TI - October Economic & Asset Class Outlook


Between the repeated epidemics and government stimulus policy, the economic recovery is gradually being confirmed. In June 2021, the EU PMI confirmed the high point for the year. Following China and the United States, Europe has officially entered a period of stability after recovery. From the current level of consumption and production, production activities have not returned to the level before the epidemic. When the monetary policy is withdrawn, the fiscal policy's Q4 and the rise of real interest rates are inevitable, and the price of high valued assets will become very fragile in the next macro stage.

Since 2021, the global economy is gradually recovering from the epidemic, and real interest rates have gradually recovered along with the production activities. The U.S. Treasury yield has risen to 1.6%, which is 60% compared to the increase at the beginning of the year. Looking back at the performance of major asset classes in 2021: Commodity > DM equity > EM equity > Gold. Subject to supply-side constraints, commodity prices have become the most profitable asset; U.S. stock returns have also increased by about 10% due to easing monetary policy. At the same time, gold performed the worst in 2021, falling by -10% throughout the year. Bitcoin rose by 89%, and its market value exceeded $1 trillion in 2021.

Monetary policy is about to converge and domestic economic downturn is confirmedJudging from the global market: the Fed’s statement at the September FOMC meeting shows that the plan to reduce repurchase bonds in November is almost a certainty. The market has begun to trade the investment logic of fiscal landing. The bond yield rose to 1.5% at the end of September, and the Nasdaq adjusted downwards. On the whole, US stocks (Nasdaq) will in the simultaneous adjustment of the numerator and denominator: earnings expectations fall, and interest rate rises. Focusing on the domestic market: combined with the domestic economic data in August: consumption and investment have both declined significantly, and domestic demand has dropped significantly. Due to the delay in overseas economic recovery, export projects still maintain their contribution. With the further decline of social financing, it is expected that domestic economic activities in Q4 may stabilize and decline. At the same time, due to the excessive use of electricity and high thermal coal prices in the first half of the year, many provinces and cities have introduced power rationing plans. Under the condition of blocked power supply, production and operation activities may be further dragged down, and investors should not respond to the economic situation at the end of the year. Have too optimistic expectations.

I know what kind of changes in the economic environment can cause changes in asset classes, and I also know that these correlations have remained basically unchanged for hundreds of years. There are only two major factors to worry about; the growth rate and the inflation rate. The two can rise or fall, so we found that if we can create an asset allocation portfolio that is sufficiently balanced, it can perform well in the long run.

Ray Dalio

Asset Class Analyze

Bond Market

Overseas Bond Market: In late September, the overnight 10-year U.S. Treasury comes to 1.5%. This performance reached a new high in the second half of the year. The U.S. dollar index rose to 94 and the Nasdaq fell by more than 2%. Combined with the launch of the Biden government's fiscal plan, September is likely to be the lowest point of interest rates on 10-year Treasury during the year. In addition, from the perspective of supply and demand, the issue of the government debt ceiling has caused certain concerns in the financial market. Some investors dumped US debt to avoid risks. At the same time, the Fed has a high probability of starting to reduce bond purchases in November. In an environment where supply is increasing and demand is weakening, it is not ruled out that U.S. debt may accelerate upward. On October 7, the Republican Party in the U.S. Senate stated that it would extend the allowable emergency debt ceiling to December to avoid national defaults and economic crises. As of the date of publication, the interest rate on US Treasuries has approached 1.6%.

Domestic Bond Market: On September 27, the PBOC released the contents of the third quarter 2021 meeting of the Monetary Policy Committee. The meeting mentioned that "the domestic economy is under pressure to drive weakening, and fiscal policy will work hard to boost the economy." The meeting mentioned real estate for the first time, and the expression of safeguarding the legitimate rights and equity of housing consumers explained the policy's determination to stabilize the economy. As real estate investment and consumption gradually weakened in the second half of the year, the market further traded down expectations of economic growth and monetary easing in the second half of the year. The 10-year Treasury yield is expected to remain in the 2.8% range. Considering that the central bank's monetary policy has always emphasized that it is self-centered, and the increase in U.S. bond interest rates have a limited impact on domestic interest rates, the bond market investor needs to focus on tracking social financial changes and the actual situation of the implementation of fiscal policies.

Equity Market

DM Equity Markets: Due to the epidemic, the economic cycles of China and the United States have been misaligned. For the United States, which chooses to coexist with the virus, it is still in the stage of increasing liquidity to ease the impact of the epidemic. With the rise of vaccination and inflation, the logic of high-valued stocks has become more and more fragile. Recently, the interest rate of the 10-year Treasury yield has exceeded 1.5%, driving the downward trend of US stocks. Nasdaq, which is mainly composed of technology stocks, bears the brunt. Becoming the stock index with the largest adjustment range. In the context of the central bank’s shrinking balance sheet, fiscal policy stimulates the economy, which is likely to change the current style of equity markets. Value stocks may outperform growth stocks, and the Dow Jones index may outperform the Nasdaq index. Considering that the Fed has almost made it clear that it will start taper in November, high-valued US stocks will face the challenge in the fourth quarter.

Domestic Equity Market: After the epidemic was brought under control, China's economic activities resumed orderly. In the first half of the year, China's economy grew steadily, and exports and real estate showed strong vitality. Under the circumstances of high profitability and sufficient liquidity, the CSI 500 Index outperformed the CSI 300 Index. As time enters the second half of the year, as many economic indicators have not returned to pre-epidemic levels, optional consumer stocks are restricted Due to the impact of ROE, poor performance. There are also negative factors in the real estate finance sector. After July, due to tight bank credit and tightening of real estate financing, the downward trend in commercial housing sales has been confirmed. Under the rigid constraints of the three red lines, it is difficult for real estate companies to experience unexpected changes in their operating conditions. Combined with the current market environment, carbon neutrality has become a new investment mainline. Due to the shortage of electricity, it will be difficult to completely resolve this year. Supply-side constraints have brought new opportunities to related industries such as cycle, environmental protection, and new energy.

Commodity Market

Commodity Market: The suppression of the supply of various industries in the context of carbon neutrality is an important factor leading to the substantial increase in commodity prices. The recurrence of the epidemic made commodity supply even more difficult. Considering that the overseas economy as a whole continues to be in an upward cycle, production demand will continue to drive commodity prices. Considering that the U.S. PMI and EU PMI peaked in March and June, respectively, China’s economy also confirmed its highs for the year in Q2. After the end demand recedes, supply has become a key factor affecting commodity prices. On the whole, crude oil, copper, and supply are gradually recovering. Therefore, it is recommended that investors follow the route of limited supply and unabated demand.

Cryptocurrency Market: Due to the rise of the NFT sector, Ethereum went out of the market in August. Its spot price rose from US$2,000 to $4,000, and the trading volume of related applications such as Opensea also reached new highs. As the market gradually returns to rationality, the prices of application tokens such as NFT and GameFi have also gradually fallen. In October, Bitcoin remained fluctuating in the $50,000 range. The current cryptocurrency asset market has valuations and is not driven. It is more manifested in the game of stock funds. In the case of limited incremental funds, it is difficult to have a sustainable market.


Summary: Be wary of the risk of a new round of interest rates. 10-Year Treasury yield may rise to 1.8% at the end of the year. First of all, the US debt ceiling problem will be resolved with a high probability, or it will completely change the supply and demand relationship of US debt and push up the interest rate of US debt. Second, the shift in global monetary policy is almost a foregone conclusion. Under the influence of factors such as the reduction in the size of central banks' bond purchases in major developed countries and the warming of interest rate hike expectations, U.S. bond interest rates are facing upward pressure. Finally, the turmoil of the epidemic makes it difficult to change the trend of recovery. The fundamentals of the US economy are still in the process of recovery, and real interest rates still have room for upwards. With a high probability that domestic economic activities will continue to fall in Q4, under the background of carbon neutrality, whether it is the stock market or the equity market, supply is the core logic of transactions.



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