achieve the net-zero transition. Catch the full conversation here

On Nov. 5, Afsaneh joined David Westin on Bloomberg’s Wall Street Week to unpack how the Fed tapering announcement and COP26 discussions will impact investor considerations. “The most important point highlighted in COP26 is that finance is key; asset allocation is key,” Afsaneh pointed out. “We at RockCreek have signed up with a number of the alliances, [GFANZ] in particular, but it’s not signing up and committing that matters – it’s actually what you are going to do.” Watch the full segment here

Team RockCreek

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