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International Internet Magazine. Baltic States news & analytics
Wednesday, 24.04.2024, 02:09
Rietumu experts: healthy economic data, excellent earnings season
“Noteworthy that a possibility
of nuclear war on Korean peninsula caused just a few percentage points market
correction,” note RAM experts in the review. In their opinion, such reaction
means that investors’ perception of risk is distorted taking into account
significantly heightened risk of real military escalation. Moreover, it seems
that investors from the Old World do not assign any probability for a
worst-case scenario.
In July inflation in the U.S.
disappointed both market participants and the Fed. Inflation pace is still
running below the Fed’s target of two percent. As a result, the third interest
rate hike in this year is under the question, especially, if inflation will not
accelerate. Trump’s failure to unite the Republicans and pass promised health
care reform bill together with subdued inflation decreased value of the dollar.
Almost unanimous vote for new sanctions against Iran, North Korea and Russia
showed the parliament mistrust of the president. Moreover, new sanctions have a
structure that makes them hard to dismantle. As the history showed, such
sanctions could last for decades, – say RAM experts.
European Union GDP growth rate
for the second quarter of 2017 exceeded both economists’ forecasts and the U.S.
growth rate. Strong growth in Europe and in China helped American companies to
show outstanding results. Revenue of S&P 500 companies increased by 5%,
while earning grew by 10% comparing to the same quarter last year.
Worth mentioning is investors’
extraordinary appetite for risk taking. Yield on high yield bonds in the euro
area exceeds yield on the U.S. treasury notes by just a several dozen basic
points. Remember that we are speaking about the debt of companies that might
disappear in five years and the debt of a country that has been the world
hegemony during last decades.
Current environment could be
best illustrated by Tesla. Recently the company, famous by its revolutionary
electric cars and charismatic leader, issued $1.8 bln bonds. Tesla is also
known as a company that had recorded positive profit just twice in its entire
history. Credit agencies also have low opinion about creditworthiness of the
company. For example, Moody’s assigned credit rating to Tesla that is five
notches below investment grade (B-). Analysts and investors can discuss about
upside potential of Tesla stock, but they all should admit that bonds do not
have upside and have full downside by definition. Therefore, it’s extremely
weird to see solid investor demand for bonds with a yield of 5.25 per cent. For
those investors, the whole difference between credit risk of Tesla (B-) and
United States of America (AA+) can be compensated by mere three percentage
points. Bear in mind that those investors won’t get any additional penny, if
Tesla become new Apple.
“Therefore, in the current
environment, it is extremely important for investors to keep in mind
fundamentals and how much they are paying for them,” note RAM experts.
The review on RAM and the
current comments of the specialists can be found here.
Rietumu Asset Management (RAM) is part of Rietumu Bank, the leading private
bank in Latvia. The company provides professional asset management services.
RAM’s products and services are intended for a wide range of investors and are
designed to meet the specific demands and needs of each customer. In the
current market conditions, RAM’s specialists offer their customers the ability
to reach an effective yield to risk ratio.