The Market At a Glance: I changed my mind

For February’s issue, we made a detour in the 1990s to pick our song of the month. And we came back with a music UFO. In 1999, American rapper Lyrics Born released “I changed my mind”, a hip-hop song with funky accents that makes you want to go on a ride in the U.S. in summer. The video clip is so kitsch that it would deserve an NFT, but the flow is so groovy and uplifting.

Why did we choose that song?

Well, the title is evocative of what seems to be happening in the market right now. Until recently the word “recession” seemed to be in every economist’s mouth. Never in Wall Street history was an economic slowdown more anticipated than the one our economies are (supposedly) heading towards. There is no shortage of evidence that some economies are slowing: Consumer spending less, real estate price slowing, and companies reporting mixed earnings. But the recession is still not officially here. More intriguing, markets are discounting something different. The logic has it that if companies are not growing their revenues and sales because the economic environment is hardening, then their stock price should reflect that.

But that’s not the case. Stocks have posted a record gain for the month of January. Digital assets have rallied as if it is 2020. And bond markets are signaling that the troubles causing the economic slowdown (Higher interest rates, not to name them) will go away soon.

As we suggested in our January Newsletter, markets operate in different time zones as economies. Markets reflect anticipations. They also are the final judge of investors’ actions in the end, and they can get the better of even the most opinionated analysts. It can be costly to “fight the markets”, as the saying goes. So, we have seen many investors “changing their mind” in January as their opinions have been shaken.

The most cautious investors are now caught between two fires. Not participating fully in markets rallies can cost you performance points. At the same time, it is probably a bit soon to claim the end of troubles. As far as we know, central banks haven’t decided to take a different course of action. Central banks recently announced new hikes in rates (Fed: 0.25%, Bank of England: 0.50% and European Central Bank: 0.50%) and maintained their commitment to continue on that path as long as necessary. Any disappointing economic data points, especially on the inflation front, could temper investors’ enthusiasm for the future.

Remorse or regret, that’s the dilemma investors find themselves in from time to time.

The other story that seems to capture a lot of attention is the reopening of China. The country experienced one of its slowest years of economic growth in decades in 2022, due to a very restrictive covid policy. As Chinese consumers hit the streets again, there is high hope that this will give a boost to the economy and the rest of the world. And the policymaker seems in a mood to keep foreign trade and investment stable.

Overall, we have repositioned our portfolios to benefit from further strength in equity markets, but we keep an eye on the risks that are on our radar: a fragile real estate markets, potentially disappointing market data, and escalation in the Ukraine war. We changed our mind, and we will be ready to change it again if needed.

Demystification room

Gold is probably one of the oldest forms of investment. Some consider it a barbaric relic, while, for others, it is the ultimate store of value when markets collapse. For sure, it is an asset that gets a lot of attention. Yet the fundamental drivers of gold performance are not very well understood. What moves the price of gold? Supply and demand, obviously. Interestingly we can have a good idea of who is producing gold and who is buying it by looking at the data released by the World Gold Council.

On the supply side we have two types of actors: mines and recyclers. Overall, the proportion of gold coming from these two has been relatively stable. Mine production accounts for roughly 75% of the supply while recycled gold 25%. The percentage of recycled gold tends to increase with the price of gold.

On the demand side, we can distinguish five main types of sectors that buy gold. Jewelry, Technology, bars and coin, financial products (such as Exchange Traded Funds) and Central banks. There is often a big focus on central banks, but they only represent a small portion of buyers. The bulk of the demand comes from Jewelry (50%). Each of these sectors adjusts its consumption depending on the price of gold. While a higher price tends to attract investors, it usually has a negative impact on Technology and Jewelry that turn to alternative.

The gold ecosystem seems like a self-regulated one. There are natural balances within supply and demand, and it is important for investors to understand them.

Let’s talk wealth

Our Senior Banking Specialist Jacques Sale, and Business Development Lead, Mattia Scolaro answer some of the questions you asked:

What is the difference between discretionary asset management and financial advisory solutions?

Mattia: discretionary and advisory solutions are investment solutions offered in private banking services. In a discretionary solution, the bank invests on the client’s behalf after completing its risk assessment and defining the strategy to follow for its portfolio. This solution offers a professionally managed portfolio that benefits from the insights and reactivity of the bank’s investment team. In this approach, clients are not part of the decision-making process and do not need dedicated time to manage their wealth.

On the other hand, an advisory solution only offers recommendations on how to invest. The client has to take the final decision. This approach requires more client involvement, and we usually follow up to point out new opportunities and to ensure that their portfolio stays aligned with their strategy.

What are the differences between asset management services and online trading?

Jacques: As the name might suggest, an asset management service is usually a company or a professional managing your asset (liquidities) following a given mandate based on your risk profile, preferences and expectations.

The fiduciary duty (stewardship) guides an asset manager. This means that an asset management service aims to invest your wealth in a way that serves your best interest in the long term. In this relationship, your involvement is limited – the asset manager will decide the most suitable investment based on your strategy.

In contrast, online trading services don’t usually offer expert support for investment decisions. You decide what to buy and sell based on your competence, emotions, and other factors.

How are conventional asset managers different from robo-advisors?

Jacques: A robo-advisor gives you automated investment advice based on your strategy. It considers market data and market sentiment and combines them with your inputs to formulate its advice. Essentially, there is no interaction with any human beings, and the advice is sent to you digitally.

A conventional asset manager is a professional that – based on experience, competencies, and knowledge – provides you with investment advice. Many asset managers begin with the analysis of a robo-advisor but go further. The freedom to think outside the robo-advisor’s framework lets them evaluate other factors to sharpen the advice they finally offer. These could include the impact of political events, macroeconomic dynamics, and even human feelings. In either case, the framework of your investment strategy is respected, and the advice given aims to align with your best interest.