NEW YORK — The Standard and Poor’s 500 index is yielding almost 27% year-to-date, its best performance in two years; while the U.S. inflation jumped 6.2% in October, its biggest increase in three decades. And on the side of the table, the Federal Reserve is ready to start tapering its monthly asset purchases in December. Three signals/events that Sora Capital is following closely to recommend its investors to be cautious as the New Year appears ever closer.
“Our view is that investors are being too complacent,” Pablo Buch and Ricardo Montes de Oca, founders of the Mexico City-based alternative investment firm, argue in a letter to stakeholders published November 11.
With the S&P 500 averaging a historical return of 11% at current prices, the net present value of the index projects a return of about 4% for the next decade, according to their estimates. “Certainly financial markets are priced for perfection and things in our periscope are far from perfect,” they said in the letter, the first one made public since the firm was created in 2019.
The executives wonder if the stubborn increase in the cost of living around the world will lead to a mild or severe stagflation. “To offset whichever scenario, prudence is our strategy. Our view on the aforementioned tilts towards being cautious, rather than speculating on such abnormal market conditions,” they added in the letter.
Earlier this week analysts at Goldman Sachs warned that Latin America is likely to face next year and in 2023 the unwanted return of low growth and high inflation. Three economists at the New York City-based investment bank projected a GDP growth of only 2% for the region in 2022 vs an expected 6.6% expansion for this year. At the same time, the inflation in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru is forecasted to moderate from a cyclical high of 12.6% this year to a “still high very uncomfortable” 9.6% next year, driven mainly by the very high-inflation environment in Argentina, the analysts said in the report published November 9.
Energy and Healthcare
Flagging that country and corporate debt levels are at historic levels, “our view considers a high likelihood that bond prices will fall in the next two years to compensate for risk-and-inflation-adjusted returns,” Buch and Montes de Oca said in the letter, adding that in their analysis corporate profits peaked this year. “Higher nominal and real rates will compress them. In terms of equity valuations, we don’t foresee a multiple expansion in the short-run. If that was the case, it will be short-live.”
Along with inflation/stagflation fears Sora Capital is also unease on other factors. “Towards the very short term, we think the biggest risk tilts towards commodities specially the energy market, oil and gas markets look very tight towards the year-end. An increase in volatility of inflation will lead to higher inflation expectations, higher yields and the possibility of higher taxes (alarming inequality statistics are arising from the pandemic).”
As of Monday, the COVID-19 virus is already responsible for more than five million confirmed deaths around the world, The New York Times reported, citing data from the Center for Systems Science and Engineering at Johns Hopkins University.
Despite this heavy human toll, “the pandemic will bring windfall profits in many sectors,” the executive said in the letter. “We believe healthcare to have similar growth prospects as Information Technology did in the 2000´s, the next GOOG, FB, and AMZN´s of the world we believe are going to be in healthcare (and some in energy and water).”
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