Corion’s David Bacher shares his team’s monthly report-back on investment market performance, reflecting on a soggy October when a good start deteriorated into a poor ending. US inflation edged higher, causing an unexpected bump in interest rates and weaker share prices worldwide. Bacher explains that investors worry that no matter which presidential candidate wins, the American State’s profligacy will worsen, bringing fresh pressure onto the country’s finances.
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Edited transcript of the interview
Alec Hogg (00:11.16)
David Bacher from Corion Capital, it’s lovely, as always, to catch up on market movements over the past month. The Corion team puts together a wonderful presentation, which we review here, covering all the essential updates on investments over the previous 30 days. This time, we’re focusing on October.
Alec Hogg (00:45.826)
David, great to be with you. We’ve had a few months now where markets have been performing exceptionally, but not so much in October. It wasn’t the best month overall, and quite a volatile one as well.
David Bacher (01:05.605)
It certainly was. Markets, as you know, don’t go up in a straight line, and last month saw a bit of a correction. October started with some enthusiasm, but as the month went on, the market became more cautious. Globally, stocks pulled back, with emerging markets seeing some of the sharper declines. And as you know, in times of “risk-off” sentiment, assets like gold and the dollar tend to perform well, as they did last month—both providing a bit of a safe haven.
Alec Hogg (01:38.274)
What exactly do you mean by “risk-off”?
David Bacher (01:41.809)
“Risk-off” is when investors see data, earnings forecasts, or future events that make them more cautious, leading them to sit on the sidelines. Instead of buying riskier assets, there’s more selling, as investors adopt a defensive mindset, focusing more on capital preservation than growth.
Alec Hogg (02:05.868)
We’ve seen gold hit new records, and Bitcoin had a fantastic month. But Bitcoin as a “risk-off” asset? Isn’t Bitcoin considered more of a risk-on investment?
David Bacher (02:20.051)
Yes, I’m by no means a Bitcoin expert, and it’s had me scratching my head for years. But for many holders, Bitcoin is seen as a store of value against inflation and government debt issues—a way to preserve wealth independent of traditional currencies. Inflation in the U.S. came in a bit hotter than expected last month, which likely fueled Bitcoin’s rally.
Alec Hogg (02:53.76)
I suppose inflation concerns are hardly surprising, especially with the upcoming U.S. presidential election. Regardless of who wins, both candidates are likely to increase the budget deficit, which many believe will be inflationary. So, inflation may well rise further no matter who wins.
David Bacher (03:27.687)
Correct. It’s remarkable when you think about it. On one hand, Donald Trump is pushing for lower taxes and corporate tax cuts, while Kamala Harris favors increased social spending. Either way, this could mean a higher deficit, and the market is starting to react to that concern. Long-term inflation expectations are rising, which might be good for markets in the short to medium term, but down the line, are they just kicking the can?
Alec Hogg (04:05.878)
Yes, kicking the can down the road—a favorite move for politicians. A bit less “risky” than last month, David! I didn’t have any complaints from the “old mother Grundys” about “doggy style” this time, but I think “election style” is a safer term. But it’s all about the U.S. election, isn’t it?
David Bacher (04:27.287)
This month, we’re a bit more conservative with our theme. Last month, we shook things up a bit, but yes, October is indeed all about the U.S. election—a major global event. What I find interesting is that, when it comes to their economic policies, both parties aren’t that far apart on a fundamental level. Compared to places like South Africa, where political views are quite divergent, both parties in the U.S. are pro-capitalism, even if the world sees them quite differently.
Alec Hogg (05:09.806)
Yes, it’s all at the margins. If you’re an American Democrat, you might be labeled a socialist, yet in most parts of the world, you’d likely be considered a capitalist. But let’s move on. Global markets were down in October, with South Africa down 3.5%, and other emerging markets—like China and India—faring even worse. What’s driving this? Is it just nerves?
David Bacher (05:49.597)
I think the primary factor, which we noted in our presentation, was the increase in U.S. Treasury yields, which rose a substantial 50 basis points. The bond market is a highly efficient indicator, and when yields shift quickly, investors take notice. The inflation data, combined with concerns over deficits, meant that expectations for interest rate cuts became more conservative. That shift impacted equity markets, contributing to October’s struggle across the board.
Alec Hogg (06:41.068)
For those not entirely familiar, when interest rates rise, it usually signals greater risk. It’s like when someone with a less stable income applies for a loan—they’ll pay a higher rate because they’re a higher risk. Is that a fair analogy?
David Bacher (07:16.787)
Yes, that’s a good comparison. Higher interest rates make borrowing costlier for consumers, which leads to reduced spending and tighter belts. This affects corporate profits, which ultimately impacts the stock market. Also, from a valuation perspective, higher interest rates reduce the present value of future earnings, which also puts pressure on stocks.
Alec Hogg (08:10.126)
So, it’s no surprise that when rates go up, stocks generally feel the pinch. Rates are usually trending downward, but that wasn’t the case in October. Could you walk us through what happened with the U.S. 10-year Treasury yield?
David Bacher (08:35.069)
Certainly. The primary concern for bond investors is inflation. Higher inflation lowers the value of future bond payments, so bond prices tend to fall as yields rise. In October, we saw U.S. Treasuries start at around 3.75% and rise by 50 basis points in a single month, a significant move. This suggests that investors anticipate inflation may be more persistent than previously expected.
Alec Hogg (09:32.246)
For context, if you were earning 3.75% on a 10-year Treasury in early October, with inflation at 2%, you’d have a real return. But if inflation expectations rise, you’d demand a higher yield—hence the jump to over 4%.
David Bacher (10:32.275)
Right. The U.S. GDP data has been somewhat disappointing, although 2.8% growth would be fantastic by South African standards. But interestingly, a recent survey showed over 50% of Americans think the economy is in recession, even though it hasn’t technically been in recession under Joe Biden. I think distributional concerns—how economic gains are shared—might play a bigger role in how Americans feel about the economy than actual growth.
Alec Hogg (11:15.486)
Yes, and then there’s the “MAGA” versus “mega-cap” narrative, where many believe a Trump presidency would favor large tech stocks more than a Harris administration. Could you explain?
David Bacher (11:54.629)
Most would agree that a Trump presidency might be more favorable for mega-caps. Trump supports tech, AI, and competition freedom, and would likely lower corporate tax rates. So, a Trump win could indeed boost the tech sector and mega-cap stocks in particular.
Alec Hogg (12:26.23)
I spoke with Anthony Ginsberg in Los Angeles, who thinks Trump would replace the current antitrust regulator, who opposes big tech acquisitions of smaller companies. He suggests that if Trump wins, we might see a tech rally because smaller companies could finally get acquired. Do you think he’s onto something?
David Bacher (13:25.135)
Anthony raises a good point. Without that antitrust oversight, smaller companies could see new opportunities for acquisition, which could indeed attract private equity. So, yes, I think he has a case.
Alec Hogg (14:15.566)
Looking at the bigger picture, you did an analysis comparing 2024’s market performance with the best and worst years of the past 25. What does that tell us?
David Bacher (14:31.059)
The chart shows the range of equity market returns over the last 25 years, with the best year around 29% (in 2013) and the worst at -29% (in 2008). This year, 2024, has been outstanding so far, with year-to-date returns at 21%. If the trend holds, we may end up with another record-breaking year.
Alec Hogg (15:32.098)
And on the U.S. deficit front, both candidates, despite different economic strategies, seem likely to increase it. Could you unpack that?
David Bacher (15:58.045)
We labeled this topic “the elephant in the voting room” because the deficit is largely being ignored. Trump talks about cutting taxes, which appeals in the short term, but how will future generations manage the mounting debt? On the Democratic side, more social spending is likely. Neither strategy addresses the deficit, though that’s what might be needed for long-term stability.
Alec Hogg (17:10.114)
Now, back to South Africa. We’ve had rate increases despite slowing inflation. Why does the Reserve Bank continue hiking rates?
David Bacher (18:05.163)
The Reserve Bank likely feels pressure to keep rates high, especially with the risk of rand depreciation against the dollar. South Africa’s reliance on capital inflows means we must maintain attractive interest rates to support our currency. A weak rand raises import costs, which could lead to inflationary pressures despite domestic factors.
Alec Hogg (19:26.388)
Thank you, David Bacher from Corion Capital. We appreciate your insights as always!
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