The rebound in financial markets reflects strong optimism among market participants that real and nominal economic growth and inflation are about to get stronger in the coming years. This view has supported a sharp rebound in valuation ratios (see chart above). At the same time, USD has continued appreciating against most currencies, and the fixed income market has consolidated on the back of rising yields. Lire la suite
We haven’t heard much about Brexit so far… This is going to change. UK’s PM Theresa May is expected to give a speech about her strategy to manage UK’s exit from European union: it’s a two-option strategy: « Soft » or « Hard » Brexit, with consequences that few can yet imagine, since Brexit in itself will be a very lengthy process. Lire la suite
Maybe both actually… Lire la suite
Courtesy of Bank of America Merrill Lynch Engineering and Construction team in the US, who asked themselves which sectors/stocks might potentially benefit the infrastructure spending plan of Trump, of which so far we don’t know nothing… Lire la suite
To those who fear market have already priced in a lot of good news, especially on the « Trump » effect on the macro backdrop, and that maybe the « Value » trade is now overcrowded and associated sector rotation (from defensive names to more cyclical ones) is overdone, Morgan Stanley’s equity strategy team, lead by Graham Secker, has some good news. Actually 6… Lire la suite
The Bank of International Settlements has released a research paper that looks interesting on the impact of the globalization of value chain (hello iPhone and all the rest) on the dynamics of inflation. Lire la suite
A very good read to recap 2016, the « RIC » report from Bank of America Merrill Lynch. The returns in the above tables are in dollar terms if I’m not mistaken.
The European consumer staples sector has been characterized by slowing organic growth number, due to volume softness and pricing pressure, which has in turn contributed to its valuation de-rating, on top of sector rotation triggered since July 2016 by the rise in bond yields. What will be the drivers of earnings going forward ? Lire la suite
Question: how long will this hold ?
Consumer in many developed countries have played a major role sustaining growth, and the current environment seems to be still supportive. The good news, if we rely on the above chart from Citi, is that business confidence seems to be catching up.
According to Citi, those « are consistent with average AE (« Advanced Economies ») real GDP growth of 2.2. (SAAR) in Q4 and 2.1% in Q1″, they wrote in a Jan 9 note.
Key question they caution is: « whether confidence can be maintained or even rise further — There are plenty of downside risks, including potential disappointment by slower-or-lower-than-expected fiscal easing, tightening monetary conditions, China, geopolitical risks and an increase in protectionism. »
Global and regional macro backdrop is improving, investor sentiment is getting more bullish, EPS have turned the corner and are now on a more positive trend… No surprise European equities finished 2016 in a pretty better shape than they started it. Is the rally going to continue in 2017 ? Well, the mood is there and some brokers have decided to add some fuel to it.
This morning, Deutsche Bank and Merrill Lynch raised their SXXP y/e target to respectively 375 (from 345) and 390 (7% upside). Drivers for upside: accelerating growth, higher earnings revisions and EPS growth (11% for 2017e vs 7-8% previously at Merrill), forward P/E of 15x (stable from current level).
Real estate stocks are no longer in fashion. Since their peak in July 2016, the sector is down c10% in Europe. Yet Morgan Stanley’s analyst consider some names offer value – Unibail-Rodamco is one of them. Lire la suite
Exane BNP Paribas has upgraded its rating to Outperform on Enel (TP of €4.8) and Enagas (TP of €28), which add to its O/P rating on Engie (TP €16.1).
« Value, Banks and Autos EPS are the most leveraged here »… Lire la suite
After the recent rally in stocks, a note of caution from BofAML strategist Michael Hartnett and team. Since it’s difficult to sum it up, here are the key points made by them : Lire la suite
Better macro, improvind and sentiment improving, there are many positives for European equities, according to Goldman Sachs’s strategy team. Lire la suite
Recovery in earnings, a lower yen, a relatively attractive valuation ratios, favorable technicals (higher demand for Japanese equities), continued support from BoJ, a rebound from capex and high cash distribution potential might be the main driver of a pursuit of the rebound in Japanese equities in 2017, according to Matsuura Hisao, Nomura’s chief strategist. Lire la suite
Since the global financial crisis (GFC), a number of trends have been worrying investors : aging demographics in both developed and emerging countries, increase of income inequality, decline in productivity growth, lack of investment from the corporate sector, and the slowdown of global trade.
Have government bond yields reached a low point that will signal the end of the bull market for bonds (which started in the early 80s) ? Well according to some commentators, this might be it. And the recent bond selloff is just a reflection of that. Lire la suite
The country has seen its growth slow in the recent years, reflecting the lack of trade and economic growth around the world. Lire la suite
Yes, probably according to BofAML analysts.
« Our analysis shows fewer bonds trade on a daily basis over the past year. We also find that trading volumes are declining over the past years as a percentage of the stock of corporate bonds. Liquidity is concentrated in benchmark bonds; 5y and 10y bonds exhibit better liquidity both in terms of tighter bid/offer spreads and also higher turnover. Higher spread/yield bonds exhibit better liquidity. »
According to UBS’strategists:
« Since our last FX Atlas in early July, market pricing for a December hike has risen from near zero to more than 50%, and US 10-year yields have risen nearly 30bp. Yet neither has been much help to the dollar, which remains locked in an extremely narrow range, and on a trade-weighted basis, is actually a bit weaker during this time. »
Later they write:
« We continue to see the dollar as having peaked on a trade-weighted basis versus DM currencies, the euro in particular. Fair value models indicate that the euro remains cheap, and with the growth gap between the US and Euro area shrinking, we continue to forecast a grind higher to our year-end target of 1.16. »
The latest survey of global fund managers by Merrill Lynch continues to reveal high levels of cash in asset allocation, neutral stance on equities (1% net overweight vs 9% a month ago), yet on the backdrop of positive sentiment towards economic and profit growth…
Interestingly, most investors explain that high cash levels in allocation (net 5.4%) reflect « bearish views on markets »…
Another interesting indicator in the survey is about the « most crowded trades » based on investors’ views.
From Merrill’s note:
« Most crowded trades are all « NIRP-winners »: long High Quality stocks; long US/EU Corporate bonds; long EM debt. Sept FMS shows first meaningful reduction in bond proxy exposure (staples, utilities, telcos – Exhibit 1), as well as reduction in « high growth » US market. But both REITs & tech remain big stubborn longs, and EM equity OW highest in 3.5 years. All vulnerable should Fed and especially BoJ fail to reduce bond vol in Sept. »
When you think about the increasing interest in EM debt, or the sustaining impact of QE on « low vol », « bond proxies », « high visibility/quality » stocks, you get a sense markets are probably ripe for a correction…
One of the latest publication on X-asset strategy comes from Morgan Stanley and the message is pretty grim:
« Our cycle indicators across DM have stalled, pointing to rising risks of a shift from ‘expansion’ to ‘downturn’. The dilemma is that this peak has characteristics of both ‘true’ and ‘false’ turns. We explore our cycle checklist. »
UBS’s Europe strategists stick to their Stoxx 600 340 points target by year-end and provide a useful table of the underlying fundamentals/valuation factors. The following table illustrates where market would be if you change either 2017 EPS earnings growth and 12month forward P/E ratio. Bottom line: if you are cautious right now, don’t touch European equities.
Another good chart from Morgan Stanley most recent « Cross Asset Playbook », there are tons of useful and valuable material in there, this is just a selection (see previous post as well).
Interesting comments from Barclays’ equity research team…
Lots of numbers and valuation ratios with some granularity at the sector level for MSCI Europe…
A clever question raised by strategist at Nomura, and here are the summary of their answers… Enjoy
From GS’s latest GOAL publication:
« Much of the reason that equities appear cheap versus bonds therefore is simply a reflection of how much bond yields have fallen. Most measures of the ERP will use some kind of long-run historical average measure of profit growth and extrapolate into the future. »
Current levels of ERP assumes that earnings growth of the past 20 years will go one forever. But that’s a hard case to make. In fact, as GS’s strategists put it:
« Here lies the great dilemma for investors: on the one hand, current bond yields imply that valuations can continue to rise for financial assets (as they have already done over recent years), but, on the other hand, to justify current risk free rates into the future, we should assume lower long-term growth (consistent with ‘secular stagnation’).This should cap the level of valuations close to current levels.This is why we argue that while the Long Good Buy for equities still holds – they should do well relative to bonds over the medium term – the market trajectory is likely to be flatter than experienced through 2009 to 2016. »
Merrill Lynch strategists have recently published a very interesting chart that clearly illustrates how western central banks’ QE, by lowering the return on safest assets (aka govies), has forced many investors climb the ladder of risk…
Excerpt from the latest GOAL publication from Goldman Sachs… I’m just picking a couple of paragraphs that give a good understanding of how difficult it is to do proper asset allocation and not be weary of losing it all when markets are distorted by central banks and the prospects for growth and inflation are dull…
Just discovered it thanks to Value Investing World (great site BTW)… Enjoy
The Brexit has been painful for UK banks, but also for REITs with the trouble of many open-ended funds sold in the UK mainly. But what about the stocks themselves ? Well, if you look at the following charts from Exane, there are probably some value to look for from there…
Many fund managers pried their ability to pick stocks, or, as the jargon goes « generate alpha » through stock selection (and with that the handsome fees they charge you). But the following 2 graphs show that rather than picking the right stocks, it’s better to pick the right sectors…
Courtesy of Goldman Sachs who reviewed the performance of UK and European stocks after the Brexit vote… We focus specifically on European stocks although GS’s strategists recommend to be cautious on UK stocks even after the volatility in FTSE 100 & 250.
Jason Zweig from the WSJ published a column titled « Gold is still a pet rock » and its a great read (and obviously JZ is not ‘a moron’ as he calls himself)… He reminds us that if gold is a good « insurance against chaos », its value fluctuates so much it’s a poor protection of purchasing power for short periods of time. Lire la suite
The bank sees 7% YoY EPS growth for S&P 500 in 2017… but this will probably depend on the global macro picture which is not very comforting right now.
That’s a severe correction (knowing it started way before the UK referendum). But Goldman’s analyst add some interesting comments:
» Whilst EUR funding is exhibiting no sign of strains, funding pressures are gradually building in USD (USD/EUR and USD/GBP cross-currency basis) and GBP funding indicators. This said, they remain at levels that are a fraction of previous crises (2009 and 2012) peaks. We maintain that funding shocks are unlikely, given generous central bank backstops – these were sufficient to contain the aftermath of both the Lehman and European sovereign crises. »
European banks are probably stay in such a comatose stage for some time, as long as there are no sign of steepening yield curve or a better macro environment. On top of that, due to there high beta, banks are considered a good play to short the market when everything goes wrong. So be careful if you decide to pick one.
« Low global bond yields are pressuring US Treasury yields, while inflation outlooks are muted and the Fed appears on hold with rate hikes. All of these points favor high dividend yields »… Makes sense although this is massively pushing investors into the most expensive territories of equity markets !
And the answer from Barclays:
« While valuations are certainly not pricing in a full-blown global recession, we are not far away from pricing a 2012-style moderate recession. If such a scenario were to fully materialise, the fundamental floor appears to us to be a STOXX 600 level of 300 (c. 10% below today’s levels). However, if a more benign economic scenario were to occur, as per our economic team’s forecasts, we expect valuations to eventually revert higher. Till further evidence of this materializes, in the near-term, we expect markets to remain volatile and follow economic and political developments. »
Source: Morgan Stanley
Interestingly, one week after the event, systemic risk doesn’t seem to be an issue…
Source: Morgan Stanley
Views per asset classes:
- Equities: stay defensive (global earnings have been falling, and valuation are relatively fair)
- Currencies: USD bull market is not over…
- Rates: lower for longer
- Credit: best option for carry
Asian countries could be the main beneficiaries over the long run, according to a Nomura report. Lire la suite
From GOAL report dated June 26:
« Brexit has driven a sharp drawdown in equities
The UK vote to ‘leave’ the EU has triggered a sharp drawdown in European and global equities. We have long argued that equities are stuck in a ‘Fat & Flat’ range given both elevated valuations and a lack of growth. The impact of Brexit on confidence and the ERP, as well as on European growth, increases the risk that we move downward in this trading range. We have highlighted risks of a correction in our recent GOAL – Global Strategy Paper No. 19 and strategies to mitigate this risk. A key concern remains the lack of diversification or availability of ‘hedges’ for equities as most safe assets, in particular bonds, remain expensive alongside equities.
Potential for further weakness & volatility in global equities We think equities will remain volatile and stay defensively positioned in our asset allocation (neutral equities over 3- and 12 -months, overweight cash over 3 months). While we think investors have been lightly positioned into the drawdown, we feel that due to policy uncertainty and lack of growth, risk appetite might remain low in the near term. However, a combination of further declines in valuations and positive growth/policy surprises are needed to stabilise equities within their ‘Fat & Flat’ range.
Lowdown on the drawdown
Comparing the current EURO STOXX 50 drawdown to history indicates that it might continue (most drawdowns have lasted more than a month), valuations might have to drop further and bonds have been less good hedges for equities. Gold and Yen performed best as ‘risk off’ hedges. »