If America’s debt spiral gets worse, here’s the stock that may benefit, says fund manager

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Wall Street is undecided about trying for another rally on Friday, according to early trading in futures. That’s in keeping with the struggle it has been of late, with the S&P 500?SPX?down six of the last eight sessions amid August’s bearish tendencies.

Some technical factors are causing concern. The Nasdaq 100?NDX?is in danger of decisively falling back below its 50-day moving average support trend. Apple?AAPL,?-0.12%?did so a week ago, and now its relative strength index, a gauge of momentum, has swiftly dropped to 30, signaling the stock may soon enter short-term oversold territory.

Over the same short period, the yield on the 10-year Treasury?BX:TMUBMUSD10Y?has twitched within a range of roughly 4% to 4.2% as investors try to get a handle on varying inflation and economic growth readings.

So, what’s an investor to do amid such uncertainty? Well, buy the companies that help traders to trade it, reckons VGI Partners, the Australia-based fund manager. In it’s semi-annual investor letter, covering performance to the end of June, VGI highlighted the top ten long investments in its Global Investments fund , three of which provide, to varying degrees, what may be termed the plumbing of the financial markets.

With a weighting of 7% is the London Stock Exchange?LSEG,?-0.72%,?which VGI is keen to point out has transformed from a traditional exchange into a data and analytics group. After its purchase of data group Refinitiv in 2021, the LSE now generates only 3% of revenues from its legacy cash equities exchange.

Deutsche B?rse represents about 8% of the portfolio and is deemed atractive says VGI because it provides trading, clearing, pre/post-trading and data and analytic services in four key operating segments: Trading & Clearing, Fund Services, Security Services and Data & Analytics.

DB is a “well-diversified exchange group whose activities touch on most aspects of European capital markets, offering a blend of transactional and non-transactional revenue exposure,” VGI adds.

But top holding is CME Group?CME,?0.00%,?with a 9% weighting. CME operates futures and derivatives exchanges, including the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Chicago Board of Trade, and the Dow Jones Index Services.

VGI particularly likes CME’s “effective monopoly” of trading in interest rate derivatives. “Demand for interest rate derivatives is driven by volatility in interest rate markets, whose effect is compounded by the number of bonds held by those looking to manage interest rate risk and, by extension, market liquidity,” the fund manger notes. And the chart below illustrates this strong relationship.

VGI expects the growth in the size of the U.S. Treasury market, particularly in relation to privately held US treasuries as the Fed undergoes a balance sheet unwind, to provide important support to a CME’s interest rate derivatives business. CME should also benefit — as are other exchanges — from a boost to net interest income from the collateral balances it holds.

“We believe that CME’s assets are critical pieces of market infrastructure and will be recognized as such in the future,” VGI concludes.

Markets

U.S. stock-index futures?ES00,?-0.49%,?YM00,?-0.19%,?NQ00,?-0.80%?are little changed as benchmark Treasury yields?BX:TMUBMUSD10Y?dip. The dollar?DXY?is lower, while oil prices?CL.1,?-0.13%?slip and gold?GC00,?-0.12%?gains.

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