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Letter from a Portfolio Manager to his investors: Stock market analysis 2021 (Part II)

Dear investor,

Next we will analyze what has been the first half of 2021 and what we can expect going forward.

We must accept that there will always be “excuses” for not being completely calm in the financial markets. After all, we live in a globalized world full of uncertainties about the future. To this, we must add that the media and “experts” have to do their job, which means that everything is magnified.

Therefore, the stock market corrections (pull back) happen and can be healthy and necessary, they are part of the “game” and that is how they must be assimilated. Furthermore, I consider that due to the excess liquidity that currently exists in the markets and the consequent need to invest it, it will be necessary to take advantage of these pull back to buy at better prices waiting for it to rise again and not interpret them as a crash.

Fear of inflation

In recent months, we are repeatedly hearing about the inflation and the fear it generates in Wall Street. Isn't it ironic that when the inflation objective pursued by the Central Banks is finally achieved, it is perceived as something negative? After flood the liquidity market and with economies reopening, it was a matter of time before it happened. Furthermore, let us not forget that some inflation is positive for the economy, since behind it there are economic growth.

Although it involves greater costs for companies, so will the sales prices of your goods or services. The important thing now will be to keep an eye on how this inflation stabilizes over the coming months and years, to see if it is something temporary or it may have escaped the control of the Central Banks. The key to tackling inflation is Invest in assets with returns higher than this.

Let us remember that the market does not fear inflation, but rather consequent rise in interest rates. I understand that the market reacts nervously to a possible increase since we come from a long period in which we have become accustomed to rates at 1% and even negative being the “normal”. In my opinion, small gradual increases should not be dramatic with the margin there is, but should be considered as a transition towards “normality” in which we will continue in a low rate environment.

Historic recovery of the American economy

To have a vision of the situation as a whole, we must analyze the evolution of business profits. Last May the publication of results for the first quarter of 2021 ended and we were able to see how more than 70% of companies Wall Street beat the analysts' estimates (although it is true that many times without reflecting it in the price), being even more surprising and positive, the forecasts that many of them have given for the entire year, “warning” that Its benefits will exceed all expectations. This is absolutely historic.

evolution of business profits

In the first quarter of 2021, The American economy has grown at an incredible 6.4%, and it is expected that annual growth will be the highest in the last 37 years. It is clear that each economic cycle is different and cannot be compared with each other, but without a doubt, there had not been an economic collapse followed by a boom of this magnitude until now. In fact, one of the concerns today is that supply is not being able to cover the enormous demand, something that I consider a positive “problem” that reflects economic expansion.

Although there will always be concerns on the horizon and reasons to give us some headaches, we must analyze the cocktail as a whole: i) historic economic recovery driven by levels record consumption, ii) low interest rates and financing facilities for companies, iii) abundance of liquidity in the markets and, iv) investment trends that will generate profound changes and exponential profits in certain sectors and companies.

In the third part we will analyze the sectors in which, without a doubt, we must be invested in the coming years to benefit from the disruptive changes that are occurring at an unimaginable speed thanks to technology.

Dan Benbunan,

Portfolio Manager

If you want to train in this world, with Master in Financial Management, Accounting and Management Control You will become a finance professional and acquire great knowledge about this field.

Head of Investments & Strategy at RBU

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