Acciones

Aspectos destacados Estrategia de cartera La débil demanda de vivienda, el mínimo en las tasas de interés, la deflación de los precios de viviendas nuevas y las pobres perspectivas de empleo en la industria sugieren que ahora procede una posición infraponderada en el índice S&P homebuilding.      El fortalecimiento de la dinámica demanda/oferta, las regulaciones IMO Sulfur 2020, y las expectativas de beneficios relativos hundidas indican que hay más ganancias por delante para las acciones puras de refino. Cambios recientes Bajar la calificación del índice S&P de construcción de viviendas a infraponderado, hoy. Tabla 1 ¿Esto es todo? ¿Esto es todo? Artículo Las acciones intentaron alcanzar nuevos máximos históricos la semana pasada, continuando con el entusiasmo por el acuerdo comercial "fase uno" y respirando con alivio por resultados bancarios mejores de lo esperado. Dudamos que se materialice un acuerdo real que incluya la Propiedad Intelectual y el sector tecnológico. En el mejor de los casos, lo único que obtuvimos fue una tregua comercial. Vale la pena repetir la reciente analogía futbolística de Larry Kudlow: “Es como estar en la línea de siete yardas en un partido de fútbol... Y como fanático sufridor de los New York Giants, podrían estar en la línea de siete y nunca logran llevar el balón a la zona de anotación... Cuando llegas al último 10 por ciento, a la línea de siete yardas, es difícil”. Como recordatorio, las altas tarifas permanecen vigentes y hay muchas probabilidades de que el daño ya infligido al comercio global sea lo suficientemente severo como para que pasen meses antes de que surjan brotes verdes. Mientras tanto, dando seguimiento a nuestro “candidato a gráfico del año” que publicamos hace dos semanas, profundizamos y descubrimos dos índices económicos sensibles adicionales que consistentemente alcanzaron su pico antes que el SPX en los tres ciclos anteriores (Gráfico 1). Ahora conforman el Indicador Líder de Acciones de la Estrategia de Renta Variable de EE. UU.: un compósito con ponderación igual del índice S&P Banks, el índice Russell 2000 y el índice Value Line Geometric, que señala que el dinero fácil ya se ha hecho este ciclo en el SPX (Gráfico 2). Gráfico 1 Tres señales infalibles... Tres señales infalibles... Tres señales infalibles... Gráfico 2 ...Combinadas en un único indicador líder de acciones ...Combinados en un único indicador líder de renta variable ...Combinados en un único indicador líder de renta variable Es importante subrayar que, en ausencia de crecimiento de beneficios, sigue siendo extremadamente difícil que las acciones emprendan un nuevo tramo alcista sostenible confiando únicamente en la expansión de múltiplos. Gráfico 3 muestra nuestro actualizado Indicador de Poder de Fijación de Precios Corporativos (CPPI) y continúa desinflándose. De hecho, la fuerte caída de nuestro CPPI compensa más que la caída en el crecimiento salarial, advirtiendo que la contracción de márgenes en el S&P 500 tiene poder de persistencia1 (panel inferior, Gráfico 3). Analizando en profundidad, nuestro CPPI está agitando una bandera roja. Como recordatorio, calculamos el poder de fijación de precios por grupo industrial a partir de las tasas de crecimiento relevantes del CPI, PPI, PCE y las materias primas para cada uno de los 60 grupos industriales que seguimos. Tabla 2 también destaca las tendencias de poder de fijación de precios a más corto plazo y la diferencia de cada industria con respecto a la inflación general. Sólo el 42% de las industrias que cubrimos están elevando los precios de venta en más del 1%, y el 33% están claramente deflacionando. Preocupantemente, solo el 26% de los sectores están subiendo precios a un ritmo superior al de la inflación general. En cuanto a las tendencias de poder de fijación de precios, dos tercios de las industrias que cubrimos están o bien planas o en tendencia descendente (Tabla 2). Gráfico 3 Poder de fijación de precios corporativo nulo Nulo poder corporativo de fijación de precios Nulo poder corporativo de fijación de precios Tabla 2 Poder de fijación de precios por grupo industrial ¿Es esto todo? ¿Es esto todo? El oro ha saltado a la cima de nuestra tabla galopando a una tasa del 26% anual (recuerde que estaba en deflación en nuestra actualización de principios de julio), y solo tres industrias adicionales relacionadas con materias primas llegaron al top veinte (Tabla 2). La desaparición del complejo de materias primas de los primeros puestos es consistente con los problemas del PPI global y la fortaleza del dólar estadounidense. Esta semana actualizamos dos grupos, uno temprano y otro profundamente cíclico. Curiosamente, los sectores defensivos tienen una presencia saludable en los diez primeros puestos con cinco entradas. Por el contrario, las materias primas en general y las industrias relacionadas con la energía en particular ocupan la parte baja de la clasificación, ya que el crudo WTI está deflacionando fuertemente desde el pico de octubre de 2018. Sumando todo, la inflación de precios de venta del sector corporativo se está hundiendo en línea con las expectativas de inflación deprimidas. Como planteamos en nuestro reciente Informe Especial sobre márgenes de beneficio, los márgenes de beneficio ya han alcanzado su pico para el ciclo. Reiteramos nuestra visión cautelosa del mercado accionario en un horizonte cíclico de 9 a 12 meses. Esta semana actualizamos dos grupos, uno temprano y otro profundamente cíclico. Resquebrajando los cimientos de la construcción de viviendas Recomendamos degradar el nicho del índice S&P homebuilding a infraponderado, ya que la mayoría, si no todos, los impulsores positivos de beneficios ya están reflejados en los precios relativos de las acciones. Específicamente, la caída de las tasas de interés ha sido más que compensada por el comportamiento superior en lo que va del año de los constructores de viviendas. Desde la Gran Recesión, los constructores de viviendas han estado en ciclos claramente definidos de subidas y bajadas, y hay muchas probabilidades de que pronto entremos en una oscilación descendente (panel inferior, Gráfico 4). Las tasas de interés tocaron fondo a principios de septiembre y hay poco impulso adicional que puedan ejercer sobre los precios relativos de las acciones (rendimiento del Treasury a 10 años mostrado invertido, panel superior, Gráfico 4). Gráfico 4 Las ganancias relativas están agotadas Las ganancias relativas están agotadas. Las ganancias relativas están agotadas. Preocupantemente, las expectativas de los consumidores de comprar una vivienda nueva se desplomaron el mes pasado según la encuesta de The Conference Board, y esa debilidad en la demanda afectará a los inicios de vivienda y, en última instancia, a los ingresos de la construcción de viviendas (Gráfico 5). Gráfico 5 Aparecen grietas Formación de grietas Formación de grietas Para colmo, los precios de venta de casas nuevas están perdiendo terreno frente a los precios de las viviendas existentes, pero dicho descuento ya no está impulsando los volúmenes dado que las ganancias de cuota de mercado de ventas de viviendas nuevas se han estancado recientemente. Ya, las ventas del S&P homebuilding están contrayéndose y existe el riesgo de que la deflación se arraigue en esta industria de la construcción (Gráfico 6). Aunque el índice de solicitudes de hipoteca para compra (MAPI) ha estado subiendo por el desplome de las tasas de interés, el aumento de 30 puntos básicos en el rendimiento del Treasury a 10 años desde el 1 de septiembre indica que el MAPI ha alcanzado tentativamente su pico (segundo panel, Gráfico 7). Gráfico 6 Ventas en contracción Ventas por contrato Ventas por contrato Gráfico 7 Problemas de margen Problemas de margen Problemas de margen Simultáneamente, los precios de la madera están cobrando fuerza y, junto con la contracción de los precios de viviendas nuevas, señalan que las ganancias de los constructores sufrirán un retroceso (paneles medio y cuarto, Gráfico 7). Esto contrasta notablemente con la comunidad sell-side que ha estado aumentando las estimaciones de beneficios para el índice S&P homebuilding (panel inferior, Gráfico 7). Resumiendo, la débil demanda de vivienda, el mínimo en las tasas de interés, la deflación de los precios de viviendas nuevas y las deterioradas perspectivas de empleo en la industria sugieren que ahora procede una posición infraponderada en el índice S&P homebuilding. En el frente operativo, el mercado laboral también emite una señal de alarma. Las ofertas de empleo en la industria de la construcción están cayendo como una piedra y el crecimiento del empleo en la construcción residencial coquetea con la zona de contracción. Históricamente, los flujos y reflujos en los empleos de la construcción han ido a la par con el rendimiento relativo de los precios de las acciones y el mensaje actual es esperar una caída en estos últimos (Gráfico 8). La mayoría de los indicadores que seguimos subrayan un entorno desafiante para la construcción de viviendas en los próximos meses. Sin embargo, existe un riesgo clave para nuestra visión: las tasas de interés. Si la tasa hipotecaria fija a 30 años cayera más desde los niveles actuales, atraerá a los compradores de primera vivienda y amortiguaría el golpe a la demanda de construcción de viviendas (tasas hipotecarias mostradas invertidas, panel superior, Gráfico 9). De forma similar, los banqueros están dispuestos a extender crédito hipotecario y están reportando una demanda creciente de préstamos inmobiliarios residenciales como consecuencia rezagada de la caída de las tasas. Pero, nuestra sensación es que las ganancias fáciles están agotadas y está a la vista una reversión en la mayoría de estas medidas (Gráfico 9). Gráfico 8 Preste atención al mensaje del mercado laboral Preste atención al mensaje del mercado laboral Preste atención al mensaje del mercado laboral Gráfico 9 La posible caída de las tasas es un riesgo clave Las Tarifas Potencialmente Más Bajas Son Un Riesgo Clave Las Tarifas Potencialmente Más Bajas Son Un Riesgo Clave Resumiendo, la débil demanda de vivienda, el mínimo en las tasas de interés, la deflación de los precios de viviendas nuevas y las deterioradas perspectivas de empleo en la industria sugieren que ahora procede una posición infraponderada en el índice S&P homebuilding. Conclusión: Bajar la calificación del índice S&P homebuilding a infraponderado, hoy. Los símbolos bursátiles de las acciones de este índice son: BLBG – S5HOME – DHI, LEN, PHM, NVR. Mantenerse con las refinerías Aunque nuestra visión alcista sobre las refinerías tuvo un comienzo resbaladizo, ha recuperado todas las pérdidas y esta posición ahora está en positivo. Los factores están alineándose para ganancias adicionales en los próximos meses y recomendamos que los inversores mantengan esta recomendación de sobreponderar en acciones puras del downstream. De manera alentadora, las acciones de refino han estado superando al índice energético general últimamente y han reanudado su tendencia relativa alcista de varios años (panel superior, Gráfico 10). En cuanto a la válvula de alivio de las exportaciones, las exportaciones netas de productos refinados de EE. UU. están en una tendencia secular al alza y sorprendentemente no se ven afectadas por los movimientos del dólar (panel inferior, Gráfico 10). Sume las regulaciones de la Organización Marítima Internacional (IMO) Sulfur 2020 que pronto se adoptarán en el combustible de transporte marítimo, y las refinerías de EE. UU. que producen fuelóleo de menor azufre están bien posicionadas para superar en rentabilidad al SPX. Gráfico 10 Reanudada la tendencia alcista Tendencia alcista reanudada Tendencia alcista reanudada El consumo doméstico de productos refinados se mantiene vigoroso y debería servir como catalizador para desbloquear un excelente valor en este subgrupo energético nicho (panel medio, Gráfico 11). De hecho, el consumo de gasolina está volviendo a expandirse por el aumento de los kilómetros recorridos por vehículo (panel inferior, Gráfico 11). Gráfico 11 Demanda sólida... Demanda sólida... Demanda sólida... La dinámica de oferta de productos de refinería también se está moviendo en la dirección correcta. Los inventarios de gasolina se están reduciendo y deberían impulsar las expectativas de beneficios relativos castigadas de las refinerías (inventarios mostrados invertidos, panel inferior, Gráfico 12). Es importante, este contexto de demanda/oferta más firme ha sido un impulso para los márgenes de refino y debería continuar sustentando el impulso relativo de los precios de las acciones (panel medio, Gráfico 12). En términos de lo que ya está descontado para esta industria, la barra esperada de crecimiento de beneficios es extremadamente baja y está cayendo, y el valor relativo se ha restaurado por completo. Primero, en términos de valoraciones relativas, la ratio precio/ventas relativa histórica se ha corregido un 35% desde el pico de mediados de 2018 (panel medio, Gráfico 11). En términos de PER a futuro, las refinerías son extremadamente atractivas comparadas con el SPX tras una casi reducción a la mitad en el PER futuro relativo en los últimos quince meses (segundo panel, Gráfico 13). Gráfico 12 ...El contexto de oferta está impulsando los 'crack spreads'  ...El entorno de la oferta está impulsando los crack spreads ...El entorno de la oferta está impulsando los crack spreads Gráfico 13 El umbral de beneficios es inusualmente bajo El umbral de ganancias está inusualmente bajo El umbral de ganancias está inusualmente bajo En segundo lugar, el crecimiento EPS relativo ha caído por debajo de la línea cero tanto a doce meses como a cinco años vista. Ese pesimismo está sobredimensionado y nos inclinaríamos a contradecir el pesimismo del sell-side (panel inferior, Gráfico 13). Incluso la ratio de revisiones de ganancias netas de la industria de refino se ha desplomado, lo cual es contrariamente positivo (tercer panel, Gráfico 13). Sumando todo, la firmeza de la dinámica demanda/oferta, las regulaciones IMO Sulfur 2020, y las expectativas de beneficios relativos hundidas indican que hay más ganancias por delante para las acciones puras de refino. Conclusión: Mantener sobreponderado el índice S&P oil & gas refining & marketing. Los símbolos bursátiles de las acciones de este índice son: BLBG – S5OILR – MPC, VLO, PSX, HFC.   Anastasios Avgeriou, Estratega de renta variable de EE. UU. anastasios@bcaresearch.com   Notas al pie 1      Consulte el Informe Especial de BCA U.S. Equity Strategy, “Peak Margins” de fecha 7 de octubre de 2019, disponible en uses.bcaresearch.com. Recomendaciones actuales Operaciones actuales Visión sobre tamaño y estilo Mantener neutral: cíclicos frente a defensivos   (alerta de degradación) Favorecer el valor sobre el crecimiento Favorecer las grandes capitalizaciones sobre las pequeñas (Stop 10%)

Puntos destacados El acuerdo comercial interino de "fase 1" alcanzado la semana pasada representa un avance significativo hacia una distensión en la guerra comercial entre China y EE. UU. Independientemente de lo que ocurra después en las negociaciones del Brexit, se evitará una salida dura. Mantener posición larga en la libra. Es probable que el crecimiento de los beneficios en EE. UU. sea plano en el tercer trimestre, en contraste con las expectativas "bottom-up" de una caída interanual. El crecimiento de los beneficios debería repuntar a medida que el crecimiento global vuelva a acelerarse hacia fin de año. Un crecimiento global más fuerte presionará a la baja al dólar estadounidense. Mantener sobreponderación en acciones globales respecto a los bonos en un horizonte de 12 meses. Las acciones cíclicas deberían comenzar a superar a las defensivas. El sector financiero finalmente tendrá su momento de gloria. Vientos favorables del comercio En nuestra Perspectiva estratégica del cuarto trimestre publicada hace dos semanas, argumentamos que las acciones globales habían entrado en una fase de "demuéstramelo", lo que significa que sería necesaria evidencia tangible de una desescalada en la guerra comercial y una recuperación del crecimiento global para que los índices bursátiles subieran.1  Recibimos algunas noticias positivas en el frente comercial el pasado viernes. A cambio de suspender la subida prevista de aranceles del 15 de octubre del 25% al 30% sobre $250 mil millones de importaciones chinas, China acordó comprar entre $40 y $50 mil millones de dólares de productos agrícolas estadounidenses por año, mejorar el acceso al mercado para las empresas de servicios financieros de EE. UU. y aumentar la transparencia en la gestión del tipo de cambio. Admitimos que aún queda mucho por hacer. El texto del acuerdo aún no se ha finalizado. Ambas partes apuntan a concluir el pacto para la cumbre de la APEC en Santiago, Chile, los días 16 y 17 de noviembre. Teniendo en cuenta que quedan sin resolver una serie de cuestiones clave, incluyendo qué tipo de mecanismos de cumplimiento y resolución se incluirán en el acuerdo, son posibles más retrasos o incluso un colapso en las conversaciones. El acuerdo interino pactado la semana pasada también aplaza la espinosa cuestión de cómo manejar las protecciones de propiedad intelectual a una "fase 2" de las negociaciones programada para comenzar poco después de que se cierre la "fase 1". Según la independiente y bipartidista Comisión sobre el robo de la propiedad intelectual estadounidense, los productores de EE. UU. pierden entre $225 y $600 mil millones anuales por el robo de PI.2 China a menudo ha sido considerada entre los peores infractores. Dada la importancia del tema de la PI, será necesario un progreso significativo para asegurar que no se introduzcan aranceles del 15% sobre aproximadamente $160 mil millones de importaciones chinas el 15 de diciembre. Trump quiere un acuerdo A pesar de los muchos obstáculos que quedan, los acontecimientos de la semana pasada aumentan significativamente las probabilidades de una distensión en la guerra comercial de 18 meses. Como autoproclamado "maestro negociador", el presidente Trump ha puesto en juego su credibilidad al describir las negociaciones como un "festival de amor", llamar al pacto comercial "el mayor y mejor acuerdo jamás hecho para nuestros grandes y patrióticos agricultores" y decir que tiene "poca duda" de que se alcanzará un acuerdo final. Al igual que hizo con el sucesor del TLCAN, el USMCA —un acuerdo que es sustantivamente similar al que reemplazó— es probable que Trump pase a modo de promoción, pregonando el nuevo acuerdo "tremendo" que ha negociado en nombre del pueblo estadounidense. Desde el punto de vista político, esto tiene perfecto sentido. Con razón o sin ella, los votantes valoran más a Trump por su manejo de la economía que por cualquier otra cosa (Gráfico 1). Una guerra comercial prolongada socavaría la economía estadounidense y, por tanto, dañaría las perspectivas de reelección de Trump. Gráfico 1 Trump recibe calificaciones relativamente altas por su manejo de la economía, pero no por mucho más Kumbaya Kumbaya Gráfico 2 Las empresas chinas no están soportando la mayor parte de los aranceles Kumbaya Kumbaya A pesar de sus afirmaciones en sentido contrario, la evidencia sugiere firmemente que son los consumidores estadounidenses, más que las empresas chinas, quienes están pagando la mayor parte de los aranceles. Gráfico 2 muestra que los precios de importación de EE. UU. desde China apenas han disminuido, aun cuando las tasas arancelarias sobre las importaciones chinas han aumentado. En la medida en que las últimas rondas de aranceles se centran en bienes chinos para los que hay poca competencia en EE. UU. o en terceros países, la capacidad de los productores chinos para repercutir el coste de los aranceles solo aumentará. Si se implementaran todas las subidas de aranceles anunciadas, la tasa arancelaria efectiva sobre las importaciones chinas subiría desde alrededor del 15% a finales de agosto hasta un máximo del 25% en diciembre (Gráfico 3). Tal tasa arancelaria reduciría los ingresos disponibles de los hogares estadounidenses en más de $100 mil millones de dólares, borrando la mayor parte de las ganancias de los recortes fiscales de 2017. Trump no puede permitir que la guerra comercial llegue a ese punto. Gráfico 3 Las sucesivas rondas de aranceles han empezado a acumularse Las sucesivas rondas de aranceles han empezado a acumularse. Las sucesivas rondas de aranceles han empezado a acumularse. ¿China adoptará una postura dura? Un riesgo para una resolución favorable de la guerra comercial es que China vea cada vez más a Trump como desesperado por cerrar un acuerdo. Esto podría llevar a los chinos a adoptar una postura dura en las negociaciones. Aunque no se puede descartar este riesgo, lo atenuamos por tres razones: Primero, aunque los exportadores chinos han podido mantener cierto poder de fijación de precios durante la guerra comercial, los volúmenes comerciales han sufrido, con las exportaciones a EE. UU. cayendo casi un 22% interanual en septiembre. Segundo, como han demostrado las sanciones paralizantes contra ZTE, China sigue siendo muy dependiente de las tecnologías estadounidenses. Esto le da a Trump mucha palanca en las negociaciones comerciales. Gráfico 4 ¿Quién ganará la nominación demócrata de 2020? Kumbaya Kumbaya Tercero, como al propio Trump le gusta decir, a China le resultará más fácil negociar con él durante su primer mandato que en un segundo. Esperar que Trump perdiera su intento de reelección podría haber tenido sentido para China hace unos meses cuando Joe Biden iba por delante en las encuestas; pero ahora que Elizabeth Warren ha emergido como la favorita para asegurar la nominación demócrata, esa esperanza se ha desvanecido (Gráfico 4). Como señalamos hace varias semanas, es probable que China encuentre a Warren no menos problemática en asuntos comerciales que a Trump.3  Todo esto sugiere que China, al igual que Trump, buscará formas de enfriar las tensiones comerciales en las próximas semanas. ¿Avance en el Brexit? Cuando se cierra esta edición, las perspectivas de un acuerdo del Brexit han mejorado. Aunque los detalles aún no se han publicado, el acuerdo propuesto pondría efectivamente a Irlanda del Norte en una verdadera superposición cuántica donde está tanto en el mercado común europeo como en el Reino Unido al mismo tiempo. Esta hazaña se conseguiría manteniendo a Irlanda del Norte dentro de la jurisdicción política del Reino Unido pero aún alineada con las normas regulatorias de la UE. Las negociaciones aún podrían torcerse. A pesar de la garantía del primer ministro Boris Johnson de que logró "un gran nuevo acuerdo", el socio de coalición de los conservadores, el Partido Unionista Democrático de Irlanda del Norte, todavía está reteniendo su apoyo al pacto. El líder laborista Jeremy Corbyn también ha rechazado el acuerdo, diciendo que es aún peor que el pacto originalmente propuesto por Theresa May. Independientemente de lo que ocurra en los próximos días, seguimos pensando que se evitará un Brexit duro. A lo largo de todo el calvario del Brexit, hemos sostenido que no existía suficiente apoyo político dentro de la clase dirigente británica para un Brexit sin acuerdo. Esa convicción solo se ha reforzado a medida que los datos de opinión han revelado que una mayor proporción de votantes elegiría permanecer en la UE si se celebrara otro referéndum (Gráfico 5). Hemos mantenido una posición larga en la libra frente al euro desde el 3 de agosto de 2017. La operación ha ganado un 6.6% en este periodo. Los inversores deberían mantener esta posición. Basándonos en los diferenciales de tasas de interés reales, GBP/EUR debería cotizar cerca de 1.30 en lugar del nivel actual de 1.16 (Gráfico 6). Esperamos que el cruce se mueva hacia su valor justo a medida que disminuyan aún más los riesgos de un Brexit duro. Gráfico 5 Angustia por el Brexit: un caso de arrepentimiento por Brexit Angustia por el Brexit: Un caso de Bremorse Angustia por el Brexit: Un caso de Bremorse Gráfico 6 Importante potencial alcista en la libra Potencial Alcista Sustancial en la Libra Potencial Alcista Sustancial en la Libra   Mejoran las perspectivas de crecimiento global Gráfico 7 La desaceleración del crecimiento ha sido más pronunciada en los datos blandos La desaceleración del crecimiento ha sido más pronunciada en los datos suaves La desaceleración del crecimiento ha sido más pronunciada en los datos suaves Gráfico 8 La producción manufacturera se recupera en medio del desplome del ISM La producción manufacturera se recupera en medio de la caída del ISM La producción manufacturera se recupera en medio de la caída del ISM Una distensión en la guerra comercial y una resolución de la saga del Brexit deberían ayudar a sostener el crecimiento global. La debilidad en los datos económicos ha sido mucho más pronunciada en las medidas denominadas "blandas", como las encuestas empresariales, que en las medidas "duras" como la producción industrial (Gráfico 7). Notablemente, la producción manufacturera estadounidense se ha estabilizado en los últimos tres meses, aun cuando el índice manufacturero ISM se ha desplomado (Gráfico 8). A medida que el sentimiento se recupere, los datos blandos deberían mejorar. Las condiciones financieras globales se han relajado significativamente en los últimos cinco meses, en gran parte gracias al giro acomodaticio de la mayoría de los bancos centrales (Gráfico 9). El número neto de bancos centrales que recortan tasas suele adelantar al PMI manufacturero global entre 6 y 9 meses (Gráfico 10). Además, la decisión de la Fed de volver a comprar bonos del Tesoro aumentará la liquidez en dólares, contribuyendo así a unas condiciones financieras más laxas. Gráfico 9 Condiciones financieras más fáciles impulsarán el crecimiento global Condiciones financieras más favorables impulsarán el crecimiento mundial Condiciones financieras más favorables impulsarán el crecimiento mundial   Gráfico 10 Los efectos de la relajación de la política monetaria deberían filtrarse pronto a la economía Los efectos de la flexibilización de la política monetaria deberían llegar pronto a la economía. Los efectos de la flexibilización de la política monetaria deberían llegar pronto a la economía. Un estímulo chino reforzado también debería ayudar a activar el crecimiento global. El crecimiento del dinero y del crédito en China superó las expectativas en septiembre. El PBoC ha estado recortando los requisitos de reservas, lo que ha contribuido a reducir las tasas interbancarias. Es probable que se realicen nuevos recortes a la facilidad de financiación a medio plazo durante el resto de este año. Los cambios en el crecimiento del crédito chino adelantan al crecimiento global en aproximadamente nueve meses (Gráfico 11). Gráfico 11 El crédito chino debería apoyar la recuperación del crecimiento global El crédito chino debería respaldar la recuperación del crecimiento mundial El crédito chino debería respaldar la recuperación del crecimiento mundial Mantener sobreponderación en acciones globales Aunque el camino para finalizar un acuerdo de "fase 1" a tiempo para la cumbre de la APEC probablemente será accidentado, reiteramos nuestra recomendación de que los inversores sobreponderen acciones globales frente a bonos en un horizonte de 12 meses. Esperamos mejorar la valoración de las acciones de mercados emergentes (EM) y europeas en las próximas semanas una vez que veamos más evidencia de que el crecimiento global está tocando fondo. En última instancia, la trayectoria de las acciones dependerá de lo que ocurra con los beneficios. La temporada de resultados en EE. UU. comenzó esta semana. Hasta la semana pasada, los analistas esperaban que las EPS del S&P 500 disminuyeran un 4.6% en el tercer trimestre respecto al mismo trimestre del año anterior, según datos compilados por FactSet. Tenga en cuenta, sin embargo, que el crecimiento de las EPS ha superado las estimaciones en alrededor de cuatro puntos porcentuales desde 2015 (Gráfico 12). Por tanto, una apuesta razonable es que los beneficios estadounidenses se mantendrán planos este trimestre, superando una baja barrera de expectativas. Gráfico 12 Las EPS reales generalmente han superado las estimaciones Kumbaya Kumbaya Gráfico 13 Los beneficios y el PIB nominal tienden a moverse al unísono Las ganancias y el crecimiento del PIB nominal tienden a moverse al unísono Las ganancias y el crecimiento del PIB nominal tienden a moverse al unísono El hecho de que el 83% de las 63 empresas del S&P 500 que han informado beneficios hasta ahora hayan superado las estimaciones —mejor que la media histórica del 64%— respalda la opinión de que las estimaciones actuales para el tercer trimestre son demasiado pesimistas. Mirando hacia adelante, el crecimiento de los beneficios debería mejorar a medida que se acelere el crecimiento del PIB nominal (Gráfico 13). Las acciones europeas y de mercados emergentes generalmente superan al referente global cuando el crecimiento global mejora (Gráfico 14). Esto se debe a la naturaleza más cíclica de sus mercados bursátiles. Además, como moneda contracíclica, el dólar tiende a debilitarse en un entorno de crecimiento más rápido. Un dólar más débil beneficia de manera desproporcionada a las acciones cíclicas (Gráfico 15).   Gráfico 14 Las acciones de EM y de la zona euro suelen superar cuando mejora el crecimiento global Las acciones de los mercados emergentes y de la zona del euro suelen tener un mejor rendimiento cuando mejora el crecimiento global. Las acciones de los mercados emergentes y de la zona del euro suelen tener un mejor rendimiento cuando mejora el crecimiento global. Gráfico 15 Las acciones cíclicas superarán si el dólar se debilita Las acciones cíclicas tendrán mejor desempeño si el dólar se debilita Las acciones cíclicas tendrán mejor desempeño si el dólar se debilita Incluiríamos a los financieros en nuestra definición de sectores cíclicos. A medida que mejore el crecimiento global, los rendimientos de los bonos a largo plazo aumentarán en el margen. Dado que los bancos centrales no tienen prisa por subir las tasas, las curvas de rendimiento se empinarán. Esto impulsará los beneficios bancarios y los precios de las acciones (Gráfico 16). Las acciones cíclicas están actualmente bastante baratas en comparación con las defensivas (Gráfico 17). Del mismo modo, las acciones no estadounidenses son relativamente baratas en comparación con sus homólogas estadounidenses, incluso si se ajusta por diferencias en la composición sectorial entre regiones. Mientras que las acciones estadounidenses cotizan a 17.5 veces las ganancias a futuro, las acciones internacionales cotizan a un PER a futuro más atractivo de 13.7. La combinación de mayores rentabilidades por beneficios y tipos de interés más bajos en el extranjero implica que la prima de riesgo de la renta variable es aproximadamente dos puntos porcentuales más alta fuera de Estados Unidos (Gráfico 18). Gráfico 16 Curvas de rendimiento más empinadas beneficiarán a los financieros Curvas de rendimiento más pronunciadas beneficiarán al sector financiero Curvas de rendimiento más pronunciadas beneficiarán al sector financiero Gráfico 17 Las acciones cíclicas son más atractivas que las defensivas Las acciones cíclicas son más atractivas que las defensivas Las acciones cíclicas son más atractivas que las defensivas   Gráfico 18 La prima de riesgo de la renta variable es bastante alta, especialmente fuera de EE. UU. La prima de riesgo de las acciones es bastante alta, especialmente fuera de Estados Unidos. La prima de riesgo de las acciones es bastante alta, especialmente fuera de Estados Unidos. Esperamos mejorar la valoración de las acciones de mercados emergentes (EM) y europeas en las próximas semanas una vez que veamos más evidencia de que el crecimiento global está tocando fondo.   Peter Berezin, Jefe de Estrategia Global Estrategia Global de Inversiones peterb@bcaresearch.com Notas al pie 1Consulte Estrategia Global de Inversiones, “Perspectiva estratégica del cuarto trimestre de 2019: un mercado 'muéstrame',” con fecha 4 de octubre de 2019. 2 “Actualización del Informe de la Comisión sobre el Robo de la Propiedad Intelectual: El informe de la Commission on the Theft of American Intellectual Property,” The National Bureau of Asian Research, 2017. 3Consulte Global Investment Strategy Weekly Report, “Elizabeth Warren y los mercados,” con fecha 13 de septiembre de 2019. Estrategia & tendencias del mercado Modelo MacroQuant y puntajes subjetivos actuales Kumbaya Kumbaya Recomendaciones estratégicas Operaciones cerradas

Informe especial

Highlights A recovery in Chinese auto sales is not imminent. Car sales will likely stage only a rate-of-change improvement, moving from deep to mild contraction or stagnation over the next three-to-six months. Low-speed electric vehicles are a cheap substitute for regular low-end cars. Their production requires fewer inputs and parts compared to cars. Hence, their rising penetration will be negative for economic activity at the margin. Auto ownership will continue to rise in China in the years to come. However, this does not necessitate rising car sales. In fact, auto ownership can increase with car sales contracting in each consecutive year. This scenario represents a major risk to auto stock prices. Feature Chart 1Chinese Auto Sales: An Extended Downturn Chinese automobile sales have been deep under water for 15 consecutive months. The magnitude of the contraction has been even worse than the one that occurred in 2008-‘09. Annualized sales1 have declined from a peak of nearly 30 million units in June 2018 to 26 million this September (Chart 1). To put this 4-million-unit decline into perspective, only about 5 million units of automobiles were produced in Germany last year. Given the already long and deep contraction, does this mean Chinese auto sales and production are about to stage an imminent recovery? Although a revival sometime next year is plausible, we are not positive in the near term. Car sales will stage a rate-of-change improvement only, moving from deep to mild contraction or stagnation (i.e. zero growth) the next three to six months (Chart 1, bottom panel). Gauging The Demand Outlook Chart 2Marginal Propensity To Spend Is Falling Reluctance to purchase a car and curtailed financing are the causes of the deep auto sales contraction in China. The factors that have weighed on consumers’ willingness to purchase cars remain intact. First, our indicator for household marginal propensity to spend continues to fall, indicating no immediate signs of a turnaround (Chart 2). Cyclically, decelerating economic activity is weighing on income expectations, prompting consumers to delay their discretionary spending. Besides, the growth rate of disposable income per capita is at the lower end of its historical range and is falling in real (inflation-adjusted) terms (Chart 3). In addition, Chinese households are more leveraged now than their U.S. counterparts (Chart 4). Their debt levels have reached over 120% of annual disposable income. Chart 3Real Disposable Income Growth Is Weakening Chart 4Chinese Households Are Increasingly Indebted   Meanwhile, the U.S.-China confrontation continues to foster uncertainty among consumers and businesses in the Middle Kingdom. Although some sort of agreement was reached last week, the future of longer-term U.S.-China relations remains highly uncertain. Hence, the potential “phase-one” trade agreement is unlikely to shift Chinese consumers’ and businesses’ overall cautious sentiment. These factors will continue to weigh on consumers’ purchasing behavior, especially on big-ticket items like automobiles. Reluctance to purchase a car and curtailed financing are the causes of the deep auto sales contraction in China. Second, Chinese auto financing penetration rate – measured as the proportion of autos bought using borrowed funds – has risen from 20% in 2014 to about 48%2 last year. This remains well below the 70%-plus penetration rate in major western countries (the U.S., Germany and France), but is not far from the 50% rate in Japan. The rapid increase in the use of auto financing has facilitated auto sales in China over the past several years. Financing for auto purchases has been provided by banks via loans and credit cards, dealer/manufacturer loans and peer-to-peer lending (P2P). While banks contribute about 40% of auto financing and auto dealers/manufacturers account for about 30%, the peer-to-peer platform has become the third major source of auto loans in recent years. Chart 5Limited Auto Financing From Peer-To-Peer Platforms However, since early last year, bankruptcies and closures of P2P platforms have significantly reduced available auto financing. P2P financing continues to shrink, further depressing loans for auto purchases (Chart 5). Third, there is an ongoing structural decline in consumers’ willingness to purchase cars due to greater traffic congestion, limited parking and improved public transportation. In addition, greater use of ride-sharing and car-sharing services, which the government is aiming to promote, will also continue to reduce the need to buy a car. Concerning government incentives for auto buyers, auto sales have failed to recover, so far this year, despite policy support and significant auto price cuts (Box 1). Although the government recently loosened some restrictive auto sales policies in certain cities,3 the scale was much smaller than what was done earlier this year. As in any market, production decisions are driven by sales, not inventories. Box 1 Policy Support And Auto Price Cut During January-September 2019 Since late January, Chinese authorities have released a set of pro-auto-consumption measures aimed at spurring auto sales. These measures include the approval of 100,000 new license plates in Guangzhou province and an additional 80,000 in Shenzhen. Since May, auto dealers in China have slashed prices of their Emission Standard 5 cars in order to liquidate inventories, as 15 provinces/provincial level cities have been implementing the new emissions standards since July 1, 2019 – one year earlier than the national implementation deadline. According to the law, vehicles that do not meet the new standard will not be allowed to be sold or registered once the new standard is implemented. Another pertinent question to address is whether inventories can be used to identify a bottom in this industry. This is difficult to gauge in China, as inventories at different stages of the supply chain are currently sending conflicting signals. Manufacturers’ inventories have dropped to low levels (Chart 6). Yet, dealers’ inventories remain elevated according to the newly released inventory data for September (Chart 7). Chart 6Auto Manufacturers Inventories Are Low... Chart 7...But Dealers Inventories Remain Elevated   Chart 8Auto Demand Drives Production As in any market, production decisions are driven by sales, not inventories. The chain reaction always starts from demand: rising sales lead to rising production. Producers do not typically ramp up output when sales are falling, even if inventories are low (Chart 8). Without a strong and durable rise in demand, manufacturers will not significantly increase their inventories. In short, low car inventories among manufacturers could lead to a short-term rise in output. A sustainable and lasting recovery in production, however, is contingent on a cyclical revival in auto sales. Bottom Line: A cyclical recovery in auto sales is not imminent in the next three-to-six months. A Threat From A Cheap Substitute In many small cities (from Tier 3 to Tier 6 cities), towns and villages where auto buyers are more sensitive to prices, consumers are opting to purchase low-speed electric vehicles (LSEVs) – a cheap substitute for regular autos. Last year, LSEV makers sold about 1.5 million units in China, accounting for about 6% of passenger vehicle sales for the year. In comparison, even with massive government subsidies, total new energy vehicle (NEV, mainly including pure electric vehicles and plug-in hybrids) sales only reached 1.2 million units in 2018, 20% lower than LSEV sales. In many small cities, towns and villages consumers are opting to purchase low-speed electric vehicles (LSEVs) – a cheap substitute for regular autos. LSEVs are small, short-range electric vehicles (three- or four-wheeled cars) with top driving speeds below 80km per hour and with a similar look to regular cars.4 They have much lower technical and safety standards: LSEVs are not considered automobiles by the country’s motor vehicle management system. Consequently, official auto production and sales data released by authorities do not include LSEV figures. Chart 9Significant Output Expansion In Low-Speed Electric Vehicles Technically, these vehicles are within some sort of grey area of Chinese regulations, but that has not stopped the industry's remarkable growth. Shandong province accounts for about 40% of the country’s LSEV output. The dramatic LSEV production expansion in the province gives a glimpse into the booming LSEV industry in China (Chart 9). Last year’s LSEV production drop was due to the government’s tightening of LSEV output policies and greater competition from small-size pure electric vehicles, which benefited from government subsidies. Both factors have diminished this year due to policy changes and the termination of subsidies for the small-size pure electric vehicle. Looking forward, consumers will continue purchasing LSEVs as a substitute for lower-end cars. They will have negative effect on low-end car sales, especially when household budgets tighten. Table 1 lays out the main differences between an LSEV and a lower-end passenger car. Clearly, the most attractive feature of an LSEV is its price, which can be as cheap as 10,000 RMB (less than US$2,000) with a big proportion of LSEVs ranging from 20,000 RMB to 30,000 RMB. In comparison, prices of lower-end passenger vehicles in general range from 50,000RMB to 80,000 RMB, more expensive than LSEVs. As nearly half of Chinese households already own an automobile, the potential of future auto sales clearly lies in lower-income households. However, the 2018 NBS household survey showed the annual household disposable income for the lowest 60% percentile rural households was lower than the low-end price of regular auto – 50,000 RMB (US$ 7,050) (Chart 10). In comparison, a much cheaper LSEV will be affordable for them. Given that they are inferior goods, LSEVs could become even more attractive at times of weak disposable income growth. In addition to cheap prices, Box 2 reveals other attractive features that will make LSEVs the most convenient and affordable form of transportation for many potential auto buyers. This will also help promote the popularity of the LSEVs in small cities and rural areas. Table 1The Comparison Between LSEVs And Lower-End Passenger Cars Chart 10Low-Speed Electric Vehicles: Affordable For Lower-Income Households   Further, this year’s regulatory changes are also favorable for the LSEV industry (Box 3). This marked a clear policy reversal from last year when the government executed a crackdown on LSEV production and issued a policy prohibiting new capacity of LSEVs. Box 2 The Non-Price Reasons For The Increasing Popularity Of The LSEVs The LSEV is more convenient as it is easy to drive and to park because of its small size. The drive range of 100 km per charge of the battery is sufficient for a person who only uses it to go to work or pick up the kids from school. It is particularly useful in small cities and rural areas where the public transportation network is poor. The speed of 40-60 km per hour is also fast enough to drive in small cities and rural area where there are not much road traffic and the roads are often designed for low driving speed. LSEVs also have the benefit of being able to charge from home electrical outlets, eliminating the need to use public charging/fueling infrastructure. Box 3 Policy On LSEV Industry: More Favorable In 2019 Than In 2018 In March, the Ministry of Industry and Information Technology announced that by 2021 the national standards of the “Technical Conditions of Four-Wheel Low-Speed Electric Vehicles” would be established. This will eventually bring the LSEV market under the government’s supervision while giving LSEV makers two years to improve their technology. This will help improve the quality and safety measures of LSEVs. In May and June, over 20 cities started to issue car plates for LSEVs and approved of the LSEVs right to be on the road. This signals that the government is aiming to regulate the LSEV sector in a positive way, rather than simply banning production. Bottom Line: Cheap LSEVs will be a low-cost substitute for regular low-end cars. Their production requires fewer inputs and parts compared to cars. Hence, their rising penetration will be negative for economic activity at the margin. What About NEV Demand? New Electric Vehicle (NEV) sales were a bright spot among all categories of auto sales in China last year, with year-on-year growth of 62%. However, NEV sales growth has decelerated considerably this year as the government began cutting subsidies (Chart 11). NEV sales will remain under pressure. Table 2 shows the timeline of China’s NEV subsidy exit plan, which was released in late March. The subsidy is set to be phased out by 2021. Chart 11New Electric Vehicle Sales Growth Will Slow But Remain Positive Table 2The China’s New Electric Vehicle Subsidy Exit Plan   In comparison to last year, there will be no subsidy at all for pure electric vehicles (PEVs) with recharge mileage of 250 kilometers and lower. This will make it more difficult for mini-PEVs to compete with LSEVs with respect to price. For PEVs with recharge mileage of 250 kilometers and above, the subsidy has also been cut significantly. However, we still expect NEV demand growth to remain positive. The government will continue to maintain zero sales tax on NEVs until the end of 2020. This gives it a major advantage over non-NEV vehicles, which carry the 10% sales tax. In addition, NEVs are exempt from license restrictions on car sales and time or area restrictions on on-road autos, in cities where such policies apply. This is an attractive privilege for car buyers to consider. Current NEVs that can achieve recharge mileage of 300-450 kilometers, sell at a price of RMB 100,000 to RMB 150,000 per unit. They are both affordable and appealing for upper-middle-income and high-income urban households who prefer either green options or energy cost savings. The recharge mileage is sufficient for most daily use, and prices are in line with prices of traditional gasoline or diesel cars. If and as auto sales fail to stage a notable recovery in the next several months, Chinese auto stock  prices will likely break down. Bottom Line: With the gradual phasing out of subsidies, the period of exponential NEV sales growth is over. Nevertheless, NEV demand growth will likely remain positive. Investment Implications Chart 12Chinese Auto Stock Prices Could Break Down There are three pertinent investment implications to consider. First, Chinese auto stock prices in the domestic A-share market have dropped by 60% from their 2017 highs, and have lately been moving sideways (Chart 12). Notably, these listed automakers’ per-share earnings have plunged, and the companies have cut dividends by more than the drop in their share prices (Chart 13). As a result, their trailing P/E ratio has risen and the dividend yield has dropped (Chart 14). This implies that investors are looking through the current sales contraction and expecting an imminent recovery. Chart 13A Major Contraction In Corporate Earnings And Dividends Chart 14Rising Trailing P/E And Falling Dividend Yield   If and as auto sales fail to stage a notable recovery in the next several months, these share prices will likely break down. Second, petroleum demand growth from the transportation sector will be decelerating in China over the coming years. Rising NEV sales as a share of total auto sales, substituting autos for LSEVs and a slower pace of growth in the number of vehicles on roads imply diminishing demand for gasoline in the coming years (Chart 15). Today BCA’s Emerging Markets Strategy service is also publishing a Special Report discussing India’s demand for oil. The report argues for slowing growth in Indian oil demand. Combined, China and India make up 19% of the world’s oil consumption (slightly lower than the 21% accounted for by the U.S.), and weaker demand growth in these economies is negative for oil prices. Third, investors should differentiate between a long-term economic view and investment strategy. We do not disagree with the economic viewpoint that auto ownership will rise in China in the years to come. But this will happen even if auto sales decline on an annual basis over the next 10 years. Chart 16 illustrates this point: if annual auto sales drop by 2% during each consecutive year over the next decade, and the scrap rate is around 3%, car ownership, defined as the share of households owning one car, will continue to rise from the current 50% level, reaching 80% by 2030. Chart 15Falling Growth In Existing Vehicles Entails Slower Growth In Gasoline Demand Chart 16Stimulation: Car Ownership Can Rise With Shrinking Auto Sales   Nevertheless, such a scenario – a 2% annual drop in car sales in each consecutive year over the next decade - is bearish for automakers’ share prices. Any stock price is very sensitive to long-term growth expectations for corporate earnings.5 A 2% recurring annual drop in car sales will be disastrous for auto stock valuations. This is a case when the long-term economic view on rising prosperity and car ownership in China stands in contrast with a negative investment outcome for the auto sector and its shareholders. Ellen JingYuan He, Associate Vice President ellenj@bcaresearch.com   Footnotes 1      Sales of total automobiles, including passenger vehicles and commercial vehicles. 2      From Chinese Banking Association Report on June 18, 2019. https://www.china-cba.net/Index/show/catid/14/id/26688.html 3      Guangzhou further added 10,000 car plates open to the public while Guiyang eliminated cap on new-vehicle sales. 4      https://www.wsj.com/video/big-in-china-tiny-electric-cars/CF7E986A-7C70-4EE3-8F7B-441621F10C94.html 5      The reason is that both interest rates and earnings long-term growth rate are present in the denominator of any cash flow discount model (Stock Price = Expected Dividends / (Interest rate – Earnings long-term growth rate)). Hence, they have the potential to affect share prices exponentially while dividends/profits are present in the numerator so their impact on equity prices is linear.

Highlights New structural recommendation: long GBP/USD. The substantial Brexit discount in the pound makes it a long-term buy for investors who can tolerate near-term volatility. The most powerful equity play on a fading Brexit discount would be the U.K. homebuilders. Specifically, Persimmon still has a further 25 percent of upside. Take profits in long Euro Stoxx 50 versus Shanghai Composite. Within Europe, close the overweight to Switzerland and the underweight to the Netherlands. Stay overweight banks versus industrials. Stay overweight the Euro Stoxx 50 versus the Nikkei 225. Fractal trade: long NZD/JPY. Feature Chart of the WeekThe Pound Has Substantial Upside If The Brexit Discount Fades Carnival Says The Pound Is Cheap Carnival, the world’s largest cruise liner company, lists its shares on both the London and New York stock exchanges. But there is an apparent riddle: in London the shares trade on a forward PE of 8.8, while in New York they trade on 9.4. How can Carnival trade at different valuations on the two sides of the Atlantic when the market should instantly arbitrage the difference away? The answer to the riddle is that the London listing is quoted in pounds, the New York listing is quoted in dollars, while Carnival’s sales and profits are denominated in a mix of international currencies. Neither Brexit developments nor a potential Jeremy Corbyn led government will prevent the pound from rallying in the longer term.  Carnival is trading on a higher valuation in New York versus London because the market is expecting its mixed currency earnings to appreciate more in dollar terms than in pound terms. Put another way, the valuation differential is expecting the pound to appreciate versus the dollar to a ‘fair value’ of around $1.40 (Chart I-2). Likewise, BHP Billiton shares are trading on a higher valuation in their Sydney listing compared to their London listing. This valuation differential is expecting the pound to appreciate versus the Australian dollar to around A$2.00 (Chart I-3). Chart I-2Carnival Says The Pound Is Cheap Chart I-3BHP Billiton Says The Pound Is Cheap In other words, the market believes that neither Brexit developments nor a potential Jeremy Corbyn led government will prevent the pound from rallying in the longer term. We tend to agree. The Wrong Way To Pick Stock Markets… And The Right Way Before continuing with the pound’s prospects, let’s wander into the wider investment landscape. One important lesson from dual-listed companies like Carnival and BHP Billiton is that a multinational’s valuation will appear attractive in a market where the currency is structurally cheap.1 This lesson has deep ramifications. Today, multinationals dominate all the major stock markets, meaning that the entire stock market will appear cheap if its currency is cheap. The stock market will also appear cheap if it is skewed towards lower-valued sectors. But sectors trade on a low valuation for a reason – poor long-term growth prospects. Through the past decade, Japanese banks seemed a relative bargain, trading on a forward PE of less than half of that on personal products companies (Chart I-4). Yet Japanese banks were not a relative bargain. Quite the contrary. Through the past decade Japanese personal products have outperformed the banks by 500 percent! (Chart I-5) Chart I-4Japanese Banks Seemed A Relative Bargain... Chart I-5...But Japanese Banks Were Not A Relative Bargain Hence, beware of picking stock markets on the basis of observations such as ‘European stocks are cheaper than U.S. stocks’. Given that a stock market valuation is the result of its currency valuation and its sector composition, assessing relative value across major stock markets is extremely difficult, if not impossible. To repeat, Carnival appears to be trading at a valuation discount in London versus New York, but the cheapness is illusory. Here’s the right way to pick major stock markets. Identify your preferred sectors and currencies, and then pick the regional and country stock markets that are skewed to these preferred sectors and currencies. In this regard, large underweight sector skews also matter. For example, China and EM have a near-zero exposure to healthcare equities, so their performances tend to correlate negatively with that of the global healthcare sector – albeit the causality could run in either direction. Identify your preferred sectors and currencies, and then pick the regional and country stock markets that are skewed to these preferred sectors and currencies. In early May, we noticed that the extreme outperformance of technology versus healthcare was at a critical technical point at which there was a high probability of a trend reversal. This high conviction sector view implied overweight Europe versus China, as well as overweight Switzerland and underweight Netherlands within Europe (Chart I-6 and Chart I-7). Chart I-6When Tech Underperforms Healthcare, China Underperforms Switzerland Chart I-7When Tech Underperforms Healthcare, The Netherlands Underperforms Switzerland   Given that this sector trend reversal has played out exactly as anticipated, it is time to bank the profits:   Close long Euro Stoxx 50 versus Shanghai Composite. And within Europe, close the overweight to Switzerland and the underweight to the Netherlands. Right now, it is appropriate to overweight banks versus industrials. It is the pace of the bond yield’s decline that has weighed on bank performance this year. But if the sharpest decline in bond yields is behind us, as seems likely, then banks should fare better versus other cyclicals (Chart I-8). Chart I-8If The Sharpest Decline In Bond Yields Is Over, Banks Will Outperform Industrials Once again, this sector view carries an equity market implication: stay overweight the Euro Stoxx 50 versus the Nikkei 225 (Chart I-9). Chart I-9Euro Stoxx 50 Vs. Nikkei 225 = Global Banks In Euros Vs. Global Industrials In Yen The Pound Is A Long-Term Buy Back to the pound. The message from the dual listings of Carnival and BHP Billiton is that the pound is cheap, and this is neatly corroborated by the relationship between relative interest rates and the pound versus the euro and dollar. Based on the pre-Brexit relationship between relative real interest rates and the pound’s exchange rate, we can quantify the ‘Brexit discount’. Absent this discount, the pound would now be trading close to €1.30 and well north of $1.40 (Chart of the Week and Chart I-10). Chart I-10The Pound Has Substantial Upside If The Brexit Discount Fades In the Brexit psychodrama, we do not claim to know exactly how the next few days or weeks will play out. In the short term, Brexit is a classic non-linear system, and non-linear systems are inherently unpredictable. However, in the longer term we expect the Brexit discount to fade in any sort of transitioned resolution that allows the U.K. to adapt to a new trading relationship with the world, or alternatively to stay in a relationship broadly similar to the current one. Whatever the eventual endpoint is, the key requirement to remove the Brexit discount is to avoid a cliff-edge. We expect the Brexit discount to fade in any sort of transitioned resolution. The stumbling block to a resolution is that the three key actors – the EU, the U.K. government, and the U.K. parliament – have conflicting red lines, so the Brexit ‘Venn diagram’ has had no overlap. The EU will not countenance a customs border that divides Ireland; the current U.K. government wants a Free Trade Agreement, which implies casting away Northern Ireland into the EU customs union; and the current U.K. parliament – unless its intentions suddenly change – wants the whole of the U.K., including Northern Ireland, to remain in the EU customs union.   Given that the EU will not budge its red line, the only way to a lasting resolution is for the government and parliament red lines to realign, This could happen via parliament being willing to sacrifice Northern Ireland, via a second referendum, or via a general election in which the government’s intentions and/or the composition of parliament changed. Given a long enough investment horizon – 2 years or more – it is likely that the government and parliament will realign their red lines to a Free Trade Agreement or to a customs union, one way or another. On this basis, the substantial Brexit discount in the pound makes it a long-term buy for investors who can tolerate near-term volatility. Accordingly, today we are initiating a new structural recommendation: long GBP/USD.  For equity investors, the most powerful play on a fading Brexit discount would be the U.K. homebuilders (Chart I-11). Specifically, if the pound reached $1.40, Persimmon still has a further 25 percent of upside. Chart I-11U.K. Homebuilders Have Substantial Upside If The Brexit Discount Fades Fractal Trading System*  Based on its collapsed fractal structure, we anticipate a countertrend rally in NZD/JPY within the next 130 days. Accordingly, go long NZD/JPY setting a profit target of 3 percent and a symmetrical stop-loss. Chart I-12 For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. The post-June 9, 2016 fractal trading model rules are: When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. Use the position size multiple to control risk. The position size will be smaller for more risky positions.   * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com. Dhaval Joshi, Chief European Investment Strategist dhaval@bcaresearch.com Footnotes 1 There are also several companies with dual listings in the U.K. and the euro area. Unfortunately, these valuation differentials have been temporarily distorted by the risk of a no-deal Brexit, in which EU27 investors may have been forbidden from trading in the U.K. listed shares. Fractal Trading System Cyclical Recommendations Structural Recommendations Fractal Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

Dear Client, In lieu of our regular Weekly Report this week, tomorrow we will be publishing a joint Special Report on the Chinese automobile industry outlook with our Emerging Markets Strategy service, authored by my colleague Ellen JingYuan He. Best regards, Jing Sima China Strategist Feature Chart 1Chinese Economy Likely To Bottom In Q1 President Trump announced last Friday the first phase of a potential trade agreement with China. For now, the most concrete aspect of the announcement has been the deferral of an increase in tariffs that had been scheduled to occur this week, in exchange for agriculture purchase commitments from China. Market participants initially reacted with caution to the news, given the U.S. administration’s about-face in early-May and given signs from Beijing that China “needs time” to finalize a deal. However, Chinese policymakers have subsequently played up the progress made during the negotiations, and characterized both sides as being on “the same page”. We noted in last week’s report that China’s economy was likely to stabilize in Q1 of next year (Chart 1), but that a further shock to China’s external sector and/or internal policy missteps could easily tip the Chinese economy into a deeper growth slowdown.1 This, to us, justified a tactically bearish stance towards Chinese stocks, despite our positive cyclical bias. Indeed, following our tactical underweight call initiated on July 24,2 relative to global stocks, Chinese investable stocks dropped nearly 3% in the months of August and September in reaction to intensified trade tension. Chart 2Chinese Stocks Have Been Underperforming Since Late April While it is not yet clear how substantive the final deal between the U.S. and China will be, it is our judgment that the odds of a further escalation in the trade war have legitimately fallen over the past week. Both sides of the negotiating table have strong incentives to reach a deal (particularly the U.S.), and both U.S. and Chinese policymakers may finally be acting in a way that is consistent with each side’s respective constraints. As such, we no longer feel that a tactical underweight stance is warranted, and we recommend that clients maintain a neutral stance towards Chinese stocks over the near term. The potential for the talks to collapse once again is keeping us from recommending an outright overweight tactical stance, as well as the small but still non-trivial chance that the final deal is not meaningful enough to help revive economic activity. Cyclically, a substantive trade deal would be bullish for Chinese stocks, as the relative performance of both the investable and domestic markets are meaningfully below their late-April highs (Chart 2). The stimulus that policymakers have already provided should be enough to stabilize Chinese domestic demand, and a trade deal should help reinforce a stabilization in sentiment and activity over the coming year. However, one risk to our cyclical positioning is that the removal of uncertainty for China’s exporters strengthens the will of Chinese policymakers to curb “excess” credit growth. For now, this remains “a story for another day”, as investors will almost certainly bid up Chinese stocks (particularly the investable market) in reaction to a deal. But the behavior of China’s credit impulse following the surge in Q1 of this year underscores that policymakers are very serious about preventing another significant rise in the macro leverage ratio. This could lead to a less optimistic outlook over the coming 6-12 months than we originally expected when we recommended upgrading Chinese stocks earlier this year, and is a risk that we will be continually monitoring over the coming months. Stay tuned!   Jing Sima China Strategist JingS@bcaresearch.com   Footnotes 1      Please see China Investment Strategy Weekly Report, “Mild Deflation Means Timid Easing”, dated October 9, 2019, available at cis.bcaresearch.com 2      Please see China Investment Strategy Weekly Report, “Threading A Stimulus Needle (Part 2): Will Proactive Fiscal Policy Lose Steam?”, dated July 24, 2019, available at cis.bcaresearch.com   Cyclical Investment Stance Equity Sector Recommendations

Highlights Portfolio Strategy The trade-weighted U.S. dollar’s appreciation along with the still souring manufacturing data are weighing on SPX profit growth, at a time when heightened geopolitical uncertainty and a looming reversal in financial conditions has the potential to wreak havoc on stock prices. Stay cautious on the prospects of the broad equity market on a cyclical 9-12 month time horizon. Firming operating metrics, the resilient U.S. dollar, compelling valuations and depressed technicals, all signal that there is an exploitable tactical trading opportunity in a long S&P industrials/short S&P tech pair trade, irrespective of the trade war outcome. A tentative tick up in EM and China data along with improving relative operating metrics signal that the time is ripe to initiate a long machinery/short semis pair trade. Recent Changes Initiate a long S&P Industrials/short S&P Tech pair trade on a tactical three-to-six month time horizon, today. Initiate a long S&P Machinery/short S&P Semiconductors pair trade on a tactical three-to-six month time horizon, today. Feature The S&P 500 oscillated violently again last week, as the barrage of declining economic data, heightened trade war-related volatility and political upheaval dominated the news flow. While the Fed remains the backstop of last resort, we doubt additional interest rate cuts, which are already aggressively priced in the bond market, will boost lending and entice CEOs to invest in capital expenditure projects. Investors have to stay patient and disciplined, let this economic slowdown play out and allow for the natural healing of the economy. As a reminder, the ISM manufacturing index has been decelerating for twelve months and only been below the boom bust line for two. If history is an accurate guide, an additional three-to-six months of manufacturing pain are in store before a definitive bottom is in place (bottom panel, Chart 1). Such a macro backdrop, still warrants caution on the prospects of the broad equity market. Chart 1Allow Time For Economic Healing Beginning in August, a number of BCA publications became a tad more cautious on risk assets. Following our October editorial view meeting last week, this cautiousness was cemented with a tactical downgrade of global equities to neutral from previously overweight in the BCA House View matrix. While this marks a clear shift toward this publication’s less sanguine view of the U.S. equity market adopted during the summer, BCA's cyclical 12-month House View remains overweight global equities. Worryingly, the majority of the indicators we track continue to emit distress signals and warn that the SPX has further downside (Chart 2), especially absent profit growth. Importantly, we first correctly posited last May that the back half of the year global growth reacceleration was in jeopardy and would go on hiatus courtesy of rising policy uncertainty.1 Such a backdrop would boost the U.S. dollar and simultaneously take a bite out of SPX EPS.2 Chart 2Soft Data Red Flag Last week we highlighted that the U.S. dollar is the most important indicator to monitor given its global deflationary/reflationary properties. Were the greenback to maintain its year-to-date gains, it will continue to dent SPX profitability via P&L translation loss effects and likely sustain the profit recession into early 2020 (trade-weighted U.S. dollar shown inverted, bottom panel, Chart 3). Chart 3Greenback Weighing On Profits U.S. Equity Strategy’s S&P 500 four-factor macro EPS growth model remains downbeat (middle panel, Chart 4). Were we to isolate the U.S. dollar as a single variable and re-run the regression it is clear that additional greenback appreciation will further weigh on SPX profit growth (bottom panel, Chart 4). Meanwhile, the easing in financial conditions and drubbing of the 10-year Treasury yield since the Christmas Eve lows is already reflected in the 23% jump in the forward PE multiple, which explains over 90% of the SPX’s rise since the Dec 24, 2018 trough (top & middle panels, Chart 5). In other words, for multiples to expand anew, financial conditions would have to further ease, which in our view is a tall order (bottom panel, Chart 5). Chart 4EPS Model Warrants Caution Chart 5Financial Conditions Are The Forward P/E This week we are initiating two related pair trades to exploit the mispricing of the trade war within the deep cyclical sector universe.  Thus, we would lean against the narrative that easy financial conditions are not fully reflected into stocks. In contrast, our worry is that junk spreads are on the verge of a breakout and such a backdrop would tighten financial conditions and aggravate an SPX drawdown (junk OAS shown inverted, Chart 6). Adding it all up, the trade-weighted U.S. dollar’s appreciation along with the still souring manufacturing data are weighing on SPX profit growth, at a time when heightened geopolitical uncertainty and a looming reversal in financial conditions has the potential to wreak havoc on stock prices. Stay cautious on the prospects of the broad equity market on a cyclical 9-12 month time horizon. This week we are initiating two related pair trades to exploit the mispricing of the trade war within the deep cyclical sector universe. Chart 6Watch Junk Spreads Initiate A Long Industrials/Short Tech Pair Trade… Ever since the Sino-American trade war started in March 2018, the market has punished industrials, but tech has escaped unscathed. While the global growth soft patch preceded the U.S./China trade spat, courtesy of the Fed’s tightening cycle and Chinese policymakers’ slamming on the brakes, the trade war has served as a catalyst to aggressively shed deep cyclical equities except for tech stocks (Chart 7). We think this misalignment presents a playable opportunity to generate alpha by going long industrials/short tech, irrespective of the trade war’s outcome. In other words, this market neutral trade will be in the black either because the trade spat gets resolved or because there will effectively be no “real” deal including intellectual property and the tech sector. If the two sides manage to iron out their differences and strike a deal, industrials stocks should benefit from a greater catch-up phase because they have been depressed over the past two years, while tech stocks are near relative all-time highs. In contrast, a “no deal” scenario, should also re-concentrate investors’ minds and lead to a relative selling in tech stocks versus their already beaten-down deep cyclical peers: industrials. Chart 7Bifurcated Deep Cyclicals Market Chart 8Lots Of Bad Trade War News Reflected In Prices Chart 8 shows the drubbing in relative share prices as three key macro drivers have felt the trade war’s wrath. In more detail, were a deal to get struck, growth expectations will reverse course and a bond market sell-off will almost immediately reflect such an improvement in the global macro backdrop. Rising interest rates on the back of a reflationary/inflationary impulse are a boon for industrials and a bane for high growth tech stocks (top panel, Chart 8). Similarly, the middle panel of Chart 8 highlights that the ISM manufacturing survey should climb above the boom/bust line and outshine the San Francisco Fed’s Tech Pulse Index (that comprises “coincident indicators of activity in the U.S. information technology sector”3) on news of a successful deal. Finally, relative capital expenditure outlays should also veer in favor of industrials as previously mothballed infrastructure projects will come out of hibernation (bottom panel, Chart 8). In contrast, tech capex has been resilient of late with analytics, security and cloud computing being the most defensive capex corner, leaving little room for additional relative capex gains. Taking the opposite side i.e. a “no deal”, we doubt the metrics we depict in Chart 8 would sink that much further. If anything we believe that there is an element of exhaustion and relative share prices would jump on news of a breakdown in trade talks as tech sector fire sales would trump the sell-off in already depressed industrials. Meanwhile, the U.S. dollar and relative share prices have been steeply diverging recently and this gap will likely narrow via a catch-up phase in the latter (top & middle panels, Chart 9). According to Factset’s latest data the S&P industrials sector garners 37% of its sales from abroad, whereas the S&P information technology sector’s foreign exposure stands at 57% of total revenues.4 Therefore, given this 20% delta, a rising greenback should be beneficial to the more domestically geared industrials stocks (bottom panel, Chart 9). On the operating front, industrials also have the upper hand. The relative wage bill is sinking like a stone (shown inverted, middle panel, Chart 10) at a time when relative selling price inflation is holding its own (top panel, Chart 10). The upshot is that a relative profit margin jump is in store in the coming months which should boost the relative share price ratio (bottom panel, Chart 10). Chart 9Unsustainable Divergence Chart 10Industrials Have The Upper Hand U.S. Equity Strategy’s proprietary relative Cyclical Macro Indicators and relative profit growth models capture all these drivers and both signal that an industrials versus tech earnings-led outperformance phase looms into year end (Chart 11). Chart 12 shows that the relative earnings breadth and relative net earnings revisions are both deep in negative territory. In terms of technicals, the relative percentage of groups trading with a positive 52-week rate of change has hit the lowest level in the past two decades (second panel, Chart 12) and our composite relative technical indicator is roughly one standard deviation below the historical mean (bottom panel, Chart 11). Chart 11Profit Models And...  Chart 12...Washed Out Breadth Say Buy Industrials At The Expense Of Tech Finally, relative valuations are also bombed out. Our relative valuation indicator has been in a six-year uninterrupted drop, falling from two standard deviations above the mean to one standard deviation below the mean (fourth panel, Chart 11). Such entrenched bearishness in relative value is unwarranted. Bottom Line:  Firming operating metrics, the resilient U.S. dollar, compelling valuations and depressed technicals, all signal that there is an exploitable tactical trading opportunity in a long S&P industrials/short S&P tech pair trade, irrespective of the trade war outcome. …And A Long Machinery/Short Semis Pair Trade A more speculative and higher octane vehicle to explore this trade war-related mispricing is via a long S&P machinery/short S&P semiconductors pair trade. Most of the drivers mentioned above also hold true in this subsector market-neutral trade. However, in this section we will drill deeper in the China/EM drivers. The Emerging Asia leading economic indicator (EALEI) has plummeted to levels last hit around the 1998 LTCM bailout (top panel, Chart 13). While more pain is likely in the coming months as global trade has ground to a halt, we doubt the carnage in the EALEI can continue indefinitely. In fact, a tentative trough in the Emerging Markets (EM) manufacturing PMI heralds a brighter outlook for relative share prices (bottom panel, Chart 13). Chart 13Same Trade War Theme, Different Vehicles To Play It Chart 14China...  Encouragingly, China’s fiscal and credit impulse also signals that a bottom in relative share prices is likely already in place. If this leading indicator proves accurate in the coming months, then relative share prices can spike 20% near the late-2018 highs (Chart 14).   Chinese money supply growth is showing some signs of life and capital committed to infrastructure spending is coming out of hibernation. Goldman Sachs’ China current activity indicator is on a similar upward trajectory, underscoring that the path of least resistance is higher for relative share prices (Chart 15). Chart 15...Holds The Key Chart 16Firming Final Demand... On the operating front, relative new orders and relative shipment growth have both ticked higher (top & middle panels, Chart 16). Importantly, our relative demand proxy suggests that the relative end-demand backdrop is also firming. Using Caterpillar’s global sales to dealers data compared with global chip sales reveals that a wide gap has formed between relative share prices and our relative demand gauge (bottom panel, Chart 16). If our thesis pans out in the upcoming three-to-six months then machinery will trounce semis. Finally, relative pricing power corroborates that machinery demand has the upper hand versus semiconductor final demand. The Commodity Research Bureau’s raw industrials index is climbing relative to Asian DRAM prices. The upshot is that the compellingly valued relative share price ratio will gain steam in the months ahead (Chart 17). In sum, a tentative up-tick in EM and China data along with improving relative operating metrics signal that the time is ripe to initiate a long machinery/short semis pair trade. Bottom Line: Initiate a long S&P machinery/short S&P semiconductors pair trade today. The ticker symbols for the stocks in the S&P machinery and S&P semis indexes are: BLBG – S5MACH – CAT, DE, ITW, IR, CMI, PCAR, PH, SWK, FTV, DOV, XYL, IEX, WAB, SNA, PNR, FLS, and BLBG – S5SECO – INTC, TXN, NVDA, AVGO, QCOM, MU, ADI, AMD, XLNX, QRVO, MCHP, MXIM, SWKS, respectively. Chart 17...Is A Boon To Relative Pricing Power Key Risk To Monitor One important risk to both of our newly recommended market-neutral trades is China. We recently touched base with our ex-Chief Geopolitical Strategist and currently Chief Strategist at the Clocktower Group, Marko Papic. He warned us that all bets would be off because: “I think we will look back at the recession of 2020 and it will be known as the “China recession”. Basically, China just decided to stop playing, pick up its toys, and go home”. If Marko’s wise words were to ring true, then such a Chinese policy shift will truly be a game changer with negative global economic growth implications. With regard to our pair trades, they would both be offside.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com   Footnotes 1      Please see BCA U.S. Equity Strategy Weekly Report, “Consolidation” dated May 21, 2019, available at uses.bcaresearch.com. 2      Please see BCA U.S. Equity Strategy Weekly Report, “On Edge” dated May 13, 2019, available at uses.bcaresearch.com. 3      https://www.frbsf.org/economic-research/indicators-data/tech-pulse/ 4      https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_100419A.pdf Current Recommendations Current Trades Size And Style Views Stay neutral cyclicals over defensives   (downgrade alert) Favor value over growth Favor large over small caps (Stop 10%)

Overweight Last week Costco reported its fiscal fourth-quarter earnings, which came in beating expectations. These results are good news for our S&P hypermarkets overweight call as Costco accounts for nearly 50% of the index. We first recommended investors increase their exposure to this plain vanilla consumer defensive industry just under 3 months ago, and this position is already up 8% relative to the SPX since inception. Macroeconomic data remains soft across the board heralding more gains for the S&P hypermarkets index (second panel). Meanwhile, industry specific data is encouraging, with Big Box retail sales slated to firm further (third & bottom panels). Specifically, hypermarkets’ pricing power is set to increase as the relative consumer confidence by income (defined as the ratio of Americans who make less than $35,000/annum to those who make above $35,000/annum) has climbed to fresh cyclical highs (bottom panel). Bottom Line: Consumer staples stocks in general and hypermarkets in particular continue to shine. Stay overweight the S&P hypermarkets index. The ticker symbols for the stocks in this index are: BLBG: S5HYPC - WMT, COST.    

Analysis on Turkey is available below. Highlights A dovish Fed or robust U.S. growth does not constitute sufficient conditions for a bull market in EM. China’s business and credit cycles are much more important factors for EM than those of the U.S. A recovery in the Chinese economy and global manufacturing is not imminent. The common signal reverberating from various financial markets is that the risks to the global business cycle are still skewed to the downside. Feature Current investor perceptions of emerging markets are mixed. Some expect EM to benefit greatly from low U.S. interest rates. These investors view even a partial trade deal between the U.S. and China as sufficient for EM to embark on a bull market. BCA’s Emerging Markets Strategy team disagrees with this narrative. We deliberated the significance of the U.S.-China confrontation to EM in our September 19 report; therefore, we will not go over this subject here. Rather, in this report we discuss some of the more common misconceptions surrounding EM currently, and infer what these mean for investment strategies. Perception 1: The share of resource sectors (materials and energy) in the EM equity benchmark has declined substantially. This along with the expanded role of consumers and consumer stocks (Alibaba, Tencent and Baidu) in EM economies and equity markets has made their share prices less exposed to the global trade cycle and commodities prices. Reality: It is true that in many EM bourses, the weight of consumer stocks has been growing. Nevertheless, their financial markets in general, and equity markets in particular, remain very sensitive to the global trade cycle and commodities prices. Chart I-1 illustrates that the aggregate EM equity index has historically been and continues to be strongly correlated with the global basic materials stock index. The latter includes mining, steel and chemical companies. Global materials stocks also exhibit a very strong correlation with Chinese banks’ share prices. Moreover, global materials stocks also exhibit a very strong correlation with Chinese banks’ share prices (Chart I-2). The rationale for the high correlation is that both mainland banks’ profits and global demand for basic materials are driven by a common factor: China’s business cycle. Chart I-1EM And Global Materials Stocks Move Together Chart I-2Chinese Bank And Global Materials Share Prices Are Highly Correlated For example, construction in China is contracting (Chart I-3), which entails both higher NPLs for Chinese banks and lower demand for basic materials. China accounts for about 50% of global consumption of industrial metals, cement and many other basic materials. Finally, EM ex-China bank stocks also correlate strongly with global basic materials share prices. The basis is as follows: Many emerging economies export raw materials, and commodities price fluctuations impact their business cycle, exports and exchange rates. Chart I-3China: Construction Activity Is Contracting Chart I-4High-Yielding EM: Currencies And Local Bond Yields Historically, in high-yielding EM markets, currency depreciation has led to higher interest rates and lower bank share prices, and vice versa (Chart I-4). Lately, EM bond yields have not risen in response to EM currency depreciation. However, we believe this correlation will soon be re-established if EM currencies continue drifting lower.  In short, China’s money/credit cycles drive not only the mainland’s business cycle, banking profits and NPLs, but also global trade and commodities prices. The latter two - via their impact on exchange rates and in turn interest rates - have historically explained credit and domestic demand cycles in high-yielding EM. Perception 2:  EM stocks are a high-beta play on the S&P 500, i.e., EM equities outperform when the S&P 500 rallies, and vice versa. Reality: Since 2012, the beta for EM equity versus the S&P 500 has often been below one (Chart I-5). Furthermore, since 2012, EM share prices often failed to outpace their DM peers during global equity rallies. Indeed, EM relative equity performance versus DM, as well as the EM ex-China currency total return index, have been closely tracking the relative performance of global cyclicals versus global defensive stocks (Chart I-6). Chart I-5EM Equities Beta To The S&P 500 Chart I-6Global Cyclicals-To-Defensives Equity Ratio And EM   In short, EM equities and currencies have been, and will remain, sensitive to the global business cycle rather than the S&P 500. Since 2012, the latter has - on several occasions - decoupled from the global manufacturing and trade cycles. Perception 3:  EM stocks, currencies and fixed-income markets are very sensitive to U.S. interest rates. Hence, a dovish Fed will lead to EM currency appreciation.  Reality: Chart I-7 reveals that EM currencies, total returns on EM local currency bonds in U.S. dollar terms and EM sovereign credit spreads do not exhibit a strong relationship with U.S. Treasury yields. U.S. interest rate expectations have a much smaller impact on EM financial markets than commonly perceived by the investment community.  Overall, U.S. interest rate expectations have a much smaller impact on EM financial markets than commonly perceived by the investment community.  Chart I-7EM And U.S. Bond Yields: No Stable Correlation Chart I-8China Cycle And EM Stocks Led U.S. Bond Yields On the contrary, the declines in U.S. bond yields in both 2015/16 and in 2018/19 were due to the growth slowdown that emanated from China/EM. The top panel of Chart I-8 illustrates that Chinese import growth rolled over in December 2017, yet U.S. bond yields rolled over in October 2018. What is more, EM share prices have been leading U.S. bond yields in recent years, not the other way around (Chart I-8, bottom panel). Perception 4:  If the U.S. avoids a recession, EM risk assets will recover. Chart I-9EM Profits Are Driven By Chinese Not U.S. Business Cycle Reality: EM per-share earnings contracted in 2012-2014 and in 2019, despite reasonably robust growth in U.S. final demand (Chart I-9, top panel). This suggests that even if the U.S. economy avoids a recession, that will not be a sufficient condition to be bullish on EM. EM corporate profits are highly driven by China’s business cycle. The bottom panel of Chart I-9 illustrates that mainland domestic industrial orders have been the key driver of EM corporate profit cycles since 2008. Perception 5:  EM equities, fixed-income markets and currencies are cheap. Reality: EM stocks are not cheap. They are fairly valued. Equity sectors with very poor fundamentals have very low multiples. Hence, they are “cheap” for a reason. These include Chinese banks, state-owned enterprises in various countries and resource companies. Equity segments with robust fundamentals are overpriced. Given that Chinese banks, state-owned enterprises in various countries, resource companies, and cyclical businesses have very large market caps, EM market-cap based equity valuation ratios are low – i.e., they appear cheap.  To remove the impact of these large market cap segments, we constructed and have been publishing the following valuation ratios: median, 20% trimmed mean and equal-sub-sector weighted (Chart I-10). Each of these is calculated based on the average of trailing and forward P/E ratios, price-to-book value, price-to-cash earnings and price-to-dividend ratios. EM equities relative to DM are not cheap either. Chart I-11 demonstrates the same ratios – median, 20% trimmed-mean and equal-sub-sector weighted values for EM versus DM. Chart I-10EM Equities Are Not Cheap Chart I-11Relative To DM EM Stocks Are Not Cheap Further, when valuations are not at extremes as in the case of EM equities at the moment, the profit cycle holds the key to share price performance over a 6 to 12-month horizon. EM earnings are presently contracting in absolute terms, and underperforming DM EPS. Two currencies that offer value are the Mexican peso and Russian ruble. Chart I-12EM Local Yields Are Low In Absolute Terms And Relative To U.S. In the fixed-income space, EM local bond yields are very low in absolute terms and relative to U.S. Treasury yields (Chart I-12). EM sovereign and corporate spreads are not wide either. As to exchange rates, the cheapest currencies are those with the worst fundamentals, such as the Argentine peso, Turkish lira and South African rand. The majority of other EM currencies are not very cheap. Two currencies that offer value are the Mexican peso and Russian ruble. Yet foreign investors are very long these currencies, and a combination of lower oil prices and portfolio outflows from broader EM will weigh on these exchange rates as well. Takeaways And Investment Strategy Chart I-13EM Currencies And Industrial Metals Prices EM risk assets and currencies exhibit the strongest correlation with global trade and commodities prices. Chart I-13 indicates that the EM ex-China currency total return index closely tracks commodities prices. This corroborates the messages from Chart I-1 on page 1 and Chart I-6 on page 4.  China’s business and credit cycles are much more important for EM than those of the U.S. A dovish Fed or strong U.S. growth are not sufficient reasons to bet on an EM bull market. A recovery in the Chinese economy and global manufacturing is not imminent. Individual EM countries’ domestic fundamentals such as return on capital, inflation, banking system health, competitiveness and politics drive individual EM performance. On these accounts, the outlook varies among EM. Readers can find analyses on specific EM economies in our Countries In-Depth page. Asset allocators should continue underweighting EM stocks, credit and currencies versus their DM counterparts.  Absolute-return investors should outright avoid EM, or trade them on the short side. Within the EM equity space, our overweights are Mexico, Russia, Central Europe, Korea ex-tech, Thailand and the UAE. Our underweights are South Africa, Indonesia, Philippines, Hong Kong, Turkey and Colombia. The path of least resistance for the U.S. dollar is up. Continue shorting the following basket of EM currencies versus the dollar: ZAR, CLP, COP, IDR, MYR, PHP and KRW. We are also short the CNY versus the greenback. As always, the list of our country allocations for local currency bonds and sovereign credit markets is available at the end of our reports – please refer to page 16. Take Cues From These Markets We suggest investors take cues from the following financial market signals. They are unequivocally sending a downbeat message for global growth and risk assets: The ratio between Sweden and Swiss non-financial stocks in common currency terms is heading south (Chart I-14). Swedish non-financials include many companies leveraged to the global industrial cycle, while Swiss non-financials are dominated by defensive stocks. Hence, the persistent decline in this ratio presages a continued deterioration in the global industrial sector. Where is the next defense line for this ratio? To reach its 2002 and 2008 nadirs, it will need to drop by another 10%. In the interim, investors should maintain a defensive posture. Chart I-14A Message From Swedish And Swiss Equities Chart I-15A Breakdown In The Making? U.S. FAANG stocks appear to be cracking below their 200-day moving average. The relative performance of global cyclical versus global defensive stocks is relapsing below the three-year moving average that served as a support last December (Chart I-15). U.S. FAANG stocks appear to be cracking below their 200-day moving average (Chart I-16). If this support gives, the next one will be about 17% below current levels. Finally, U.S. high-beta share prices are on the verge of a breakdown (Chart I-17). The next technical support is 10% below current levels. Chart I-16FAANG Are On The Support Line Chart I-17U.S. High-Beta Stocks Are On The Edge Bottom Line: The common message reverberating from these financial markets corroborates our fundamental analysis that a global business cycle recovery is not imminent, and that global risk assets in general, and EM financial markets in particular, are at risk of selling off further. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com   Turkey: Is The Mean-Reversion Rally Over? Turkish financial markets have rebounded to their respective falling trend lines (Chart II-1). Are they set to break out or is a setback looming? Chart II-1Back To Falling Trend Chart II-2TRY Is Cheap Pros The economy has undergone a considerable real adjustment and many excesses have been purged: The current account balance has turned positive as imports have collapsed. Going forward, lower oil prices are likely to help the nation’s current account dynamics. The lira has become cheap (Chart II-2).  According to the real effective exchange rate based on unit labor costs, the currency is one standard deviation below its fair value. Core and headline inflation have fallen, allowing the central bank to cut interest rates aggressively. However, the exchange rate still holds the key: if the currency depreciates anew, local bonds yields will rise and the ability of the central bank to reduce borrowing costs further will diminish. Finally, private credit and broad money growth have decelerated substantially and are contracting in inflation-adjusted terms (Chart II-3). Chart II-3Money & Credit Have Bottomed Chart II-4Banks Have Been Aggressively Buying Government Bonds The recent gap between broad money and private credit growth has been due to commercial banks buying government bonds (Chart II-4). When a commercial bank purchases a security from non-banks, a new deposit/new unit of money supply is created. Banks’ purchases of government bonds en masse have capped domestic bond yields. However, if pursued aggressively, such monetary expansion could weigh on the currency’s value.   Cons Presently, potential sources of macro vulnerability in Turkey are: Foreign debt obligations (FDOs) – which are calculated as the sum of short-term claims, interest payments and amortization over the next 12 months – are at $168 billion, which is sizable. The annual current account surplus has reached only $4 billion and is sufficient to cover only 2.5% of FDOs, assuming the capital and financial account balance will be zero. Clearly, Turkey needs to both roll over most of its foreign debt coming due and attract foreign capital to finance a potential expansion in its imports if its domestic demand is to recover. Critically, $20 billion of net FX reserves, excluding gold, swap lines with foreign central banks and net of domestic banking and non-banking corporations’ foreign exchange deposits, are not adequate either to cover foreign debt obligations. Even though headline and core inflation measures have fallen, wage inflation remains rampant (Chart II-5). If wage inflation does not drop substantially very soon, rapidly rising unit labor costs will feed into inflation leading to negative ramifications for the exchange rate. This is especially crucial in Turkey given President Erdogan has undermined the central bank’s credibility and is resorting to populist measures to revive his popularity. Finally, Turkish banks remain under-provisioned. Currently, the banking regulator is requiring banks to boost their non-performing loans (NPL) ratio to 6.3% of total loans.This a far cry from the 2001 episode when the NPL ratio shot up to 25% (Chart II-6).   Even though interest rates rose much more in 2001 than last year, the private credit penetration in the economy was very low in the early 2000s. A higher credit penetration usually implies weaker borrowers have borrowed money and heralds a higher NPL ratio. Typically, following a credit boom and bust, it is natural for the NPL ratio to exceed 10%. We do not think Turkish banks stocks, having rallied a lot from their lows, are pricing in such a scenario. Chart II-5Surging Wages Are A Risk Chart II-6NPL Ratio Is Unrealistic Investment Recommendation We recommend both absolute-return investors and asset allocators not to chase Turkish financial markets higher. Renewed market volatility lies ahead. Given we expect foreign capital outflows from EM, Turkish companies and banks will encounter difficulties in rolling over their external debt and attracting foreign capital into domestic markets. This will produce a new downleg in the exchange rate. In turn, currency depreciation will weigh on performance of local bonds as well as sovereign and corporate credit. Stay underweight.   Andrija Vesic, Research Analyst andrijav@bcaresearch.com Footnotes Equities Recommendations Currencies, Credit And Fixed-Income Recommendations

Business confidence peaked in March 2018 and has been in a freefall ever since, with the steepest drop taking place in recent months as the Sino-American trade war has re-escalated (CEO confidence shown inverted, top panel). Moreover, there is mounting evidence that the trade tensions are further infecting the economy beyond manufacturing including services and the consumer. Using data from the Conference Board’s Consumer Confidence survey and from the University of Michigan Sentiment survey the chart shows that consumer intentions to buy large household durable goods (shown inverted, second panel), cars (shown inverted, third panel) and homes (shown inverted, bottom panel), all have taken a massive hit of late. Historically, all three survey measures have been excellent leading indicators of the labor market and the current message is to expect a rise in the unemployment rate in coming months. Bottom Line: While we are on the sidelines on the defensive/cyclical portfolio bent we stand ready to move to a defensive over cyclical preference. Once our S&P software trailing stop gets triggered, which will move this heavyweight tech subgroup to neutral, then the broad tech sector will shift to underweight and our defensive/cyclical bent to overweight. Stay tuned.