More Than The Magnificent Seven and Some Hidden Risks

Good Morning Ladies and Gentlemen

“Our Attention Economy has been taken to its extreme. People are shouting nonsense, and no one even blinks. But that doesn’t mean it isn’t nonsense.”

Peter Atwater

Michael Arone from State Street suggests that we should not overlook the importance of recent earnings results simply because they appear concentrated. He points out that in the first quarter, seven out of eleven economic sectors experienced double-digit earnings growth, and all sectors reported revenue increases. This does not diminish the technology sector’s significant contribution to overall earnings; instead, it indicates a diversification of leadership beneath the surface, even as technology remains a major driver of overall profit growth. This development appears quite positive. However, there are also concerns to consider. For instance, the impending record El Niño, today’s first topic, and rising private credit exposure, today’s second topic, warrant further exploration.

El Niño

El Niño has officially begun, with forecasts suggesting it may evolve into a ‘Super El Niño’ by the end of the year. The most powerful El Niño on record occurred in the 1870s, a period characterised by widespread famines globally. However, there has not yet been an El Niño of the expected magnitude. It adds yet another layer to global warming. It is worth bearing in mind that the last two years have been dominated by a La Niña, the cooler counterpart. If conditions such as those recently seen in Europe with temperatures around 40 degrees centigrade were to persist for longer, the sugar beet harvest, for example, would be at risk. The full impact of El Niño will be felt around three to five months after it peaks, i.e. in spring/summer 2027. Food inflation could replace energy inflation.

Agricultural Futures Prices

At present, U.S. agricultural futures prices are primarily influenced by rice, which has risen 38%, and wheat, which has risen 27%. The monsoon season in India has commenced, but during El Niño years, rainfall is typically lighter, putting parts of the rice harvest at risk. Fortunately, thanks to record harvests thus far, stock levels are adequate. However, traders are concerned that reduced rainfall in Southeast Asia could threaten rice production. Additionally, soya bean prices have surged by 13.7% this year, as Chinese importers have recently resumed purchasing US soya beans. The U.S. Department of Agriculture (USDA) projects a record global harvest, but rising demand suggests the market is precariously balanced. Furthermore, the heat in the Midwestern United States could negatively impact soybean yields. The primary growing regions for these crops are Brazil, Argentina, and the United States.

Privat Credit

Today’s second topic is all about private credit, which has become increasingly significant for insurers. A recent survey by Marsh & McLennan Companies reveals that a substantial majority plans to enhance their exposure to this asset class, despite concerns about deteriorating credit standards, rising default rates, and a shrinking illiquidity premium. Interest in private credit continues to rise markedly within the insurance industry, even amid some warning signs. Approximately 57% of insurers surveyed globally intend to increase their allocation to private credit instruments over the next 12 to 24 months, rising to 65% among U.S. companies. This information comes from a survey conducted by Marsh, published on July 16, and reported by Bloomberg. Compared with the previous survey conducted in 2024, there has been a significant increase in willingness to invest. Back then, only 32% of respondents indicated plans to expand their private credit exposure. Moreover, for the first time, demand for private credit investments has outstripped that for publicly traded bonds. Currently, 48% of insurers intend to increase their exposure to investment-grade securities in the public bond market, up from 37% two years ago. Despite this growing appetite for investment, insurers are not overlooking the associated risks. More than half of the 123 respondents expressed concerns about declining lending standards, weaker creditor-protection clauses, rising default rates, and the increasing prevalence of payment-in-kind arrangements, in which interest is not paid in cash but added to the outstanding debt. Whenever I read something like that, interest is not paid in cash but added to the outstanding debt, my stomach tenses up.

Conclusion

Indeed, Ladies and Gentlemen, the earnings season presents a more optimistic outlook than the concentration of headlines may imply, with broader sector participation bolstering corporate profitability. However, investors must remain vigilant. The emergence of a potential Super El Niño could reignite food inflation just as the pressures from energy prices begin to wane. Additionally, the rapid expansion of private credit raises concerns about deteriorating lending standards and concealed risks. These factors collectively serve as a reminder that, beneath the current optimism, significant macroeconomic and financial vulnerabilities most likely justify careful attention.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li