Inflationary pressures continue to rise strongly across the global economy. Czech inflation data for August were published on Friday. While analysts' consensus had estimated year-on-year consumer price growth in the Czech economy at 3.6% after 3.4% in July, the 4.1% published surprised most market participants in a strongly negative way. Moreover, according to many economists, Czech inflation is expected to rise further in the coming months and could reach 5% by the end of the year, while the Czech National Bank's inflation target is significantly lower at 2%. It should also be added that, according to the Czech Statistical Office, prices of all the main components of the Czech consumer basket rose strongly, even month-on-month. The current strong price growth is therefore not limited to a limited number of elements of the consumer basket, but inflationary pressures are currently spread widely across the economy. The likelihood that the Czech National Bank will raise the base interest rate by half a percentage point from the current 0.75% to 1.25% at its next meeting on 30 September is therefore rising significantly. Inflationary pressures are currently even stronger in the world's largest economy, the USA, than in the Czech Republic. On Friday, the producer price index (PPI) data for August was published, and after a 7.8% year-on-year increase in July, the annual growth in producer prices reached 8.3% last month. The global scenario of stagflation, i.e. weak economic growth and significantly increased inflation, is therefore still gaining momentum.
As for stock markets, they slightly corrected the previous steep rise last week. The main stock indices therefore came down slightly from their all-time highs. The broadest global equity index, the MSCI All Country World Index, wrote off 1.2% and probably the most followed equity index, the US S&P 500, wrote off 1.7%. Central Europe, our preferred region, again performed above average. The CECEEUR index lost "only" -0.8%.
In-line with my view, which I have had already for some time, I must repeat that overall global equity markets as a whole remain overvalued as my global valuation Z-Score reaches 2.0, which is still close to the all-time high. The average global equity valuation is thus currently around 2.0 standard deviations above the historical average, based on the data since 1995, which is approximately at the level from the market peak in 2000. Therefore, I believe that equity returns will be rather below average in the next few years. The average annual equity returns, including dividends, over the next five to seven years on the basis of the broadest global stock index MSCI All Country World are unlikely to exceed 5%. At the same time, I believe that our active investment management approach should, on average each year, help the global equity component of our investment portfolios outperform the MSCI All Country World global equity index by several percentage points.
Bonds also weakened slightly. The broadest global bond index, the Bloomberg Barclays Global Aggregate Bond Index, shed 0.2%, while the average global bond yield to maturity rose 0.02 percentage point to 1.06%. In real inflation-adjusted terms, the average global bond yield to maturity remains deeply in negative territory, currently at -3.2%. We refer to negative real inflation-adjusted bond yields to maturity as financial repression. The Czech government bond performance index posted a more significant loss last week at -0.7%. The nominal yield to maturity of the Czech government bond with a long 10-year maturity was 1.93% at the end of last week. Czech government bonds are therefore also rather overvalued now, as their real inflation-adjusted yields to maturity are also quite significantly negative.
As for my outlook on bonds, like stocks, they are expensive at the moment. Therefore, I believe that bonds’ returns over the next five to seven years will be below average compared to historical trends. That said, those bond investors who want to beat inflation will continue to have no choice but to invest primarily in above-average risk bond instruments, specifically high-yield corporate bonds, and primarily smaller issuers without an external rating from one of the major rating agencies.
Commodities did not see any major movements during last week. The S&P GSCI global commodity index rose marginally by 0.1%. The price of a barrel of North Sea Brent rose by 0.4% to $73. Gold weakened by 2.3% to $1,790 per troy ounce.
The US dollar strengthened last week. The dollar index DXY, which measures the dollar's performance against a basket of other major currencies, gained 0.6%. Against the euro, the dollar also strengthened by 0.6% to 1.181 USD/EUR. The koruna strengthened slightly last week. It strengthened by 0.3% against the dollar to 21.36 CZK/USD and by 0.5% against the euro to 25.29
Investment Strategist at Conseq Investment Management, a.s.