COVID syndrome Financial markets' post - "Economics and Business of the post COVID-19 World" - HANFA
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Financial markets’ post
COVID syndrome
"Economics and Business of the post COVID-19 World"
Economics of Digital Transformation (EDT) 2021
Ante Žigman, PhD
25th June 2021
Economic policy response to COVID-19
Monetary conditions remain relaxed Stabilisation of the economy has implicit fiscal costs
Size of central bank COVID-19 asset purchases, Net public lending/borrowing, Total consolidatet public debt,
ECB and FED policy rates, in %
in % of 2020. GDP in % of GDP in % of GDP
Croatia Euro area USA ECB Deposit facility FED EA19 HR USA EA19 HR USA
0
15.0%
90
4
-5
10.0%
60
2
5.0% -10
30
0
0.0% -15 0
Croatia Euro area USA 06 08 10 12 14 16 18 20 22 2019 2020 2019 2020
Source: CNB, ECB, Eurostat and St. Louis FED Source: St. Lois FED, Eurostat
• Strong monetary and fiscal response to COVID-19 helped alleviate financial instability and prevented greater
losses
• As a negative consequence fiscal position worsened
Post-covid recovery stronger than expected
Strong recovery in 2021. but slowdown in following years Uptick in producer prices puts additional pressure on inflation
Real GDP growth rates, in % Producer and consumer prices growth rate, in %
China Croatia EU USA Consumer prices Producer prices
China Croatia Euroa area USA
20.0%
15.0% 7.5%
10.0%
5.0%
5.0%
2.5%
0.0%
0.0%
2021
2022
2023
2024
2021
2022
2023
2024
2021
2022
2023
2024
2021
2022
2023
2024
3/2021
3/2021
3/2021
3/2021 Dec Jan Feb Mar Apr MayDec Jan Feb Mar Apr MayDec Jan Feb Mar Apr MayDec Jan Feb Mar Apr May
Note: Shaded area denote projected values.
Source: European comission, ST. Louis FED Source: Eurostat, ST. Louis FED
• Solid conditions are established for economic recovery in the medium term
• Upward pressures on prices could jeopardize expected recovery
Systemic stress in financial markets dip down to
levels before the pandemic
Significant reduction in systemic stress in financial markets US stock market volatility decreased firmly in 2021
Composite indicator of systemic stress (CISS) VIX volatility index
Foreign exchange market Financial intermediaries Money market
60
Stock market Correlation Bond market
40
0.50
0.00
20
2000 2005 2010 2015 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021
1990 2000 2010 2020
Note: A seven-day moving average of the value of the index and its components is shown. Areas marked in red indicate periods
of crisis in European financial markets.
Source: ECB Source: St. Louis FED
• Reactions of economic policymakers alleviated stress in financial markets, which returned to pre-crisis
levels by mid-June 2021Nominal bond yields are rising considering
economic recovery and inflation
Nominal yields remain at historical lows despite signs of potential increase Drivers of US Treasury yields
Yields to maturity on long-term government bonds, in % May 2013-May 2021; basis points
CEE countires HR Other EU countries USA Global demand shocks US macro risk shocks
Global risk shocks US monetary policy shocks
80
7.5
60
5.0
40
2.5
20
0.0
0
2007 2009 2011 2013 2015 2017 2019 2021
2021 Taper tantrum
CEE countries are: BG, CZ, EE, HU, LV, LT, PL, RO, SI and SK.
Source: Bloomberg, Eurostat Source: ECB
• Signs of potential interest rate spike due to inflation concerns appeared at the beginning of the year
• Nevertheless, sentiment towards monetary policy remained stableRe-pricing risk of bond portfolios is increasing (interest rate
risk), in line with observed increase in duration
Amount of duration risk in euro area bond markets Increase in maturity means bigger interest rate risk
Avg. residual bond portfolio maturity, in years
Investment funds Life insurance Non-life insurance Pension funds
8
6
4
2014. 2015. 2016. 2017. 2018. 2019. 2020. 2021.
Source: ECB Source: Hanfa
• Increased duration of investment portfolio due to search-for-yield behavior emphasizes interest-rate risks,
globally and domesticallyCroatian financial services sector assets are highly
concentrated in bond investments
Pronounced concentration of investments in government bonds Relatively high concentration of bond portfolio investments
Investment structure of financial services sector by type of investment, in % (left) and Share of the five largest counterparties in total investments in bonds and shares, in %
annual rate of change, in HRK bn. (right)
Bonds Shares
Cash and deposits Government bonds Loans Real estate
Corporate bonds Investment funds Other Shares
Insurance companies Investment funds Pension funds
100%
100%
75% 20
75%
50%
10
50%
25%
0
25%
0%
2016 2017 2018 2019 2020 2021 2017 2018 2019 2020
11 12 13 14 15 16 17 18 19 20 21 11 12 13 14 15 16 17 18 19 20 21 11 12 13 14 15 16 17 18 19 20 21
Note: The investments of insurance companies, pension and investment funds are presented, which together form
almost 90% of the assets of the financial services market.
Source: Hanfa Source: Bloomberg, Hanfa
• Relatively high concentration of bond investments exposes domestic institutional investors to potentially
sizeable revaluation lossesStock markets growth on the basis of
economic recovery expectations
Global equity and bond market developments Strong financial markets rebound on the basis of quick recovery expectations
Index, 31.12.2021=100
Major stock indices, quarterly rate of change (%) Real gdp, yearly rate of change (%)
US US
Bonds Stocks UK UK
SK SK
SI SI
SE SE
RO RO
110 PT PT
PL PL
NL NO
MT NL
LV MT
100 LV
LU
LT LU
IT LT
IE IT
90 HU IE
HU
HR HR
GR FR
FR FI
80 FI ES
ES EL
EE EE
DK DK
70 DE DE
CZ CZ
CY CY
BG BG
60 BE BE
AT AT
Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021
Note: Global stock index is represented by MSCI All Country World Index, while global bond index is represented by Note: Color of the square for a particular date indicates position of historical distribution of obsereved indicator for a particular
Bloomberg Barclays Multiverse Index. country where green color indicates very high growth rates and red color very low growth rate.
Source: Bloomberg Source: Eurostat, St. Louis FED
• Despite the huge contraction, global stocks outperformed global bonds due to strong recovery
• Record stock valuations in current subdued economic activity circumstancesInvestors’ glass is half full (maybe?)
Domestic investor sentiment recovered in hightened uncertainty environment Risk sentiment indices
Investor sentiment index in domestic capital market
2.5
1
0.0
0
-2.5
-1
-5.0
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 04-20 07-20 10-20 01-21 04-21
Note: Marked area indicates crisis period starting with 20th February 2020.
Source: Hanfa Source: ECB
• Risk sentiment in both the euro area and the US continues improving
• Croatia investor sentiment index indicates a continuation of a positive trend after the transitory dip at the
beginning of the crisisStrong market recovery rally took place at the beginning of
2021…
Stock market recovery accelerated after US elections and news of Most CEE stock markets redeemed value lost at beginning of crisis
vaccine introduction Value of leading stock indices in selected CEE countries, 100 = 31.12.2019.
Average value of leading stock indices in EU countries
100 = 31.12.2007 100 = 31.12.2019 End 2019 End 2020 Mid May 2021
CEE countries HR Other EU countries USA 130
120 110
200
100 90
100
80
70
09 11 13 15 17 19 21 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
BG CZ EE HR HU LT LV PL RO SI SK
Note: CEE countries are: BG, CZ, EE, HU, LV, LT, PL, RO, SK and SI. Vertical lines indicate November 3 for US elections,
and December 11 when the first COVID-19 vaccine was approved. Note: Vertical lines denote range of values observed since end of 2019. until 14th od May 2021.
Source: Bloomberg Source: Bloomberg
• US elections and the start of the vaccination process gave a boost to stock markets recovery at end of 2020
• Most emerging markets redeemed lost value by mid-May 2021… however, the growth is asymmetrical between and within
individual markets
K-shaped recovery driven primarly by recovery expectations Major domestic stock prices fully recovered lost ground in 2020
Selected STOXX Europe 600 sector stock indices, 100 = 1.1.2020 Selected domestic sector stock indices, 100 = 1.1.2020
Banks and insurance Industry Stoxx 600 Technology Traveling Construction Food industry Tourism
CROBEXplus Industry
200
120
100
150
80
100
60
40
Jan-2020 Jul-2020 Jan-2021 Jul-2021 Jan-2020 Jul-2020 Jan-2021 Jul-2021
Source: Bloomberg Source: ZSE
• Technology and industry leads the way in EU markets, but cyclical sectors (such as banks and insurance) are catching up
• However, inflation expectations could jeopardize relatively high market valuations of growth companies (such as certain IT
companies)Flying to close to sun?
Record stock market valuations rely on continuation of low interest-rate environment Excess CAPE yield
S&P500 index (left), cyclically adjusted price-to-earnings ratio - CAPE (middle),
long-term bond yield and excess cyclically adjusted stock market yield (right)
S&P500 CAPE Long interest rate (%) Excess CAPE yield (%)
4000
40 7.5
3000
5.0
30
2000
2.5
20
1000
0.0
1990 2000 2010 2020 1990 2000 2010 2020 1990 2000 2010 2020
Source: ECB
Source: Robert J. Shiller
• Albeit realizing record high valuations, excess yields (relative to long term bonds) in US and EA markets are still
within the range observed in the last decade
• Change in interest rate environment could bring the prices downDomestic market price recovery accompanied by increased
market concentration
The recovery of prices in the domestic capital market in the environment of subdued Stock market liquidity stable in 2021, but trading becomes more concentrated
trading Share of the first three and the first five most traded stocks in total turnover
Turnover on the ZSE regular market, in HRKm ZSE market capitalization, in HRKbn
Top 3 Top 5
Bonds Other instruments Stocks Bonds ETF Stocks
80
1000 200
60
500 100
40
0 0
2014 2015 2016 2017 2018 2019 2020 2021 2019 2020 2021 2014 2015 2016 2017 2018 2019 2020 2021
Source: ZSE, Hanfa Source: ZSE, Hanfa
• The beginning of 2021 was highlighted by a recovery in prices in the domestic capital market, but trading remains at
suppressed levels
• In 2020, the multi-year trend of increasing the concentration of trading on the domestic stock market continued, which
emphasizes the possibility of contagion and the propagation of disturbances through parts of the financial systemMarket risks of domestic financial services sector remain
pronounced in 2021
Exposure to market risks is growing Materialization of market risk in 2020
Share of equity and investment funds in assets/investments, in % Estimated loss per shares and units in investment funds in the scenario with probability of
occurence of 5%, in % of assets
Equity Investment funds
Portfolio VaR VaR
Insurance Mandatory
Mandatory UCITS Voluntary
30%
20%
10% 10.0%
0%
UCITS Voluntary
5.0%
30%
20%
10%
15 16 17 18 19 20 21 15 16 17 18 19 20 21 15 16 17 18 19 20 21
0%
2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 Note: The blue line indicates the portfolio Value at Risk of the portfolio on the observed day, while the red line indicates
the number Value at Risk values of the individual exposures estimated based on weekly returns in a moving time horizont
of one year.
Source: Hanfa Source: Hanfa
• Slight increase in exposure to market risks through the investments in equity and investment funds’ shares
(search for returns)
• Despite stabilization in 2020, market risks remain elevatedAlongside the growth of equity investments, foreign
investments are growing progressively (equity and IF)
Increase in cross-border exposures Bonds remain being dominant component in foreign transactions
Transactions in financial assets of the financial services sector to the counterparty, in HRKbn Annual transactions of investments in foreign assets by type of instrument, in HRKbn
Central bank Enterprises Government Other Bonds Investment funds Other Shares
Credit institutions Foreign sector Investment funds Other FI
8
20 6
4
10
2
0
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: CNB, Hanfa Source: CNB, Hanfa
• The growth of cross-border exposure brings potential diversification benefits as it reduces the exposure to the
domestic government
• At the same time, the sector is exposed to higher volatility and potential shocks in foreign capital marketsPositive market trends have returned investors to the funds
Investors return in investment funds with underlined growth of market valuations In 2021, there were no pressures on the liquidity position of UCITS funds
Quarterly change in net assets of investment funds, in HRKbn Trade of UCITS funds units, in HRKbn
Total payins and payouts Net payins by fund category
Exchange rate changes Market trends Net receipts
Balanced Equity
Payins Payouts
Investment funds Pension funds Bond Other
2.5
8
1.00
3.0
0.0
6 0.75
-2.5 0.0
0.50
4
-5.0 -3.0 0.25
2
0.00
-7.5
2018 2019 2020 2021 2018 2019 2020 2021 0
10 11 12 13 14 15 16 17 18 19 20 21 22 Jul-20 Oct-20 Jan-21 Apr-21
Note: Net receipts stand for net payments into funds in the observed quarter.
Source: Hanfa Source: Hanfa
• At the beginning of 2021, investment and pension funds recorded stable growth under the impact of positive
market trends as well as positive net payments
• Bond funds remain the most popular fund typeProfitability of investment and pension funds remained
relatively stable in 2020 is improving
Recovery of UCITS funds returns in early 2021 Profitability of mandatory pension funds
Annual returns of individual categories of UCITS funds, in % Annual returns of MIREX indices
Balanced Bond
A category B category C category
5.0%
10% 20.0%
2.5%
0%
15.0%
0.0%
-10%
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
10.0%
Equity Other
30.0% 5.0%
20%
20.0%
10.0% 10%
0.0%
0.0%
0%
-10.0%
-5.0%
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021
Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21
Note: The marked area indicates the interquartile range of indicators by individual funds.
Source: Hanfa Source: Hanfa
• Almost all categories of pension and investment funds achieved positive returns in 2020 value of investor
assets preserved in challenging circumstances
• Profitability recovery at the beginning of 2021 mainly under the influence of the recovery of investor
sentiment and positive market trendsA strong ESG proposition can help create additonal excessive
business value across the financial services sector
Environment Social Governance
One of the most important The social impact may not Staying ahead of violations,
concerns of the 21st century be evident right at the onset, ensuring transparency and
but it is an integral part industry best practices, and
Sustainable practices attract
dialogue with regulators
more customers, allows better How a company fosters its people
access to resources, lowers and culture will have ripple effects Sustainable practices may lead to
energy and water consumption on the broader community. Their government support, subsidies,
and therefore also can reduce inclusivity and diversity will pave overcoming increasing regulatory
operational costs. the way for a sustainable future. pressure and better investor relations.
• Marked by the COVID-19 pandemic and the global social and economic crisis, 2020 emphasized the
importance of sustainable financing
• Nowadays, ESG criteria have become a reference for socially responsible investing complete integration of
ESG factors in investment policies is of a great importanceStrong investor demand for ESG and crypto funds suggests that
the pandemic has increased the overall awareness of the global
sustainability needs
The number of ESG UCITS in Europe has been rising at a
steady rate of 20% annually during the last five years in
response to the ever-growing demand for sustainable investing
Equity funds are the most dominant ESG fund type, counting
During the last five years in Europe, the
number of ESG funds has grown at more
for 56% of ESG UCITS net assets.
than double the rate of non-ESG funds
While non-ESG funds saw a growth in net assets The COVID-19 pandemic, which led to a sharp fall in global
of only 4.8% in 2020, ESG funds recorded a markets in March 2020, did not halt the growth of the ESG
growth rate of 37.1% market in 2020
The gross annual performance of European ESG
equity funds reached on average 10.4% in 2016- Recognizing the relevance of a sustainable financing in
2020. This compares to 9.2% for non-ESG funds domestic market two ESG funds were founded in last
Social funds have experienced substantial growth in
year
demand, but environmental funds still hold the
dominant position in the ESG universe.
Growing interest in digital assets international hedge
funds significantly increase their exposure to
cryptocurrencies
Source: EFAMA, Hanfa
Interest into crypto is rising in domestic market first
domestic crypto fund established and is in proceedingDynamics of crypto market
THE The crypto currency world is growing
1 GROWTH
exponentially and has reached market
cap that now exceeds $1 trillion
CRYPTO AS Not only Bitcoin, but Zcash,
2 DIGITAL ASSET
Chainlink, Ripple, Litecoin,
Ethereum
Unlike before, today's crypto
SUPPORTED BY market is being propelled by
3 INSTITUTIONS
institutional adoption and big
money entering the field rather
than retail investors
Interest for crypto currency
CROATIA IS NOT investment is also growing in
4 AN EXCEPTION
Croatia, as evidenced by launch
of first local „crypto” fund
Apple
Microsoft
Potential for long term gain and
5 TRUST ISSUES diversification of portfolios but data
security issues are present
Kriptovalute
Amazon
Consumer/investor education is required Alphabet
due to the fact this is a very volatile and
6 EDUCATION opaque /non transparent asset class with
high risk of market manipulation Facebook
TeslaClosing remarks
What we have learned from The economy of the future
COVID-19 pandemic? • pandemic has already outlined a future in which the sectors
that traditionally boosted GDP the most are going to be
• the world of today is truly interconnected
challenged in the medium term by new, growing sectors
systemic stress like this can occur
• digitalisation, in line with growing respect for the environment,
anytime and disrupt the entire global
will mark the economy of the future
economy
• the fourth industrial revolution efficiency and quality of
• technology and science have never been
production processes and the optimisation of decision-making
more important
ESG propositions incorporated in business policies
• the need to maintain a healthy relationship
• green recovery proposed by the EU grouped into two main
with the environment
objectives: create a generation of employment and wealth
• importance of macroprudential policies
and fight against climate change
and prompt response of regulators
• new opportunities for financial services marketsThank you for attention!
You can also read
