Analysis of today's markets

Enrique Marazuela, CFA CAd, director of investments at BBVA Private Banking.

Uncertainty rising


If we can be sure of one thing, it's that the market will experience periods of euphoria and panic, with prices that, in retrospect, make no sense. The worst thing is that these moments, which seem like an opportunity, are only recognized once they are gone. When extreme uncertainty prevails, as happens during panics, or unfounded certainties, as in the case of euphoria, these are compelling reasons to justify absurd prices. That is why we support long-term investments with stable portfolios, so we only have to adjust tactical ranges to market circumstances, but not the risk allocation of the portfolio itself. 

We have been talking about the effect of the Delta variant for weeks, but the markets did not react as sharply as they have recently. It's true that it's not the only unknown; rather, it is piling up on top of others, such as the tensions between China and the United States, not to mention Russia, and the inflationary trend. 

With this in mind, the Delta variant will take its toll on both the economy and the markets. We are already seeing that its impact is high enough to postpone many measures aimed at restoring mobility, with the consequences that this has on activity. But we reiterate what we've been saying for the past few weeks: the road to eradicating the virus is neither smooth nor straight; rather, it has bumps and turns, as is the case with this variant, but we remain steadfast in our central theme of herd immunity through vaccination. As Seneca once said, through hardship to the stars.

With regard to inflation, last week we had a new setback, with this figure jumping to 5.4% in the United States, up from 5.0% in the previous month. Economic officials in the US made an effort to convey that these figures are temporary, and that they will not have structural effects. We share in the belief that these high numbers are the result of non-recurring factors, and will tend to even out over time, but our forecasts point to it being at 3.5% at the end of this year and 2.5% at the end of next year. Our long-term outlook indicates that this figure will be one percentage point higher in this decade than it was in the previous decade; in the previous decade, this indicator averaged 1.7% in the United States and 1.3% in the European Union. 

What seems to be a contradiction is that despite the rising inflation numbers, we have seen drops in bond yields, which in the case of the United States is around 1.30%, and in Germany almost -0.40%. In this case, we think that the mood of investors turned sour not because of the recent inflation figures, but because of the potential consequences of new coronavirus variants. We also insist that we're not expecting a meltdown in the bond markets, not while the current monetary policies are in place. Even so, we don't think bonds offer value to investors from a risk-to-reward viewpoint, so our advice to investors is to be underweight in this asset.

Stocks did suffer, although these drops must be seen in the context of the significant price increases this year. These setbacks are putting a dent in the sectors that were benefiting most from the return to mobility, basically cyclical and classic companies (in contrast to tech firms). Despite these uncertain times, we continue to think that the market has potential in the current circumstances, so we have not changed our overweight stance. 

The dollar remains in the 1.18 range; we see this is a neutral point, as long as circumstances stay the same, so our stance in this regard is neutral. Oil dropped sharply, not only because the OPEC+ countries (traditional OPEC plus Russia) finally agreed to increase production and reassign quotas, but especially because of fears that the slowdown will be more severe as a result of the variants of the virus.

In short, the variants of the virus are of concern to the markets, as evidenced by rising bond prices and falling stock and commodity prices. We continue to think that vaccines are the path to eradicating the pandemic, and while the variants do hinder progress, they don't impede it; which is why we remain bullish on stocks and cautious on bonds. We would take advantage of any significant pullbacks to increase our holdings in this type of asset.