Kickstarting the year: what’s new at BSAMC?
Welcome to the Bocconi Student Asset Management Club newsletter! This year has brought several exciting changes to our association, and we’re excited to guide you through them. Our activities for the year officially started on October 8th with the welcome kick-off event in the Sarfatti building. This event was a key moment for both new and returning members, as we introduced all the upcoming initiatives and activities of the association. Let’s take a closer look at what was presented during the event and the updates within the association.
Market Insights Division
This year, the Market Insight division is made up of five teams:
Derivatives;
Macro Research;
Fixed Income;
Equity Research;
AMC Weekly.
Asset Management Division
On the other hand, the Asset Management division consists of three teams:
Long-Short Strategy;
Equity and Fixed Income;
Emerging Markets.
AMC Weekly: Your weekly Market Insights
One of the big news this year is the launch of our weekly newsletter team!
Each week our team will analyse and break down key trends and events that impact investments and so the asset management world. Here’s what we’ll be covering:
Global Economy: we’ll take a look at important economic releases from the week, using our selected economic calendar and discuss other significant events that influenced the markets;
Equity Highlights: we’ll talk about how the main stock indexes performed each week and highlight the stocks that caught everyone’s eye. During earnings season, we’ll briefly comment on the most crucial reports;
Fixed Income Focus: we’ll let you know about the latest happenings in the bond market, including changes in interest rates and new bonds issued;
Wrap up for the AM Division.
Global Economy
Before we get into this week's events, let's look at our economic calendar, which provides a useful guideline for the important data releases to keep an eye on.
U.S.
On Monday, Federal Reserve’s Governor Christopher Waller suggested prudence concerning the reduction of interest rates. After the Federal Reserve cut the policy rate by 50pp in September, Waller is now calling for a more gradual transition that could allow the Federal Reserve to react to an unexpected rise in inflation. On the other hand, the drop in import prices that occurred in September encourages rate cutting. This decrease - that according to data from the Department of Labor was the most significant decrease this year - can be reconnected to the lowering in the cost of energy products.
In his statement, Waller also claimed that job gains in October could be underestimated by around 100,000 units due to the effect of hurricanes and the strike at Boeing Inc. Indeed, hurricanes Helene and Milton, together with a month-long strike by machinists at Boeing, blur the labor market picture. Unexpectedly, for the week ended Oct. 12, jobless claims have decreased, reaching a seasonally adjusted 241,000. The report concerns the week during which the government carried out the survey of employers for October’s employment report. However, it is likely that the Federal Reserve won’t rely too much on this report for its meeting in early November.
EMEA
On October 17th, the European Central Bank (ECB) cut interest rates by 25 basis points due to lower inflation and growth forecasts across the eurozone.
The inflation rate was revised lower to 1.7% in September compared to the 2.2% in August, marking the first time in three years that inflation fell below the ECB’s target of "just under 2%.". This decline was largely driven by falling energy prices, which contributed to weakened price pressures across the region. Growth forecasts in the eurozone have also lagged due to its largest economy, Germany, facing weaknesses in the manufacturing sector. This weakness resulted in Germany’s projected GDP growth to fall by 0.1% given lower than expected private consumption and business investment.
Therefore, to boost consumer spending and business investment, the ECB cut rates to stimulate economic activity. Lower borrowing costs should help push inflation back towards the central bank’s 2% target while catalyzing growth in a stagnant economy. This marks the first back-to-back rate cut by the ECB, emphasizing the bank's growing concern over the eurozone’s economic outlook. Specifically, the lower refinancing rate provides European commercial banks with cheaper borrowing costs, enabling them to deliver lower interest rates on loans. In our opinion, the ECB should keep cutting interest rates until growth is stimulated and to maintain inflation under its 2% mark.
APAC
This past Friday, October 18th, the People’s Bank of China (PBOC) established two funding schemes—a swap scheme and a relending program—to inject 800 billion yuan ($112.38 billion USD) into the stock market. This announcement stems from sluggish GDP growth in China during Q3, driven by weak consumer spending and a downturn in the property market which are both weighing on demand. Therefore, the PBOC has implemented these two expansive policies to strengthen the economy and capital markets.
Swap Scheme
The 500-billion-yuan swap scheme allows brokerages, fund management firms, and insurers to use their assets to borrow money from the central bank. With the additional liquidity, these institutions can increase their stock purchases. This initiative is key to avoiding the downward spiral witnessed in the Chinese stock market, where institutions are usually forced to sell shares to access liquidity during market downturns. This swap scheme acts as a stabilizing force and prevents panic-driven sell-offs, which ensures market stability and boosts investor confidence during volatile periods.
Relending Program
The PBOC also invested 300 billion yuan towards a relending program that gives out low-interest loans to financial institutions for share buybacks and purchases. Given that current share buybacks represent less than 2% of China’s total market buyback volume, the PBOC aims to increase buyback activity by reducing borrowing costs. Share buybacks are beneficial because they decrease outstanding shares, which increases Earnings per Share (EPS) and boosts stock attractiveness to investors. The 1.75-2.25% interest rate range for one-year relending facilities gives financial institutions greater liquidity, which increases share investment, economic growth, and investor confidence.
Although institutions are awaiting approval to utilize these schemes, the Shanghai Stock Exchange Composite (SSEC) responded positively with a 4% gain. These initiatives aim to steer the Chinese economy upwards, a promising outlook amidst economic challenges.
Markets pills from the rest of the world
On Monday, the Inter-American Development Bank (IDB) announced US$ 3.8 billion loans in favor of Argentina. This year, the country will receive US$ 2.4 billion to be invested in the public sector, while US$ 1.4 billion will be destined to infrastructure, energy, private agribusiness, and mining projects over the next two years.
In the last two weeks, the price of Lebanese Eurobonds increased by 35% on international markets. Thanks to Eurobonds, issued before the 2019 economic crisis, the country was able to issue debt in dollars. Although this increase reflects positive expectations on the country, it is important to be cautious, as these expectations could not materialize. The low price (now 8.75 cents) and the sensitivity to expectations make these bonds appetible.
On Thursday, at a conference at the University of Stellenbosch, the South African Reserve Bank Governor Lesetja Kganyago claimed that the country has an opportunity window for lowering inflation permanently and, consequently, achieving lower interest rates. He argues for a reduction of the 3% to 6% inflation target that shaped policymaking in the last 24 years.
Equity Highlights
U.S.
U.S. equity markets continued to rise this week, with the Dow, S&P, and Nasdaq marking their sixth consecutive week of gains, with the S&P hitting another record high on Friday. Big tech performed well, with AAPL up 3.3% and NVDA up 2.4%. Other strong sectors included airlines, asset managers, banks, P&C insurers, investment banks, homebuilders, retail/apparel, casual dining, cruise lines, and utilities. On the downside, managed care, energy, semiconductors, road/rail, machinery, and chemicals.
China and Japan
The Hang Seng Index experienced a decrease of 2% in light of poorly received news by the Chinese Minister of Finance about introducing fiscal policy measures to alleviate public debt risks. Other major Asian markets have followed suit, with Japan’s Nikkei 225 losing 1.65% amid semiconductor market concerns, which caused tech stocks to fall.
Earnings
Earnings were another key focus of the week. Overall, results have continued to indicate growth, with the blended year-over-year EPS growth rate for S&P 500 companies currently at 3.4% (around 14% of the index members have reported so far). Although this is slightly below the 4.3% expected at the start of the quarter, there is still cautious optimism about the broader Q3 earnings season. Banks drew significant attention, with their reports generally being well received. Key insights included improvements in capital markets, stable credit conditions, and a resilient consumer base.
Fixed Income Focus
EU Yield curve movement
The ECB cut rates on Thursday for the third time this year, saying inflation in the euro zone was increasingly under control. In the Eurozone government bonds recorded a slight decrease, with AAA bonds that taken the road of a downward trend.
U.S. Treasury Yields
Overseas the expectation on the decisions that FED will make on the next 6-7 November divides the analysts that are uncertain whether the Fed will hold rates steady or possibly raise them by 25 basis points, depending on inflation trends and economic indicators.
Interest rates kept rising across the Treasury yield curve as stronger-than-expected economic data poured in, cooling hopes for any quick rate cuts:
Retail sales jumped 0.4% month-over-month, beating expectations and building on the prior month’s small 0.1% gain, showing that consumer demand is holding steady;
Jobless claims dropped to 241,000, well below the forecasted 259,000, showing the labor market’s strength despite economic uncertainties.
U.S. Investment grade bonds & High-yield issuance
Banks accounted for the majority of this week's investment-grade primary issuance, which totalled around $21 billion but fell about $20 billion shy of investor forecasts. On the high-yield side, roughly $3 billion in new debt hit the market.
Wrap up for the Asset Management Division
Given the present economic climate, the asset management division might consider implementing a diverse investment strategy:
In the United States market, stocks should be approached with caution. It is critical to constantly watch the Federal Reserve's interest rate signals, especially given the mixed economic data that influences market volatility.
In the Eurozone, recent ECB rate cuts have created possibilities for growth stocks to profit from lower borrowing costs. A detailed analysis of inflation dynamics will be required to identify areas primed for recovery.
The People's Bank of China's creation of funding programs opens opportunities for investment in technology and infrastructure.
The current increase in gold prices favours mining businesses, giving a tempting investment opportunity.
Furthermore, investing in bonds is smart, given yields are now high and are expected to fall in the long run.
Credits:
Andrea Zito (Team Leader)
Lavinia Catalano (Global Economy analyst)
Mahek Dodani (Global Economy analyst)
Pablo Ruiz (Equity analyst)
Vladimir Pashov (Equity analyst)
Filippo Caselli (Fixed income analyst)
References
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