Developed Countries

Special Report

The risk to ROE remains to the downside, which suggests that valuation multiples have peaked for the cycle. Beyond a potentially violent near-term counter-trend bounce, valuation multiples will remain under pressure.

Special Report

We are introducing a new set of fair value models for currencies. On a cyclical basis, the dollar is expensive. However, this is not enough of a reason to expect an imminent fall in the greenback. The yen is extremely cheap, and its fair value is rising on the back of a positive terms-of-trade shock. The yuan is fairly valued. Most commodity currencies are not yet cheap.

The retail drug store industry is enjoying a twin boost from both bullish cyclical and secular forces. The latter is reflected in the long-term advance in personal outlays at pharmacies, which likely reflects increased drug demand as a consequence of an aging population. From a cyclical perspective, the surge in health care sector hiring activity reflects increased health coverage and rising patient volumes. That is a boon for drug demand, and is consistent with rising store traffic. As a result, pharmacies should be able to continue lifting selling prices at a rapid clip, despite deep deflation in the overall corporate sector. The upshot is ongoing productivity gains, as measured by sales/employee, should support robust earnings performance and a relative valuation re-rating. Stay with a high-conviction overweight. The ticker symbols for the stocks in this index are: WBA, CVS.

Sterling has come under intense pressure since PM Cameron announced date of the EU referendum. Our bearish view on the British pound has not been based on a forecast of U.K. succession from the EU.

The remarkable admission by OPEC's secretary-general, Salem el-Badri, earlier this week that with "any increase in (oil's) price, shale will come immediately and cover any reduction" in output only hints at the larger impact of light-tight-oil (LTO) going forward.

The previous Insight outlined the case for good building supply store sales growth, but an aggressive rise in wage inflation and intensifying deflation pressures may provide a negative offset. Meanwhile, the gap between house price inflation and mortgage rates has slipped below zero (second panel), suggesting that the financial incentive to buy and renovate a home has eased, on the margin. It is notable the retailing CEO confidence has taken a sharp turn for the worse in recent months, as this series often provides a good lead on industry sales trends. Souring confidence may reflect deflationary pressures. Importantly, our Home Improvement Retail model, which incorporates leading top and bottom line indicators, has not confirmed the advance in relative share performance into overvalued territory. Against this backdrop, we recommend only a market neutral weight. The ticker symbols for the stocks in this index are: HD, LOW.

Both Home Depot and Lowe's produced strong profit results in the most recent quarter, aided by a warm winter weather, which pulled forward sales of many products. The odds of the industry maintaining decent sales momentum are good, given that ultra-low mortgage rates should sustain housing turnover (second panel). Banks are still willing to extend mortgage credit, as rising house prices provide confidence in underlying asset values. Nevertheless, extrapolating future store traffic growth straight down to the bottom line risks being too optimistic. The industry has hired aggressively to meet rising demand, and deflation still plagues the industry (bottom panel). Deflation amidst good store traffic also suggests that a serious market share battle is raging, which means meeting this year's aggressive industry earnings growth estimates is not guaranteed, please see the next Insight. The ticker symbols for the stocks in this index are: HD, LOW.

Where is the most likely mispricing of interest rates today? Plus our latest thoughts on the U.K.'s June 23 referendum on EU membership, and its market implications.

Special Report

This month's Special Report reviews the main factors driving the "lower for longer" bond yield view. A key finding is that the demographically-driven portion of the expansion in world capital spending has come to a virtual standstill, representing a major hit to underlying demand growth.

This month's Special Report reviews the main factors driving the "lower for longer" bond yield view. A key finding is that the demographically-driven portion of the expansion in world capital spending has come to a virtual standstill, representing a major hit to underlying demand growth.