Mega Themes

Time is running out on the Bank of England’s tightening cycle. UK economic growth is flirting with recession, unemployment is rising, house prices are contracting and inflation is decelerating. Markets are overestimating the eventual bottom in UK inflation, and thus are also underestimating how much the Bank of England will eventually cut rates in the next easing cycle, which could begin as soon as H1/2024. The backdrop is turning increasingly positive for Gilts on a medium-term basis, while the overbought pound is due for a breather.

Some thoughts on this week’s bear-steepening of the Treasury curve and this morning’s employment report.

China’s extremely high savings rate is the real culprit behind its current economic woes. The authorities have been slow to stimulate the economy, and the risks of “Japanification” have increased. For now, the fact that China is exporting deflation is not such a bad thing. However, if global recession risks were to flare up again, a lethargic Chinese economy would be a cause for concern. Chinese stocks are quite cheap but lack a clear catalyst to move higher. Favor EM markets where earnings and sales estimates have been moving up lately.

The Supreme Court is a generator of certainty rather than uncertainty for US markets. In the event of a constitutional crisis, a court intervention will likely reduce volatility.

Collapsed complexity, plus the unwinding of favourable base effects and favourable seasonal adjustments to the inflation and jobs numbers, all pose a danger to the Goldilocks market.

The trajectory of China’s infrastructure investment in 2023H2 will be like what occurred in 2021H2. Growth will likely drop from the current nominal 10% to 0-2% in the next six months. China will continue promoting environmentally friendly infrastructure projects that may prevent a contraction in infrastructure investment in 2023H2.

Investors remain cautious about the US economy and still have significant cash that needs to be put to work which could extend the rally further. Earnings rebound later in the year will be supported by rising sales growth and surging earnings of the Magnificent Seven. A restocking cycle, and a pickup in freight activity support transports. Upgrade Transports to an overweight.

In Section I, we audit the market’s “soft landing” narrative in response to a meaningful challenge to our cautious stance from recent financial market developments. We acknowledge that US economic growth was stronger in the first half of the year than many investors expected, but we are unmoved by the recent uptick in “soft landing” hopes. A “soft landing” outcome very likely necessitates interest rate cuts before recessionary dynamics emerge, and it is far from clear that rate cuts or (especially) an easy monetary policy stance are likely to materialize over the coming year. As such, we continue to believe that conservative portfolio positioning is appropriate. In Section II, we discuss some simple approaches that we use when valuing the major asset classes that we cover. We conclude that global ex-US equities and ex-US developed market currencies are the main assets that can be considered “cheap” today.

Among the critical materials needed for the global energy transition, Li is expected to see the largest increase in demand from 2022 to 2050. Li supply is not constrained, but continued investment in mining and refining will be required to meet increasing demand. We expect strong Li-ion battery demand in the major economies of the world – the EU, US and China – will keep a bid under Li, and allow growing supply to find a home. At tonight’s close we are getting long the LIT ETF, consistent with our view.

We recommend a small structural exposure to cryptocurrencies and blockchain tokens, given their incipient real-world uses as well as their proven hedging qualities against the debasement of fiat money and in banking crises. In this Special Report, we rank the major blockchains on five factors – developer activity, adoption, decentralization, scalability, and security – from which we arrive at our top five blockchains.