Equities
Implied volatility for the US dollar, EM currencies and a wide range of equity markets has plummeted to record lows. Such low levels of implied currency market volatility historically preceded major moves in currency markets and often led to a material…
Aspectos destacados
El crecimiento global está dispuesto a acelerarse este año, aunque la propagación del coronavirus podría frenar el gasto en el muy corto plazo.
La historia sugiere que la probabilidad de una recesión aumenta cuando el desempleo cae a niveles muy bajos.
Se han propuesto tres canales para explicar por qué ocurre esto: 1) El bajo desempleo puede llevar a los hogares y a las empresas a sobreextenderse, lo que hace que la economía sea más frágil; 2) Un crecimiento salarial más rápido derivado de un mercado laboral ajustado puede comprimir los márgenes de beneficio, lo que conduce a menos gasto de capital y contratación; 3) La reducción de la capacidad ociosa puede alimentar la inflación, obligando a los bancos centrales a subir las tasas.
El primer canal es muy relevante para algunas economías desarrolladas más pequeñas donde se han formado burbujas inmobiliarias y la deuda de los hogares ha alcanzado niveles muy altos. Sin embargo, no es una preocupación inmediata en EE. UU., Japón y la mayor parte de la zona euro.
Restaríamos importancia al segundo canal, ya que un crecimiento salarial más rápido también probablemente aumentará la demanda agregada e incentivará a las empresas a aumentar la inversión de capital en tecnologías que ahorran mano de obra.
El tercer canal plantea el mayor riesgo a largo plazo, pero es poco probable que sea relevante para los mercados este año.
Los inversores deberían seguir siendo alcistas con las acciones globales durante los próximos 12 a 18 meses. Una postura más prudente será justificable a partir de la segunda mitad de 2021.
Acciones globales: Mantenerse alcista
Las acciones globales son vulnerables a una corrección a corto plazo después de haber ganado un 16% desde sus mínimos de agosto. No obstante, seguimos manteniendo una perspectiva positiva sobre las acciones para los próximos 12 meses debido a nuestra expectativa de que el crecimiento global cobrará impulso a lo largo del año.
Los datos más recientes sobre la actividad manufacturera global han respaldado en general nuestra tesis constructiva. El PMI manufacturero de la Fed de Nueva York superó las expectativas, mientras que el PMI de la Fed de Filadelfia subió casi 15 puntos hasta el nivel más alto en ocho meses. El componente de perspectivas empresariales (seis meses hacia adelante) del índice de la Fed de Filadelfia aumentó hasta su mejor nivel desde mayo de 2018.
La manufactura europea también debería mejorar este año. Las expectativas de crecimiento para Alemania en el índice ZEW se dispararon en enero, subiendo al nivel más alto desde julio de 2015 (Chart 1). Los índices Sentix e IFO también han aumentado. De manera alentadora, las matriculaciones de automóviles en la zona euro aumentaron un 22% interanual en diciembre.
En el Reino Unido, la confianza empresarial en la encuesta CBI a fabricantes se disparó de -44 en el tercer trimestre de 2019 a +23 en el cuarto trimestre, el mayor aumento en los 62 años de historia de la encuesta. El estímulo fiscal y el menor riesgo de un Brexit desordenado también deberían reforzar el crecimiento este año.
Chart 1
Aparecen algunos brotes verdes en la zona euro
Emergen algunos brotes verdes en la zona euro
Emergen algunos brotes verdes en la zona euro
Chart 2
Asia emergente se está recuperando
Asia de mercados emergentes se está recuperando
Asia de mercados emergentes se está recuperando
Los datos de manufactura y comercio en Asia han estado mejorando. Tras los mejores datos comerciales chinos de la semana pasada, las exportaciones coreanas se recuperaron en términos de tasa de cambio por cuarto mes consecutivo. Las exportaciones japonesas a China aumentaron por primera vez desde febrero pasado. En Taiwán, la producción industrial aumentó más de lo esperado en diciembre, al igual que los pedidos de exportación. Nuestro Índice de Difusión Económica de Asia emergente ha subido al nivel más alto desde octubre de 2018 (Chart 2).
Coronavirus: ¿No es para menospreciar?
El brote del coronavirus representa una amenaza potencial a corto plazo para la incipiente recuperación económica global. Conceptualmente, los brotes pueden afectar a la economía de dos maneras. Primero, pueden reducir la demanda al recortar el gasto en viajes, entretenimiento, restaurantes o cualquier cosa que requiera proximidad con otras personas. Segundo, pueden reducir la oferta al hacer que la gente evite ir a trabajar.
En la práctica, el primer efecto suele dominar al segundo. Como resultado, este tipo de brotes tiende a tener un impacto deflacionario.
La Brookings Institution estima que la epidemia de SARS de 2003 redujo alrededor de un punto porcentual el crecimiento chino ese año.1 El hecho de que este brote esté ocurriendo durante las celebraciones del Año Nuevo chino, cuando más de 400 millones de personas estarán en movimiento, tiene el potencial de exacerbar la transmisión del virus y, en el proceso, amplificar el daño económico.
Dicho esto, aunque pertenece a la misma clase de virus zoonóticos, las primeras indicaciones sugieren que esta cepa en particular es menos letal que el SARS. Además, las autoridades chinas se han movido más rápido para abordar los riesgos que durante el brote de SARS. El gobierno ha puesto efectivamente en cuarentena Wuhan, una ciudad de 11 millones de personas, donde parece haberse originado el virus. También han secuenciado el virus y compartido la información con la comunidad médica global. Esto ha permitido que los Centros para el Control y la Prevención de Enfermedades de EE. UU. (CDC) desarrollen una prueba para el virus, que probablemente estará disponible en las próximas semanas.
El lado oscuro del bajo desempleo
Siempre que el brote del coronavirus se contenga, un mayor crecimiento global debería seguir absorbiendo el excedente del mercado laboral. Esto plantea la cuestión de si, en algún momento, la disminución del desempleo podría volverse contraproducente.
El brote del coronavirus representa una amenaza potencial a corto plazo para la incipiente recuperación económica global.
La tasa de desempleo en la OCDE se sitúa actualmente en el 5,1%, por debajo del mínimo de 5,5% establecido en 2007 (Chart 3). En EE. UU., la tasa de desempleo ha caído a un mínimo en 50 años.
Chart 3
Las tasas de desempleo están por debajo de sus mínimos previos a la crisis en la mayoría de las economías
¿Quién le teme a una baja tasa de desempleo?
¿Quién le teme a una baja tasa de desempleo?
Nadie negaría que la caída del desempleo desde la crisis financiera ha sido una evolución bien recibida. Sin embargo, conlleva un gran riesgo: históricamente, la probabilidad de una recesión ha aumentado cuando el desempleo ha caído a niveles muy bajos (Chart 4).
Chart 4
Las recesiones se vuelven más probables cuando el mercado laboral empieza a sobrecalentarse
¿Quién le teme a un desempleo bajo?
¿Quién le teme a un desempleo bajo?
Se han propuesto tres canales para explicar esta correlación positiva: 1) El bajo desempleo puede llevar a hogares y empresas a sobreendeudarse, haciendo que la economía sea más frágil; 2) Un crecimiento salarial más rápido derivado de un mercado laboral ajustado puede comprimir los márgenes de beneficio, lo que conduce a menos gasto de capital y contratación; 3) La reducción de la capacidad ociosa puede alimentar la inflación. Esto puede obligar a los bancos centrales a subir las tasas, asfixiando el crecimiento.
Examinemos cada uno a su vez.
Desempleo y exuberancia irracional
Chart 5
Crecientes desequilibrios inmobiliarios en algunas economías
Crecientes desequilibrios en la vivienda en algunas economías
Crecientes desequilibrios en la vivienda en algunas economías
Una economía fuerte fomenta la toma de riesgos. Si bien cierta toma de riesgos es esencial para el capitalismo, una cantidad excesiva puede conducir a la acumulación de desequilibrios y, por ende, sentar las bases para una eventual recesión.
En Australia, Nueva Zelanda, Canadá y las economías escandinavas, la combinación de tasas de interés bajas y un fuerte crecimiento económico ha alimentado burbujas inmobiliarias impulsadas por la deuda (Chart 5, panel 3). Como discutimos la semana pasada, tasas de interés más altas en esas economías podrían sembrar las semillas de dificultades económicas.2
En la mayoría de los demás países, los desequilibrios financieros no son lo suficientemente graves como para desencadenar recesiones. Chart 6 muestra que el saldo financiero del sector privado – la diferencia entre lo que el sector privado gana y gasta – todavía se sitúa en un saludable superávit del 3,4% del PIB en las economías avanzadas. En 2007, el saldo financiero del sector privado cayó a 0,4% en las economías avanzadas, alcanzando un déficit del 2% en EE. UU. El saldo del sector privado también se deterioró bruscamente en el período previo a la recesión de 2001 (Chart 7).
Chart 6
El sector privado gasta menos de lo que gana en la mayoría de las economías
¿Quién le teme al bajo desempleo?
¿Quién le teme al bajo desempleo?
Chart 7
El superávit del sector privado es mayor que antes del fin de expansiones previas
El superávit del sector privado es mayor que antes del final de las expansiones anteriores
El superávit del sector privado es mayor que antes del final de las expansiones anteriores
En EE. UU., la tasa de ahorro personal ha aumentado hasta casi el 8%, mucho más de lo que se esperaría en función del nivel de la riqueza neta de los hogares (Chart 8). A pesar de crecer alrededor del 2,5% en 2018/19, el consumo personal real ha aumentado a un ritmo más lento del previsto por el nivel de confianza del consumidor. Esto sugiere que los hogares han mantenido una disposición bastante prudente. En consonancia con ello, la ratio de deuda de los hogares respecto a la renta disponible ha disminuido en 32 puntos porcentuales desde 2008.
Chart 8
Los hogares están ahorrando más de lo que cabría esperar
Los hogares están ahorrando más de lo que cabría esperar.
Los hogares están ahorrando más de lo que cabría esperar.
Cierto es que algunas categorías de crédito han experimentado aumentos importantes (Chart 9). La deuda estudiantil ha aumentado hasta el 9% de la renta disponible. Los préstamos para automóviles han vuelto a sus máximos previos a la recesión.
No nos preocuparíamos demasiado por lo primero, ya que la gran mayoría de la deuda estudiantil está garantizada por el gobierno. Los préstamos para automóviles son más preocupantes. Sin embargo, es importante tener en cuenta que el mercado de préstamos para automóviles es menos de una sexta parte del tamaño del mercado hipotecario.
Además, después de relajar las normas de concesión de préstamos para vehículos entre 2011 y 2016, los bancos las han endurecido desde entonces. Este ajuste parece estar en gran medida completo. Las normas de concesión no se endurecieron más en la última Encuesta a Oficiales Superiores de Préstamos, mientras que la demanda de préstamos para automóviles aumentó al ritmo más rápido en dos años. La cuota de préstamos para automóviles que entran en mora ha ido tendiendo a la baja, lo que sugiere que las tasas de morosidad están alcanzando su punto máximo (Chart 10).
Chart 9
Los niveles de deuda de los hogares en EE. UU. han caído, a pesar de los aumentos en los préstamos estudiantiles y para automóviles
Los niveles de deuda de los hogares en Estados Unidos han disminuido, a pesar de los aumentos en los préstamos estudiantiles y para automóviles.
Los niveles de deuda de los hogares en Estados Unidos han disminuido, a pesar de los aumentos en los préstamos estudiantiles y para automóviles.
Chart 10
Préstamos para automóviles: seguimiento de las tendencias en normas de crédito y tasas de morosidad
Préstamos para automóviles: seguimiento de las tendencias en los criterios de crédito y las tasas de morosidad
Préstamos para automóviles: seguimiento de las tendencias en los criterios de crédito y las tasas de morosidad
Por último, señalaríamos que, a pesar de todo el revuelo sobre el estado del mercado de automóviles, los valores respaldados por activos de préstamos para automóviles han tenido un buen comportamiento (Chart 11). Si bien las tasas de impago han aumentado, los prestamistas generalmente han fijado tasas de interés lo suficientemente altas como para absorber las pérdidas entrantes.
Chart 11
Los préstamos para automóviles titulizados han tenido un buen desempeño
Los préstamos automotrices titulizados han tenido un buen desempeño
Los préstamos automotrices titulizados han tenido un buen desempeño
¿Deteriorarán los márgenes de beneficio la expansión?
Los márgenes de beneficio suelen alcanzar su máximo unos años antes del inicio de una recesión (Chart 12, panel superior). Esto ha llevado a algunos a especular que la caída de los márgenes podría dar paso a una recesión al frenar la disposición de las empresas a contratar trabajadores e invertir en nueva capacidad.
Chart 12
Un pico en los márgenes de beneficio: ¿un signo ominoso?
Un pico en los márgenes de beneficio: ¿una señal ominosa?
Un pico en los márgenes de beneficio: ¿una señal ominosa?
Si bien es una teoría interesante, no resiste un escrutinio más detallado. Las encuestas de sentimiento empresarial muestran claramente que las intenciones de gasto de capital están positivamente correlacionadas con los planes de aumentar los salarios (Chart 13, panel izquierdo). Lejos de reducir los gastos de capital en respuesta al aumento de los salarios, las empresas tienen más probabilidades de aumentar el capex si también planean incrementar la compensación laboral.
Chart 13A
Crecimiento salarial más rápido, mayor contratación y más capex van de la mano (I)
Crecimiento salarial más rápido, más contrataciones y mayor gasto de capital van de la mano (I)
Crecimiento salarial más rápido, más contrataciones y mayor gasto de capital van de la mano (I)
Chart 13B
Crecimiento salarial más rápido, mayor contratación y más capex van de la mano (II)
Crecimiento salarial más rápido, mayor contratación y más capex van de la mano (II)
Crecimiento salarial más rápido, mayor contratación y más capex van de la mano (II)
Una razón de esto es que el aumento de los salarios hace que la automatización resulte más atractiva. Por definición, la automatización requiere más inversión de capital. Sin embargo, esa no es toda la historia porque las empresas también tienden a contratar a más trabajadores durante los períodos en que el crecimiento salarial está aumentando (Chart 13, panel derecho).
Esto implica que un tercer factor – el fuerte crecimiento económico – es responsable tanto de la aceleración de los salarios como del aumento de las intenciones de contratación. El hecho de que las ventas empresariales reales estén fuertemente correlacionadas tanto con el crecimiento del empleo como con la inversión no residencial es evidencia de esta afirmación (Chart 12, panel inferior).
Márgenes en caída: un síntoma de un problema
La discusión anterior sugiere que un crecimiento salarial más rápido probablemente no disuadirá a las empresas ni de contratar más trabajadores ni de aumentar la inversión de capital. De hecho, probablemente ocurra lo contrario: dado que los trabajadores normalmente gastan más de cada dólar de ingreso que las empresas, un aumento en la parte del ingreso nacional que fluye a los trabajadores elevará la demanda agregada.
Entonces, ¿por qué los márgenes de beneficio suelen alcanzar su máximo antes de las recesiones? La respuesta es que la disminución del exceso de capacidad laboral tiende a aumentar los costos laborales unitarios, obligando a los bancos centrales a elevar las tasas de interés en un esfuerzo por frenar el aumento de la inflación. Por lo tanto, la caída de los márgenes es solo un síntoma de un problema subyacente: el sobrecalentamiento económico. No culpe a los márgenes más bajos por las recesiones. Culpe a los bancos centrales.
La inflación no es una amenaza... todavía
Por ahora, la inflación de los costos laborales unitarios se mantiene razonablemente contenida en las principales economías (Chart 14). Sin embargo, hay poca evidencia que sugiera que la relación histórica entre el exceso de capacidad laboral y el crecimiento salarial se haya roto (Chart 15). A menos que haya un aumento importante en el crecimiento de la productividad, es probable que la inflación se acelere eventualmente a medida que las empresas intenten trasladar los mayores costos laborales a sus clientes.
Chart 14A
Los costos laborales unitarios se comportan bien por ahora (I)
Los Costes Laborales Unitarios Se Comportan Bien Por Ahora (I)
Los Costes Laborales Unitarios Se Comportan Bien Por Ahora (I)
Chart 14B
Los costos laborales unitarios se comportan bien por ahora (II)
Los Costos Laborales Unitarios Se Comportan Bien Por Ahora (II)
Los Costos Laborales Unitarios Se Comportan Bien Por Ahora (II)
Chart 15
La correlación entre el exceso de capacidad laboral y el crecimiento salarial permanece intacta
La correlación entre la holgura del mercado laboral y el crecimiento salarial permanece intacta
La correlación entre la holgura del mercado laboral y el crecimiento salarial permanece intacta
No sabemos exactamente cuándo surgirá esa espiral precios-salarios. La inflación es un indicador notoriamente rezagado (Chart 16). Nuestra mejor estimación es que la inflación podría convertirse en un riesgo serio para los inversores a fines de 2021 o en 2022. Por lo tanto, los inversores deberían mantener una sobreponderación en acciones globales durante los próximos 12 a 18 meses, pero estar preparados para volverse más cautelosos en la segunda mitad de 2021.
Chart 16
La inflación es un indicador rezagado
¿Quién le tiene miedo al bajo desempleo?
¿Quién le tiene miedo al bajo desempleo?
Peter Berezin Estratega global en jefe peterb@bcaresearch.com
Notas al pie
1 Jong-Wha Lee and Warwick J. McKibbin, “Globalización y enfermedad: el caso del SARS,” Brookings Institution, con fecha de febrero de 2004.
2 Consulte el Informe semanal de estrategia de inversión global, “Rendimientos de los bonos: ¿Qué tan alto es demasiado alto?” con fecha 17 de enero de 2020.
Matriz de perspectivas de la estrategia de inversión global
¿Quién le teme al bajo desempleo?
¿Quién le teme al bajo desempleo?
Modelo MacroQuant y puntuaciones subjetivas actuales
¿Quién le teme al bajo desempleo?
¿Quién le teme al bajo desempleo?
Recomendaciones estratégicas
Operaciones cerradas
We have been cyclically overweight Chinese stocks, because we expected the economy to bottom in the first quarter of 2020 and a trade deal to materialize eventually. In the past two weeks, these two possibilities became realities. Last week's small selloffs…
Highlights An analysis on India is available on page 12. There is extreme complacency in global financial markets. With currency markets’ implied volatility at a record low, we recommend going long EM currency volatility. The latter will rise in the next six month regardless the direction of global risk assets. For now, we remain long the EM MSCI equity index with a stop point at 1050. In India, nominal income growth has fallen below lending rates. The latter have not declined despite monetary easing. The authorities will force banks to reduce their lending rates, which will hurt bank stocks. Feature “…we have probably seen the end of the boom-bust cycle.” Bob Prince, Co-CIO of Bridgewater World Economic Forum, Davos January 22, 2020 Low Volatility = Complacency Chart I-1Go Long Currency Volatility The comment above by co-CIO of the largest hedge fund declaring the end of boom-bust cycle is consistent with lingering complacency in global financial markets. Any time an influential person made a similar declaration in the past, it marked a major turning point in financial markets. Remarkably, implied volatility for the US dollar has plummeted to a record low, as it has for EM currencies and a wide range of equity markets. Chart I-1 illustrates the implied volatility for EM currencies and the US dollar. Such low levels of implied currency market volatility historically preceded major moves in currency markets and often led to a material selloff in broad EM financial markets. It does not mean that the world economy will crash but financial markets volatility in general and currency market volatility in particular are bound to rise considerably in the months ahead. The risk-reward profile of going long EM currency or US dollar volatility appears very attractive. Today we recommend investors to go long EM currency volatility. The latter will rise regardless the direction of global risk assets. Concerning overall strategy, EM financial markets are entering a testing period. How broader EM risk assets and currencies perform in the coming weeks will signal how durable and long-lasting the current EM rally will be. Given global risk assets are overbought, a correction or consolidation phase is overdue. If EM equities, currencies and credit markets outperform, or at least do not underperform their DM peers in the course of this indigestion phase, it will beckon more upside for EM risk assets in 2020. If during budding market turbulence EM risk assets and currencies underperform their DM peers, it will signal their vulnerability in 2020.Implied volatility for the US dollar has plummeted to a record low, as it has for EM currencies. Implied volatility for the US dollar has plummeted to a record low, as it has for EM currencies. For now, we remain long the EM MSCI equity index with a stop point at 1050. We will upgrade our EM equity and credit market allocations versus DM if the EM universe generally exhibits relative resilience in the coming weeks, and more of our indicators confirm China’s growth recovery. Hints Of Recovery… December economic data out of China were strong, and it seems that the credit and fiscal stimulus are finally beginning to lift growth: Chinese imports and nominal industrial output – among the most reliable measures of the Chinese business cycle – posted very robust growth numbers in December (Chart I-2). DRAM and NAND semiconductor prices are climbing, and China’s container freight index is also in revival mode (Chart I-3). These high-frequency (daily and weekly) data confirm improving business activity in both the global semiconductor sector and in overall world trade. Chart I-2China's December Economic Data Were Strong Chart I-3Asia's Trade Is Recovering There are tentative signs of amelioration in our proxies for marginal propensity to spend by households and enterprises in China (Chart I-4). A more decisive improvement in these indicators is needed to reinforce the positive outlook for China’s growth. …But Doubts Still Linger Despite the recent improvement in Chinese economic data and the rebound in China-related plays, there are a number of financial market indicators that are not yet confirming a sustainable business cycle recovery in China and global trade. In particular: First, apart from semiconductor stocks, global cyclical equity sectors and sub-sectors – industrials, materials, and freight and logistics – have begun, once again, underperforming defensive sectors (Chart I-5). Outperformance by these cyclical sectors against defensives is essential in confirming that global and Chinese capital spending – which were the primary sources of the most recent slowdown – are picking up again. Chart I-4China: Tentative Improvement In Household And Corporate Marginal Propensity To Spend Chart I-5Global Equities: Cyclicals Are Again Underperforming Defensives Notably, the relative performance of EM share prices to the global equity benchmark historically tracks the relative performance of global materials versus the global overall stock index.1 However, the two have recently diverged (Chart I-6). In short, global materials are not corroborating sustainability in the recent EM outperformance. If EM equities, currencies and credit markets outperform, or at least do not underperform their DM peers in the course of this indigestion phase, it will beckon more upside for EM risk assets in 2020. Second, the rebound in Chinese and EM shares prices is not corroborated by Chinese onshore government bond yields, which are dipping to new cyclical lows (Chart I-7). In other words, interest rate expectations in China are falling – i.e., they are not confirming a robust recovery. Chart I-6Unsustainable Decoupling Chart I-7A Message From The Chinese Fixed-Income Market Third, EM ex-China currencies have not yet broken out versus the US dollar (Chart I-8). Consistently, the broad trade-weighted US dollar has not yet broken down. Chart I-9 illustrates that the greenback’s advance-decline line has not yet fallen below its 200-day moving average, a condition that has historically been required to confirm the dollar’s cyclical bear market. Chart I-8EM Currencies: No Breakout Yet Chart I-9The US Dollar Is At A Critical Juncture We view these exchange rate patterns as a litmus test to validate turning points in the global business cycle. Finally, the technical profiles of the KOSPI, EM small cap stocks and copper prices are inconclusive (Chart I-10). These markets have rebounded but seem to be confronting a critical technical test. If they decisively break above these technical levels, it will be a sign that the EM bull market will be lasting and durable. Otherwise, caution is still warranted. Bottom Line: There is a good amount of complacency among global investors at a time when there are several market signals that are still challenging the view of enduring revival in China/EM growth. Corporate Profits Will Be The Arbiter Ultimately, economic growth and corporate profits will determine the direction of not only share prices but also EM sovereign and corporate credit spreads as well as their currencies. So far, the EM equity rebound of the past 12 months has been solely due to multiples expansion amid a deepening EM profit recession: Earnings per share in US dollar terms has been contracting by 10% from a year ago, and the rate of change has so far not turned around (Chart I-11). Chart I-10The KOSPI And Copper Are Facing A Resilience Test Chart I-11EM Equities: A Profitless Rally? Going forward, however, EM corporate profits growth is set to improve. Our indicator for semiconductor companies’ revenues is heralding a revival in semi sector profits (Chart I-12, top panel). The rate-of-change improvement in commodities prices is also foreshadowing potential amelioration in corporate earnings growth among energy producers and materials (Chart I-12, middle and bottom panels). Chart I-12EPS Growth In EM Technology, Energy And Materials We are negative on EM bank profits due to their need to recognize and provision for non-performing loans as well as the authorities’ mounting pressures on them to reduce lending rates. The latter will shrink banks’ elevated net interest rate margins. The profit profile of other EM equity sectors is illustrated in Chart I-13A and I-13B. Chart I-13AEM EPS Growth By Sectors Chart I-13BEM EPS Growth By Sectors Provided technology, materials and energy stocks account for 33% of the MSCI EM aggregate equity index’s earnings (banks account for another 28% of total profits), it is safe to assume that the growth rate of EM EPS will move from -10% currently to zero or mildly positive territory by mid-2020. Nevertheless, beyond the next several months, our leading indicators on the EM profit outlook are not positive. China’s narrow money growth leads EM EPS by 12 months, and currently suggests the EPS recovery will be both muted and short-lived (Chart I-14). The technical profiles of the KOSPI, EM small cap stocks and copper prices are inconclusive. Further, China’s broad money impulse points to a peak in the credit impulse in the first half of the year (Chart I-15). Given that EM share prices bottomed a year ago, simultaneously with China’s credit impulse, odds are that EM equities could slump with a rollover in the latter. Chart I-14EM EPS: Marginal Improvement Ahead But No Robust Recovery Chart I-15China: A Signpost Of A Potential Top In The Credit Impulse Chart I-16DM Central Banks' Assets And EM Stocks And Currencies: No Stable Correlation What if the current liquidity-driven rally continues? In our report last week titled A Primer On Liquidity, we elaborated at great length about the different liquidity measures and how they influence financial asset prices. Empirically, changes in DM central banks’ balance sheets have had no stable correlation with either EM share prices or EM local currency bonds, as demonstrated in Chart I-16. There have been periods over the past 10 years when EM risk assets and currencies have performed poorly, despite an accelerating pace of QE programs worldwide (Chart I-16). The true and critical driver for EM equity and currency performance has been EM’s own domestic fundamentals and China’s business cycle (please refer to Chart I-11 on page 7). To be sure, we are not suggesting that DM central bank policies have not affected global and EM financial markets at all. They have done so in spades. By purchasing and withdrawing about $9 trillion in high-quality securities from the marketplace, the monetary authorities have shrunk the stock of available financial assets. Consequently, even though QE programs have expanded broad money supply only modestly,2 the upshot has been that more money has been chasing fewer financial assets. Also, low interest rates reduce the opportunity cost of owning risk assets. These two phenomena have led investors to bid up prices of various securities, including EM ones. Nevertheless, despite the ongoing and indiscriminate global search for yield, EM share prices in US dollar terms and EM ex-China currencies (including carry, i.e. on a total-return basis) are still below their 2010 levels. Such poor performance of EM risk assets has been a corollary of just how bad EM fundamentals have been. Bottom Line: EM corporate profits will improve on a rate-of-change basis in the coming months. However, forward-looking indicators do not yet point to a robust recovery in EM corporate profits as occurred in 2017. Investment Conclusions We are maintaining our long EM equities position with a stop point at 1050 for the MSCI EM stock index (7% below the current level). If EM share prices, credit markets and currencies outperform their DM peers during a correction/consolidation phase, we will upgrade EM allocations to overweight in global equity and credit portfolios. At the moment, EM is confronting a resilience test. Within the EM equity universe, our overweights are Russia, Korea, Thailand, Mexico, UAE, Pakistan and central Europe. Our recommended equity underweights include Indonesia, the Philippines, Hong Kong domestic stocks, South Africa, Turkey and Colombia. In sovereign credit and local bond markets, our overweights are Mexico, Russia, Thailand, Malaysia, Pakistan and Ukraine. In turn, South Africa, Turkey, Philippines and Indonesia warrant an underweight stance. Today we are upgrading Indian bonds from neutral to overweight (see page 17). In the currency space, we continue holding a short position versus the US dollar in the following basket of currencies: BRL, ZAR, CLP, COP, IDR, PHP and KRW. As always, the full list of our positions is presented at the end of report (please refer to pages 18-19 and on our website). Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com India: Beware Of Private Banks And Consumer Perils Indian private banks and consumer staple stocks have been holding up the Indian equity market at a time when the rest of the bourse has been sluggish. Both sectors, however, are extremely expensive and thus tremendously sensitive to minor profit disappointments. Remarkably, private banks now trade at a price-to-earnings (P/E) ratio of 31 and price-to-book value (PBV) ratio of 4. Indian consumer staple stocks, on the other hand, trade at a P/E ratio of 41 (Chart II-1 and Chart II-2). Chart II-1Indian Private Bank Stocks Are Expensive Chart II-2Indian Consumer Staple Stocks Are Very Pricey Chart II-3A Credit Boom Among Indian Private Banks Given that private banks have been specializing in both mortgages and non-mortgage consumer lending, the call on both private bank and consumer staple stocks is contingent on consumer financial health. The loan book of private banks has expanded tremendously: since 2010 it has grown at a compounded annual growth rate (CAGR) of 20% and 14% in nominal and real (inflation-adjusted) terms, respectively (Chart II-3).3 In turn, the share of household loans is reasonably large at around 52% of private banks total loan book. Unfortunately, India’s consumer sector appears to be fragile at the moment. Employment and wage growth have downshifted – the Manpower employment index is at a 14-year low (Chart II-4). Consequently, household disposable income growth has decelerated to 9% in nominal terms (Chart II-5). Critically, households’ ability to service debt has deteriorated as nominal disposable household income growth has fallen slightly below borrowing costs, i.e., bank lending rates (Chart II-5). This development is precarious not only because it makes it more difficult for consumers to service their debt – causing NPLs to rise – but it also dampens consumer credit demand. Consequently, private banks’ considerable exposure to consumers could reverse the fortunes of the former as consumers face increasing difficulties servicing their debt. Moreover, with borrowing costs above nominal income growth, banks in India could face adverse selection problem. The latter is a phenomenon when loan demand primarily comes from riskier borrowers who are in desperate need for funding. In such a case, non-performing loans are bound to mushroom. Chart II-4India's Labor Market Is In Doldrums Chart II-5India: Household Nominal Income And Lending Rate Overall, household spending is in the doldrums. Two- and three-wheeler and passenger car unit sales have all been contracting. In the meantime, consumer demand for non-durable goods has also weakened, as reflected by stalling non-durable consumer goods production. Residential property demand has plummeted. According to the Reserve Bank of India’s December Financial Stability Report – quoting data from PropTiger DataLabs – housing sales units contracted by 20% in September from a year ago. In turn, growth in house prices has been anemic (Chart II-6). Prices are now growing below core inflation, i.e. property prices are deflating in real terms. Households’ ability to service debt has deteriorated as nominal disposable household income growth has fallen slightly below borrowing costs. Going forward, odds are that employment and wage growth will remain weak in India. The basis is the corporate sector is also struggling and still reluctant to invest and hire. Chart II-7 illustrates that the number of investment projects has collapsed, while capital goods production and capital goods imports are both shrinking (Chart II-7). Chart II-6India: Housing Market Is Feeble Chart II-7India: Companies Are Not Investing Overall, the entire Indian economy is suffering from high borrowing costs in real (adjusted for inflation) terms (Chart II-8, top panel). Chart II-8Lending Rates Have Not Declined Despite Monetary Easing Importantly, the monetary policy transmission mechanism has not been working effectively in India. Even though the central bank has cut its policy rate by 135 basis points in 2019, prime borrowing did not budge (Chart II-8, middle panel). Consequently, loan growth has decelerated sharply (Chart II-8, bottom panel). On the whole, for the economy to recover, it requires considerably lower borrowing costs or a substantial fiscal boost. Indian central and state fiscal aggregate budget deficit is already wide at 6% of GDP. With public debt-to-GDP ratio at 68%, there is some but not enormous room for boosting government expenditures drastically. This makes reducing commercial bank lending rates the most feasible mechanism to jump-start the economy. Consequently, the authorities will become more aggressive in forcing commercial banks to cut their lending rates. This seems to be taking place as in September 2019 the RBI asked Indian commercial banks to link lending rates on certain types of loans more closely to the central bank’s policy rate to ensure more effective monetary policy transmission. Yet doing so will squeeze down commercial banks’ net interest rate margins – which have widened – and will hit banks’ profits. Alternatively, if lending rates do not fall, non-performing loans (NPLs) will increase because only risky borrowers will be willing to borrow while existing debtors will struggle to service their debt at current elevated interest rates. This will also depress bank profits. These two negative scenarios are probably reflected in low valuations of public bank share prices, but they are not yet priced in among private banks stocks. Given the latter’s exuberant valuations, only a small drop in net interest rate margins or a small rise in NPLs, will be enough to drag their share prices lower. Investment Conclusions Chart II-9India Vs. EM Relative Equity Performance Is Often About Oil Travails of the Indian economy will persist for now. Much more policy support is required to turn the business cycle around. EM equity investors should keep a neutral allocation to Indian stocks within an EM equity portfolio. Indian share prices often outperform their EM peers when oil prices drop and lag when crude prices rally (Chart II-9). Given our negative view on oil prices,4 we are reluctant to downgrade this bourse to underweight. Private banks are susceptible to a drawdown as either their net interest rate margins will drop or they will face rising non-performing loans. Consumer staples stocks are expensive and, hence, are vulnerable to marginal profit disappointments. We are upgrading our allocation to Indian domestic bonds from neutral to overweight within an EM local bond portfolio. Consistently, we are closing our yield curve steepening trade in India. This position has produced a 30 basis points gain since July 2016. Low inflation, weak real growth, a struggling credit system and ineffective transmission of monetary easing argue for even lower interest rates in India. The surge in food prices should be viewed as a relative price shock, not inflation. Higher food prices will curb the spending power of consumers and weaken their expenditures on non-food items. In addition, core inflation remains very low. Ayman Kawtharani Editor/Strategist ayman@bcaresearch.com Footnotes 1 Please click on the link to access EM: Perception versus Reality report. 2 Commercial banks’ reserves at central banks do not constitute and are not a part of narrow or broad money supply. 3 The calculation is based on the annual reports of four large Indian private banks: HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank. 4 This is the Emerging Markets Strategy team’s view and it differs for BCA’s house view on oil. Equities Recommendations Currencies, Credit And Fixed-Income Recommendations
Highlights The bank credit 6-month impulse is likely to drop sharply in Europe, drop modestly in the US, but remain positive in China. Hence, the momentum of first-half economic data is likely to be worse in Europe than in China – albeit the Wuhan coronavirus scare is an unknown risk to this view. Initiate long CNY/GBP on a 6-month horizon. Underweight banks and the cyclical-heavy Eurostoxx 50 versus other markets, again on a 6-month horizon. There will be a better time to enter these positions later in the year when 6-month impulses are improving. Long-term investors seeking value in Europe should focus on the main currencies and not on the main equity indexes. Fractal trade: long EUR/GBP. Europe And China Play A Role-Reversal In recent dispatches we have highlighted that the euro area bond yield 6-month impulse stands near +100 bps, posing the strongest headwind to growth for three years. To make matters worse, the impulse has flipped from a strong -100 bps tailwind last summer into the current strong headwind, equating to a marked deterioration in the weather. But in China, it is the opposite story. Last summer, the China bond yield 6-month impulse constituted a strong +80 bps headwind; today the headwind has disappeared. Indeed, it has morphed into a tailwind, albeit a very mild tailwind at just -10 bps. In this sense, Europe and China are now playing a role-reversal. The momentum of first-half economic data is likely to be worse in Europe than in China – albeit with the caveat that the Wuhan coronavirus scare is an unknown risk to this view (Chart of the Week). Chart of the WeekBond Yields In Europe And China Play A Role-Reversal For the sake of completeness, we should address the world’s other large economy, the United States. Just as in the euro area, the US bond yield 6-month impulse has flipped from a strong -100 bps tailwind last summer into a current headwind. But the headwind, at +50 bps, is not as strong as it is in the euro area (Chart I-2). Chart I-2Headwind Impulses In The Euro Area And The US, But Not In China The Four Impulse Framework For Short-Term Growth The bond yield 6-month impulse is the first component of our proprietary ‘four impulse framework’ for short-term growth. The bond yield 6-month impulse is important because it usually leads the framework’s second component, the bank credit 6-month impulse, by a few months. This relationship makes perfect sense as, at the margin, it is the price of credit that drives credit demand. Indeed, to the extent that monetary policy drives growth, this is the main mechanism by which it operates, albeit with a slight delay. The bond yield impulse usually leads the credit impulse. On this compelling theoretical and empirical evidence, the bank credit impulse is now likely to drop sharply in the euro area (Chart I-3), drop modestly in the US (Chart I-4), but remain positive in China (Chart I-5). Chart I-3The Credit 6-Month Impulse Is Likely To Drop Sharply In The Euro Area... Chart I-4...Drop Modestly In ##br##The US... Chart I-5...But Remain Positive In China But we must also consider the other two impulses in our four impulse framework. In the case of the euro area, the third important impulse is the oil price 6-month impulse. This is because the euro area relies on oil imports whose volumes tend to be price inelastic. Hence, when the oil price falls it subtracts from imports, thereby adding to net exports and growth – and vice-versa when the oil price rises. In the middle of 2019, the oil price impulse constituted a very strong headwind which helps to explain the midyear sharp slowdown in Germany. Subsequently, the headwind eased, even reversing into a modest tailwind which facilitated a recovery. But the tailwind is now fading (Chart I-6). Chart I-6A Fading Tailwind From The Oil Price 6-Month Impulse The fourth and final component of our four impulse framework is geopolitical risk. This is not an impulse in the strict mathematical sense, but it is the same broad idea applied to the flow of geopolitical tail-events, both negative and positive. Europe’s positive events came several months ago: first in early-August when Italy ousted the firebrand Matteo Salvini from government; then in early-October when the UK parliament legislated against a no-deal Halloween Brexit. The tailwind from these positive events has now likely faded. For China, a positive geopolitical event and potential mild tailwind has come more recently, with the signing of the phase one trade deal with the US. Against this, the Wuhan coronavirus scare is a new risk – though based on the latest information it is unlikely to impact a 6-month view. The tailwind from the oil price impulse is now fading. On the four impulse framework, the momentum of first-half economic data is likely to favour China over Europe. We have found that the best way of playing this is through the exchange rate (Chart I-7), though given recent moves our preferred expression is versus the pound rather than the euro. Hence, on a 6-month horizon, initiate long CNY/GBP. Chart I-7Play Relative Impulses Through Currencies More generally, can the mild tailwind in China counter the headwinds in the West? No. Despite the improvement in China, the aggregate global bond yield impulse still constitutes a +50 bps headwind, which is almost certain to weigh down the global credit impulse through the early months of 2020 (Chart I-8). Chart I-8The Global Credit 6-Month Impulse Will Weaken In Early 2020 Therefore, as discussed last week in Strong Headwind Warrants Caution In H1, we recommend an underweight stance to banks and to the cyclical-heavy Eurostoxx 50 versus other markets, again on a 6-month horizon. This is not to say that these positions cannot do better on a 12-month view, as per the BCA house view. But if so, any outperformance will be back-end loaded, and there will be a better time to enter these positions later in the year when 6-month impulses are improving. Where Is The Value In Europe? One of the most common questions we get is: are European equities cheaper than US equities? Usually, this question comes from our US clients who are aware that their own stock market is expensive and wish that Europe might be less so. Unfortunately, the wishful thinking won’t make it come true! Major stock market indexes comprise multinational companies with global footprints. For these multinationals, there is no such thing as a ‘European’ company or a ‘US’ company. They are simply global companies that could list their shares on any major stock market. Now ask yourself this: is it really plausible that such a multinational would be cheaper if its primary listing was in Frankfurt as opposed to New York? Of course not. The valuation depends on the industry and company specifics, but it is highly unlikely to depend on whether the company is listed in Frankfurt or New York. It is not European equities that are cheap, it is European currencies that are cheap. But then why do companies with dual listings in Europe and outside Europe trade at a valuation discount in their European listing? For example, Carnival Cruises trades around 8 percent dearer in New York than in London (Chart I-9); and BHP Billiton trades around 15 percent dearer in Sydney than in London (Chart I-10). The answer is that the London listing is quoted in pounds, the New York listing is quoted in US dollars, the Sydney listing is quoted in Australian dollars, but Carnival’s and BHP’s sales and profits are denominated in a mix of international currencies. Chart I-9Carnival Cruises Trades Dearer In New York Than In London Chart I-10BHP Trades Dearer In Sydney ##br##Than In London Hence, Carnival and BHP are trading dearer in New York and Sydney because the market is expecting their mixed currency earnings to appreciate more in US dollar and Australian dollar terms respectively than in pound terms. Put another way, the market is expecting the pound to appreciate structurally versus the major non-European currencies. Therein lies the important message. It is not European equities that are cheap, it is European currencies that are cheap. For those of you still in doubt, just visit the ECB website. The central bank’s own currency valuation indicator admits that the trade-weighted euro is 10 percent undervalued (Chart I-11). Chart I-11The ECB Admits That The Euro Is 10 Percent Undervalued Hence, investors seeking value in Europe should not focus on the main equity indexes. Instead, they should focus on the main currencies. That said, valuation based investing only works if you have a long enough time horizon, meaning at least two years. For shorter horizons, economic momentum and technical factors dominate. In this regard, the pound’s strong rally faces resistance once post-Brexit trade deal negotiations begin in earnest after January 31. As a tactical trade, go long EUR/GBP (see next section). Fractal Trading System* The Brexit deal unleashed a strong rally in the pound, but this is vulnerable to a countertrend setback once the trade deal negotiations begin in earnest. Accordingly, this week's recommendation is long EUR/GBP. Set a profit target at 2 percent with a symmetrical stop-loss. In other trades, long tin achieved its 5 percent profit target at which it was closed. The rolling 1-year win ratio stands at 62 percent. Chart I-12EUR/GBP 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. * 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 Fractal Trading System Cyclical Recommendations Structural Recommendations Trades Closed 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
Highlights The recently signed Phase One deal is positive for China and global equity markets as it brings a temporary truce to the trade war. However, China is unlikely to change its current policy trajectory to create additional domestic demand to consume $200 billion in new imports from the US. China is likely to meet the commitment only half way in the next two years, and meet the 2020 import target from the US by a redistribution of its purchases overseas. The RMB will modestly appreciate in the next three to six months. On the monetary policy front, there is no sign of further monetary easing from the PBoC. We continue to recommend an overweight stance towards Chinese stocks in the next six months, relative to the global benchmark. Feature Economic data released last week, including Q4 GDP growth, December industrial production, fixed-asset investment and trade data, all suggest that the Chinese economy bottomed before the end of 2019. The Phase One trade deal between China and the US marks a significant de-escalation in a two-year trade war. The RMB appreciated by 1.4% against the greenback since the beginning of the year, pushing USD-CNY firmly below the key psychological 7 mark. The performance of equities in China’s onshore and offshore markets confirms that the economy has bottomed. Since December 11, 2019, Chinese cyclical sectors have outperformed defensives and both the investable and domestic markets have broken above their respective 200-day moving averages versus global stocks (Chart 1A and 1B). Chart 1ABoth Onshore And Offshore Equities Signal A Bottoming In China's Economy Chart 1BCyclicals Have Significantly Outperformed Defensives Lately We continue to recommend a cyclical long stance on Chinese stocks. We expect pro-growth policy support to accelerate in the first quarter, economic recovery to further solidify, and the Phase One trade deal to reduce economic and financial market volatility until the November 2020 US presidential election. All of these factors should support an outperformance in Chinese stocks relative to their global peers. Some Inconvenient Truth To The Truce China’s commitment to purchase an additional $200 billion in goods from the US was more than market participants anticipated. We do not think China will honor this commitment to its full extent. Moreover, we also do not think this will change China’s domestic economic policy trajectory for 2020. Details in Chapter 6 of the Phase One trade agreement titled “Expanding Trade”1 include: In the next 2 years, China is committed to purchase an additional $200 billion worth of goods and services from the US, from the 2017 baseline. The additional $200 billion amount is split over the next two years: China will need to add no less than $77 billion of imports from the US in 2020, and $123 billion in 2021. This amounts to a 41% increase in 2020 and a 66% increase in 2021, from the 2017 baseline of $186 billion (Chart 2). The text from Chapter 6 of the Phase One deal also specifies that, between January 2020 and December 2021, China will add a total of $77.7 billion in purchases of manufactured goods (including aircraft components), $32 billion in agricultural products, $52.4 billion in energy and $37.9 billion in services from the US (Chart 3). Chart 2Phase One Trade Deal Sets An Ambitious Import Target For The Next Two Years Chart 3Chinese Imports Of Agro And Energy Goods From The US Likely To See The Biggest Increase In 2020 From 2019 China’s annual import growth from the US in 2017 was the highest one in the past ten years. If we assume that China will simply add $200 billion of new imports in the next two years from the US to this high starting point, it will need to boost domestic demand to accommodate at least a 4-6% increase in total imports in the next two years from 2019.2 In contrast, growth in China’s total imports in 2019 contracted by 3% from 2018, and averaged at only 2% in the last five years. In other words, in 2020 and 2021, even if China does not increase imports from other countries, just the commitment from purchases of US goods alone would require a sizable boost in China’s domestic demand. However, the assumption above is overly simplified and optimistic. Even though Chinese leadership may have shifted their policy priority from financial deleveraging to supporting economic growth this year, we do not think they will fully abandon the battle against systemic risks in the financial sector. Therefore, China is unlikely to significantly deviate from its current policy trajectory and stimulate aggressively to create additional domestic demand to consume the agreed $200 billion in new imports from the US. It is equally unlikely that China will absorb the $200 billion additional imports from the US, at the expense of its domestic production. A more plausible approach, which is our base case scenario, is that China will meet a large portion of the 2020 import target before November, to show good faith. After the US presidential election, China will face the challenge of either a re-escalation from the Phase Two trade talk with a re-elected President Trump, or a new US president with his/her own political agenda. In either case, at this point China is unlikely to have the intention to meet the import target for 2021. Chart 4China Likely To Shift Agro And Energy Import Suppliers To The US In 2020, to absorb a $77 billion additional imports from the US, China will likely shift some of its imports, such as agriculture and energy products, from other countries to suppliers in the US. China currently imports $150 billion of agriculture goods and $298 billion of energy related products on an annual basis, so the pie is large enough to absorb some of increased import commitments by shifting the sources of imports (Chart 4). The same logic goes for the manufactured goods category in the trade agreement, which includes cars, airplanes, steel, industrial machinery, and so on.3 China is likely to choose to shift its import suppliers of these goods to the US, while increasing its own share of intermediate goods supplies to the US manufacturers. Almost all of the eight subcategories under the manufactured goods category in the Phase One trade agreement are deeply integrated in the global supply chain. For example, foreign value-added share accounts for 23% of the total output value of the US automobile industry.4 In other words, if a “Made in America” car is worth $20,000, $4,600 is produced by foreign suppliers of intermediate goods. Since China has been the leading source of this foreign value-added in the US automobile industry, a sizeable slice of these additional imports will likely benefit Chinese manufacturers. In this scenario, we expect an increase in bilateral trade between China and the US in 2020, at the expense of other players in the global supply chain. Lastly, while this is not our base case scenario, it is possible the Phase One trade agreement was set up for failure, if China is simply hoping to delay the imposition of additional tariffs as part of a gamble that President Trump will not be re-elected. In this scenario, China might not make any meaningful additional purchases from the US even in 2020 (while claiming that they will be made closer to the election), implying that bilateral trade between China and the US will only revert to its historical average this year, at best. Bottom Line: Chinese policymakers are unlikely willing to alter their existing policy trajectory when accommodating more imports of US goods. China will, at best, reshuffle its supply chain to absorb a portion of the commitment before November 2020. The RMB And Monetary Policy: A Refocus On The Economic Fundamentals As tensions from the US-China trade war abate, investors are starting to refocus on economic fundamentals. The RMB has appreciated by 1.4% against the USD since the beginning of this year (Chart 5). The recent appreciation in the currency is a reversal to its fair value, which reflects an ongoing economic recovery (Chart 6). In the next three to six months, the improvement in China’s economic fundamentals and market sentiment should support a continuation in the RMB’s reversal to its structural trend. Chart 5USD/CNY Has Durably Fallen Below 7 Chart 6The Recent Appreciation In RMB Is A Reversal To Its Fair Value But Chinese leadership’s cautious approach to boosting domestic demand will also cap the upside potential in the RMB appreciation. We think Chinese policymakers will maintain their tight grip this year on local government spending and bank lending, and will continue to fine-tune policies based on economic conditions. This will limit the magnitude in both the stimulus and economic recovery. Baring a major re-escalation in the trade war, the RMB should oscillate within a relatively narrow band through the third quarter of this year. For that reason, the PBoC is unlikely to intervene in the RMB exchange rate by significantly altering its monetary stance (Chart 7). The 3-month interbank lending rate, China’s de facto policy rate, remains low compared with the 2015-16 easing cycle. There is no sign that the PBoC will allow the rate to fall much more. The recent bank reserve requirement ratio (RRR) rate cut provides additional liquidity to the interbank system, but on a net basis liquidity does not seem excessive (Chart 8). Chart 7PBoC Unlikely To Alter Monetary Policy To Intervene RMB Exchange Rate This Year Chart 8No Sign Of Meaningful Monetary Easing From PBoC Historically, the 3-month interbank lending rate only falls significantly and durably when the PBoC places consecutive RRR rate cuts (in both 2015 and mid-2018) and/or keeps net fund injections positive through the open market for a prolonged period (such as in the 2015/16 easing cycle). Chart 8 suggests the current monetary environment does not indicate that such an extremely easy stance is in place, as PBoC net fund injections through the open market remain negative. Furthermore, neither the 3-month interbank lending rate nor the 10-year government bond yield has fallen below its most recent lows in the third quarter of last year. Bottom Line: While the current environment supports a stronger RMB, the upside potential in RMB appreciation is capped by a modest scale of economic recovery. There is no sign that the PBoC is easing its monetary stance by lowering the policy rate. Investment Conclusions We have been cyclically overweight Chinese stocks on the basis of a bottoming in the economy in the first quarter of 2020, and the likelihood of an eventual trade deal. These two factors were confirmed in the past two weeks. Last week’s small selloffs in both onshore and offshore Chinese equity markets were likely technical corrections and pre-Chinese New Year profit taking, rather than a fundamental shift in investors’ sentiment towards Chinese stocks (Chart 9). We expect Chinese stocks to resume an upward trajectory after the Chinese New Year. Chart 9Small Corrections Following A 14% Gain Since Dec 2019 Chart 10Offshore Stocks Still Showing More Upside Potential Than Onshore China’s economic conditions and corporate earnings should continue to improve, with investable stocks showing more upside potential than their domestic counterparts (Chart 10). As growth supporting measures continue to work their way through the economy and solidify an economic recovery, China’s leadership may pull back the scale of the stimulus in the second half of the year. Therefore, the relative outperformance in both markets may be front loaded and subsequently subside in the second half of 2020. Jing Sima China Strategist jings@bcaresearch.com Footnotes 1 https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rVaHxDBUtdew/v0 2 China’s total imports of goods and services in 2019 was $2604 billion, including $168 billion imports from the US. If China was to fully meet the $200 billion target of additional imports from the US, assuming no change to imports from other countries in 2020 from 2019, China’s total imports would jump to $2699 billion in 2020 and $2745 billion in 2021. 3 The eight subcategories of Manufacturing Goods listed in the Annex 6.1 of the Phase One Trade agreement include: Industrial Machinery, Electrical Equipment and Machinery, Pharmaceutical Products, Aircraft, Vehicles, Optical and Medical Instruments, Iron and Steel, Other Manufactured Goods including solar-grade polysilicon and other organic and inorganic chemicals, hardwood lumber, integrated circuits (manufactured in US), and chemical products. 4 WIOD Data, 2016 release and OECD Input-Output Tables (IOTs), 2015 release. Cyclical Investment Stance Equity Sector Recommendations
We recently downgraded our tactical three-month view on global equities from overweight to neutral on the grounds that stocks had run up too hard, too fast. Net long positions in equity futures among asset managers and levered funds are now at levels that…
Highlights We continue to have a positive view on global equities over the next 12 months, but see heightened risks of a near-term correction. Despite dwindling spare capacity, government bond yields are still lower today than they were shortly after the financial crisis. Many investors argue that bond yields cannot rise much because asset values would plunge if yields rose sharply, while debt burdens would quickly become unsustainable. We disagree. We think there is greater scope for yields to rise than is widely believed. Investors should maintain below-benchmark duration in fixed-income portfolios, favoring inflation-linked over nominal bonds and positioning for steeper yield curves. Gold should also do well next year. As long as bond yields are rising in response to stronger growth, as will be the case for the next two years, equities will fare well. The stock market will buckle, however, once stagflation sets in around 2022. Stocks Need To Work Off Overbought Conditions Before Moving Higher Again In last week’s report, entitled “Time For A Breather,” we downgraded our tactical three-month view on global equities from overweight to neutral on the grounds that stocks had run up too hard, too fast. Net long positions in equity futures among asset managers and levered funds are now at levels that have historically preceded corrections (Chart 1). Chart 1Stocks Are At A Heightened Risk Of A Correction Chart 2Breadth Is Quite Narrow Chart 3The Equity Risk Premium Is Fairly High, Especially Outside The US The rally has been lopsided, characterized by very narrow breadth. The top five stocks in the S&P 500 (Apple, Microsoft, Alphabet, Amazon, and Facebook) now comprise 18% of market cap, a higher share than in the late 1999/early 2000s (Chart 2). As my colleague, Anastasios Avgeriou, has pointed out, Apple’s $30 billion one day market cap gain on January 9th was greater than the market cap of the median stock in the S&P 500 index. Despite our near-term concerns, we continue to maintain a positive 12-month view on global equities. Easier financial conditions, a turn in the global inventory cycle, modestly looser fiscal policy in the UK and euro area, and re-upped fiscal/credit stimulus in China should all support global growth this year. Faster growth, in turn, will lift corporate earnings. The equity risk premium also remains quite high, particularly outside the US (Chart 3). A Fragile Trade Truce A de-escalation in the trade war should provide a further tailwind to equities. The “phase one” agreement signed on Wednesday features a commitment by China to purchase an additional $200 billion in US goods and services over the next two years relative to 2017 levels. In return, the US will halve tariffs, to 7.5%, on the $120 billion tranche in Chinese imports and suspend any further tariff hikes. No firm schedule exists to begin “phase two” talks, and at this point, it is quite likely that no negotiations will take place until after the US presidential election. Nevertheless, the tail risk of an out-of-control trade war has receded for the time being, which is positive for stocks. Better Chinese Trade Data Adding to growing optimism over the global economy and diminished trade tensions, Chinese trade data surprised on the upside this week. Exports rose 7.6% in December, well above the consensus estimate of 2.9%. Imports surged 16.3%, easily surpassing the consensus estimate of 9.6%. While base effects explain some of the improvement, the overall tone of the trade data is consistent with the strengthening Chinese PMIs and improvement in industrial production and retail sales (Chart 4). Chart 4Chinese Trade Data Is Improving Chart 5Better News Out Of China Has Propelled The Yuan Higher Versus The US Dollar Better news out of China has pushed the yuan to the strongest level against the US dollar since last summer (Chart 5). The Chinese currency is the most important driver of other EM currencies. If the yuan continues to strengthen, as we expect, EM assets – particularly EM stocks and local-currency bonds – should do well this year. How High Can Bond Yields (Realistically) Go? Despite rising over the past few months, global government bond yields are lower today than they were shortly after the financial crisis ended (Chart 6). The decline in yields has occurred alongside dwindling spare capacity. In most countries, the unemployment rate today is below 2007/08 lows (Chart 7). Many investors argue that bond yields cannot rise much from current levels because asset values would plunge if yields rose sharply, while debt burdens would quickly become unsustainable. If such an unfortunate turn of events were to occur, central bankers would have to shelve any tightening plans, just as Jay Powell had to do in late 2018. Chart 6Bond Yields Are Lower Today Than They Were After The Great Recession Chart 7Unemployment Rates Are Below Their Pre-Recession Lows In Most Economies Convexity Fears One argument often heard these days is that asset prices have become hypersensitive to changes in interest rates. There is some basis for thinking this. As Box 1 explains, the relationship between asset returns and interest rates tends to be “convex,” meaning that any given change in interest rates will have a bigger effect on returns if rates are low to begin with, as they are today. The effect is particularly pronounced for long duration assets such as long-term bonds, equities, or real estate. Nevertheless, while the theoretical presence of convexity in asset returns is crystal clear, many commentators overstate its practical importance. As Chart 8 shows, the average maturity of government debt stands at seven years. At that level of maturity, the effects of convexity tend to be quite small.1 Chart 8Average Debt Maturity Is Below 10 Years In Most Countries Granted, the overall stock of debt has increased in relation to GDP. However, much of that additional debt has been absorbed by central banks, reducing the amount of government debt available for the private sector. What about equities? The ratio of stock market capitalization-to-GDP has risen to 59%, up from a low of 24% in 2009, and close to its 2000 highs (Chart 9). Does that mean that stocks will sink if yields rise from current levels? Not necessarily. Remember that the discount rate is not the only thing that affects the present value of a stream of income. The expected growth rate of that income also matters. In fact, in the standard dividend discount model, it is simply the difference between the discount rate and the growth rate of dividends that determines how much a stock is worth. If higher bond yields coincide with rising growth expectations, stock prices do not need to fall at all. Chart 9Equity Market Cap Is Approaching Previous Highs Chart 10 shows that the monthly correlation between equity returns and bond yields remains as high as ever. This suggests that favorable economic news, to the extent that it leads investors to revise up the expected growth rate for earnings, usually more than compensates for a rising discount rate (Chart 11). Chart 10Correlation Between Equity Returns And Bond Yields Remains High Chart 11Earnings Estimates Tend To Move In Sync With Swings In Bond Yields So why are so many investors worried that higher bond yields will undercut stocks? The answer has less to do with convexity and more to do with the fear that bond yields will reach a level that chokes off growth. The combination of a rising discount rate and a falling growth rate would be toxic for equities and other risk assets. Debt Worries Likewise, it is not so much that corporate bond investors are worried that rising yields will cause interest payments to swell. After all, interest costs are still quite low as a share of cash flows for most firms (Chart 12). Rather, the fear is that higher yields will imperil growth, causing those cash flows to evaporate. Government debt is also much less of a problem than often assumed, at least in countries that issue bonds in their own currencies. The standard rule for debt sustainability says that the debt-to-GDP ratio will always converge to a stable level if the interest rate is below the growth rate of the economy.2 This is easily the case in almost all economies today (Chart 13). Chart 12US Corporate Sector: Interest Payments Are Not A Worry Chart 13Bond Yield Minus GDP Growth: Please Mind The Gap The only places where central banks are severely constrained in raising rates are in economies such as Canada, Sweden, and Australia where debt-financed housing bubbles have formed (Chart 14). However, even in these countries, the quality of mortgage underwriting has generally been strong, implying that a banking crisis would likely be avoided. Chart 14Canada, Sweden, And Australia Stand Out As Having Very Frothy Housing Markets It’s Really About The Neutral Rate The discussion above suggests that the main constraint to higher bond yields is the economy itself. If bond yields rise enough, the interest rate-sensitive sectors of the economy will weaken, and a recession will ensue. As long as bond yields are rising in response to stronger growth, as will be the case for the next two years, equities will be fine. Unfortunately, no one knows where the neutral rate – the interest rate demarcating the boundary between expansionary and contractionary monetary policy – really lies. Chart 15Rising Labor Share Of Income Occurring Alongside Labor Market Tightening Slower trend growth has probably reduced the neutral rate, as has the shift to a more “capital-lite” economy. On the flipside, other forces have probably raised the neutral rate over the past few years. A tighter labor market has increased workers’ share of national income (Chart 15). Since workers spend more of every dollar of income than companies, this has raised aggregate demand. Fiscal policy has also been loosened, while elevated asset prices have likely incentivized some spending that would otherwise not have taken place. Even though we do not know the exact value of the neutral rate, we do know that the unemployment rate has been falling in most countries for the past 10 years, a period during which bond yields were generally higher than today. This suggests that monetary policy remains in expansionary territory. True, global growth did slow in 2018, just as the Fed was raising rates. However, this probably had more to do with the natural ebb and flow of the global manufacturing cycle, exacerbated by the Chinese deleveraging campaign and the brewing trade war. If global growth recovers this year, as we expect, estimates of the neutral rate will rise. This will allow equity prices to increase even in an environment of modestly higher bond yields. Inflation Is Coming… Eventually While stronger economic growth will lift bond yields this year, the big move in yields will only come when inflation breaks out. Core inflation tends to track unit labor costs (Chart 16). Unit labor cost inflation has remained range-bound for most of the recovery in the United States, which explains the failure of inflation to take flight. Unit labor cost inflation has been even more moribund elsewhere. Chart 16Core Inflation Tends To Track Unit Labor Costs Chart 17Correlation Between Labor Market Slack And Wage Growth Remains Intact Looking out, barring a major surge in productivity, rising wage growth should lead to accelerating unit labor cost inflation, first in the US and then in the rest of the world, which will translate into higher price inflation. We doubt that such a price-wage spiral will erupt this year. If anything, US wage growth has leveled off recently, with the year-over-year change in average hourly earnings falling back below the 3% mark. Nevertheless, the long-term correlation between labor market slack and wage growth remains intact (Chart 17). As wage growth reaccelerates, unit labor cost inflation will drift higher, setting the stage for a period of rising price inflation. Investors should maintain below-benchmark duration in global fixed-income portfolios, favoring inflation-linked over nominal bonds and positioning for steeper yield curves. Gold should also do well next year. As long as bond yields are rising in response to stronger growth, as will be the case for the next two years, equities will be fine. The stock market will buckle, however, once stagflation sets in around 2022. Box 1 Asset Prices And Interest Rates: The Role Of Convexity Peter Berezin Chief Global Strategist peterb@bcaresearch.com Footnotes 1Assuming semi-annual compounding, the price of a 10-year bond with a 5% coupon rate falls by 7.9% if the yield increases from 1% to 2%, which is only slightly higher than the 7.6% decline that would be incurred if the yield increases from 4% to 5%. 2One might add that if the interest rate is below the growth rate of the economy, a higher starting point for the debt stock will allow for more debt issuance without leading to a higher debt-to-GDP ratio. As we have shown before, the steady-state debt-to-GDP ratio can be expressed as p/(r-g), where r is the interest rate, g is trend GDP growth, and p is the primary (i.e., non-interest) budget balance. Thus, for example, if the government wanted to achieve a stable debt-to-GDP ratio of 50% and r-g is -2%, it would need to run a primary budget deficit of 0.5*0.02=1% of GDP. However, if the government targeted a stable debt-to-GDP ratio of 200%, it could run a primary budget deficit of 2*0.02=4% of GDP. Global Investment Strategy View Matrix MacroQuant Model And Current Subjective Scores Strategic Recommendations Closed Trades
Neutral Our recent gold miners overweight has pushed the broad materials sector from underweight to neutral. Simultaneously, macro data also suggests that it no longer pays to be bearish materials stocks. Our materials sector profit growth model has troughed and signals that a turnaround in EPS growth is underway and should gain steam this year (second panel). Keep in mind that this niche deep cyclical sector has borne the brunt of the Sino/American trade war and the recent de-escalation can serve as a catalyst for an earnings-led recovery. Moreover, this industry is not at a standstill. Contrary to the overall economy, materials executives are investing in new projects as financial market reported materials sector capex clearly shows (third panel). These investments should bear fruit in coming quarters and translate into higher top line growth, something that is not at all discounted in bombed out relative sales growth expectations (bottom panel). Bottom Line: Book relative gains of 5% since inception and lift the S&P materials sector to a benchmark allocation. Please refer to this Monday’s Weekly Report for more details.