Latest from BCA Research
The Fed increased interest rates by 0.25% during its May FOMC meeting, a hike that was both well-telegraphed and widely anticipated. However, the FOMC statement and post-meeting press conference of Chairman Powell had enough for both bulls and bears to stay entrenched in their respective positions. A few bullet points below are what we heard and our take in the context of US equities.
If the recession begins this year, it is unlikely to be mild, because inflation will not have fallen by enough to allow the Fed to cut rates aggressively. In contrast, if the recession starts in 2024 or later, when inflation is likely to be much lower, the Fed will be able to cushion the blow. Our base case remains a 2024 recession but the risks around that view have increased in light of recent banking stresses.
The initial phase of the EU’s ambitious CBAM will launch 1 October and will begin collecting a carbon tax in 2026. Between now and then, it will be challenged as it attempts to put a price tag on CO2 emissions as imports cross the EU border. The CBAM will impart an inflationary bias in EU commodity and goods markets as 2026 draws near and importers have to secure EU ETS credits, the number of which, by design, will contract over time.
In a relatively uneventful month, given the action-packed start to 2023, the BCA Score L/S performed well as the outperformance of Safety and Technicals overpowered the underperformance of Value and Size. With this in mind, the USHQ SMID cap portfolio was able to beat its benchmark, however the USHQ Large Cap portfolio low beta tilt in tech held it back and it missed on its benchmark.
Indian EPS growth is set for major disappointments vis-à-vis the lofty expectations. Weak domestic demand amid tight fiscal and monetary policy entails more downside in stock prices. Stay underweight.
The Fed hiked 25 basis points at yesterday’s FOMC meeting while also signaling that the tightening cycle is now on hold. We discuss the short-run and long-run implications for Treasury yields.
China’s reopening, combined with a slew of pro-consumption policy stimuli, will likely boost household consumption by 10% in nominal terms in 2023 from a year ago. Some of the hardest hit service sectors during the pandemic will experience a strong recovery. Within the A-share market, investors should overweight the consumer discretionary sector versus the Chinese CSI300 benchmark.
The Global Equity Score did not change significantly this month and remains bearish, however on the heels of positive momentum, the sector model is now neutral-to-bullish on most growth sectors.
As the Fed meets today, we explain what it did wrong in 1970, 1974, and 1980 that prevented inflation from being exorcised, and the lessons for 2023-24. Plus, we identify a currency cross that could rebound in the next year.
Macro and geopolitical risks may spoil the narrow window for a stock market rally before recessionary trends rise to the fore.