Topic Tags: Currency

2022 Market Preview Video

This video coincides with our 2022 Market Preview letter from Director of Research Greg Leonberger, FSA, EA, MAAA and provides analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2022.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

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Bulls on Parade: What’s Driving the 2021 Digital Asset Rally?

The first bitcoin futures ETF — the ProShares Bitcoin Strategy ETF — was approved on October 15th, making it easier for investors to access the most well-known cryptocurrency. Not surprisingly, Bitcoin’s network value (the market capitalization) surged on the announcement, reaching $1.13T (equating to $61,571 per coin). However, this was not the first time Bitcoin’s capitalization crossed $1T: as the orange line in the chart shows, Bitcoin’s total value has crossed this threshold several times since 2020, with significant volatility along the way.

Certainly, the ProShares ETF approval has provided more access to investors, and the October run-up can at least be partially attributed to this new channel. However, there also appears to be an evolving demand dynamic in terms of investor type, which could create broader acceptance of cryptocurrency as an asset class in the coming years. We can examine this trend by looking at the types of transactions on the bitcoin network to see what has changed over the last five years.

Illustrated in blue and on the left axis is bitcoin’s daily exchange-to-network flow ratio: this measures bitcoin transfers on open exchanges (both inflows and outflows) as a percent of total network transfers. The total network is a classic ledger of accounts, the blockchain technology which serves as the foundation for all cryptocurrencies; transfers are debits and credits to and from accounts. Transfers are classified as either open exchange (retail investors), or over the counter (i.e., wholesale, OTC — more akin to institutional investors). As the ratios in blue approximate open exchange flows, the remaining network transfers approximate OTC flows. Overlaying exchange flows and network value propounds the degree to which exchanges drive or do not drive asset appreciation. To that point, the data illustrated above suggests three points:

  • Historically, retail participants via open exchanges drove Bitcoin demand. Daily exchange-to-network flows surged from mid-2017 through mid-2020, averaging ~35.2%, with a high of 99.4%.
  • Around August 2020, the drivers of demand shifted. Daily exchange-to-network flows decreased and have sustained five-year lows, averaging ~15.4% in 2021, with a low of 0.8%.
  • OTC transfers correspond with the 2021 rally, averaging ~84.6% of network transfers. Although it is not definitive, this implies institutional wholesale transfers are the dominant driver of Bitcoin’s value appreciation through 2021.

Taking this analysis a step further, it appears that more institutional money is driving demand for bitcoin. In the past, the infancy of the asset class coupled with the radical volatility of returns was enough to frighten most institutional investors off. If the trend suggested by this chart continues, however, bitcoin and other cryptocurrencies may become a more common holding across institutional portfolios.

Print PDF > Bulls on Parade: What’s Driving the 2021 Digital Asset Rally?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Volatility in Crypto

Bitcoin has been under pressure over the past month while Ethereum has held up relatively well, resulting in a large discrepancy in returns between the two largest cryptocurrencies. After a surge in prices from late 2020 through early 2021, a number of factors have weighed on Bitcoin more recently. China reiterated its restrictions on cryptocurrencies and proposed punishments for companies involved in mining Bitcoin in the Inner Mongolia region. Mining rigs have a large energy footprint and have since been banned in order to lower China’s overall energy consumption. China accounts for more than 65% of the world’s total Bitcoin mining due to its cheap energy costs. Elon Musk, a prominent voice in the crypto space, also announced that Tesla would no longer accept Bitcoin as a form of payment due to environmental concerns.

Ethereum also dropped in May, but is still up 83% since March, a stark difference from the -19.8% return of Bitcoin. Ethereum has benefited from increased interest in the underlying technology. Decentralized finance focuses on using Ethereum-enabled smart contracts to optimize transactions. The rise of non-fungible tokens or NFTs has also contributed to Ethereum’s gains. NFTs are digital assets, secured by the Ethereum blockchain, that represent unique ownership of virtual items like art and sports memorabilia. NFT trading volumes in the first quarter of 2021 were up 15X quarter-over-quarter.¹

Cryptoassets are an emerging asset class and this level of volatility should be expected. We recommend interested investors remain diligent and only pursue investments that are appropriate for their risk tolerances.

Print PDF > Volatility in Crypto

¹CoinDesk, Nonfungible.com

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Q1 2021 Market Insights Video

This video features an in-depth analysis of the first quarter’s performance by Marquette’s research analysts and directors, reviewing general themes from the quarter and risks and opportunities to monitor in the coming months.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

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Weak Dollar, Strong EM

For U.S.-based investors, the movement of the dollar has a direct and indirect impact on emerging market equity returns. The direct impact is straightforward. Purchasing foreign-listed equities requires conversion to the local currency. On top of the change in the price and any dividends of the underlying stock, a weakening U.S. dollar creates a positive currency return, while a strengthening U.S. dollar generates a negative currency return.

The movement of the dollar also has an indirect impact on emerging market returns. This week’s chart looks at the performance of the MSCI EM Local Currency Index and the U.S. Dollar Index (DXY). The local currency index removes any direct currency impact, isolating price performance of the underlying stocks. The DXY measures the U.S. dollar versus a basket of trade partner currencies. Since 2000, the correlation of monthly returns between the local currency index and the dollar index is -0.40, meaning historically they have moved in opposite directions.

There are several reasons why a weak dollar is supportive of emerging market equities. A weaker U.S. dollar is generally positive for overall economic growth and emerging economies typically benefit from strong global growth. Many developing economies are also reliant on dollar-issued debt. A weaker dollar lowers the cost of borrowing, a positive for emerging markets companies and equity markets. The U.S. dollar weakened throughout most of 2020, with the DXY down 10% between February and December. Over that same time frame, emerging markets equities returned 19%. So far in 2021, the dollar is up modestly, with emerging markets pulling back more recently. Looking forward, we expect the historical relationship between the two to persist, positioning emerging market equity investors to benefit should the dollar weaken further.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Prospects of Dollar Depreciation in the COVID Recovery & Impact on Asset Classes

As vaccine distribution continues in full force and the global economy’s recovery from the COVID pandemic gains momentum, investors are concerned about depreciation of the U.S. dollar and how this phenomenon might affect various asset classes within a portfolio.

In this paper, we examine the mechanics of dollar depreciation and its subsequent impact on traditional asset classes. We begin by exploring the macroeconomic factors that drive dollar strength or weakness and then examine the impact of dollar depreciation on the fixed income, U.S. equities, and non-U.S. equities asset classes both by covering the potential effects of a stronger or weaker dollar and by assessing historical performance.

Read > Prospects of Dollar Depreciation in the COVID Recovery & Impact on Asset Classes

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

 

2021 Market Preview

2020 was a year like no other and has left investors across the world wondering what the future looks like. Will vaccines prove effective in halting a pandemic that spread like wildfire across the globe? What will the impact of a new administration in Washington be on economies and markets? How much additional stimulus will be injected into the economy? And most broadly, will things ever get back to “normal”? While there are no easy answers to these questions, 2021 promises to be another volatile year, most especially until there has been sufficient roll-out and distribution of vaccines to contain the COVID-19 outbreak that continues to haunt economic growth across the globe.

Remarkably, 2020 ended up as a positive year for financial markets despite a massive sell-off in the equity and credit markets during February and March. Paradoxically, 2021 may be a less eventful year but at the same time a lower overall return environment, given that much of the optimism about economic re-openings and stimulus has already been priced into the markets. Nonetheless, there are a variety of factors worth monitoring over the next year which will directly impact market returns. Similar to past years, we offer our 2021 market preview newsletters for each of the primary asset classes we cover, with in-depth analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2021.

We hope these materials can assist you and your committees as you plan for the coming year and beyond. We have also produced a 2021 Market Preview video if you would like to hear a high-level summary of the market previews. Should you have any questions about anything related to these materials, please feel free to reach out to any of us for further assistance. Here’s to a return to normalcy in 2021!

U.S. Economy: Are Better Days Ahead?
by Brandon Von Feldt, CFA, Research Analyst

Fixed Income: Poised for Further Recovery with Undertones of Exuberance
by Ben Mohr, CFA, Director of Fixed Income

U.S. Equities: Birth of a New Market
by Samantha T. Grant, CFA, CAIA, Assistant Vice President,
Colleen Flannery, Research Analyst, U.S. Equities, and
Evan Frazier, CAIA, Research Analyst, U.S. Equities

Non-U.S. Equities: Constructive but Cautious
by David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities, and
Nicole Johnson-Barnes, CFA, Senior Research Analyst, Global Equities

Hedge Funds: Poised for Another Record Year?
by Joe McGuane, CFA, Senior Research Analyst, Alternatives
and Jessica Noviskis, CFA, Senior Research Analyst, Hedge Funds

Real Estate: Finding the New Normal
by Will DuPree, Senior Research Analyst, Real Assets

Infrastructure: An Evolving Opportunity Set, but an Essential Allocation
by Will DuPree, Senior Research Analyst, Real Assets

Private Equity: Both Quality and Growth Shine Brightly in 2020
by Derek Schmidt, CFA, CAIA, Director of Private Equity

Private Credit: Two Steps Forward, One Step Back
by Brett Graffy, CAIA, Research Analyst

Download the combined files > Traditional and Alternatives

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2021 Market Preview Video

This video coincides with our 2021 Market Preview newsletters and provides a high-level summary of each, including analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2021.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for research alerts to be notified when we publish new videos here.
For more information, questions, or feedback, please send us an email.

The Dollar Returns to Trend (and Could Go Lower)

The dollar has enjoyed an impressive run during the last few years on the backs of trade restrictions, off-cycle expansionary fiscal policy, and muted inflation. That said, the currency has weakened in recent months, as the U.S. Dollar Index — which measures the strength of the greenback relative to a basket of several international currencies — has dropped nearly 10% since the end of March. The index is now nearing its 30-year average of 91.2.

The dollar could fall even further in the near term given the current landscape. While it is unclear exactly how President-elect Joe Biden will govern along the political spectrum, the new administration will almost certainly take a more dovish approach with respect to international trade. A de-escalation of Trump-era tariff wars would be a boon to emerging market equities, which could create trouble for the dollar. Additionally, the lack of additional fiscal stimulus in the United States after the passage of the CARES Act in March, coupled with unprecedented expansionary efforts by the Federal Reserve, is a harbinger of a weaker greenback. Even a new relief package that is more modest in size may not be enough to prevent a further slide in the dollar given the extraordinary scope of the Fed’s support and a sustained low interest rate environment.

It is important to remember that a declining dollar does not necessarily spell doom for the U.S. economy. Goods produced in the United States become more attractive to consumers when the domestic currency is weak, which can lead to job creation in the manufacturing sector and economic growth. Increased global demand for American goods can also lead to trade deficit reductions. If current trends continue, investors will have to weigh these benefits against the costs of a weakening greenback, which include inflation and subsequent increases in commodity prices, as well as lower relative returns for dollar-denominated assets. Now more than ever, allocators should stress the importance of international and style diversification.

Print PDF > The Dollar Returns to Trend (and Could Go Lower)

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

What Does the Biden Win Mean for Financial Markets?

On Saturday, November 7th, Joe Biden was declared the winner of the presidential election and will become the 46th president of the United States in January. Markets were surprisingly positive last week despite the uncertainty around results as multiple states were too close to call until all the votes had been tallied. While there is still pending litigation in certain states, it seems highly unlikely that these actions will reverse the election result. Thus, market participants have turned their attention to what the market can expect from a Biden-led White House coupled with a split Congress, while the coronavirus pandemic marches on.

In this newsletter, we tackle this question for each of the “traditional” asset classes: Fixed Income, U.S. Equities, and Non-U.S. Equities. The impact on alternative asset classes such as hedge funds, real assets, and private equity are more nuanced and will be covered in our 2021 market preview to be released in January.

Read > What Does the Biden Win Mean for Financial Markets?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.