Abelardo “Billy” Cortez l September 20, 2022 l Manila Bulletin
The global economy markets continue to limp along on a wing and prayer. As expected, the global financial markets remain highly volatile as fears of rising inflation continue to spread globally.
US consumer prices were again resurgent last month, fueling concerns of another large interest-rate hike in the US capital market from the Federal Reserve. So-called core CPI, which takes out the more volatile food and energy components, advanced 0.6% from July and 6.3% from a year ago, the first acceleration in six months on an annual basis. Given that, there’s really not much to add to the observation since shelter, food and medical care were among the largest contributors to the US price growth.
Increasingly, it looks like a possible recession in the economic horizon in the near future. Issues over rising inflation being addressed by many countries include high jobless rate, falling wages, supply chain disruptions, trade and fiscal deficits, the ongoing Ukraine war, and a devastating climate change that might end up with subpar global growth this year. The global capital markets, along with the constant drumbeat of recession, have become vulnerable to a high level of market volatility making it likely we may not witness a global consumption growth this year, a lackluster event we’d rather not imagine at all.
Today’s market is more about emotions. Investors have become emotion-driven, rather than reason-driven; they readily think up a thousand and one reason to avoid getting into, or even staying a bit longer in the capital markets, afraid that something unexpected may happen, but deep inside, they know that piles of cash shouldn’t stay idle longer.
Worldwide, the highly elevated inflation rates are forcing a good number of central banks, including the US Fed, to reduce without hesitation their respective nations’ money supply by raising interest rates and bring down the inflationary threats to acceptable levels. As Fed Chair Jerome Powell said last week, the Fed will act “forthrightly” in order to achieve price stability soon. The upward trajectory of US inflation, however, points to a continuing high cost of living for most Americans because their consumer prices have remained elevated and widespread, a big hurdle toward the Fed’s inflation target of around 2%.
Market traders are betting the Fed will raise interest rates again by three-quarters of a percentage point. Jay Bryson, chief economist at Wells Fargo & Co., said on Bloomberg Television. “We thought they’d be stepping it back to 50 basis point in November. At this point, you’d say 75 basis point is certainly on the table in November.”
On another point. The recent rise and fall in global interest rates have sent bond prices moving like yo-yos, rendering the bond market no longer the safe harbor it once was. For instance, when you buy a corporate bond today and interest fall, you’ll make a profit if you sell. However, if interest rates climb back up, you’ll lose if you have to sell your bond before maturity. Bond values move in the opposite direction to interest rates: up when interest fall and down when interest rates rise. You make a profit with bonds in two ways: by earning a fixed rate of interest, or by selling at a higher price over what you paid for.
Since bonds set interest rates and pay back the principal at a future date, they do not offer a good hedge against inflation. Over the long run, stocks still outperform bonds as inflation hedge, though it may be a long run.
When corporate bonds are first issued, they are sold at face value, but afterward they move up and down in price, trading in the secondary market either above par at a premium, or below par at a discount in response to varied changes in interest rates. When one speculates or does any serious investing, keep this in mind, the relationship between risk and reward holds there is no free lunch when it comes to investments; you just have to take more risks. A word of caution. Even if all the relevant information is available to you, don’t just assume there is already a level playing field between you (the investor) and the bond issuing company. Peter Lynch, the legendary fund manager, advised investors to invest only with familiar companies whose businesses they really understand. At the very least, one must be pragmatic enough to change plans when facts and conditions change.
Outcomes also matter, not only intentions.
*** Atty. Abelardo “Billy” Cortez is former FINEX national president and chairman of FINEX Foundation, former co-chairman of the Phils. Capital Markets Development Council and currently member of FINEX Ethics Committee. He’s Finance Committee chairman of San Beda Law Alumni Association. He is presently board director and executive committee member of the International Association of Financial Executives Institutes (IAFEI). A former independent board director at First Metro Investment Banking Corp, he is currently independent board director at other First Metro companies such as First Metro Securities Brokerage, Corp, First Metro Exchange-Traded Fund (ETF), PBC Capital Investment Corporation and First Metro Save and Learn FOCCUS Dynamic Fund (Metrobank Group).