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
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
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).
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…
Interesting comments from Barclays’ equity research team…
h/t value investing.
Unfortunatelly or fortunatelly the reporter who asks questions is completely in line with European commission’s dogmatic views. For a newspaper that claims to bring indepth analysis of economy and society, it’s a shame when one of his journalist only has cliches question to throw away.
Don’t underestimate Grexit risks warns Veronique Riches-Flores, from RF Research.
If Greece were to exit Eurozone, which would be unprecedented and is not anticipated by current European treaties (as far as I know), the consequences would be dire for financial markets.
Even more so since financial markets are globally overvalued, as illustrated in the above chart…
« When people jump into stocks even though they know valuations are high… it’s a bubble ». Well at least that’s pretty clear. Interesting interview from famed Prof Shiller.
I jus discovered this webiste. Amazing work, many many book reviews available. So if you’re looking for book ideas, just go there.
A thorough review of Greenwald’s course on value investing with lots of very valuable content. For those who haven’t read his classic book Value Investing From Graham to Buffet and Beyond.
Some valuable piece of information and insight on global financial markets, with a somewhat alarming message: « Don’t let the unthinkable become the new normal« .
« The global expansion remains unbalanced, debt levels and financial risks are still too high, productivity growth is too low, and the room for manoeuvre in macroeconomic policy has continued to narrow », warns the BIS, with a global message: current governance and ruling of financial markets around the world is a big mess and there is little progress in aknowledging and fixing that…
It’s sad/funny that this kind of analysis comes at a time when the IMF is sending ultimatums to Greece which replies with democratic call to its people, something IMF’s leaders are probably not accustomed to.
Reknowned investor Guy Spier (Aquamarine Capital) published his autobiobraphy late 2014, a book entitled The Education of a Value Investor (Palgrave MacMillan). As Spier explains himself, the book recounts his journey from Wall Street where he started as a junior investment banker to becoming a Buffett’s groupie (like many value investors, including myself) and a famous value investor, with an outstanding track record (here it is as of end 2012). Lire la suite
Mohnish Pabrai is considered one of the most remarkable investors of his generation. Lire la suite
« We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t. A public opinion poll is no substitute for thought »
Source: Of Permanent Value, The Story of Warren Buffett, Andrew Kilpatrick, McGraw-Hill, 1998, page 52.
Some footage from the « Woodstock of Capitalism ». Sorry for the poor quality of images, but you should be able to recognize some folks here and there.
Derivatives specialists at Goldman have put up an interesting piece of research. Unfortunatelly, it only covers the US equity market.
Over the past 9 months, the cost of SPX 55% OTM 5 year equity puts has more than doubled while the cost of 10 year puts is up 50%+. Long-dated options markets appear increasingly concerned about the potential for a decline in the S&P 500. Equity valuation and CDS spreads have been highly correlated with put prices over the past several years, but long-dated put prices have diverged. We see reason for concern as put prices were up a similar amount in 2007 ahead of the financial crisis, diverging from credit and equity at that time as well.
Where Warren Buffett, the most acclaimed and respected investor, converses about Berkshire Hathaway’s past, present and future. A must read !
Watch and Learn
If you don’t know what Net Neutrality is, look at this Jon Oliver video: it’s both serious and very funny, but still very serious… So watch and learn !
ECB decision: 60 bn € of asset purchase on a monthly basis, starting in March and for as long as the inflation trajectory of the Eurozone is not sustainable. This was partly priced. The expansion of ECB’s balance sheet is ON, so this will certainly have some impact on markets.
Key items of ECB policy action:
Here are a couple of first market reactions and commentaries.
Barclays’ equity research theme has published a note about the 3 questions investors may ask about ECB QE and its impact on market.
Here’s the summary:
In a summary: cash levels remain high. Deflation in Eurozone is seen as the major risk (along geopolitical tensions). Investors are somewhat still optimistic about global growth, but less so than previous month and their expectations regarding EPS going forward have come up a tide grim.
The most contrarian call is Energy and Materials, but as long as oil prices do not recover, that probably to risky a call.
From Suki Mann, FI strategist at UBS (bold statements from us):
« Corporate bond market capitulation: Is it coming?
We believe that if the ECB announces any kind of corporate bond buying this week, investors could well embark on a fairly aggressive grabfest ahead of the actual commencement of the programme.
Already bereft of supply, decent yield, spreads unchanged into the macro-headwinds; and, plenty of pent-up demand for paper as cash keeps rolling-in to the asset class, we think that the actual announcement could see a lurch tighter in spreads. That is, QE is not in the current price. Some think it is, we don’t.
How much can spreads tighten? The answer ultimately depends on the modalities of the program (size, duration, mix). »
From Srikanth Sankaran & Shrina B. Poojara at Morgan Stanley fixed income research team:
« We maintain a constructive bias on credit heading into Thursday’s ECB meeting. Despite the outperformance of European credit in recent months, we do not think that QE upside is fully priced in. A 20-25bp compression in IG spreads is likely, should the ECB deliver.
Sovereign QE is now our economists’ base case: Our economists’ base case now is €500 billion of government bond purchases and €100 billion of private sector asset purchases. In terms of timing, the complexity of designing a sovereign QE programme makes January 22 an ambitious start day. Announcement in January and execution in March is more realistic, they think. »
Here’s the summary of their views:
I’m not sure how this is good news for the liquidity of financial markets. First we had the regulatory pressure on exchanges to open them to competition, which split away the liquidity and has made it more difficult for money managers to buy/sell even equities.
Second we had the regulatory pressure on insurers, banks, pension funds to limit their risk appetite with contracyclical rules (which basically says: « you have to buy bonds when they are expensive and sell equities when they are quite cheap »).
So now, big money managers (Fidelity, etc…) are said to organize dark pools which would exclude hedge funds and investment banks (good thing) but in the end would reduce overall market liquidity. Imagine what will be left to individual investors if this project goes through and goes global…
Although the bank predicts the European equity market might gain c. 8% over next 6 months from QE’s announcement, its economist are still scratching their heads regarding the ability to implement and the benefits of this kind of measures. Lire la suite
« Stocks are not lottery tickets. There is a company behind every stock »
In short, Goldman sees oil market equilibrium back around 2016, since the main adjustment course will come from capital. Warns of « high yield defaults potentially beginning if prices were maintained at $40/bbl ». Sees US supply growth slowing to 400k b/d yoy in 4Q15.
BUT, as GS puts it: « To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer. » That’s a warning.
Now sees marginal cost at $65/bbl for WTI and $80/bbl for Brent. Lire la suite
Au moins 4 millions de personnes ont défilé ce dimanche en France. Du jamais vu qui démontre l’attachement des citoyens que nous sommes tous aux idéaux de liberté et de démocratie, de savoir-vivre ensemble et de tolérance.
Mais quelle lecture en feront nos dirigeants politiques ? On peut voir les choses de deux façons, que l’on se propose de résumer ici par deux mots : la soupape et l’électrochoc. Lire la suite
Say Morgan Stanley’s European equity strategists:
« We believe the fall in the oil price is set to translate into a significant boost for European corporate earnings. Energy accounts for around 10% of European earnings – and historical precedent suggest a 50% drop in the oil price should lead to a 25% fall in energy EPS. Earnings for chemicals, utilities and mining, which together account for a further 10% of European earnings, should also experience a net negative impact from lower oil prices. However, the remaining 80% of European corporate earnings should see a net boost of around 13% on our estimates, as lower material costs lead to higher gross margins. In aggregate, we estimate that even on conservative assumptions a 50% drop in the oil price should translate into a net boost of around 7% to European market-level EPS. »