The Market At a Glance: It’s Time For Rehab.

Monday, November 7

Publications

For our very first newsletter, let us introduce a new format for financial updates. We’re naming each of our market sections after a song. And October’s pick is “Rehab” by Amy Winehouse.

The song shares Winehouse’s refusal to go to rehab to treat her addiction issues. And that draws a perfect parallel with the phenomenon happening right now in the economic world.

For 12 years, we enjoyed low interest rates and their benefits. Households could borrow money at affordable prices to finance their purchases and projects. Companies could fund their operations with efficiency, and Governments could issue debt without thinking twice about interest. Now, with inflation reaching levels we had not seen in decades (in developed markets at least!), this era is over.

Central banks, the institutions that manage states’ currencies and monetary policies, are raising interest rates. The idea is quite simple: if you make money less “affordable”, it will push people, companies and states to look after the pennies and spend less. This, in turn, should push prices lower and signal the end of inflation.

Such a strategy is less simple in practice and comes packaged with many implications: by raising rates, central banks risk slowing down the economy. Their actions also won’t take effect immediately - it may take months to curb inflation. Finally, each economic agent will react differently. It might be easier for some to live with higher rates than others.

Regardless, we all must go to rehab to learn how to live with our new economic reality. Rehab is painful, which we see reflected in the decreasing price of most assets since the beginning of the year. From equities to bonds to digital assets to real estate, few asset classes have been spared. At the same time, there are opportunities ahead for investors, and October was a good month overall for investors. First, lower prices mean bargains. Second, some asset classes are becoming attractive again - I am sure many people in Switzerland are welcoming the end of negative interest rates! So, let’s get rid of our past habits, and instead of pointing fingers at our executioners, see how we can smartly adjust to higher rates. They want to make us go to rehab, and we say yes, yes, yes!

Demystification room.

Price cap. This word seems to be on everyone’s lips these days, and here’s the reason why. The G7 countries are trying to ensure they can access oil without financing a war.

Here’s their plan.

Putting a cap on the price of an asset means that an entity - usually a government - sets regulations on the maximum price that a provider can charge for a resource. In this case, that is buying a barrel of oil at a max price of let’s say, $50, even if it is trading at a higher price. If the entity has sufficient bargaining power, the selling party will have no choice but to agree to sell at this price if it wants to continue doing business.

Does it work? Well, it depends on the leeway the buying party has and the degree of control it can exert on the price.

Is it a new strategy? Hardly. There are in essence four different ways to set a price:

The price can be negotiated between two parties (for example, when you buy a house)
Price can be set via auctions (for example, auctions or stock exchanges)
The price can be set by an entity (for example, Apple deciding the price of its next phone)
The price can be administered, i.e. an entity sets a range in which the price may fluctuate (usually by a government)

Price caps fall into the last category. And we often forget that governments set prices on many things surrounding us: water, insurance, transport, etc., more or less successfully.

From the experts.

Asteria IM is an asset management company entirely dedicated to impact investing and was founded in 2019. It has developed its own, proprietary impact measurement methodology that applied to it 3 thematic impact funds launched two years ago.

What is impact in a few words

Impact investments are investments made with the intention to generate positive, measurable social and/or environmental impact alongside a financial return. An easy way for a retail investor to take part in impact investing is to invest in a professionally managed investment fund, which takes care of having a true impact strategy, invests accordingly, and provides dedicated impact reporting.

How ESG is different from impact

ESG refers to a framework or set of criteria used to evaluate a company’s environmental, social and governance risks and practices. Impact investing is about investing in companies whose products, services or technologies generate a positive environmental or social impact.

Put differently, ESG describes how a company operates and impact is related to what it does. A company with good ESG practices does not necessarily generate positive impact, nor does an impactful company always have excellent ESG practices.

How to measure impact in a few words

One way of identifying positive-impact companies is to combine a top-down and bottom-up approach. Top-down, identify impactful business activities based on products, services or technologies creating a positive impact. And bottom-up, within the identified positive-impact activities, a companies’ top-line exposure to impactful business activities can be used to score the impact. Under such an approach, pure-players and large companies with a significant positive contribution are highly ranked.

Impact investing does not stop at the score. It is important to measure the positive impact an invested company is generating, for example by measuring the tons of CO2e avoided, GWh of green energy produced or litres of water treated. There are two ways to approach impact measurement. One way is to assess what is disclosed by each company. Another way is to approach impact measurement systematically from a top-down perspective.

Let’s talk wealth.

Our Journey Together: Your first meeting with the Wealth Management Team.

Having clear expectations from your first meeting with a financial advisor can ensure that you leave the consultation with clarity, confidence and, more importantly, the desire for a follow-up meeting!

Just like a mountain guide assesses your physical and mental capacity before choosing the adapted route, a financial advisor will assess your financial situation, spending habits, objectives, and appetite for risk before giving you financial advice.

Their experience and ability can ensure that your resources are best utilized to help you make appropriate decisions and to reach your goals.

So, how do you know if the financial advisor you’re planning to meet is right for you? And how can you tell from your first meeting? Here are some points to keep in mind.

Having the support of a trusted financial advisor who understands you and works in your interest can be invaluable in the long run. The first meeting is for you to ask questions and for the advisor to use their wealth of knowledge to guide you and provide you with valuable new perspectives.

Have a great first meeting!