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DF October 2023 Newsletter

In recent newsletters, we have discussed the growing significance of lunar developments, and it appears that NASA's recent announcement corroborates this narrative. The agency's conceptual 3-D renderings of a lunar residence by 2040 offer a glimmer of optimism in what has otherwise been a challenging year for the real estate sector.

The conventional real estate market has been facing a series of adversities, including elevated property prices, escalating interest rates, and region-specific declines in demand owing to the rise of remote work. Further exacerbating the situation are accounting scandals that have severely affected the Chinese real estate market. In light of these multi-faceted challenges, we have made the strategic decision to remove real estate from its previously core position within our investment portfolios.

A historical method of timekeeping by our ancestors, this October, we welcome the Hunter's Moon, which followed the Harvest Moon in September. We will spend part of this newsletter to better understanding the global harvest festivals and how those countries central banks can help us hunt for opportunities!

Not All Harvest Festivals are Created Equally


"In the heart of Montmartre, where art meets tradition, the Fête des Vendanges celebrates not just the harvest of the vine, but the richness of life itself. As we raise our glasses under the sparkle of Parisian fireworks, let us also toast to a more promising economic landscape, marked by a lower inflation rate of 5.7%.


The tradition of Erntedankfest honours the harvest with a blend of faith and festivity, this year's celebrations may carry a more sombre tone. Labelled as the 'sick man of Europe' by The Economist, the nation is grappling with an inflation rate of 6.4%.

United Kingdom

The Harvest Festival traditionally celebrated on the Sunday nearest to the Harvest Moon. As churches and schools join in decorating spaces and collecting food for those less fortunate, this year's celebrations may also serve as a moment of reflection. With an inflation rate of 6.7% and some of the highest interest rates in the Western world, the British populace faces the prospect of a challenging winter ahead.


The tradition of Niiname-sai provides a moment to give thanks for the year's harvest, connecting both the celestial and the earthly through offerings of newly harvested rice. As even the Emperor partakes in this solemn Shinto ceremony, the ritual underscores the nation's deep-rooted respect for the land and its bounty. Meanwhile, in the economic sphere, the Bank of Japan's policy of maintaining short-term interest rates at -0.1% and capping 10-year yields around 0% serves as a stark contrast to other nations grappling with high inflation. As efforts continue to reach a 2% inflation target. This negative interest rate has led the Topix market to being the top performing market globally in USD terms at 25.8%!


India has a range of harvest festivals, given its diversity and varying agricultural practices across states. Prominent among these are Pongal in Tamil Nadu, Makar Sankranti in various parts of India, and Baisakhi in Punjab. These festivals are celebrated with various rituals, fairs, and India had much to celebrate with an expanding economy, and a stock market that was up 8.7% at the writing of this newsletter. Activity in Canada might cause some issues regarding this near term outperformance.

United States

The timing of Thanksgiving has historical rather than agricultural origins. President Abraham Lincoln proclaimed a national day of "Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens," to be celebrated on the last Thursday in November, during the midst of the American Civil War in 1863. The aim was to foster a sense of national unity.

Before Lincoln's proclamation, Thanksgiving was celebrated on various days in different states. The choice of the fourth Thursday was later ratified by Congress in 1941, solidifying its place on the national calendar.

The late November timing makes Thanksgiving one of the last harvest festivals of the year, positioned closer to the onset of winter rather than the end of the actual harvest season. Despite its late timing, it serves similar purposes to other harvest festivals: celebrating community and giving thanks for the bounty of the year.

Hopefully, these views of unification will be remembered as we navigate an already intricate economic landscape. The United States is confronted with yet another budgetary deadlock. With a looming deadline of November 17th, just in time to ruin our favourite American harvest festival and no apparent resolutions on the horizon, the impasse adds another layer of complexity to fiscal planning and market stability.


Compounding this challenging scenario, we are witnessing a surge in oil prices, attributed to reduced supply from major producers Russia and Saudi Arabia. The prices are potentially nearing the $100 per barrel mark, a development that could have far-reaching implications for both consumers and investors. This escalation in oil prices coincides curiously with ongoing discussions to curtail military spending related to the situation in Ukraine.

The confluence of rising interest rates and escalating oil prices imposes a de facto tax on consumers, exerting downward pressure on demand. In economic theory, a decrease in demand would generally lead to a correction in prices, potentially stabilizing or reducing oil prices in the near term. However, given the complexities of the current situation—including geopolitical tensions and supply chain constraints—this rebalancing may lead to a cold and hard winter for some.

Inflation and interest rates have a complex but interconnected relationship, often influenced by the broader economic environment and the specific policy objectives of central banks. Below is an explanation of how they generally interact, followed by an overview of what central banks in the U.S., U.K., Europe, Japan, and China aim to achieve.

Correlation of Inflation Rates to Interest Rates

  1. Inflation Up, Interest Rates Up: Central banks often increase interest rates to combat high inflation. Higher interest rates typically lead to lower spending and investment, cooling the economy and thereby reducing inflationary pressure.

  2. Inflation Down, Interest Rates Down: In a low-inflation or deflationary environment, central banks may reduce interest rates to stimulate spending and investment, aiming to increase inflation to a target level.

Objectives of Central Banks in Different Regions

United States - Federal Reserve

The Federal Reserve aims for maximum employment and stable prices. It uses the federal funds rate as its primary tool and also engages in open market operations, among other strategies.

United Kingdom - Bank of England

Similar to the Federal Reserve, the Bank of England targets an inflation rate of 2%. It uses the Bank Rate as its primary tool and

engages in quantitative easing to stimulate or cool the economy as necessary.

Europe - European Central Bank (ECB)

The ECB aims for price stability, targeting an inflation rate of below, but close to, 2%. It uses main refinancing operations, among other tools, to influence interest rates across the Eurozone.

Japan - Bank of Japan (BOJ)

The BOJ has a unique challenge of combating prolonged deflation and aims for controlled inflation. It has resorted to unconventional policies like negative interest rates and yield curve control to stimulate inflation.

China - People's Bank of China (PBOC)

The PBOC has multiple objectives, including economic growth, full employment, and price stability. Unlike other central banks, the PBOC isn't independent but operates as part of the government. It employs a range of tools, including reserve requirement ratios and open market operations, to control money supply and influence interest rates.

The yield curve is a graphical representation that shows the relationship between interest rates and the maturity of bonds. Usually, the curve slopes upwards, meaning that longer-term bonds offer higher yields than shorter-term ones. This is because investors generally expect higher returns for taking on the greater risk associated with holding bonds over a longer period.

We have an inverted yield curve, which happens when short-term interest rates are higher than long-term rates. This is considered unusual and is often interpreted as a sign of economic uncertainty or even an impending recession. When the yield curve inverts, it means investors are seeking the safety of long-term bonds, driving up their prices and lowering their yields.

Our strategy of continuing to buy short-term bonds (under a one year duration) is quite conservative. We are also increasing our positions to a higher allocation of fixed income from alternatives and global equities at this point.

A normalizing yield curve suggests that investors are growing more confident in the economy's long-term prospects, moving away from the safety of long-term bonds. Central banks like those in the US, UK and the Eurozone appear to be taking a cautious approach, holding off on immediate rate hikes while monitoring upcoming inflation data. This could indicate a level of economic uncertainty that makes short-term bonds a prudent choice.

In September, the broader financial market grappled with the prospect of a sustained period of higher interest rates, triggered in part by Crude Oil prices nearing the $100 per barrel threshold. This sentiment impacted multiple asset classes, leading to a general market pullback.

The renewable energy sector was notably affected, facing challenges from both the macroeconomic environment and industry-specific factors. Elevated interest rates have a detrimental effect on the balance sheets of emerging companies in this sector, making it more expensive for them to borrow and finance growth. Concurrently, the industry is witnessing a decrease in demand for solar and wind projects. This decline can largely be attributed to diminishing financial support for such initiatives, resulting in a tepid pipeline of upcoming projects for companies dependent on both public and private sector energy infrastructure investments.

In our latest market overview, large-cap growth equities continue to dominate, with Latin America (Lat-AM) and the United States showing particularly strong regional performance. One key driver behind the robust showing in Lat-AM is the prominence of the carry trade, specifically JPY/MXN, which has been highlighted by Bank of America as the "world's favourite carry trade this year." This has resulted in an influx of "hot capital" into the region, creating a ripple effect that has also boosted the equity markets.

Additionally, the relative strength of Lat-AM can be attributed to the region's advanced position in the interest rate cycle compared to Western nations. Latin American countries were quicker to adjust interest rates, and their inflation rates have remained largely in line with central bank targets. This advantageous situation has made the region less susceptible to the broader inflationary pressures affecting other parts of the world.


Copyright © 2023 Dunhill Financial. All rights reserved.

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