The US economy, like the entire global economy, is getting closer and closer to the stage of stagflation, i.e. weak economic growth and at the same time strongly elevated inflation. Key data on the number of newly created jobs for the month of August (Nonfarm Payrolls) were published in the US on Friday. The published data were significantly weaker than economists and analysts expected. The number of newly created jobs in August was only 235 thousand, while the consensus estimate was 733 thousand. The growing curve of the number of infected Covid-19 diseases is thus taking its toll. On the other hand, the US asset markets are booming literally like never before due to continued unprecedented monetary and fiscal stimulus. For example, US residential property prices are currently rising at a year-on-year rate of 20%, which is even a bit faster than before the subprime debt crisis that started in 2007. Imbalances in the US economy appear to be widening and the stagflation scenario is clearly gaining ground. On top of that the consensus estimate for US GDP growth in the current third quarter is still falling quite sharply.
As for the financial markets, despite the not very favorable fundamentals in the entire global economy, they continued to grow sharply last week and the major stock indices reached new all-time highs. The broadest global stock index MSCI All Country World recorded a gain of 1.3 and since the beginning of the year it has attributed a gain of 16%. And as for probably the most watched stock index globally, the US stock index S&P 500, it recorded a gain of 0.6% and it also ended the week at a new record of 4535 points. The Central European region, which is our preferred region, was again above average. The CECEEUR index recorded a profit of 3.3%.
In-line with my view, which I have had already for some time, I must repeat that overall global equity markets as a whole remain overvalued as my global valuation Z-Score reaches 2.0, which is still close to the all-time high. The average global equity valuation is thus currently around 2.0 standard deviations above the historical average, based on the data since 1995, which is approximately at the level from the market peak in 2000. Therefore, I believe that equity returns will be rather below average in the next few years. The average annual equity returns, including dividends, over the next five to seven years on the basis of the broadest global stock index MSCI All Country World are unlikely to exceed 5%. At the same time, I believe that our active investment management approach should, on average each year, help the global equity component of our investment portfolios outperform the MSCI All Country World global equity index by several percentage points.
Bonds also made modest gains last week. The broadest global bond index, Bloomberg Barclays Global Aggregate Bond, recorded a gain of 0.3%, while the average global bond yield to maturity increased slightly by 0.01 percentage point to 1.04%. In real inflation-adjusted terms, the average global bond yield to maturity remains deeply negative, currently at -3.2%. Negative real inflation-adjusted bond yields to maturity are referred to as financial repression. The performance index of Czech government bonds did not change its value last week. The nominal yield to maturity of the Czech government bond with a long 10-year maturity at the end of last week was 1.83%. Therefore, even Czech government bonds are now rather overvalued, as even in their case, real inflation-adjusted yields to maturity are relatively significantly negative.
As for my outlook on bonds, they are currently expensive as well as equities. Therefore, I believe that bond returns will be below average over the next five to seven years compared to the historical trends. At the same time, those bond investors who want to beat inflation will continue to have no choice but to invest primarily in risky bond instruments, specifically in high-yield corporate bonds.
Commodities have not seen much movement over the past week. The S&P GSCI global commodity index rose by 0.5%. The price of the barrel of the North Sea Brent dropped slightly by 0.1% to $ 73. Gold rose 0.8% to $ 1,832 an ounce.
US dollar weakened last week. The DXY dollar index, which measures the dollar's performance against a basket of other major currencies, weakened by 0.7%. Against euro, dollar also weakened by 0.7% to 1.188 USD/EUR. Koruna strengthened last week. Against dollar, koruna strengthened by 1.5% to the level of 21.41 CZK/USD and against euro koruna strengthened by 0.5% to the level of 25.42 CZK/EUR.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.