Developed Countries

Sterling has come under intense pressure since PM Cameron announced date of the EU referendum. Our bearish view on the British pound has not been based on a forecast of U.K. succession from the EU.

The remarkable admission by OPEC's secretary-general, Salem el-Badri, earlier this week that with "any increase in (oil's) price, shale will come immediately and cover any reduction" in output only hints at the larger impact of light-tight-oil (LTO) going forward.

The previous Insight outlined the case for good building supply store sales growth, but an aggressive rise in wage inflation and intensifying deflation pressures may provide a negative offset. Meanwhile, the gap between house price inflation and mortgage rates has slipped below zero (second panel), suggesting that the financial incentive to buy and renovate a home has eased, on the margin. It is notable the retailing CEO confidence has taken a sharp turn for the worse in recent months, as this series often provides a good lead on industry sales trends. Souring confidence may reflect deflationary pressures. Importantly, our Home Improvement Retail model, which incorporates leading top and bottom line indicators, has not confirmed the advance in relative share performance into overvalued territory. Against this backdrop, we recommend only a market neutral weight. The ticker symbols for the stocks in this index are: HD, LOW.

Both Home Depot and Lowe's produced strong profit results in the most recent quarter, aided by a warm winter weather, which pulled forward sales of many products. The odds of the industry maintaining decent sales momentum are good, given that ultra-low mortgage rates should sustain housing turnover (second panel). Banks are still willing to extend mortgage credit, as rising house prices provide confidence in underlying asset values. Nevertheless, extrapolating future store traffic growth straight down to the bottom line risks being too optimistic. The industry has hired aggressively to meet rising demand, and deflation still plagues the industry (bottom panel). Deflation amidst good store traffic also suggests that a serious market share battle is raging, which means meeting this year's aggressive industry earnings growth estimates is not guaranteed, please see the next Insight. The ticker symbols for the stocks in this index are: HD, LOW.

Where is the most likely mispricing of interest rates today? Plus our latest thoughts on the U.K.'s June 23 referendum on EU membership, and its market implications.

Special Report

This month's Special Report reviews the main factors driving the "lower for longer" bond yield view. A key finding is that the demographically-driven portion of the expansion in world capital spending has come to a virtual standstill, representing a major hit to underlying demand growth.

This month's Special Report reviews the main factors driving the "lower for longer" bond yield view. A key finding is that the demographically-driven portion of the expansion in world capital spending has come to a virtual standstill, representing a major hit to underlying demand growth.

As world central banks increasingly shift toward negative interest rate policies to combat deleveraging and deflation, the search for yield in financial markets is likely to persist. Global bond yields continue to grind lower, which is raising the allure of income producing equities. Indeed, an Insight on February 9, showed that equity market fixed-income proxies surged in the aftermath of the ECB's decision to implement negative deposit rates. More recently, REITs in the euro area and Japan have soared anew, reflecting this powerful undercurrent of demand for stable cash flow producers. As such, we expect sell-offs in the S&P REIT index to prove transitory, and reflective of short-term swings in risk-on vs. risk-off assets rather than a fundamental change in investor appetite or REIT prospects, please see the next Insight.

The previous Insight showed that REITs in other parts of the world are outperforming smartly, but lagging in the U.S. We expect a re-convergence. Already a yawning gap has opened between REITs and Treasury yields (shown inverted). That is not sustainable, especially in view of positive underlying cash flow fundamentals. Our proxy for the REIT occupancy rate is still trending higher (third panel), supporting good growth in REIT pricing power proxies. Importantly, pipeline supply pressures look set to ease, based on the downturn in multifamily home construction. All of this points to decent cash flow growth prospects. Against a backdrop of still attractive value in a world starved for yield, we continue to recommend an overweight portfolio position in the defensive S&P REIT index.