Equities

In recent research, we have drawn a comparison between the current manufacturing recession and the late-2015/early-2016 episode. One striking similarity is the Chinese renminbi devaluation on August 11, 2015 and the subsequent parabolic move in the VIX above 50 on August 24, 2015, when the CBOE suffered an outage and delayed the VIX opening by 30 minutes. As we argue in our most recent Weekly Report, a number of internal equity market indicators suggest that the volatility spike has yet to run its course (middle & bottom panels). Even from a longer term perspective, the recent 10/2 yield curve slope inversion warns that volatility is here to stay (yield curve shown on an inverted scale, top panel). Bottom Line: We reiterate our cautious broad equity market stance on a 3-12 month horizon.  

Dear Clients, This week we have an abbreviated Weekly Report followed by a Special Report penned by my colleagues Jeremie Peloso and Arseniy Urazov on the Fed’s “mid-cycle adjustment” and sector performance. I hope you will find this report insightful. Best regards, Anastasios Avgeriou, U.S. Equity Strategist Highlights Portfolio Strategy The 10/2 yield curve inversion, the outright collapse in long term bond yields, prospects for heightened volatility and renewed trade uncertainty that is weighing on SPX EPS, all signal that investors should avoid buying the dips and instead be fading the rallies. Recent Changes There are no changes to the portfolio this week. Table 1 Feature Chart 1Repricing To Lower EPS Backdrop Has Started The SPX took it to the chin last week, but managed to recover some of the losses by Friday’s close. It appears as though equity investors are slowly becoming thick skinned to President Trump’s tweets and instead starting to focus on softening earnings fundamentals. Last week we showed that SPX EPS are at stall speed, having a tough time surpassing the $165/share mark, eerily reminiscent of the 2014-16 episode when they hit a wall near $118/share.1 Importantly, sell-side analysts are trimming Q3/2019, Q4/2019 and calendar 2020 EPS estimates and investors need to be patient and wait out this shake out period that will be full of bearish undertones (Chart 1). U.S. Equity Strategy’s view remains cautious on a 3-12 month horizon on the prospects of the broad equity market, which stands in contrast to BCA’s sanguine cyclical equity market house view.   Another similarity with the 2015/2016 manufacturing recession episode is the Chinese renminbi devaluation on August 11, 2015 and subsequent parabolic move in the VIX above 50 on August 24, 2015. There are high odds that the SPX will succumb to the renminbi’s recent devaluation (Chart 2) and volatility will surge further in coming months as the trade war outcome is highly uncertain. Indeed, a number of internal equity market indicators suggest that the volatility spike has yet to run its course (Chart 3). Chart 2The Yuan To Watch Chart 3Vol Is Primed To Spike Beyond the heightened volatility, the brief 10/2 yield curve slope inversion last week was unnerving and a reason to remain cyclically cautious on the overall equity market outlook (Chart 4). As a reminder, the yield curve inversion signals additional Fed interest rate cuts and, historically, that has been a bearish backdrop for stocks as we highlighted in recent research (please see Chart 1 from the July 29th Weekly Report). In addition, the collapse in long term interest rates is cause for concern as it suggests that growth will be scarce in coming quarters. While stocks have been benefiting from lower interest rates via higher valuation multiples as theory would suggest, our sense is that a tipping point likely occurred last week. The implication is that stocks will likely heed the bearish message bonds are sending and converge to the steeply declining 10-year nominal and real yields (Chart 5).   Chart 4Another Bad Omen Chart 5Time To Get Back Together   Adding it up, the 10/2 yield curve inversion, the outright collapse in long term bond yields, prospects for heightened volatility and renewed trade uncertainty that is weighing on SPX EPS, all signal that investors should avoid buying the dips and instead be fading the rallies.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com   Footnotes 1      Please see BCA U.S. Equity Strategy Insight Report, “Trump Backpedals, Again” dated August 14, 2019, available at uses.bcaresearch.com.

Special Report

Feature Chart 1A Feeling Of Deja Vu? Chair Powell described the recent rate cut as a “mid-cycle adjustment,” rather than a transition to full-on policy easing. This mid-cycle reference was most likely intended to leave the door open for (i) additional “insurance cuts”, likely as soon as September,1 and (ii) the tightening cycle that began at the end of 2015 to eventually resume. Needless to say the market – and President Trump –did not appreciate the hawkish tone of the latter. Importantly, it shows that the current cycle is very similar to the one in the mid-90s (Chart 1). Back then, following the post-Mexican peso devaluation (Tequila Crisis) in December 1994, the bond market started pricing three Fed cuts while the stock market was rebounding in Q1/1995 from the previous quarter’s drawdown (Chart 1, panel 2). Further, the Fed rate cuts in the mid-90s came in response to persistently low and weakening U.S. inflation (Chart 1, panel 3) amidst slowing growth in the rest of the world (Chart 1, panel 4). Bear with us, there is more to it. Former President Clinton was up for reelection the year following the first rate cut in July 1995, at a time that would later be painted as one of “irrational exuberance” in financial markets by then-Chairman Alan Greenspan. In other words, the Fed acted to sustain that economic expansion, respond to the deflationary pressures and mitigate international developments. Sound familiar?  Table 1Run-Up To The First Rate Cut: Now Vs. 1995 As a result, we decided to follow-up on the Special Report published in May when we examined which sectors performed best during Fed loosening cycles leading to recessions.2 In this issue, we delve a little deeper and – in light of all the similarities mentioned above – only look at the sectors’ relative performance following “mid-cycle adjustments” in the post-war era or, broadly speaking, the six loosening cycles that did not morph into a recession. We first isolate the 1995 episode, as the similarities in the stock market’s behavior between now and then are uncanny (Table 1). The S&P returned 18.6% and 17.3% in the six months leading to the 1995 and 2019 initial rate cuts, respectively. In relative terms, seven of the 10 sectors actually performed in a similar fashion over these two periods.3 Further, we broaden out our analysis by including six such non-recessionary loosening episodes, as highlighted in Chart 2. We omit the short-lived tightening in monetary policy both in 1976 and 1986 and instead look at the broader loosening trend. Chart 2Post-War Era Mid-Cycle Adjustments Table 2 displays the results of our analysis of the sectors’ relative average performance during “mid-cycle adjustments.” Table 2Sector Relative Performance And Non-Recessionary Fed Rate Cuts The average performance of the broad market registers negative returns ahead of the first rate cut followed by strong 6-, 12- and 24-month positive returns given the more supportive monetary backdrop and the absence of a dreaded recession. What follows in Charts A, B, C and D, is the sectors’ relative performance in the four different timeframes. The rate-sensitive sectors – S&P utilities, telecoms, consumer discretionary and financials – underperform early before they outperform once the Fed has started to ease with the exception of the S&P utilities which initially delivers low but positive returns and continue to underperform up to two years after the beginning of the “mid-cycle adjustments.” Chart 3Defying Gravity Similarly, we find that most of the deep cyclicals underperform in the run-up to the first rate cut and usually outperform subsequently. The S&P energy is an exception as it outperformed heading into the cutting cycle and then underperformed 6 to 12 months after the first rate cut. Admittedly, we cannot yet rule out the possibility Jay Powell and the Fed might very well be wrong and that the July cut will turn out to be more than just a “mid-cycle adjustment.”  After all, various slopes of the yield curve have already inverted (Chart 2, bottom panel) and the probability that the U.S. might enter into a recession 12 months from now reached 31.5% at the end of July, according to the New York Fed probit model based on the 3-month/10-year Treasury slope (Chart 3). Besides, that was before the yield curve underwent a roughly parallel shift lower of about 30 bps in a few days earlier this month, following the FOMC meeting and news about the escalation in Sino-U.S. trade tensions. Chart 3 shows our probit forecast taking into account the recent further yield curve inversion. What we know is that the current loosening episode is likely to run at least for the rest of the year. Market participants still expect at least three additional rate cuts from the Fed over the next 12 months (Chart 1, panel 2) and, as a reminder, the “mid-cycle adjustments” in the past all provided more than one interest rate cut. While we use this Special Report as a roadmap to sector performance before and after a “mid-cycle adjustment,” our view remains that a recession looms in the coming 18 months and, as such, we continue to decrease cyclical sector exposure and to add defensive exposure.4 (For purposes of completeness, we included reference charts in Appendix A showing individual sector relative performance since 1960 with the non-recessionary Fed rate cut episodes highlighted.) Finally, for those interested in how the yield curve reacts to such “mid-cycle adjustments,” our U.S. Bond Strategists5 performed a similar exercise and found that the 10-year Treasury yield has a tendency to rise following non-recessionary rate cuts and decline following rate cuts that led to a U.S. recession. They also document an interesting yield curve pattern: the curve tends to steepen quite sharply in the aftermath of a non-recessionary rate cut, before starting to flatten after a few months. Appendix A  Chart 4A Chart 4B Chart 4C Chart 4D Chart 4E Chart 4F Chart 4G Chart 4H Chart 4I Chart 4J   Jeremie Peloso, Research Analyst JeremieP@bcaresearch.com Arseniy Urazov, Research Associate ArseniyU@bcaresearch.com Footnotes 1 As we go to press, the probability of a 25 bps rate cut for the September FOMC meeting is 74.2% and of 25.8% for a 50 bps rate cut, based on CME FedWatch Tool. 2 Please see U.S. Equity Strategy Special Report, “Sector Performance And Fed Loosening Cycles: A Historical Roadmap”, dated May 6, 2019, available at uses.bcaresearch.com 3 Please see U.S. Equity Strategy Weekly Report, “A Recession Thought Experiment”, dated June 10, 2019, available at uses.bcaresearch.com 4 Please see U.S. Equity Strategy Weekly Report, “The Fed Apotheosis”, dated July 29, 2019, available at uses.bcaresearch.com 5 Please see U.S. Bond Strategy Weekly Report, “Track Records”, dated June 18, 2019, available at usbs.bcaresearch.com

Highlights Disappointing economic data outside the U.S. and the inversion of the 2-year/10-year portion of the Treasury curve have overshadowed positive developments on the trade front. Global growth should improve later this year, spurred on by lower bond yields and fiscal stimulus in some countries. In contrast to the consensus view, we see flatter yield curves around the world as a “glass half full” story, mainly reflecting the shift to an ultra-dovish stance by most central banks. A variety of structural forces have dragged down term premia in fixed-income markets, thus making the purported recessionary signal from an inverted yield curve less prescient. Had the U.S. term premium in the mid-1990s been anywhere close to today’s levels, the yield curve would have surely inverted, causing yield curve-obsessed investors to miss out on the biggest equity bull market in history. The meltdown in bond yields is ending. Investors should favor stocks over bonds over the next 12-to-18 months. Feature Recession Risk Forces Trump’s Hand Risk assets remain caught in the crossfire of slowing global growth, flattening yield curves, and trade war uncertainty. Stocks received a short-lived boost on Tuesday from the Trump Administration’s decision to delay raising tariffs until December 15th on roughly 60% of the Chinese imports – including smartphones, laptops, and toys – which were slated to be taxed starting September 1st. The decision followed a phone call between U.S. and Chinese trade representatives that Trump described as “very productive.” Seemingly in contradiction to his earlier claim that China will end up bearing the full cost of the tariffs, President Trump admitted that “We're doing this for the Christmas season, just in case some of the tariffs would have an impact on U.S. customers.” The fact that the trade war is weighing on growth and the stock market has not been lost on Trump. The latest Bank of America Merrill Lynch Global Fund Manager Survey revealed that 34% of managers believed that a recession is likely within the next 12 months. This is the largest share in eight years. The trade war topped the list of “biggest tail risks” for the fifth month in a row. A net 22% of investors said they had taken out protection against a sharp drop in the stock market, the highest number since the survey began asking this question in 2008. The question is whether Trump’s half-hearted attempt to hold out an olive branch to the Chinese is too little, too late. The fact that the Chinese government indicated on Thursday that it will still go ahead and take “necessary countermeasures” suggests that Trump’s overture does not go far enough. More worryingly, the meltdown in bond yields and the stock market’s failure to hold Tuesday’s gains imply that many investors think that the trade war has already pushed the global economy past the breaking point. Industrial Activity Struggling To Find A Bottom It is not helping matters that industrial activity outside the U.S. remains in a slump. It was confirmed this week that the German economy contracted in the second quarter on the back of flagging export demand. The decline in the expectations component of the German ZEW survey in August to the lowest level since 2012 suggests that growth has remained weak in the third quarter. Chinese economic activity also disappointed in July. Industrial production growth slowed significantly. Retail sales decelerated, led by a relapse in automobile sales. A variety of political developments around the world have further undermined market confidence. The protests in Hong Kong have become increasingly violent, causing severe disruptions to air travel in the region. The risks of a hard Brexit are rising. Italy’s coalition government has collapsed. And in one of the biggest daily moves on record, the Argentine stock market fell by 48% in dollar terms on Monday after its current reform-minded president, Mauricio Macri, was trounced by his left-wing rival in primary elections. Will The U.S. Be Dragged Down? The U.S. economy has held up relatively well compared with the rest of the world. Retail sales rose by 0.7% in July, the fastest pace in four months, and more than twice what analysts were expecting. While industrial production was somewhat softer than expected, both the Philly and New York Fed manufacturing surveys surprised on the upside. The forward-looking new orders component increased in both surveys. With this week’s data in hand, the Atlanta Fed’s GDPNow model is forecasting that U.S. real GDP will rise by 2.2% in Q3. Real final domestic demand, which excludes the contribution from net exports and inventories, is set to grow by an even-healthier 3% (Chart 1). Given the still reasonably firm U.S. data, why are so many pundits and market participants fretting about a recession? One key reason is that the yield curve has inverted. An inverted yield curve has historically been a reliable predictor of recessions (Chart 2). Chart 2The U.S. Yield Curve: Still Prescient? Yield Curve Angst President Trump wasted little time on Wednesday sarcastically thanking “clueless” Jay Powell and the Federal Reserve for the “CRAZY INVERTED YIELD CURVE” (emphasis his). Trump and the investment community should relax a bit. In contrast to the consensus view, we see flatter yield curves around the world as a “glass half full” story, mainly reflecting the shift to an ultra-dovish stance by most central banks. Not only has the Fed turned more dovish, but other central banks have cranked up monetary stimulus. A Wall Street Journal story published earlier today quoted Olli Rehn, the current governor of the Finnish central bank and member of the ECB’s rate-setting committee, as saying that the ECB is looking to unveil a “significant and impactful policy package” in September, adding that “When you’re working with financial markets, it’s often better to overshoot than undershoot.”1 Since short-term rates in the euro area and in a number of other countries cannot fall much from current levels, the only way for the ECB to ease financial conditions is to signal that short-term rates will stay lower for longer and to buy up long-term bonds through large-scale asset purchase programs. This naturally leads to lower bond yields and flatter yield curves. Falling bond yields in Europe and around the world have, in turn, dragged down U.S. yields. Unlike in the past, term premia are negative across the major economies. This means that investors today can expect to earn more by rolling over a short-term government security than by buying a long-term government bond. In addition to central bank asset purchases, rising demand for bonds from institutional investors has depressed term premia. Desperate to match their long-duration liabilities with equally long-duration assets, insurance companies and pension funds have been forced to purchase bonds with low (and sometimes even negative) yields. Term premia have also come down as investors have grown accustomed to seeing bonds as a good hedge against equity risk in particular, and recession risk in general (Chart 3). Chart 3Owning Long-Term Bonds Is A Good Hedge Against Equity Risk As such, one should take the purported recessionary signal from an inverted yield curve with a grain of salt. Today, the U.S. 10-year term premium stands at -1.2%. In late 1994, when the yield curve almost inverted, the term premium was 1.9%. Had the U.S. term premium in the mid-1990s been anywhere close to present levels, the yield curve would have surely inverted, causing yield curve-obsessed investors to miss out on the biggest equity bull market in history. TINA’s Siren Song For investors, the collapse in bond yields increasingly means that There Is No Alternative to equities. We will have much more to say about “TINA” in a forthcoming special report; but for now, suffice it to say that ultra-low bond yields have improved the relative attractiveness of stocks. The S&P 500 dividend yield is currently 2.03%, 51 bps above the yield on 10-year Treasury notes (Chart 4). To put things in perspective, even if S&P 500 companies did not increase cash dividends at all for the next ten years, the real value of the index would still have to fall by 28% (assuming 2% inflation) for bonds to outperform stocks. Chart 4S&P 500 Dividend Yield Is Above The Treasury Yield All this means that global growth is probably close to a bottom. This, in turn, implies that the meltdown in bond yields is likely to end soon. Investors should favor stocks over bonds over the next 12-to-18 months. Chart 5 shows that the equity risk premium in the U.S. remains well above its historic norm. The equity risk premium is even higher outside the U.S., reflecting both the fact that valuations are cheaper abroad and that interest rates are generally lower. Chart 5AEquity Risk Premia Remain Well Above Their Historic Norms (I) Chart 5BEquity Risk Premia Remain Well Above Their Historic Norms (II) It is useful to contrast today’s high equity risk premia with the fact that global cash allocations in the latest BofA Merrill Lynch survey stood at 5.1% in August (1.5 standard deviations above their long-term average). Bond allocations were also 1.1 standard deviations above their long-term average. On the flipside, asset allocators were net 12% underweight stocks (1.7 standard deviations below their long-term average). In fact, aside from June of this year, this represents the biggest equity underweight since March 2009. Given this backdrop, stocks are likely to continue to climb the proverbial wall of worry. Investment Conclusions We argued in our August 2nd report that risk assets are likely to face some near-term pressure.2  That pressure has been realized. At this point, we would not be chasing stocks lower. Yes, global growth, at least outside the U.S., remains weak. Encouragingly, however, the slowdown has been largely confined to the manufacturing sector. Unlike in 2008, the service sector has remained fairly resilient (Chart  6). Even in Germany, the service PMI has actually risen since late last year. Chart 6AThe Service Sector Has Softened Much Less Than Manufacturing (I) Chart 6BThe Service Sector Has Softened Much Less Than Manufacturing (II) Global manufacturing cycles tend to last three years – 18 months up, 18 months down (Chart 7). The last downleg began in early 2018. Provided the trade war does not spiral out of control, we are due for another upturn in manufacturing activity. Chart 7The Global Manufacturing Cycle Has Likely Reached A Bottom Chart 8Looser Fiscal Policy In The Euro Area   A bit more fiscal stimulus should help. Chinese credit growth came in much weaker-than-expected in July. With growth still soggy there, we expect the Chinese authorities to redouble stimulus efforts over the coming months. Fiscal policy in the euro area is also being loosened (Chart 8). Further easing is likely in Germany, where support for a German version of a “Green New Deal” is gaining traction.  All this means that global growth is probably close to a bottom. This, in turn, implies that the meltdown in bond yields is likely to end soon. Investors should favor stocks over bonds over the next 12-to-18 months. We expect to upgrade EM and European equities during the next few months.   Peter Berezin, Chief Global Strategist Global Investment Strategy peterb@bcaresearch.com     1      Tom Fairless, “ECB Has Big Bazooka Primed for September, Top Official Says,” The Wall Street Journal, August 15, 2019. 2      Please see Global Investment Strategy Weekly Report, “A One-Two Punch,” dated August 2, 2019.   Strategy & Market Trends MacroQuant Model And Current Subjective Scores Tactical Trades Strategic Recommendations Closed Trades

Highlights The current global trade downtrend has primarily been due to a contraction in Chinese imports. The latter reflects weakness in China's domestic demand in general and capital spending in particular. The current global manufacturing and trade downturns will prove to be drawn out. Several important markets have already experienced technical breakdowns, and a few others are at risk of doing so. EM domestic bonds and EM credit markets could be the last shoe to drop in this EM selloff. Steel, iron ore and coal prices, will all deflate further due to supply outpacing demand in China. Feature In our report last week, we argued that the odds of a liquidation phase in EM are growing. This week’s report continues exploring this theme, offering additional rationale and evidence of a pending breakdown in EM. Trade Tariffs: The Wrong Focus? The media and many investors seem to be solely focused on the impact of U.S. tariffs against imports from China. Yet these tariffs have not been the primary cause of the ongoing global manufacturing and trade recessions. It appears that the headlines and many investors are looking at individual trees and ignoring the forest. Chart I-1Chinese Imports Are Worse Than Exports Global trade contraction and China’s growth slump are not solely due to the trade tariffs imposed by the U.S. but rather stem from weakening domestic demand in China. Chart I-1 illustrates that Chinese aggregate exports are faring much better than imports. If the imposed tariffs were the main culprit behind both weakness in Chinese growth and global trade, mainland exports would have registered a far-greater hit by now than imports. However, they have not yet done so. This entails that U.S. tariffs have so far not had a substantial impact on Chinese and global manufacturing. The key point we would like to emphasize is that the current global trade downtrend has primarily been due to a contraction in Chinese imports. In turn, the accelerating decline in mainland imports is a reflection of relapsing domestic demand in China. The latter has been instigated by lethargic money/credit impulses owing to the government’s 2017-2018 deleveraging campaign and its reluctance to undertake an economy-wide irrigation type stimulus. What’s more, the recent RMB depreciation will likely intensify the Chinese import contraction already underway, as the same amount of yuan will buy less goods priced in U.S. dollars than before (Chart I-2). Given the majority of goods and commodities procured by mainland companies are priced in dollars, suppliers will receive fewer dollars, and their revenue derived from sales to and in China will continue to shrink (Chart I-3). Chart I-2RMB Depreciation Will Depress China's Purchases From Rest Of The World Chart I-3China Is In A Recession From Perspective Of Its Suppliers   We do not deny that the trade war has prompted a deterioration in sentiment among Chinese businesses and consumers as well as multinational companies, which in turn has dented both their spending and global trade. We do not see these issues reversing anytime soon. If the imposed tariffs were the main culprit behind both weakness in Chinese growth and global trade, mainland exports would have registered a far-greater hit by now than imports. Chart I-4EM EPS Are Contracting Even though U.S. President Donald Trump is flip-flopping on tariffs and their implementation, barring a major deal between the U.S. and China, business sentiment worldwide will not improve on a dime. In brief, delaying some import tariffs from September to December is unlikely to promote an imminent global trade recovery. The confrontation between the U.S. and China is profoundly not about trade: it is a geopolitical confrontation for global hegemony that will last years if not decades. Businesses in China and CEOs of multinational companies realize this, and they will not change their investment plans on Trump’s latest tweet delaying some tariffs. For now, we do not detect signs of an impending growth turnaround in China’s domestic demand and global trade. Therefore, China-related risk assets, commodities and global cyclicals are at risk of breaking down. Economic Rationale The global trade and manufacturing recession will linger for a while longer, and a recovery is not in the offing: The business cycle in EM/China continues to downshift. Consistently, corporate earnings are already or soon will be contracting in EM, China and the rest of emerging Asia (Chart I-4). EM corporate EPS contraction is broad-based (Chart I-5A and I-5B). The recent declines in oil and base metals prices entail earnings shrinkage for energy and materials companies (Chart I-5B, bottom two panels). Chart I-5AEM EPS Contraction Is Broad Based Chart I-5BEM EPS Contraction Is Broad Based   China’s monetary and fiscal stimulus has not yet been sufficient to revive capital spending in general and construction activity in particular (Chart I-6). Chinese household spending is also exhibiting little signs of recovery (Chart I-7). Chart I-6China: Building Construction Is Dwindling Chart I-7China: Consumer Spending Has Not Yet Recovered   Domestic demand continues to deteriorate, not only in China but also in other emerging economies, as we documented in our July 25 report. In EM ex-China, imports of capital goods and auto sales are contracting (Chart I-8). High-frequency freight data point to ongoing weakness in shipments in both the U.S. and China (Chart I-9). Chart I-8EM Ex-China: Domestic Demand Is Depressed Bottom Line: The current global manufacturing and trade downturns will prove to be drawn out, and investors should be wary of betting on an impending recovery. This is BCA’s Emerging Markets Strategy view and is different from BCA’s house view which is anticipating an imminent global business cycle recovery. Chart I-9Global Freight Does Not Signal Recovery   Breakdown Watch Financial market segments sensitive to the global business cycle have been splintering at the edges. These cracks appear to be proliferating to the center and will render considerable damage to aggregate equity indexes. EM corporate EPS contraction is broad-based. We explained our rationale behind using long-term moving averages to identify significant breakouts and breakdowns in last week’s report. We also highlighted the numerous breakdowns that have already transpired. Today, we supplement the list: EM equity relative performance versus DM has fallen below its previous lows (Chart I-10, top panel). Crucially, emerging Asian stocks’ relative performance versus DM has clearly breached its 2015-2016 lows (Chart I-10, bottom panel). The KOSPI and Chinese H-share indexes have broken below their three-year moving averages (Chart I-11, top two panels). Chart I-10EM Equities Relative Performance Has Broken Down Chinese bank stocks in particular have been responsible for dragging China’s H-share index lower (Chart I-11, bottom panel). In addition, Chinese small-cap stocks dropped below their December low, as have copper prices and our Risk-On versus Safe-Haven currency ratio1 (Chart I-12). Finally, German chemical and industrial share prices such as BASF, Siemens and ThyssenKrupp have decisively broken down (Chart I-13). Chart I-11Breakdowns In Korea And China...   Chart I-12...In Commodities Space As Well Chart I-13German Manufacturing Stocks Are In Free Fall   This implies that Germany’s manufacturing slowdown is not limited to the auto sector but rather is pervasive. Besides, these companies are greatly exposed to China/EM demand, and their share prices simply reflect the ongoing slump in China/EM capital spending. There are several other market signals that are at a critical technical juncture, and their move lower will confirm our downbeat view on global growth and cyclical markets. In particular: The global stocks-to-U.S. Treasurys ratio has dropped to a critical technical line (Chart I-14, top panel). Failure to hold this defense line would signal considerable downside in global cyclical assets. Similarly, the Chinese stock-to-bond ratio – calculated using total returns of both the MSCI China All-Share index and domestic government bonds – has plunged. The path of least resistance for this ratio might be to the downside (Chart I-14, bottom panel). Given China is the epicenter of the global slowdown, this ratio is of vital importance. The lack of recovery in this ratio signifies lingering downside growth risks. Finally, global cyclical sectors’ relative performance versus defensive ones is sitting on its three-year moving average (Chart I-15). A move lower will qualify as a major breakdown and confirm the absence of a global manufacturing and trade recovery. Chart I-14Global Stocks-To-Bonds Ratio: Sitting On Edge Chart I-15Global Cyclicals Versus Defensives: At A Critical Juncture   Bottom Line: Several important markets have already experienced technical breakdowns, and a few others are at risk of doing so. All in all, these provide us with confidence in maintaining our downbeat stance on EM risk assets and currencies. EM Bonds: The Last Shoe To Drop? Although EM share prices are back to their December lows, EM local currency and U.S. dollar bonds have done well this year, benefiting from the indiscriminate global bond market rally. However, there are limits to how far and for how long the performance of EM domestic and U.S. dollar bonds can diverge from EM stocks, currencies and commodities prices (Chart I-16). EM domestic bond yields have plunged close to the 2013 lows they touched prior to the Federal Reserve’s ‘Taper Tantrum’ selloff (Chart I-17, top panel). That said, on a total return basis in common currency terms, the GBI EM domestic bond index has not outperformed U.S. Treasurys, as shown in the bottom panel of Chart I-17. Chart I-16Which Way These Gaps Will Close? Chart I-17EM Domestic Bonds: Poor Risk-Reward Profile   Looking forward, EM exchange rates remain critical to the returns of this asset class. With the GBI EM local currency bond index’s yield spread over five-year U.S. Treasurys at about 400 basis points, EM currencies have very little room to depreciate before foreign investors begin experiencing losses. We believe that further RMB depreciation, commodities prices deflation and EM exports contraction all bode ill for EM exchange rates. Consequently, we expect EM local bonds to underperform U.S. Treasurys of similar duration over the next several months. German chemical and industrial share prices such as BASF, Siemens and ThyssenKrupp have decisively broken down. Finally, the euro has begun rapid appreciation versus EM currencies. This will erode EM local bonds’ returns to European investors and trigger a period of outflows. Within this asset class, our overweights are Mexico, Russia, Central Europe, Chile, Korea and Thailand, while we continue to recommend underweight positions in the Philippines, Indonesia, Turkey, South Africa, Brazil, Argentina and Peru within an EM local currency bond portfolio. As to EM credit space (hard currency bonds), these markets are overbought, and investors positioning is heavy. EM currency depreciation and lower commodities prices typically herald widening spreads. Argentina has a large weight in the EM credit indexes, and the crash in Argentine markets could be a trigger for outflows from this asset class. Technically speaking, there are already several negative signposts. The excess returns on EM sovereign and corporate bonds seem to have rolled over, having failed to surpass their early 2018 highs (Chart I-18). Besides, EM sovereign CDS spreads are breaking out (Chart I-19, top panel). Chart I-18EM Credit Markets Is Toppy Chart I-19EM Credit Space Is Entering Selloff   Finally, there are noticeable cracks in the emerging Asian corporate credit market. The price index of China’s high-yield property bonds – that account for a very large portion not only of the Chinese but also the emerging Asian corporate bond universes – has petered out at an important technical resistance level (Chart I-19, bottom panel). Further, the relative total return of emerging Asia’s investment-grade corporate bonds against their high-yield peers is correlated with Asia corporate spreads, and presently points to wider spreads (Chart I-20). The rationale is that periods when safer parts of the credit universe outperform the riskier ones are usually associated with widening credit spreads. China’s property market remains vulnerable as the central authorities in Beijing have not provided much housing-related stimulus in the current downtrend. Furthermore, companies in this space are overleveraged, generate poor cash flow and have limited access to credit. The euro has begun rapid appreciation versus EM currencies. This will erode EM local bonds’ returns to European investors and trigger a period of outflows. Overall, Chinese property developers will affect the EM credit space in two ways. First, their credit spreads will likely continue to shoot up, generating investor anxiety and outflows from this asset class. Second, reduced investment by debt-laden and cash-strapped property developers will inflict pain on industrial and materials companies in Asia and beyond. We discuss the outlook for steel, iron ore and coal, which are very exposed to Chinese construction, in the section below. Bottom Line: For asset allocators, we recommend underweighting EM sovereign and corporate credit versus U.S. investment grade, a strategy we have been advocating since August 16, 2017 (Chart I-21). For dedicated portfolios, the list of our overweights and underweights, as always, is presented at the end of the report (page 21). Chart I-20Emerging Asian Corporate Spreads Will Widen Chart I-21Favor U.S. Investment Grade Versus EM Overall Credit   As for EM domestic bonds, we continue to recommend betting on yield declines in select countries without taking on currency risk. These include Korea, Chile, Mexico and Russia. We will warm up to this asset class in general when we alter our negative EM currency view. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Chinese Steel, Iron Ore And Coal Markets: Renewed Deflation Chart II-1Is Deflation In Steel And Coal Back? Unlike 2015 when steel, iron ore and coal prices collapsed, in the current downturn they have so far held up reasonably well. They have begun falling only recently (Chart II-1). Even though we do not anticipate a 2015-type Armageddon in steel, iron ore and coal prices, they will deflate further due to supply outpacing demand in China. For both steel and coal, the pace of “de-capacity” reforms in China has diminished considerably, with declining shutdowns of inefficient capacity and rising advanced capacity, as we argued in a couple of reports last year.  This has led to a faster growth in supply, while demand has been dwindling with weak economic growth. Lower steel, iron ore and coal prices will harm Chinese and global producers along with their respective countries.2 Steel And Iron Ore First, both crude steel and steel products output will likely grow at a pace of 5-7% (Chart II-2). As the 2016-2020 steel de-capacity target (150 million tons capacity reduction) was already achieved by the end of 2018, the scale of further shutdowns will be limited. In addition, collapsing graphite electrode prices reflect an increased supply of this material. This along with more availability of scrap steel will facilitate the continuing expansion of cleaner technology (electric furnace (EF)) steel capacity and their output in China. The newly added EF steel capacity is planned at about 21 million tons in 2019 (representing 1.8% of official aggregate steel production capacity), slightly lower than the 25 million tons in 2018. Second, we expect steel products demand to grow at 3-5%, slightly weaker than output. Construction accounts for about 55% of Chinese final steel demand, with about 35% stemming from the property market and 20% from infrastructure. The automotive sector contributes about 10% of final Chinese steel demand. All of these end markets are weak and do not yet show signs of revival (Chart II-3). Chart II-2Steel Production In China Chart II-3No Recovery In Chinese Demand   Concerning iron ore price, we expect more downside than in steel. Supply disruptions among Brazilian and Australian producers were the main cause for the significant rally in iron ore prices this year. Evidence is that these producers have already resumed their output recovery. Current iron ore prices are still well above marginal production costs of major global iron ore producers. Besides, ongoing large currency depreciation in commodity producing countries will push down their marginal production costs in U.S. dollars terms. This will encourage further supply.  As China has increased its use of scrap steel in its crude steel production, the country’s iron ore demand has not grown much. In fact, imports of this raw material have contracted (Chart II-4) As scrap steel prices are currently very low relative to the price of imported iron ore (Chart II-5), steel producers in China will continue to use scrap steel instead of iron ore. Chart II-4China's Imports Of Iron Ore Have Been Shrinking Chart II-5Scrap Steel Is A Cheap Substitute For Iron Ore   Coal Chart II-6Coal Output Is Rising, But Beijing's Goal To Reduce Its Usage Chinese coal prices will also be under downward pressure. First, coal output growth will likely slow but will still stand at 2-4% down from a current 6% level (Chart II-6, top panel). The government has set a production goal of 3900 million tons for 2020. Given last year’s output of 3680 million tons, this implies only a 2.9% annual growth rate this year and the next. Second, the demand for both thermal coal and coking coal will likely weaken. They account for 80% and 20% of total coal demand, respectively. About 60% of Chinese coal is used to generate thermal power. As the country continues to promote the use of clean energy, thermal power output growth will likely slow further. Increasing the nation’s reliance on clean energy is an imperative strategic objective for Beijing. Given that thermal coal still accounts for a whopping 70% of electricity production, China will maintain its effort on reducing coal in its energy mix (Chart II-6, bottom panel). In the same vein, the government will continue to replace coal with natural gas in home heating. Finally, Chinese coal import volumes are likely to decline as the nation is increasingly relying on its domestic sources. In particular, the strategic Menghua railway construction will be completed in October. It will be used to transport the commodity from large producers in the north to the coal-deficit provinces in the south. This will reduce the nation’s coal imports, as the transportation cost of shipping domestic coal to the southern power plants will become more competitive than imported coal. Macro And Investment Implications First, companies and economies producing these commodities will face deflationary pressures. These include - but are not limited to - Indonesia, Australia, Brazil and South Africa, as well as steel producers around the world. Second, the RMB depreciation will allow China to gain further market share in the global steel market. In fact, China’s share of global steel output has been rising (Chart II-7, top panel). The bottom panel of Chart II-7 shows that steel production in the world excluding China have actually come to a grinding halt at a time when mainland producers have enjoyed high output growth. Global steel stocks have broken down and global mining equities are heading into a breakdown (Chart II-8). Chart II-7China Has Been Gaining A Share In Global Steel Market Chart II-8Breakdown In Steel And Mining Stocks   Finally, we remain bearish on commodities and other global growth sensitive currencies. In particular, we continue shorting the following basket of EM currencies against the U.S. dollar: ZAR, CLP, COP, IDR, MYR and KRW. Ellen JingYuan He, Associate Vice President ellenj@bcaresearch.com   Footnotes 1          Average of CAD, AUD, NZD, BRL, CLP & ZAR total return (including carry) indices relative to average of JPY & CHF total returns. 2      This is BCA’s Emerging Markets Strategy view and is different from BCA’s house view. Equities Recommendations Currencies, Fixed-Income And Credit Recommendations

While the stock market cheered the news that President Trump will postpone the tariffs on certain Chinese made goods to December – slightly reminiscent of Trump’s Mexican tariffs backtracking – we continue to heed the negative messages from a number of our indicators and remain cautious on the broad market on a cyclical time horizon. Our Equity Market Internal Dynamics Indicator (comprising economically sensitive equity sector tilts, EMIDI) continues to emit an unambiguous sell signal. Historically, this indicator peaks in advance of the broad market as it sniffs out trouble ahead of the overall market (see circles, top panel). With regard to troughs, the EMIDI’s track record is more coincident than leading. Beyond this negative omen, stalling earnings also suggest at least a digestion period in the SPX. As a reminder the last time EPS hit a wall near $118/share for three years running between 2014 and 2016, the SPX moved laterally with a lot of volatility post the August 11th, 2015 Chinese renminbi devaluation (bottom panel). Fast forward to today and it appears as though the overall market cannot clear the $165/share level. Sell-side analysts are also feverishly downgrading Q3/2019, Q4/2019 and overall 2020 EPS, warning that the SPX has more downside. Bottom Line: Absent a turnaround in profits we remain cautious on the broad equity market on a cyclical 3-12 month time horizon. ​​​​​​​

Highlights Economic data suggest the current business cycle in China has not yet reached a bottom. Stimulus measures have not been forceful enough to fully offset a slowing domestic economy and weakening global demand. With possibly more U.S. tariffs to come, intensifying political unrest in Hong Kong and a currency set to depreciate further, the potential downside risks outweigh any potential upside over the near term. Investors who are already positioned in favor of Chinese equities should stay long. We are still early in a credit expansionary cycle, and we expect further economic weakness to pave the way for more policy support in China. However, we recommend investors who are not yet invested in Chinese assets to remain on the sidelines until clearer signs of materially stronger stimulus emerge. Feature Chart 1A Breakdown In Chinese Stocks Financial market volatility surged in the first half of the month following U.S. President Donald Trump’s recent tweet, vowing to impose a 10% tariff on the remaining $300 billion of U.S. imports of Chinese goods by September 1st. By the end of last week, prices of China investable stocks relative to global equities had nearly wiped out all their 2019 year-to-date gains. (Chart 1) The extent of the decline has left some investors wondering whether the time has come to bottom-fish Chinese assets. In our view, the answer is no. In this week’s report we detail five reasons why the near-term outlook for China-related assets remains negative. We remain bullish on Chinese stocks over the cyclical (i.e. 6-12 month) horizon and recommend investors who are already positioned in favor of China-related assets stay long. However, we also recommend investors who are not yet invested to remain on the sidelines until surer signs of materially stronger stimulus emerge. As we go to press, the U.S. Trade Representative Office announced that the Trump administration would delay imposing the 10% tariff on a series of consumer goods imported from China — including laptops and cell phones — until December.1 Stocks in the U.S. surged on the news. Today’s rally in the equity market highlights our view, that short-term market performance can be dominated and distorted by news on the trade front. However, market rallies based on headline news will not sustain without the support of economic fundamentals. Reason #1: Chinese Economic Growth Has Not Yet Bottomed In a previous China Investment Strategy report,2  we presented some simple arithmetic to help investors formulate their outlook on the Chinese economy. We argued that in a full-tariff scenario, investors should focus on the likely outcome of one of the two following possibilities: Scenario 1 (Bullish): Effects of Stimulus – Impact of Tariff Shock > 0 Scenario 2 (Bearish): Effects of Stimulus – Impact of Tariff Shock ≤ 0 In scenario 1, the impact of China’s reflationary efforts more than offsets the negative shock to aggregate demand from the sharp decline in exports to the U.S. Scenario 2 denotes an outcome where China’s reflationary response is not larger than the magnitude of the shock. For now, we remain in scenario 2 due to Chinese policymakers’ continual reluctance to allow the economy to re-leverage. The magnitude of the credit impulse so far has been “half measured” relative to previous cycles.3  More than seven months into the current credit expansionary cycle, Chinese economic data have not yet exhibited a clear bottom. As a result, more than seven months into the current credit expansionary cycle, Chinese economic data have not yet exhibited a clear bottom, with the main pillars supporting China’s “old economy” still in the doldrums (Chart 2 and Chart 3). Chart 2No Clear Bottom, Yet Chart 3Key Economic Drivers Struggling To Trend Higher   In addition to a weakening domestic economy, China’s external sector has been weighed down by U.S. import tariffs as well as slowing global demand. (Chart 4).  The possibility of adding a 10% tariff by year end on the remaining $300 billion of Chinese goods exports to the U.S. may trigger another tariff “front-running” episode in the 3rd quarter. However, Chart 5 and Chart 6 highlight that any front-running would be against the backdrop of sluggish global demand. Therefore, not only the upside in Chinese export growth will be very limited in the subsequent months following the front-running, but export growth is also likely to fall deeper into contraction. Chart 4Domestic Demand More Concerning Than Exports Chart 5Pickup In Global Demand Not Yet Visible Chart 6Bottoming In Global Manufacturing Also Delayed Reason # 2: A-Shares Are Not Yet Signaling A Sizeable Policy Response In previous China Investment Strategy reports, we have written at length about how Chinese policymakers are reluctant to undo their financial deleveraging efforts and push for more stimulus. After incorporating July credit data, our credit impulse, at a very subdued 26% of nominal GDP, was in fact a pullback from June’s credit growth number (Chart 7). This confirms our view that the current stimulus is clearly falling short compared to the 2015-2016 credit expansionary cycle. It underscores Chinese policymakers’ commitment to keep their foot off the stimulus pedal. What’s more, the recent performance of China’s domestic financial markets has been consistent with a half-measured credit response, and is not yet signaling a meaningful change in China’s policy stance. The A-share market since last summer has been trading off of the likely policy response to the trade war. Chart 8Market Not Signaling Significant Policy Shift Chart 8 (top panel) shows that the A-share market has closely tracked China’s domestic credit growth over the past year. Given this, we believe that the A-share market is reacting more to the likely policy response to the trade war, in contrast to the investable market which rises and falls in near-lockstep with trade-related news (middle panel). The fact that A-share stocks have been trending sideways underscores that China’s domestic equity market continues to expect “half measured” stimulus. This week’s sharp decline in China’s 10-year government bond yield is in part related to escalating political unrest in Hong Kong (bottom panel), and in our view does not yet signal any major change in the PBOC’s stance. Finally, our corporate earnings recession probability model provides another perspective on the equity market implications of the current path of stimulus. If the current size of stimulus holds through the end of 2019, our model suggests that the probability of an outright contraction in corporate earnings lasting through year end remains quite elevated, at close to 50% (first X in Chart 9). The July Politburo statement signaled a greater willingness to stimulate the economy; as a result, we are penciling in a slightly more optimistic scenario on forthcoming credit growth through the remainder of the year, by adding 300 billion yuan of debt-to-bond swaps4 and 800 billion yuan of extra infrastructure spending5 to our baseline estimate for the rest of 2019. However, this would only add a credit impulse equivalent of 1 percentage point of nominal GDP and would only marginally reduce the probability of an earnings recession to 40% (second X in Chart 9). A 40% chance of an earnings recession is well above “normal” levels that would be consistent with a durable uptrend in stock prices, and in previous cycles, Chinese stock prices picked up only after business cycles and corporate earnings had bottomed (Chart 10). In sum, the current pace of credit growth, signals from the domestic equity market, and our earnings recession model all suggest that it is too early to bottom fish Chinese stocks. Chart 9A "Measured" Pickup in Stimulus Will Not Be A Game Changer Chart 10Too Early To Bottom Fish Reason #3: The Trade War Is Far From Over Our Geopolitical Strategy team maintains that the U.S. and China have only a 40% chance of concluding a trade agreement by November 2020, and that any trade truce is likely to be shallow.6 We agree with this assessment, which has clear negative near-term implications for Chinese investable stocks, even if temporary rallies such as what took place yesterday periodically occur. Since the onset of the trade war, Chinese investable stocks appear to have traded nearly entirely in reaction to trade-related events. Hence, until global investors are given proof that much stronger stimulus can and will offset the impact of the trade war on corporate earnings, Chinese stocks are likely to continue to underperform their global peers. Reason #4: The Hong Kong Crisis Is A Near-Term Risk Another near-term catalyst for financial market turbulence in China is the worsening situation in Hong Kong. For now, we hold the view that a full-blown crisis (i.e. China intervening with military force) can be avoided, but we are not ruling out the possibility of a severe escalation or its potential impact on market sentiment towards Chinese assets.  On the surface, China investable stocks (the MSCI China Index, the predominantly investable index that now includes some mainland A-shares) are not directly linked to businesses in Hong Kong: Out of the top 10 constituents of the MSCI China Index, which account for roughly 50% of the index’s market capitalization, seven are headquartered in mainland China and do not appear to have significant revenue exposure to Hong Kong. By contrast, at least 30% of Hang Seng Index-listed companies have business operations in Hong Kong. The remaining three companies in the top 10 MSCI China Index are Tencent (the largest component of the index, with a weight of approximately 15%), Ping An Insurance (4% weight), and China Mobile (3% weight) – all of which registered large losses in the past week. Both Tencent and Ping An Insurance are headquartered in Shenzhen, a southeastern China metropolis that links Hong Kong to mainland China. China Mobile appears to have the most revenue exposure to Hong Kong of any top constituent through its CMHK subsidiary, which is the largest telecommunications provider in Hong Kong. It is true that there has been little evidence so far that Chinese investable stocks have been more impacted by the escalation in political unrest in Hong Kong than by the escalation in the trade war. Indeed, the fact that the two escalations were overlapping this past week makes it difficult to isolate their effects. But if unrest in Hong Kong spirals out of control, it could result in mainland China intervening. According to an analysis done by BCA’s Geopolitical Strategy team,6 the deployment of mainland troops would likely lead to casualties and could trigger sanctions from western countries. The 1989 Tiananmen Square incident shows that such an event could lead to a non-negligible hit to domestic demand and foreign exports under sanctions. Should this to occur, the near-term idiosyncratic risk to Chinese stocks in both onshore and offshore markets will be significant. Reason #5: Further RMB Depreciation May Weigh On Stock Prices Whether due to manipulation or market forces, last week’s depreciation in the Chinese currency (RMB) was economically justified and long overdue. Chart 11RMB Depreciation Long Overdue Chart 11 shows the close relationship between the U.S.-China one-year swap rate differential and the USD/CNY exchange rate. The true source of the correlation shown in the chart remains somewhat of a mystery, given that Chinese capital controls, particularly following the 2015 devaluation episode, prevent the arbitrage activities that link rate differentials and exchange rates in economies with fully open capital accounts. However, Chart 11 clearly shows that China’s currency would have already weakened by now if it was fully market-driven, and we do not believe that the People’s Bank of China will be inclined to tighten monetary policy in order to reverse the recent devaluation. Hence, the path of least resistance for the CNY is further depreciation.  If the threatened 10% tariff on all remaining U.S. imports from China is imposed this year, our back-of-the-envelope calculation based on Chart 12 suggests that a market-driven “equilibrium” USD/CNY exchange rate should be at around 7.6. We have high conviction, based on previous RMB devaluation episodes, that China’s central bank will not allow its currency to depreciate in a manner that invites speculation of meaningful further weakness – meaning we are not likely to see a straight-lined or rapid depreciation down to the 7.6 mark. Chart 12Market Driven 'Equilibrium' Provides Some Guidance On The Exchange Rate A “managed” currency depreciation is in and of itself stimulative for the Chinese economy. At the same time, aggressive market intervention via the PBoC burning through its foreign exchange reserves is also unlikely: A “managed” currency depreciation is in and of itself stimulative for the economy. It improves Chinese export goods’ price competitiveness and helps mitigate some of the pain caused by increased tariffs. Therefore it is in the PBoC’s every interest to allow such depreciation. However, no matter how “orderly” RMB depreciation may be, the fact that the PBoC has signaled it is no longer defending a “line in the sand” exchange-rate mark is likely to trigger another round of “race to the bottom” currency devaluation from other regional, export-dependent economies.7 A weaker RMB and emerging market currencies will also contribute to USD strength. A strong dollar has been negatively correlated with global risky assets, implying that for a time, a weaker RMB will be a risk-off event for risky assets and thus presumably for Chinese and EM equity relative performance. Investment Implications Our analysis above highlights that the near-term outlook for Chinese stocks is fraught with risk, and it is for this reason that we recommended an underweight tactical position in Chinese stocks for the remainder of the year in our July 24 Weekly Report.8 However, by next summer (the tail-end of our cyclical investment horizon), it is our judgement that one of two things will have likely occurred: The trade war with the U.S. will have abated or been called off, and investors will have determined that a “half-strength” credit cycle is likely enough to stabilize Chinese domestic demand and the earnings outlook. In this scenario, Chinese stocks are likely to rise US$ terms over the coming year, relative to global stocks. The trade war with the U.S. will have continued, and Chinese policymakers will have acted on the need to stimulate aggressively further in order to stabilize domestic demand. In combination with an ultimately stimulative (although near-term negative) decline in the RMB, the relative performance of Chinese stocks versus the global benchmark will likely be higher in hedged currency terms. Because of the near-term risks to the outlook, we agree that investors who are not yet invested should remain on the sidelines until surer signs of materially stronger stimulus emerge. But investors who are already positioned in favor of Chinese equities should stay long, and should bet on the latter scenario: rising relative Chinese equity performance in local currency terms, alongside a falling CNY-USD / appreciating USD-CNY exchange rate.   Jing Sima  China Strategist JingS@bcaresearch.com   Footnotes 1      “US to delay some tariffs on Chinese goods”, Financial Times, August 13, 2019. 2      Please see China Investment Strategy Weekly Report, “Simple Arithmetic”, dated May 15, 2019, available at cis.bcaresearch.com. 3      Please see China Investment Strategy Weekly Reports, “Threading A Stimulus Needle (Part 1): A Reluctant PBoC”, dated July 10, 2019, and “Threading A Stimulus Needle (Part 2): Will Proactive Fiscal Policy Lose Steam?”, dated July 24, 2019, available at cis.bcaresearch.com. 4      The remaining of 14 trillion debt-to-bond swap program rounds up to 315 billion yuan. 5      The relaxed financing requirement for infrastructure projects can add 800 billion yuan. 6      Please see Geopolitical Strategy Weekly Report, “The Rattling Of Sabers”, dated August 9, 2019, available at gps.bcaresearch. 7      Please see Emerging Markets Strategy Weekly Report, “The RMB: Depreciation Time?”, dated May 23, 2019, available at ems.bcaresearch.com. 8      Please see China Investment Strategy Weekly Report, Threading A Stimulus Needle (Part 2): Will Proactive Fiscal Policy Lose Steam?”, dated July 24, 2019, available at cis.bcaresearch.com. Cyclical Investment Stance Equity Sector Recommendations