Developed Countries

The equity bear case is obvious. Prices are approaching overhead resistance and face fundamental headwinds.

Special Report

This week <i>Global Alpha Sector Strategy</i> in conjunction with <i>Emerging Markets Strategy</i> is sending out a <i>Special Report</i> on EM deep cyclical sectors, discussing debt and cash flow dynamics, identifying how far advanced the capital expenditure down cycle is, and determining if recent EM deep cyclical strength should be bought or faded.

An Insight yesterday showed that the overall technology sector was likely to record its worst quarterly earnings performance in four years. The highest beta components of the sector are most at risk. For instance, the semiconductor industry is losing its main source of support, namely an M&A premium. Last year's mini-M&A frenzy is petering out, which will put the onus on profits to support relative performance. However, global chip sales continue to deteriorate, and leading indicators such as Chinese electronics imports and Emerging Market currencies continue to warn of tepid chip demand. With chip producer inventories still growing at a historically rapid clip, there will be downward pressure on average chip selling prices. TSMC's profit warning earlier this week likely provides a good read for the overall industry, and we reiterate our high-conviction underweight rating. The ticker symbols for the stocks in this index are: BLBG: S5SECO - INTC, QCOM, TXN, AVGO, NVDA, ADI, SWKS, XLNX, MU, LLTC, MCHP, QRVO, FSLR.

Japan is in a liquidity trap: bad economic news is good for the yen while good economic news is bad for the yen. Chinese reflation could help risk assets in the months ahead, but poor EM fundamentals will reassert themselves later this year. The yen bull market is not over yet. The BoC was more positive on growth than anticipated. The BoE's Super Thursday was a non-event.

A stronger yen is hampering efforts to revive the Japanese economy and the BoJ's failed NIRP experiment leaves open the option of direct currency intervention. Probability is also high that the April 2017 sales tax hike will be postponed, perhaps indefinitely. A major stimulus package, "helicopter drops" of money, and a 4% inflation target may be the only way to permanently overcome deflation. Near-term, further yen strength is likely, but the long-term path is down.

Overall consumer spending growth has been sub-par, as the windfall from lower energy prices has translated largely into a high personal savings rate rather than increased consumption growth. As a result, performance among retailing stocks has become highly fragmented, as marked divergences in spending among specific retailing industries are developing. Investing alongside top-line trends tends to pay off. The latest retail sales report showed the industries such as hypermarkets and retail drug stores are experiencing accelerating top-line momentum (top and second panels), consistent with a more discerning consumer. That bodes well for related-industry profit outperformance and valuation expansion. Conversely, restaurant sales are slipping, similar to the cautious message from the National Association of Restaurants. We are overweight retail drug stores and hypermarkets, but underweight restaurants.

The S&P technology sector is forecast to deliver its worst quarterly earnings performance since 2012/2013, when the sector suffered a relative performance steep correction (top panel). That period was marked by a downturn in capital spending momentum, and a contraction in technology new orders-to-inventories. A similar backdrop is currently unfolding. BCA's Capital Spending Model has moved sharply lower, heralding share price underperformance. In addition, demand for tech goods remains anemic, as proxied by tech new orders and exports (second panel). That represents a headwind to future production growth, and by extension, productivity. The implication is that tech sector deflationary conditions are likely to remain intense, and it is too soon to position for better technology earnings. We remain underweight the overall tech sector.

A weaker USD resulting from more dovish forward guidance from the Fed, and evidence of continued production declines in non-OPEC and OPEC countries will continue to buoy oil prices.

Special Report

One of our highest-conviction investment ideas for the next few years.

Special Report

Clients should forgive us for being too gloomy at the start of the year -- it is difficult to be optimistic in the dead of a Montreal winter. However, with springtime comes the reflation trade, born on the wings of massive Chinese fiscal and credit expansion. In this report, we discuss how long (not very) the trade can go (and how to play it). Our In Focus feature returns to pessimism, with a discussion of why the Anglo-Saxon laissez-faire economic model may be in for a big pendulum swing.