Equities
Please note that we will be presenting a webcast on Thursday March 11 at 10:00 AM EST for the Americas and EMEA regions and on March 12 at 9:00 HKT/12:00 AEDT for APAC clients. We will be discussing macro themes and investment strategies. Highlights EMs (ex-China, Korea and Taiwan) are better positioned to handle higher US bond yields today than they were in 2013. Yet better does not mean they will be unscathed. The combination of rising US bond yields and a firming US currency will suffocate EM risk assets in the near-term. A neutral allocation is warranted in EM stocks and credit markets within global equity and credit portfolios, respectively. Feature Ever since the US elections concluded in January with a Blue Sweep, we have been warning that rising US bond yields could trigger a setback in global markets in general, and in EM markets in particular. EM equities, currencies and fixed-income markets have recently experienced a correction (Chart 1). The question now is: Is the market rout over? Or is there more to come? We are inclined to believe that the correction is not over. Rising US Treasury yields have been the culprit of the shakeout in global growth stocks, EM equities, as well as EM currencies. Therefore, taking a stance on US bond yields and on the US dollar is critical for assessing the outlook for EM financial markets. Odds are that the selloff in US long-term bonds and the rebound in the US dollar are not yet over because: Positioning and sentiment on US long-dated Treasuries is neutral, as illustrated in Chart 2. Chart 1Rising US Real Yields Have Caused A Shakeout In EM Chart 2Investor Sentiment And Positioning In US Treasurys Are Neutral Typically, US bond yields do not reverse their ascent until investor sentiment becomes downbeat and bond portfolios are of materially short duration. These conditions for a top in bond yields are not yet present. US government bond yields would have been much higher if it were not for the Federal Reserve and US commercial banks’ massive bond-buying spree. The Fed has bought $2.8 trillion and US commercial banks have purchased about $300 billion of Treasurys in the past 12 months (Chart 3). One of the main motives for commercial banks to buy US Treasurys has been the SLR relief initiative which commenced on April 1, 2020.1 This SLR relief is due to terminate on March 31, 2021. Unless it is extended, commercial banks will drastically curtail their net government bond purchases. This will exert upward pressure on Treasury yields. Regarding the greenback, investor sentiment remains quite bearish (Chart 4). From a contrarian perspective, this heralds further strength in the US dollar. Chart 3Surging Purchases Of US Treasurys By The Fed And Commercial Banks Chart 4Investors Are Still Bearish On The US Dollar From a cyclical perspective, US growth will be stronger relative to its potential, and vis-à-vis other DMs, EMs and China. Growth differentials moving in favor of the US foreshadows near-term strengthening of the dollar. Structurally, the bearish case for the US currency hinges on both the Federal Reserve falling behind the inflation curve and ballooning US twin deficits. In our view, this will ultimately be the case. Hence, the long-term outlook for the US dollar remains troublesome. That said, twin deficits alone are insufficient to produce a continuous currency depreciation. The twin deficits must also be accompanied with low/falling real interest rates – in order to generate sufficient conditions for currency depreciation. As long as US real rates continue rising, the dollar’s rebound will be extended. The USD/EUR exchange rate has been correlated with the 10-year real yield differential and this relationship will persist (Chart 5). Bottom Line: US government bonds will continue selling off. Rising bond yields (including rising real yields) will support the dollar in the near-term. The combination of rising US bond yields and a firming US currency will cause global macro volatility to rise (Chart 6). This will suffocate EM risk assets and EM currencies. Chart 5US Real Yields (TIPS) Will Continue Driving The US Dollar Chart 6Aggregate Financial Market Volatility: Higher Lows Impact On EM: 2013 Versus Now Are we entering another Taper Tantrum episode as in the spring of 2013 when many EMs were devastated? There are both similarities and differences between the current period of rising US bond yields and the 2013 episode. Similarities: Today, as in early 2013, investor sentiment on EM is very bullish and investors are long EM (Chart 7). Chart 7Investor Sentiment On EM Stocks Was At A Record High In January In early 2013, as is the case today, EM local currency bond yields were very low and EM credit spreads were too tight. When US Treasury yields spiked in the spring of 2013, EM assets tanked. Many commentators blamed it on the Fed. We disagree with that interpretation. Remarkably, the rise in US TIPS yields in 2013 had little impact on equity indices such as the S&P 500 and Nasdaq, or on US corporate spreads (Chart 8). The correction in the US equity market lasted about a week. Yet, EM equities, fixed income markets and currencies experienced a prolonged slump, and in many cases, a bear market. There is no basis to believe that the Fed’s policy and US bond yields are more important to EM than they are to US credit and equity markets. The core rationale for the EM bear market in 2013 was poor domestic fundamentals. The Fed’s tapering was the trigger, not the cause. Differences: The key difference between the current episode and the 2013 Taper Tantrum is EM macro fundamentals. Specifically: EM economies (ex-China, Korea and Taiwan) entered 2013 with booming bank loans and strong domestic demand as well as high inflation (Chart 9). Chart 8US Markets Were Not Hit By The Taper Tantrum In 2013 Chart 9EM (ex-China, Korea And Taiwan): 2013 Vs Now Chart 10EM (ex-China, Korea And Taiwan): 2013 Vs Now Presently, EM bank credit is subdued, domestic demand is dismal, and inflation is tame. Besides, EMs (ex-China, Korea and Taiwan) had a very large trade deficits in 2013 and were financing them via foreign borrowing, which was roaring prior to 2013 (Chart 10). Presently, their trade balances are in surplus and foreign indebtedness has not increased in recent years. Bottom Line: In 2013, EM economies (ex-China, Korea and Taiwan) were overheating and were addicted to foreign funding. These were the reasons why EM currencies and fixed income markets teetered when US bond yields spiked in 2013. Presently, the majority of EM economies (ex-China, Korea and Taiwan) have different types of malaises: domestic bank loan origination is too timid, consumer spending and capital expenditures are moribund, inflation is low and fiscal policy is tight. Consequently, EMs (ex-China, Korea and Taiwan) are better positioned to handle higher US bond yields today than they were back in 2013. Yet better does not mean they will be unscathed. Investment Strategy Equities: The key variable to watch to assess the vulnerability of both US and EM equity markets is their respective corporate bond yields. Historically, rising corporate bond yields (shown inverted in both panels of Chart 11) heralds lower share prices. Chart 11Rising Corporate Bond Yields Are Bad For Share Prices Given that both EM and US corporate credit spreads are too tight, they are unlikely to narrow further to offset rising US Treasury yields. Instead, EM and US corporate bond yields are likely to rise with US Treasury yields. This will trigger more weakness in share prices. Besides, rising EM local currency government bond yields also point towards more downside in EM equities (yields are shown inverted on the chart) (Chart 12). Chart 12Rising EM Local Currency Bond Yields Heralds Weaker Equity Prices Concerning equity style, global growth stocks have peaked versus global value stocks. In the EM equity space, we have less conviction on growth versus value. As to regional allocation in a global equity portfolio, we continue recommending a neutral allocation to EM, underweighting US and overweighting Europe and Japan. Commodities: Investors’ net long positions in commodities are very elevated (Chart 13). As US bond yields rise and the US dollar continues rebounding, there will be a de-risking in the commodities space resulting in a pullback in commodities prices. Currencies: We continue shorting a basket of EM currencies – including BRL, CLP, ZAR, TRY and KRW versus the euro, CHF and JPY. Several EM currencies have failed to break above their technical resistance levels, suggesting that a pullback could be non-trivial (Chart 14). Chart 13Investors Are Record Long Commodities Chart 14Asian Currencies Hit Technical Resistances In central Europe, we are closing the long CZK/short USD trade with a 3.8% gain. Continue holding the long CZK/short PLN and HUF position. Local fixed income markets: EM local bond yields have risen in response to rising US treasury real yields and the setback in EM currencies. This might persist in the near-term, but we continue to recommend receiving 10-year swap rates in selected countries where inflation risks are low and monetary and fiscal policies are tight. These countries include Mexico, Colombia, Russia, China, India and Malaysia. A further rise in their swap rates would represent an overshoot and hence, should not be chased. EM currencies are more vulnerable to a selloff than local rates are. We continue to wait for a better entry point in currencies to recommend buying cash domestic bonds instead of receiving swap rates. EM Credit: A neutral allocation to EM sovereign and corporate bonds is warranted in a global credit portfolio. Our sovereign credit overweights are Mexico, Russia, Malaysia, Peru, Colombia, the Philippines and Indonesia, while our sovereign credit underweights are Brazil, South Africa and Turkey. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Footnotes 1 The Supplementary Leverage Ratio (SLR) is equivalent to Basel III Tier-1 leverage ratio and varies from 3-5% for US banks. Under the relief program last April, the Fed allowed US banks to exclude holdings of US Treasury Bonds and cash kept in reserves at the Fed from their assets when calculating this ratio. The SLR relief is planned to end March 31, 2021. Equities Recommendations Currencies, Credit And Fixed-Income Recommendations
Highlights The US has largely passed a “stress test” of its political system. Rule of law is intact. The US dollar and treasuries may fall further due to cyclical and macro developments but not due to a structural loss of confidence in US governance. The judicial system will become the key check on the Biden administration as it shifts from short-term economic relief to its longer-term agenda, especially on executive orders. The court becomes even more important as a check if the Democrats muster the votes to remove the filibuster. This is possible but not imminent. Packing the court is much harder. Major court cases only sometimes have a major impact on the stock market but key sectors can be given certainty through court verdicts after being disrupted by policy. The US dollar is bouncing on the basis of economic recovery and political stability which poses a near-term risk to cyclical sectors. Feature US government bonds continued to sell off over the past week as the economic recovery gained steam and investors rotated into cyclical equities and commodities. The US Senate passed the $1.9 trillion American Rescue Plan – a massive and likely excessive infusion of fiscal relief – sending it to the House where it will be ratified shortly and passed over to President Joe Biden for signing. Across America shops and restaurants are opening up as immunization to COVID-19 advances and hospitalizations collapse. Meanwhile the Supreme Court announced its first set of rulings under the Biden administration: it dismissed former President Trump’s last challenge to the 2020 election and ruled on other issues such as free speech. The country has tentatively passed a political “stress test.” The rule of law remains intact. On the surface these two trends stand in opposition. US treasuries have been attractive to a savings-rich world not just because of the size of the US economy but also because of the country’s 245-year tradition of good governance – the balance of freedom and stability in its government and financial markets. The share of foreign holdings of US treasuries is declining but the reason is that the Federal Reserve is increasing its share (Chart 1). Foreigners are not liquidating their holdings just yet, although it is a risk given the US’s combination of extremely easy monetary and fiscal policy and populist politics. Chart 1Foreign Holdings Of US Treasuries In this report we focus on governance in the wake of the Trump administration and COVID-19 pandemic. Is US governance eroding? If so, how will it impact the markets? How will the courts interact with the Biden administration? Should investors care about the rule of law? With a new business cycle beginning, any assurance of a basic level of US governance allows risk appetite to recover and enables investors to pursue higher-yielding cyclical assets with less inhibition. But it also suggests that US assets will remain safe havens. How Rule Of Law Matters To Investors Rule of law and the independence of the judiciary are critical aspects of good governance that make a market attractive to foreign investors and secure for domestic investors. Nowhere is this clearer than in the breakdown of global reserve currencies. The United States and its developed market allies hold pride of place (Chart 2). Nevertheless the US has lost some of its reserve status to other currencies over two decades of partisanship and repeated crises, from 9/11 through Trump’s trade war. Chart 2Rule Of Law: Bedrock For Reserve Currencies Government bond yields exhibit some degree of correlation, inversely, with rule of law: better governance implies lower yields and vice versa. As the global savings glut grew over the past few decades, investors sought to preserve capital in securities perceived to be the safest. This is apparent whether judging by a simple comparison of developed and emerging market bond yields or by the World Bank’s Worldwide Governance Indicators.1 The relationship between governance and bond yields is strongest with emerging markets but it loosely holds among developed markets like the US, as shown in Chart 3. Chart 3Bond Yields Lower Where Laws Rule It is the level of governance rather than any change matters, since bond yields have fallen for all developed markets regardless of changes in governance over the past decade. However, governments that take negative steps that harm governance attract fewer foreign purchases of their debt than those that improve governance (Chart 4). This is true of developed and emerging economies. The implication is that demand for US treasuries would have been even greater over the past decade if the US political system had remained stable like Canada’s. Chart 4Improved Rule Of Law Attracts Bond Investors Differences in developed economy governance only slightly (if at all) correlate with portfolio or direct investment flows (Charts 5 and 6). This is not surprising as governance does not translate into short-term corporate earnings growth and foreign countries invest directly in developed markets to access technology and consumer markets. By contrast, in emerging markets, better governance goes along with stronger equity demand and foreign direct investment. Chart 5Rule Of Law A Boon For Equity Flows? Chart 6Eroding Rule Of Law Discourages Direct Investment Still the global phenomenon suggests that an erosion of rule of law can shake up one’s faith in a government’s ability or willingness to make debt payments and its operating environment for private companies. Domestically focused investors have to be concerned about rule of law since its collapse would undermine political stability as well as property rights, the surety of contracts, and the redress of grievances. US Rule Of Law Post-Trump And Post-COVID The US has the world’s longest continuously running constitution and one of the highest standards of living. Other countries with similarly high standards of living have similar constitutions or even adopted theirs from the United States. At the same time US governance has deteriorated in recent years, raising the question of whether bond investors or private entrepreneurs face greater governance risk. The drop in rule of law is apparent in the World Bank’s index (Chart 7A). The turmoil of the 2020 election cycle proves beyond doubt that the US suffers from some serious governance problems. At the same time the independence of the US judiciary is rising in the ranks (Chart 7B). Looking ahead, this trend will likely continue as the judicial system managed to get through the disruptive Trump presidency and the 2020 pandemic and election with minimal damage to its independence. Chart 7AUS Rule Of Law Erosion Will Pause Chart 7BUS Judicial Independence Has Improved This is a remarkable feat as the underlying problem in the US system – political polarization – threatens to entangle the judiciary as much as any other institution. Today, with polarization subsiding yet still at a historically high level, the court’s integrity and credibility are critical to the overall maintenance of the rule of law (Chart 8). Chart 8US Polarization Set To Fall Chart 9Trust In Supreme Court Fairly SteadyPolarization creates gridlock in Congress, which forces other branches of government to fill the vacuum and deliver solutions, thus becoming more controversial. This process has ensnared the high court from time to time as well as the central bank and other institutions.2 Over the past ten years the courts have struggled to minimize the damage from polarization. Confidence in the high court has fallen, but not catastrophically, and most voters feel about the same as ever toward the court (Chart 9). Meanwhile disapproval of Congress is stuck around 80%. The Trump era featured a range of claims about the rule of law in America that can now be assessed with some distance. The Democratic Party was not able to remove President Trump through extra-electoral means, while President Trump was not able to ride roughshod over the courts via executive order. Several of Trump’s initiatives were upheld, such as his immigration ban, while others were shot down, such as his attempt to deport the so-called “Dreamers” or add a question about citizenship on the US census. The 2020 election irregularities were not enough to sway the outcome of the electoral vote while the insurrection at the Capitol stood no chance of overthrowing the system. Supreme Court Justice John Roberts refrained from presiding over Trump’s second impeachment – differentiating it from the impeachment of a sitting president – without intervening to tell the Senate whether it could impeach a previous president. Going forward, however, the courts will act as a check on the Biden administration and therefore new controversies will arise. One of the Trump administration’s lasting legacies was to appoint three justices to the high court, creating a six-to-three conservative ideological leaning on the court. Since the Democrats won control of both the White House and Congress, the Supreme Court becomes a critical check on the administration and will thus attract opposition (Chart 10). Speculation about a conservative ideological takeover of the court has proved overrated, based on the court’s neutrality amid the election. Antagonism will inevitably increase going forward as Biden moves away from COVID relief and economic welfare to his larger legislative agenda. Yet the second reconciliation bill, which features infrastructure and green energy investments, would have to include major surprises to create anything as controversial as the dispute over the individual mandate, which imposed a tax on citizens who did not purchase health insurance.3 In other words, a major clash over legislation is more likely only when the Senate Democratic majority removes the filibuster, the rule that effectively requires 60 votes in the Senate to pass regular legislation. This can happen but it does not appear imminent. Senator Joe Manchin of West Virginia opposes removing it, keeping the Democrats at least one vote shy of repealing it, though he has recently shown some flexibility by suggesting that the Senate return to the good old days when senators had to deliver a filibuster in person (and therefore the procedural hurdle was more burdensome to maintain). Chart 10Balance Of Power In The Three Branches Thus the main arena of friction between the Biden administration and the judiciary will boil down to executive action, as with the Trump administration. Not all of this friction will be partisan but certainly ideological leanings will matter in the most important cases. While the number of Trump’s judicial appointments is often exaggerated – President Obama appointed more (Chart 11) – it is still the case that conservatives possess an improved ideological advantage due to the past few decades of appointments (Chart 12). So far Biden has faced pushback on his 100-day deportation moratorium. Chart 11Trump's Judicial Impact Overstated Chart 12Federal Courts A Bulwark For Conservatives Table 1 highlights the most investment-relevant Supreme Court cases coming due in the current session. The court will determine, among other things, whether Facebook can be treated similar to a telephone company in some respects; whether the federal government or states oversee cases brought against oil and natural and gas companies over climate change; and to what extent tech company acquisitions include patents and copyrights. The use of executive authority to reallocate funds that Congress has appropriated for different reasons, and state exemptions for Medicaid requirements, are also on the docket. Table 1Major Cases Pending At Supreme Court In addition we would identify several policy areas that are likely to become relevant to investors due to contemporary political and geopolitical concerns combined with historical precedent: National Security: The Trump administration relied heavily on the Supreme Court’s historic deference to presidents on issues involving national security and foreign policy. This tendency will likely continue, giving President Biden a freer hand in cases where he claims a national security justification, particularly in dealing with export controls vis-à-vis China. The hack into Microsoft’s Exchange email system, allegedly committed by Chinese state-backed hackers, highlights our Geopolitical Strategy view that the Biden administration will not reduce the US-China power struggle. Industrial Policy: The Supreme Court famously rebuked President Harry Truman for trying to seize control of private steel production during the Korean war (Youngstown Sheet & Tube Company v. Sawyer, 1952). Similar cases could emerge in an era in which the president is attempting to assert US government control over critical supply chains in health, tech, and defense. Immigration: The Supreme Court rebuked the Trump administration on the question of the “Dreamers,” undocumented immigrants brought to the US as children, whom the Obama administration refused to deport under an initiative called Deferred Action for Childhood Arrivals (DACA). The court said the Trump administration failed to provide adequate procedural justification for revoking the DACA program. Now the Biden administration’s executive orders loosening immigration and border controls face challenges from lower courts that could ascend the ladder. Also, following from the logic of Trump’s defeat on this issue, it is possible that the Supreme Court could overturn some of Biden’s revocations of Trump’s orders if not adequately justified. Environment: The Biden administration has pledged to phase out the fossil fuel industry over time, yet legislative majorities will be lacking and much of the activity occurs on private land free from direct federal control. The result is that Biden administration will revive regulatory expansions from the Obama era to attempt to raise the cost of carbon emissions. These actions will likely provoke court rulings. Labor: One of the Clinton presidency’s biggest legal controversies, outside the impeachment, centered on executive orders aimed at stopping businesses from hiring replacements for workers who went on strike. The Biden administration explicitly aims to have a muscular policy on labor regulation and to promote union interests and these could run afoul of the courts. Big Tech and free speech: The court has just ruled with an eight-to-one majority in favor of a free speech case on campus. The only reason Chief Justice Roberts dissented was because the case was moot. Future cases may not be moot in an era in which first amendment quarrels are heating up as Big Business, Big Tech, and mainstream media ramp up censorship of disfavored speech. The Supreme Court is likely to enforce first amendment protections robustly which could result in breaking open the digital arena for alternative platforms and services with looser standards. Bottom Line: With Democratic control over the White House and Congress, the judicial branch will become a critical source of limitations on the Biden administration’s policies. While controversial cases could possibly arise from any ambitious proposals in Biden’s second reconciliation bill, the main source of friction will center on executive orders. This is the case at least until the filibuster is removed, which is possible down the road but not imminent. Could Democrats Pack The Court? Finally there is an ongoing concern over the risk of “court packing,” i.e. partisan enlargement of the Supreme Court, under the Biden administration. During the 2020 campaign several leading Democratic Party figures suggested the party could increase the size of the high court so as to reduce the six-to-three conservative leaning. The threat was partly intended to motivate the progressive voting base and deter the Republicans from going forward with the confirmation of Supreme Court Justice Amy Coney Barrett ahead of the election. However, the possibility of court packing remains as long as polarization is extreme and the ruling party has at least 51 votes needed to repeal the filibuster in the Senate. President Biden said he was “not a fan” of court packing but one of his first acts in office was to appoint a commission of experts to study the idea of Supreme Court reform. This can be interpreted as a way of sidelining the question or as a preliminary to packing the court should it become possible later. Packing the court is politically explosive so while Democrats could remove the filibuster if and when they get the votes, they are less likely to succeed at packing the vote due to public opinion (though it cannot be ruled out over the long run). The bar to altering the filibuster is much lower than that to changing the composition of the court. History suggests that it would be a market-relevant episode if court packing were attempted. Franklin Delano Roosevelt attempted to pack the court after it ruled elements of the New Deal unconstitutional, notably a wage hike mandated by the National Industrial Recovery Act (Schechter Poultry Corp. v. United States, 1935). Roosevelt narrowly fell short of expanding the court after the Senate majority leader, a key ally, passed away unexpectedly. The S&P rallied when higher wages were struck down but there are many reasons for these developments – industrial production was rallying at the time, and when industrial production recovered later, and court packing was ruled out, the market remained low. At minimum one cannot say the case was inconsequential to the market (Chart 13). Chart 13FDR Tried To Stack The Courts In a more recent example of a Supreme Court ruling having a substantial market impact, the court ruled with a narrow five-to-four vote to uphold the legality of most of the Affordable Care Act, or Obamacare, the signature legislative effort of Obama’s presidency (National Federation of Independent Business v. Sebelius, 2012). The market reaction at that time was positive, even in the health care sector, as the result removed uncertainty. Only later, in 2015, when the major provisions of the law took effect, did the sector start to feel the negative effects (Chart 14). It is reasonable to expect that any showdown over a major piece of legislation and the courts would have a similar impact today: the market would struggle with uncertainty but rally on the verdict. Chart 14Supreme Court Ruling On Obamacare Had Market Impact Otherwise the Supreme Court’s ideological balance will likely be in place for a while. Justice Stephen Breyer, appointed by President Clinton, is 82 years old while Justice Clarence Thomas, appointed by President Bush, is 72 years old. The other justices are all younger than 66, meaning that conservatives would retain a five-to-four advantage even if Biden had the chance to replace both Breyer and Thomas. Bottom Line: As things stand, court packing is out of reach, more so than removing the filibuster, and therefore the current Supreme Court balance will remain an effective check on the Biden administration. Investment Takeaways The judicial system will become the major check on the Biden administration if its second reconciliation bill contains surprisingly ambitious and controversial provisions or if the Democrats ever get the votes to remove the filibuster. Otherwise the court is primarily a check on Biden’s executive orders. Climate policy is a likely area of friction given that the Biden administration will attempt to pioneer new areas of federal involvement in raising the cost of private industry when it comes to carbon emissions. At the same time the court could insist that the digital arena is a common forum where different voices must be heard, which could open the way to competitors to the tech giants. While the energy sector faces policy risks, it is favored by cyclical economic factors and will also benefit from checks and balances. Whereas the tech sector is not cyclically favored and could face some pushback from courts regarding competition (Chart 15). US rule of law is mostly intact. The selloff in the dollar and treasuries is driven by cyclical factors, not a structural loss of confidence in the rule of law or the American legal and political system. The Trump saga did not in itself trigger a collapse of the US dollar or government bonds – what did that was the Federal Reserve’s shift back to ultra-easy policy and the blowout fiscal spending stemming from the COVID-19 crisis. The US dollar is bouncing on the strong outlook for the economy as well as political stabilization. Chart 16 highlights that this is a near-term risk to cyclical sectors. Assuming the dollar resumes its cyclical weakening path it will power the next leg of outperformance for these sectors. Chart 15Courts Could Impact Energy, Tech Chart 16Dollar Bounce A Near-Term Risk To Cyclical Outperformance Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com Appendix Table A1Political Risk Matrix Table A2Political Capital Index Table A3APolitical Capital: White House And Congress Table A3BPolitical Capital: Household And Business Sentiment Table A3CPolitical Capital: The Economy And Markets Table A4Biden’s Cabinet Position Appointments Footnotes 1 The World Bank uses expert judgment and opinion polls to evaluate rule of law, defined as quality of contract enforcement, property rights, and functioning of the law and justice systems. Biases stem from the policy elite and non-governmental organizations of the western world. For instance, Hong Kong’s high rankings have all too predictably been undercut by Communist China’s power grab there. 2 Polarization escalated after Roe v. Wade and similar rulings that legalized abortion (1973), the Bush v. Gore ruling that decided the 2000 election, the NFIB v. Sebelius ruling that approved the Affordable Care Act (2012), and the Obergefell v. Hodges ruling that legalized gay marriage (2015). 3 The individual mandate is not expected to get shot down by the court this year, though it is conceivable. Even so, Biden’s second reconciliation bill would give the Democrats the chance to respond to any court ruling on health care reform. Biden’s health initiatives of automatic enrollment and government-provided insurance will be challenged but do not seem as controversial as the individual mandate in principle.
Highlights China’s economic recovery is in a later stage than the US. A rebound in US Treasury yields is unlikely to trigger upward pressure on government bond yields in China. Imported inflation through mounting commodity and oil prices should be transitory and does not pose enough risk for Chinese authorities to further tighten policies. Historically, Chinese stocks have little correlation with changes in US Treasury yields; Chinese equity prices are primarily driven by the country’s domestic credit growth and economic conditions. We maintain our tactical (0 to 3 months) neutral position on Chinese stocks, in both absolute and relative terms. However, the near-term pullbacks are taking some air out of Chinese equities' frothy valuations, providing room for a cyclical upswing. Chinese offshore stocks, which are highly concentrated in the tech sector, are facing multiple challenges. We are closing our long investable consumer discretionary/short investable consumer staples trade and we recommend long A-shares/short MSCI China Index. Feature Chinese stocks extended their February losses into the first week of March. Market participants fear that escalating real government bond yields in the US and elsewhere will have a sustained negative impact on Chinese risk assets, reinforced by ongoing policy normalization in China. Global equity prices have been buffeted by crosscurrents. An acceleration in the deployment of vaccines and increased economic reopenings provide a positive backdrop to the recovery of corporate profits. At the same time, optimism about global growth and broadening fiscal stimulus in the US has prompted investors to expect higher policy rates sooner. The US 10-year Treasury yield is up by 68bps so far this year, depressing US equity valuations and sending ripple effects across global bourses. In this report, we examine how rising US and global bond yields would affect China’s domestic monetary policy and risk-asset prices. Will Climbing US Treasury Yields Push Up Chinese Rates? Chart 1Chinese Gov Bond Yields Have Led The US Counterpart Since 2015 Increasing bond yields in the US will not necessarily lead to higher bond yields in China. Chart 1 shows that the direction of China’s 10-year government bond yield has a tight correlation with its US counterpart. It is not surprising because business cycles in these giant economies have become more synchronized. Interestingly, China’s 10-year Treasury bond yield has led the US one since 2015. This may be due to China’s growing importance in the world economy. China’s credit and domestic demand growth leads the prices of many industrial metals and in turn, business cycles in many economies. China’s rising long-duration government bond yields reflect expectations of an improving domestic economy, and these expectations often spill over to the rest of the world, including the US. Although the recent sharp rebound in the US Treasury yield is mainly driven by domestic factors, the rebound is unlikely to spill over to their Chinese peers, because the countries are in different stages of their business and policy cycles. America is still at its early stage of economic recovery and fresh stimulus measures are still being rolled out, whereas China has already normalized its policy rates back to pre-pandemic levels and its credit growth peaked in Q4 last year. Chinese fixed-income markets will soon start pricing in moderating growth momentum in the second half of this year, suppressing the long-end of China’s Treasury yield curve (Chart 2). Importantly, none of the optimism that has lifted US Treasury yields - a vaccine-led global growth recovery and a massive US fiscal stimulus – would warrant a better outlook for China. Reopening worldwide economies will likely unleash pent-up demand for services, such as travel and catering, rather than merchandise trade. Chart 3 shows that since the pandemic US spending on goods, which benefited Chinese exports, has soared relative to spending on services. The trend will probably reverse when the US and world economy fully opens, limiting the upside for China’s exports and its contribution to growth this year. Chart 2China And The US Are In Different Stages Of Their Economic Recoveries Chart 3US Consumers Have Been Spending Much More On Goods Than Services During The Pandemic Bottom Line: China’s waning growth momentum will insulate Chinese bond yields from higher US Treasury yields. Do Rising Inflation Expectations In The US Pose Risks Of Policy Tightening In China? Chart 4Imported Inflation Shouldnt Constrain The PBoC While China’s monetary policymaking is not entirely insulated from exogenous shocks, it is primarily driven by domestic economic conditions and inflation dynamics. We are not complacent about the risk of a meaningful uptick in global inflation, but we do not consider imported inflation a major policy constraint for the PBoC this year (Chart 4). Furthermore, at last week’s National People’s Congress (NPC), China set the inflation target in 2021 at 3%, which is a high bar to breach. Mounting commodity prices, particularly crude oil prices, may put upward pressures on China’s producer prices, but their impact on China’s overall inflation will be limited for the following reasons: China accounts for a large portion of the world’s commodity demand. Given that the country’s credit impulse has already peaked, domestic demand in capital-intensive sectors (such as construction and infrastructure spending) will slow this year. Reinforced policy restrictions on the property sector will also restrain the upside price potential in industrial raw materials such as steel and cement (Chart 5). For producers, the main and sustained risk for imported inflation will be concentrated in crude oil. The PPI may spike in Q2 and Q3 this year due to advancing oil prices and the extremely low base factor from the same period last year. The PBoC will likely view a spike in the PPI as transitory. Moreover, the recent improvement in producer pricing power appears to be narrow. The output price for consumer goods, which accounts for 25% of the PPI price basket, remains subdued (Chart 6). Chart 5Chinas Demand For Raw Materials Will Slow Chart 6Output Price For Consumer Goods Remains In Contraction Importantly, when oil prices plummeted in the first half of 2020, China’s crude oil inventories showed the fastest upturn on record (Chart 7). It suggests that China’s inventory restocking from last year may help to partially offset the impact from elevated oil prices this year. For consumers, oil prices account for a much smaller percentage of China’s CPI basket than in the US (Chart 8). Food prices, particularly pork, drive China’s headline CPI and can be idiosyncratic. We expect food price increases to be well contained this year due to improved supplies and the high base effect from last year. Chart 7Massive Buildup in Chinas Crude Oil Inventory In 2020 Chart 8Oil Prices Account For A Small Portion In China's Consumer Spending Importantly, China’s inflation expectations have not recovered to their pre-pandemic levels and consumer confidence on future income growth also remains below its end-2019 figure (Chart 9). If this trend holds, then it will be difficult for producers to pass through escalating input costs to end users. Although China’s economy has strengthened, it is far from overheating (Chart 10). Without a sustained above-trend growth rebound, it is difficult to expect genuine inflationary pressures. The pandemic has distorted the balance of global supply and demand, propping up demand and price tags attached to it. In China’s case, however, production capacity and capital expenditures rebounded faster than demand and consumer spending, constraining the upsides in inflation (Chart 11). Chart 9Consumer Inflation Expectations Have Not Fully Recovered Chart 10Chinese Economy Is Not Yet Overheating China’s CPI is at its lowest point since 2009, making China’s real yields much greater than in the US. Rising real US government bond yields could be mildly positive for China because they help to narrow the Sino-US interest rate differential and temper the pace of the RMB’s appreciation (Chart 12). A breather in the RMB’s gains would be a welcome reflationary force for Chinese exporters and we doubt that Chinese policymakers will spoil it with a rush to hike domestic rates. Chart 11And Production Has Recovered Faster Than Demand Chart 12Narrowing Real Rate Differentials Helps To Tamper The RMB Appreciation Bottom Line: It is premature to worry about an inflation overshoot in China. The current environment is characterized as easing deflation rather than rising inflation. Our base case remains that inflationary pressures will stay at bay this year. Are Higher US Treasury Yields Headwinds For Chinese Stocks? Historically, Chinese stocks have exhibited a loose cyclical correlation with US government bond yields, particularly in the onshore market (Chart 13). Equity prices in China are more closely correlated with domestic long-duration government bond yields, but the relationship is inconsistent (Chart 14). Chart 13Chinese Stocks Have Little Correlation With US Treasury Yields Chart 14Correlations Between Chinese Stocks And Domestic Gov Bond Yields Are Inconsistent Chinese stocks are much more sensitive to changes in the quantity of domestic money supply than the price of money. A sharp rebound in China’s 10-year government bond yield in the second half of last year did not stop Chinese stocks from rallying. The insensitivity of Chinese stocks to changes in the price of money is particularly prevalent during the early stage of an economic recovery. As we pointed out in a previous report, since 2015 the PBoC has shifted its policy to target interest rates instead of the quantity of money supply. Thus, credit growth, which propels China’s business cycle and corporate profits, can still trend higher even as bond yields pick up. This explains why domestic credit growth, rather than China’s real government bond yields, has been the primary driver of the forward P/E of Chinese stocks (Chart 15A and 15B). This contrasts with the S&P, in which the forward P/E ratio moves in lockstep with the inverted real yield in US Treasuries (Chart 16). Chart 15ACredit Growth Has Been Driving Up Chinese Stock Valuations Chart 15BCredit Growth Has Been Driving Up Chinese Stock Valuations Credit growth in China peaked in Q4 last year and the intensity of the economic recovery has started to moderate. Hence, regardless of the changes in bond yields, Chinese stocks will need to rely on profit growth in order to sustain an upward trend (Chart 17). Chart 16Falling Real Rates Were Propping Up US Equity Valuations Chart 17Earnings Growth Needs To Accelerate To Support Chinese Stock Performance The good news is that recent gyrations in the US equity market, coupled with concerns about further tightening in China’s domestic economic policy have triggered shakeouts in China’s equity markets. The pullback in stock prices has helped to shed some excesses in frothy Chinese valuations and has opened a door for more upsides in Chinese stock on a cyclical basis. Bottom Line: Rising Treasury yields in the US or China will not have a direct negative impact on Chinese equities. Last year’s massive credit expansion has lifted both earnings and multiples in Chinese stocks and an acceleration in earnings growth is now needed to support stock performance. Investment Implications The key message from last week’s NPC meetings suggests that policy tightening will be gradual this year. While the 6% growth target was lower than expected, it represents a floor rather than a suggested range and it will likely be exceeded. Bond yields and policy rates are already at their pre-pandemic levels, indicating that there is not much room for further monetary policy tightening this year. The announced objectives for the fiscal deficit and local government bond quotas are only modestly smaller than last year. The economic and policy-support targets support our view that policymakers will be cautious and not overdo tightening. We will elaborate on our takeaways from this year’s NPC in next week’s report. Chart 18Chinese Cyclicals Can Still Benefit From An Improving Global Economic Backdrop Meanwhile, there is still some room for Chinese cyclical stocks to run higher relative to defensives, given the current Goldilocks backdrop of global economic recovery and accommodative monetary policy (Chart 18). We maintain a tactical (0 to 3 months) neutral position on Chinese stocks, in both absolute and relative terms. The market correction has not fully run its course. However, the near-term pullbacks are taking some air out of Chinese equities' frothy valuations, providing room for a cyclical upswing. We are closing our long investable consumer discretionary/short investable consumer staples trade. Instead, we recommend the following trade: long A-share stocks/short MSCI China Index. Investable consumer discretionary sector stocks, which are concentrated in China’s technology giants, face a confluence of challenges ranging from the ripple effects of falling stock prices in the US tech sector and tightened antitrust regulations in China (Chart 19). In contrast, the A-share index is heavily weighted in value stocks while the MSCI China investable index has a large proportion of expensive new economy stocks (Chart 20). The trade is in line with our view that the investment backdrop has shifted in favor of global value versus growth stocks due to a strong US expansion, rising US bond yields and a weaker US dollar. Chart 19Chinese Investable Tech Sector Is Facing Strong Headwinds Chart 20Overweight A Shares Versus Chinese Investable Stocks Jing Sima China Strategist jings@bcaresearch.com Cyclical Investment Stance Equity Sector Recommendations
The US 10-year Treasury yield had climbed 16 basis points so far this month, alarming equity investors. March’s selloff to date follows a 35 basis point rise in February – the deepest monthly bond rout since November 2016. Although investors are…
BCA Research’s Global Investment Strategy service concludes that the end of the pandemic will herald a period of value-oriented outperformance. There are some notable similarities between 2000 and the present. One potential parallel with 2000 that is worth…
Highlights The recent backup in bond yields could cause stocks to fall further in the near term. However, history suggests that as long as yields remain low in absolute terms, as they are now, equities will recover. Market angst that the Fed is about to turn more hawkish is unwarranted. Central banks around the world have both the tools and the inclination to keep bond yields from rising excessively. Despite the jump in bond yields, the forward earnings yield is 540 basis points above the real bond yield in the US. Outside the US, the forward earnings yield is 615 basis points above the real bond yield. In 2000, the earnings yield was below the real bond yield. Just as value stocks began to outperform growth stocks in mid-2000, the end of the pandemic will herald a similar period of value-oriented outperformance. Commodity producers and banks will lead the way. Some Parallels Between Today And 2000… Stock prices have buckled in recent weeks, raising concerns that global bourses are at risk of a major crash, just like they were in early 2000. There are certainly some notable similarities between 2000 and the present: In both cases, the preceding rise in stock prices was fueled by the Federal Reserve’s desire to prevent an exogenous shock from causing a major recession (Chart 1). Last year, the shock was the pandemic. In 1998, it was the collapse of Long-Term Capital Management (LTCM). The Connecticut-based hedge fund imploded shortly after Russia defaulted on its debt, leading to a gut-wrenching 22% decline in the S&P 500. The brewing crisis prompted the Fed to cut rates by a total of 75 basis points. Spurred on by fears of Y2K, the Fed also injected vast amounts of liquidity into the financial system. Tech stocks led the market higher both in the late 1990s and last year. The NASDAQ Composite rose 68% between its intra-day low in October 1998 and March 2000. In 2020, the NASDAQ outperformed the S&P 500 by 24% and returned 44% overall. Chart 1The NASDAQ's 1999 Surge Followed The 1998 “Insurance Cuts” And Coincided With The Fed’s Balance-Sheet Expansion Chart 2Low-Priced Stocks Have Been The Winners In The First Quarter The speculative mania in the 1990s spread from large-cap tech stocks to small-cap companies. We saw the same pattern earlier this year, with prices and trading volumes exploding among smaller, low-priced stocks (Chart 2). As was the case in the late 1990s, retail investors – this time armed with “stimmy” checks and access to zero-commission trading accounts – plowed into the market. Chart 3Some Pockets Of Bullish Equity Sentiment Chart 4Some Pockets Of Bullish Equity Sentiment Bullish equity investor sentiment was rampant at the peak of the stock market in 2000. Although not quite to the same extent as back then, most measures of investor sentiment turned bullish prior to the recent selloff (Chart 3). Like most investors, analysts were wildly optimistic on stocks in the late 1990s (Chart 4). Long-term earnings growth projections are very optimistic today, a potentially ominous signal given that (unlike in the late 1990s), productivity growth is now more anemic. Rising stock prices in the late 1990s allowed corporate insiders to cash in their options, while enabling new companies to go public. Recently, we have seen a flurry of companies list their shares, in some cases through dubious SPAC vehicles (Chart 5). Valuations reached nosebleed levels in 2000. While the forward P/E ratio on the S&P 500 is somewhat below its 2000 peak, other valuation measures such as price-to-sales, Tobin’s Q, and enterprise value-to-EBITDA are above where they were in 2000 (Chart 6). Chart 5Renewed Interest In Listing Stocks Chart 6Stretched Valuations, Then And Now … But One Important Difference Despite the parallels between today and 2000, there is an important difference: The Federal Reserve. Having cut rates in 1998, the Fed reversed course in mid-1999, eventually taking the fed funds rate up to 6.5% in May 2000. The yield curve inverted in February of that year, shortly after the 10-year yield reached a high of 6.79%. Chart 7What Happens To Equities When Treasury Yields Rise? Bond yields have risen briskly over the past six months. However, they remain very low in absolute terms. While rising yields can produce a temporary stock market correction, they need to move into restrictive territory in order to trigger a recession and an accompanying bear market in equities. Chart 7 highlights some research that Garry Evans and BCA’s Global Asset Allocation team recently produced. It shows eight episodes since 1990 of a sharp rise in the 10-year Treasury yield. On every occasion (except in 1993-94, when the Fed unexpectedly raised rates in February 1994), equities performed strongly while rates were rising (Table 1). Today, the forward earnings yield on the S&P 500 is 540 basis points above the real yield. In 2000, the real bond yield was higher than the earnings yield (Chart 8). The gap between earnings yields and real bond yields is even greater outside the US, where valuations are generally more attractive. By the same token, the S&P 500 dividend yield was well below the bond yield in 2000. Today, they are roughly the same. Even if one were to pessimistically assume that US companies are unable to raise nominal dividend payments at all for the next decade, the S&P 500 would need to fall by 21% in real terms for equities to underperform bonds. Many other stock markets would have to decline by more than that (Chart 9). Table 1As Long As Bond Yields Don't Rise Into Restrictive Territory, Stocks Will Recover Chart 8Relative To Bonds, Stocks Are More Favorably Valued Now Than in 2000 Chart 9Stocks Would Need To Fall A Lot For Equities To Underperform Bonds Central Banks Will Lean Against Rising Bond Yields Stocks sold off earlier today on the perception that Jay Powell had failed to push back forcefully against the recent increase in bond yields. We think this angst is unwarranted. As Powell noted, most of the rise in bond yields reflected economic optimism. If yields were to continue rising in the absence of further economic improvements, the Fed would dial up the rhetoric, stressing its ability to buy bonds in unlimited quantities in order to support the economy. Despite all the fiscal stimulus, the unemployment rate remains elevated – perhaps as high as 10% according to some Fed measures. The prime-age employment-to-population ratio is four percentage points below where it was before the pandemic (Chart 10). Moreover, many stimulus measures will expire towards the end of the year. With the prospect of a “fiscal cliff” in 2022, we expect the Fed to want to tread carefully in withdrawing monetary support. What would really rattle investors is if long-term inflation expectations were to rise above the Fed’s comfort zone. However, considering the 5-year/5-year forward inflation breakevens are still below where they were in 2012-13, this is not an imminent risk (Chart 11). Chart 10The Fed Will Remain Accommodative To Aid The Labor Market Recovery Chart 11Inflation Expectations Have Recovered But Are Still Low Like the Fed, the ECB wants to keep financial conditions highly accommodative. On Tuesday, ECB Executive Board member Fabio Panetta, echoing comments made by other senior ECB officials, said that higher yields were “unwelcome and must be resisted.” He noted that “We are already seeing undesirable contagion from rising US yields into the euro area yield curve,” adding that the ECB “should not hesitate” to increase the pace of bond purchases. The ECB’s threat is credible. Already, its purchases have deviated significantly from its capital key, revealing Frankfurt’s willingness to act where and when it is needed. In the same spirit, the Reserve Bank of Australia boosted its government bond purchases earlier this week after the 10-year yield backed up from 0.7% last October to over 1.9% late last week. The RBA also reaffirmed its intent to maintain the current 3-year Yield Curve Control target at 0.1%, stating that “The Board will not increase the cash rate until actual inflation is sustainably within the 2-to-3 percent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.” The RBA’s determination to keep bond yields down is noteworthy given that the neutral rate of interest is higher in Australia than in most other developed economies.1 If the RBA does not intend to raise rates for the next three years, it may take even longer for other central banks to take away the punch bowl. Will Value Stocks Begin To Outperform As They Did Starting In Mid-2000? There is another potential parallel with 2000 that is worth mentioning. This was the year that the outperformance of growth stocks came to a halt and value stocks began to shine. In fact, outside of the tech sector, the S&P 500 did not peak until May 2001 (Chart 12). Value continued to outperform right through to 2007. Since February 12th of this year, the price of the highly liquid Vanguard Growth ETF (VUG, market cap of $143 billion) has fallen by 8.9% while the price of the Vanguard Value ETF (VTV, market cap of $97 billion) has risen 0.5%. Despite the nascent outperformance of value names, they still remain relatively cheap. According to a simple valuation measure that combines price-to-earnings, price-to-book, and dividend yields, value stocks are more than three standard deviations cheap relative to growth stocks – a bigger valuation gap than seen at the height of the dotcom bubble (Chart 13). Chart 12The Non-Tech Portion Of The Stock Market Peaked More Than A Year After The Tech Bubble Burst Chart 13The Tech Bust Of 2000 Also Marked The Start Of A Multi-Year Outperformance By Value The Outlook For Commodity Stocks And Bank Shares Commodity producers are overrepresented in value indices. Strong global growth against a backdrop of tight supply should heat up the commodity complex over the next 12-to-18 months. Chart 14 shows that capital investment in the oil and gas sector has fallen by more than 50% since 2014. BCA’s Commodity & Energy Strategy service, led by Robert Ryan, expects crude oil demand to outstrip supply over the remainder of this year (Chart 15). Chart 14Oil + Gas Capex Collapses In COVID-19’s Wake Chart 15Crude Oil Demand To Outstrip Supply Over The Remainder Of This Year A physical deficit in the metals markets – particularly for copper and aluminum – should also persist this year (Charts 16A & 16B). While the boom in electric vehicle (EV) production represents a long-term threat to oil, it is manna from heaven for many metals. A battery-powered EV can contain more than 180 pounds of copper compared with 50 pounds for conventional autos. By 2030, the demand from EVs alone should amount to close to 4mm tonnes of copper per year, a big slug of demand in a market that consumes about 26mm tonnes per year. Chart 16ACopper Will Be In Physical Deficit... Chart 16B...As Will Aluminum Ongoing strong demand for metals from China should also buoy metals prices. While trend GDP growth in China has slowed, the economy is much bigger than it was in the 2000s. China’s annual aggregate consumption of metals is five times as high as it was back then. The incremental increase in China’s metal consumption, as measured by the volume of commodities consumed, is also double what it was 20 years ago (Chart 17). As we discussed in our report To Deleverage Its Economy, China Needs MORE Debt, the Chinese government has no choice but to continue to recycle persistently elevated household savings into commodity-intensive capital investment. This will ensure ample commodity demand from China for years to come. Chart 17China Keeps Buying More And More Commodities Chart 18Credit Growth Has Been Recovering Along with commodity producers, financials helped propel value indices during the 2000s. While credit growth is unlikely to revert to its pre-GFC days, it has been trending higher in both the US and Europe (Chart 18). Analysts are starting to take note of improving bank earnings prospects. EPS estimates for banks are rising more quickly than for tech companies on both sides of the Atlantic (Chart 19). Not only is the “E” in the P/E ratio for banks likely to rise, the ratio itself will increase. Currently, US and European banks are trading at 14 and 10-times forward earnings, respectively, a huge discount to the broad market in general, and tech stocks in particular (Chart 20). Chart 19EPS Estimates For Banks Are Rising More Quickly Than For Tech Companies (I) Chart 19EPS Estimates For Banks Are Rising More Quickly Than For Tech Companies (II) Chart 20Banks Are Cheap Bottom Line: Despite near-term uncertainty, investors should overweight stocks on a 12-month horizon, while pivoting away from last year’s winners (growth stocks) towards last year’s losers (value stocks). Peter Berezin Chief Global Strategist pberezin@bcaresearch.com Footnotes 1 According to RBA’s estimates, the neutral rate of interest in Australia is at the high end of developed market estimates. Specifically, Australia’s R-star is higher than the average of the US and euro area R-stars and is slightly lower than the average of the Canadian and UK neutral rates. Global Investment Strategy View Matrix Special Trade Recommendations Current MacroQuant Model Scores
Weekly Performance Update For the week ending Thu Mar 04, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI -1.63% -1.55% Top Contributors WES:US MPLX:US AM:US UHAL:US NRG:US Weekly Return 49 bps 20 bps 15 bps 10 bps 10 bps Top Detractors EXPI:US IEP:US AWK:US ICLR:US CCI:US Weekly Return -73 bps -33 bps -22 bps -20 bps -20 bps Top Prospects TX:US QFIN:US SCCO:US MORN:US LPX:US BCA Score 99.49% 97.38% 95.03% 92.70% 91.21% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI -1.98% -0.47% Top Contributors PXT:CA MG:CA CSH.UN:CA SPB:CA LNR:CA Weekly Return 33 bps 13 bps 9 bps 8 bps 7 bps Top Detractors SCR:CA CS:CA NXE:CA SOY:CA APHA:CA Weekly Return -53 bps -48 bps -36 bps -30 bps -24 bps Top Prospects LNF:CA IFP:CA CFP:CA FTT:CA MIC:CA BCA Score 99.69% 99.64% 99.03% 86.29% 85.06% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI -0.33% 0.22% Top Contributors MTO:GB SMS:GB OXIG:GB ROSN:GB PZC:GB Weekly Return 27 bps 24 bps 14 bps 13 bps 8 bps Top Detractors TRMR:GB FDEV:GB MXCT:GB PLUS:GB GLO:GB Weekly Return -31 bps -26 bps -18 bps -15 bps -12 bps Top Prospects NLMK:GB SVST:GB MNOD:GB GLTR:GB PLUS:GB BCA Score 98.66% 98.59% 97.82% 97.57% 95.74% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI -1.95% 0.24% Top Contributors FDJ:FR LOTB:BE SOLV:BE GCO:ES ZV:IT Weekly Return 11 bps 11 bps 11 bps 8 bps 6 bps Top Detractors MELE:BE FTK:DE PHA:FR VBK:DE REG1V:FI Weekly Return -46 bps -25 bps -23 bps -19 bps -18 bps Top Prospects SOL:IT LOG:ES EDNR:IT HAL:NL IPS:FR BCA Score 98.45% 96.79% 95.55% 95.37% 94.65% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI 0.06% -2.15% Top Contributors 4980:JP 9436:JP 3132:JP 7966:JP 8133:JP Weekly Return 19 bps 9 bps 8 bps 7 bps 6 bps Top Detractors 3765:JP 7943:JP 8198:JP 8739:JP 8595:JP Weekly Return -12 bps -11 bps -9 bps -6 bps -5 bps Top Prospects 8198:JP 4966:JP 8173:JP 3291:JP 8133:JP BCA Score 99.22% 98.98% 97.27% 96.43% 96.40% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI -5.53% -2.78% Top Contributors 1378:HK 867:HK 86:HK 6198:HK 2798:HK Weekly Return 18 bps 10 bps 5 bps 4 bps 2 bps Top Detractors 2008:HK 579:HK 1798:HK 2138:HK 818:HK Weekly Return -78 bps -55 bps -49 bps -47 bps -42 bps Top Prospects 1830:HK 1866:HK 1571:HK 2138:HK 297:HK BCA Score 99.06% 98.75% 98.06% 97.38% 95.61% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI -2.08% -0.85% Top Contributors GRR:AU PDN:AU JLG:AU ARF:AU CWP:AU Weekly Return 55 bps 23 bps 15 bps 13 bps 11 bps Top Detractors ADO:AU 360:AU OCL:AU PSQ:AU SDG:AU Weekly Return -80 bps -42 bps -39 bps -30 bps -20 bps Top Prospects GRR:AU BSE:AU BLX:AU PSQ:AU BFG:AU BCA Score 99.69% 99.66% 99.28% 99.10% 99.02%
Recently we reopened our long “Back-To-Work”/short “COVID-19 Winners” pair trade that we first instituted in the September 8th, 2020 Strategy Report, and subsequently closed earlier this year for a gain of 21.5%, since inception as our risk management rolling stop was hit. The selloff in the bond market last week served as a catalyst and turbocharged this pair trade that is highly levered to the economic reopening theme; already stellar gains have accrued for our portfolio to the tune of 20% since the early February second inception. Importantly, as the bottom panel of the chart on the right shows, the relative price ratio still has catch up potential to the parabolic move in yields. More recently, we took a deep dive into the economic reopening theme and created two baskets (laggards and overshooters) from the entire GICS4 universe we cover and recommended investors put an intra “Back-To-Work” trade on. Bottom Line: Stay with the long “Back-To-Work” / short “COVID-19 Winners” pair trade. The ticker symbols in the “Back-To-Work” and “COVID-19 Winners” baskets are: LUV, DAL, MAR, HLT, CVX, EOG, SBUX, MCD, CAT, HON, AXP, COF, NUE, GM; and TDOC, FCN, ZM, CTXS, JNJ, AMGN, REGN, CLX, RBGLY, WMT, COST, KR, NFLX, AMZN, respectively.