The market at a glance: Half-Full Glass.

This one should please fans of psychedelic rock. Our pick for this month is “Half-Full Glass of Wine” by the Australian group Tame Impala. The song begins with hi-hats that give you the sensation of riding a galloping horse, and then a powerful electric guitar kicks in. After a few bars, the tempo gradually slows down, leaving the floor to the vocal line before the tension picks up again. From both a rhythmic and lyrical standpoint, this song perfectly illustrates what happened in the markets in July: a story of a half-full glass. 

Let’s start with the full part of the glass: The economic situation showed improvements on many fronts. In just a few weeks, we witnessed positive developments on topics that had been causing concern for investors for quite some time. Inflation is retreating, the threat of a financial crisis has diminished, the US treasury found a way to avoid a debt crisis, and the financial results reported by companies so far have been encouraging. These are all valid reasons to celebrate.  

However, despite this breath of fresh air, the financial markets' performance was more mixed than one might have expected. While the US stock market recorded additional gains, largely driven by tech giants, the mood was different in other parts of the world. The Swiss markets, as well as some European and Asian markets, experienced slight retreats. Although overall fixed income markets benefited from lower rates, most currencies depreciated against the Swiss franc, and digital assets gave back some of the gains accumulated in June. 

Why is this happening? Well, this brings us to the empty part of the glass. If less bad news is a good thing, markets probably need more than that to trend higher. Even if economies manage to avoid a recession, the ingredients for robust growth are still subdued. Interest rates remain high, inflation is not totally out of the equation yet, and consumers still have to manage their budgets more tightly.  

Some fears are also resurfacing. Take the commodities markets for example, which are often considered close proxies of economic activity. Something seems to be brewing there. From wheat to oil and gasoline, to copper, to cotton, the prices of pretty much all the resources Earth has to offer went up this month. It could be indicative of an economic recovery or reveal deeper underlying geopolitical tensions that could undermine growth. 

In any case, the big question remains: Will investors continue to climb the “Wall of Worry” (an expression used to describe rising markets even in the face of negative news) and see the glass half-full? In the absence of a crystal ball, we keep betting on diversification to build all road portfolios. Glasses never stay half-empty or half-full for very long. A hangover is a risk, running out of drinks in the middle of the party, too.  

Demystification room: CBDC, hit or flop? 

Although the first cryptocurrency was introduced in 2009, it wasn't until 11 years later that the advantages of developing digital currencies became evident for central banks. And not as a threat but as an opportunity. 3 years ago, the Bahamas central bank was launching the first CBDC, later followed by other central banks. What is a CBDC and what is in there for the rest of us? Let’s demystify the concept. 

Central Bank Digital Currency (CBDC) is the digital form of a government-issued currency. It exists only electronically and is intended for use by households and businesses for making payments. Why the sudden interest from central banks? We can highlight several reasons: 

• The trend towards cashless economies has made digital currencies more relevant. 

• Digital currencies have gained popularity among investors. 

• CBDCs can promote financial inclusion, offering safe access to money for unbanked populations. 

• They offer potential benefits like enhanced payment controls and greater flexibility in implementing monetary policies. 

How is it used? For now, the rate of adoption is muted and the use depends on the implementation chosen by the central bank, but the possibilities are numerous. The two main uses are: 

• Payments between individuals and businesses or other individuals. 

• Payments between banks. 

While approximately 130 countries are reportedly exploring the concept of CBDCs, only 11 of them have successfully launched digital currencies. China notably became the first major economy to issue its digital currency, while the Swiss National Bank is anticipated to launch a CBDC on the SIX Digital exchange as part of a pilot initiative. 

Further readings:

• https://www.imf.org/en/Publications/WP/Issues/2023/05/16/Nigerias-eNaira-One-Year-After-533487 

• BIS, SNB and SIX successfully test integration of wholesale CBDC settlement with commercial banks (six-group.com) 

Let’s talk about wealth: Do your emotions control your finances? 

For a long time, economists have thought of investors as rational people, capable of dispassionate and optimal investment decisions. It is only in the second half of the 20th century that some researchers really started challenging the human ability to be consistently rational, especially when investing. This led to the emergence of a very prolific field of research: behavioral economics. Several hundreds of articles and a few Nobel prizes later, nobody would dare to question that emotions and psychology play a key role in an investor’s choices. The point about emotions is not to try and suppress them but rather to factor them efficiently in your investment decision process.  

At Alpian, we harness the insights of behavioral finance to construct portfolios. Through a unique methodology developed in collaboration with Neuroprofiler, a leading player in this field, we design strategies that account for the human element. If you are keen on learning more, please do not hesitate to reach out to us; we would be delighted to provide a detailed explanation of our approach. Additionally, we recommend a couple of insightful readings to further enhance your understanding of the topic: 

• Dan Ariely, Predictably Irrational 

• Morgan Housel, The Psychology of Money 

• Richard H. Thaler, Misbehaving 

• Richard H. Thaler, Nudge 

• Michael Lewis, The Undoing Project 

• I-vest reading: Do your emotions control your finances? and The Psychology of Investing: Making better decisions

We hope these readings will assist you in managing your personal finances and investments more effectively.

We wish you a pleasant rest of the summer.