Valuations

Stocks are flirting with new highs, courtesy of a gradualist Fed and the reduced threat
of incremental near-term U.S. dollar strength.

A playable pair trade opportunity has emerged on the back of shifting capital spending patterns: long communications equipment/short machinery.

This week, we are introducing a new investment benchmark index that includes all the countries and sectors that we regularly cover in our research, and a detailed recommended portfolio that fully reflects our market views.

Consumer products stocks are likely to move to an even larger valuation premium before the cyclical outperformance phase ends.

The secular bond bull market is over. Safety is in a bubble. The shift from monetary to fiscal easing is the most likely candidate to prick the bubble in safety.
In this piece we revise our yield portfolio to increase its resilience to interest rate shocks.

While we expect both direct and indirect exposure to generate solid risk-adjusted returns, favor direct given its overall portfolio impact, lower correlation to financial assets and better inflation protection.

EM corporate credit spreads are too tight according to our fair value model. Such expensive valuations in conjunction with a strong sell signal from our Corporate Financial Health (CFH) Monitor signify that the EM corporate credit market is very vulnerable. The CFH Monitor currently heralds a major relapse in EM risk assets. A new relative value recommendation: long Russian and Chilean / short off-shore China corporate credit.

The Fed is sending signals that another rate hike is coming, despite sluggish U.S. growth and modest inflation, while both the ECB and BoJ are facing questions about the ability to maintain the pace of bond purchase programs. Amidst all this uncertainty, bond risk premiums can rise further in the near term.

Disappointing ISM surveys could signal a growth consolidation.
That, in turn, would spur a correction in risk assets.