Latest from BCA Research

Falling inflation will allow bond yields to decline in the major economies over the next few quarters. As such, we recommend that investors shift their duration stance from underweight to neutral over a 12 month-and-longer horizon and to overweight over a 6-month horizon. Structurally, however, a depletion of the global savings glut could put upward pressure on yields.

Despite uncertainty and intrusive government policy, natural gas and oil markets have managed to direct much-needed supplies to Europe going into winter. Natgas markets attracted massive LNG inflows – at a cost of record-high prices – that now leave the continent’s on-land storage close to full. A floating LNG market now exists on Europe’s Atlantic Coast – made possible by spot prices at the Dutch Title Transfer Facility trading ~ 40% below 1Q23 futures. The TTF futures contango market structure allows unsold cargoes to be stored on vessels off the coast of Europe until needed this winter via hedging (e.g., buy spot, sell 2- to 3-month-forward futures to lock in storage costs). This expands storage for the continent, leaving the EU in much better shape to weather the loss of Russian pipeline gas.

It’s time to go overweight Hungarian domestic bonds in an EM and European core bond portfolios. Currency investors should book profits on our long CZK / short HUF trade, which has generated 29.4% gains since its inception in June last year.

Bank Credit Analyst

Section II of this month’s Bank Credit Analyst report is a guest piece written by Martin Barnes, which we are making available to all clients. Martin, who retired from BCA Research as Chief Economist last year after a long and illustrious career, discusses the long-run outlook for US government debt and the possibility of an eventual crisis. Martin’s report serves as an important reminder of the unsustainable long-run trajectory of government debt and deficits, which we trust you will find both interesting and insightful.

Bank Credit Analyst

Bank Credit Analyst

In Section I, we note that while recent inflation developments point to some supply-side and pandemic-related disinflation, they also point to potentially stickier inflation over the coming several months. The inflation, monetary policy, and geopolitical outlook remains sufficiently risky that an overweight stance towards equities within a global multi-asset portfolio is not justified, and we continue to recommend a neutral stance for now. This month’s Section II is a guest piece written by Martin Barnes. Martin, who retired from BCA Research as Chief Economist last year after a long and illustrious career, discusses the outlook for government debt and the possibility of an eventual crisis.

We recommend that investors use the following framework to think about whether potential disinflation would be bullish or bearish for share prices: disinflation will prove to be bullish for global share prices if it is due to an improvement in supply-side dynamics, but bearish if it is demand driven. We believe it is the latter.

It takes time for wage inflation to die. So, if 2022 was the year that central banks’ monster tightening killed bond and stock market valuations, then 2023 will be the year that it finally reaches the economy and kills profits, jobs, and the wage inflation that has so far refused to die. This means that commodity prices have substantial further downside, while healthcare relative performance has substantial further upside.

Financials stocks have been on the radar of equity investors as central banks around the work grapple with rising inflation. Higher interest rates are usually a boon for stocks in the sector, which year-to-date, has helped Financials marginally outperform on a relative basis. However, returns are still negative on an absolute basis due to systemic risk in the markets caused by the underlying economic conditions.

The 20th Communist Party Congress concluded on Sunday with President Xi Jinping cementing his third term in office. We are maintaining our cautious stance on Chinese stocks and the exchange rate. The lack of a significant shift away from current macro and regulatory policies means that China’s economic recovery and stock performance remain at risk.