CURRENT
POLL

Will bitcoin crash in 2018?

33.73%
Y
66.27%
N
http://blog.en.erste-am.com/wp-content/uploads/sites/13/2017/09/Fotolia_69474500_L-890x390.jpg

Market Monitor: risky markets have come far

(c) Fotolia

Earlier this week, we convened the last Investment Committee of 2017. The general risk appetite of the team has not changed vis-à-vis the previous month (from 78.85 percent to 79 percent on our 0 – 100 percent scale). The team continues to see the future optimistically, with a resulting “risk on” stance.

 

Source: Erste AM

 

For the first time, we asked the individual members what risk stance they were expecting for the Committee overall. The result: on average, team members tended to think they were taking more risk than the group. While the team members are still optimistic we regard this as ambitious in comparison with the market. From our point of view this is another indicator as to how far the current cycle has come already.

Risk of correction on the rise

The following discussion focused mainly on two topics. On the one hand, the tax reform in the USA should enable US companies to boost their profits in 2018. On the other hand, the valuations of many asset classes are being perceived as high. The risk of even relatively unimportant events triggering a correction has thus increased. All in all, the good economic performance still suggests optimism, and to allocate significant weights to risky asset classes in the portfolio. That being said, the air is getting thinner.

Our inflation outlook for 2018 made up a large part of our discussion. In summary, a lot of signs suggest that the rate of inflation will rise by about 0.5 percentage points next year.

Reasons for higher inflation in the USA

  • The good economic situation
  • Less pressure from the labour market
  • The weaker US dollar
  • Higher import prices
  • Higher commodity prices

As an example, please have a look at the following chart that juxtaposes the ISM index, i.e. the sentiment index of 400 US purchasing managers (18 months from the present), and the core inflation rate. In view of the most recent economic development, higher inflation rates would not come as a surprise.

 

ISM = Institute of Supply Management, CPI = Consumer Price Index
Source: Erste AM
Note: Past performance is not indicative of future development.

US central bank could come under interest rate pressure

If this forecast were to be matched or even exceeded, the US central bank would come under pressure to raise interest rates more significantly than currently expected by the market (N.B. December 2018 Fed Fund futures are at 1.795 percent) or communicated by the Fed itself (mean of the Fed Dots for end-2018: 2.125 percent). This would definitely be negative for US Treasury bonds and instruments with a higher beta* relative to them, such as government bonds or corporate bonds with investment grade rating.

*Beta is the ratio that measures the relative bandwidth of fluctuation of a security with respect to the overall market.

Bitcoin gains not sustainable

The second big discussion was about bitcoin. At our previous Committee, we decided to thoroughly analyse bitcoin as investment class and how one could invest in it. In the meantime, a number of instruments have cropped up that facilitate investments in bitcoin. Some of the members of our Investment Committee have already invested in bitcoin. Those happy few can celebrate a 115 percent gain since the previous Committee. Of course, such numbers make it difficult to scrutinise the issue seriously. To paraphrase Donald Rumsfeld, and with a touch of polemics, I would associate “Shock and Awe” with bitcoin. To word it politely, we do not regard the latest gains of bitcoin as sustainable.

 

The last item on the agenda was the discussion of our event list. What topics will be driving the markets in the coming 12 to 18 months?

 

EIC = Erste AM Investment Comittee
Source: Erste AM
Note: Prognoses are no reliable indicator for future performance.

 

Prior to discussing the contents, I would like to explain the modus operandi of the matrix. The topics are in order of frequency of being named by the individual team members. This is what the numbers in the circles refer to. The colour of the circle indicates whether we regard the event as clearly positive (green) or negative (red) for the financial markets, or in between (grey). The Probability axis indicates how likely such a result of the event is. The axis Impact on Portfolio Positions shows how strongly the respective event could potentially affect our portfolio.

Elections in Italy as biggest market risk

The most commonly cited event risk were the elections in Italy, which according to the constitution have to be held by 20 May. A medium probability and a high impact of a result that is negative for the financial markets make the elections one of the big issues for the first months of 2018. After the elections in France, the Netherlands, and Germany and the end of the turbulences caused by the struggle for independence in Catalonia, the market has come to largely ignore the political risks in the Eurozone again. This results in the risk of getting caught on the wrong foot.

P.S. In the 24 hours prior to me writing this article (7 December 2017, 19.30), bitcoin has increased almost continuously for 23 hours by a total of 31 percent and has then dropped by 10 percent in the last 60 minutes.

 

Legal note:

Prognoses are no reliable indicator for future performance.

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Legal disclaimer

This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. The simplified prospectus is prepared by ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. and published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the ImmoInvFG 2003 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011.

The fund prospectus, Information for Investors pursuant to § 21 AIFMG, the simplified prospectus, and the key investor document/KID can be viewed in their latest versions at the web site www.erste-am.com or www.ersteimmobilien.at or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus or simplified prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com or www.ersteimmobilien.at.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Gerold Permoser

Gerold Permoser has been Chief Investment Officer at Erste Asset Management since early April 2013. He is responsible for all asset management activities and investment strategies for all investment funds held by the Erste Asset Management Group in Austria, Germany, Croatia, Romania, Slovakia, th...

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