Sectors

The S&P technology sector is forecast to deliver its worst quarterly earnings performance since 2012/2013, when the sector suffered a relative performance steep correction (top panel). That period was marked by a downturn in capital spending momentum, and a contraction in technology new orders-to-inventories. A similar backdrop is currently unfolding. BCA's Capital Spending Model has moved sharply lower, heralding share price underperformance. In addition, demand for tech goods remains anemic, as proxied by tech new orders and exports (second panel). That represents a headwind to future production growth, and by extension, productivity. The implication is that tech sector deflationary conditions are likely to remain intense, and it is too soon to position for better technology earnings. We remain underweight the overall tech sector.

Special Report

One of our highest-conviction investment ideas for the next few years.

Chinese PPI deflation will likely continue to ease going forward. There are non-trivial odds that the PPI deflation may turn positive. Our models predict a sharp upturn in China's profit cycle. Meanwhile, Anti-corruption investigation cases have dropped substantially since the beginning of the year, a sign that the Communist Party may be reorienting priorities to boost economic growth.

Treasuries appear overbought in the near-term, especially given evidence of a rebound in global manufacturing, but we would need to see evidence of a sustained re-synchronization of global growth before advocating a shift to below benchmark duration on a 6-12 month horizon.

Special Report

We do not expect Russia and OPEC members to reach a production-limiting agreement at the April 17 meeting in Doha, but that does not diminish our bullish expectations for a rebalancing of oil markets in H2 2016.

The previous Insight showed that macro forces were shifting in favor of a trough in the brutal backdrop for hypermarkets sales. Even if the latter are slow to recover, there is scope for positive profit margin surprises in the coming quarters. The massive U.S. dollar appreciation has invigorated the retailing industry's largest buying group's purchasing power. It would be highly unusual for operating margins not to expand on the back of currency strength. Keep in mind that varying lags exist between currency swings and their impact on profitability, given long-term contracts and hedges. Consequently, the recent currency depreciation does not mean the window for margin improvement has closed. Other sources of reduced cost inflation exist. For instance, the cost of goods sold should benefit from deflation in transportation costs. Asian manufacturers are also in full inventory liquidation mode, which suggests little upward pressure on imported consumer goods prices, despite the recent U.S. dollar dip. These factors will support margins. Adding it all up, on a cyclical basis, hypermarkets are well positioned to produce better-than-market returns and we recommend upping weightings to above-benchmark on price weakness. The ticker symbols for the stocks in this index are: BLBG: S5HYPC - WMT, COST.

Hypermarkets are off their relative performance lows, despite the rebound in the broad market. That is a solid showing for a defensive industry that has been in the doldrums for more than three years. It is easy to understand why underperformance has been so stark. Sales growth has been abysmal. Deflation has rocked the retailing sector. It is hard for earnings to grow sustainably without sales gains, particularly in a low margin, high turnover business. But there are signs that the worst is over. Retail deflation has passed through its most intense phase. The pickup in overall income growth suggests that the average consumer will have more disposable income, which has often been a reliable indication of sales and profit turning points. When the personal savings rate rises and overall consumption growth cools, hypermarkets benefit (top and bottom panels). Fading federal income tax growth reinforces that consumers are unlikely to soon 'trade up' to shop at higher ticket stores (middle panel, taxes shown inverted). Even if sales growth is slow to regain traction, hypermarkets have room to improve profitability, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HYPC - WMT, COST.

Special Report

In this <i>Special Report</i>, we discuss the state of the New Zealand business cycle and propose some trade ideas to capitalize on the excessive pessimism currently at play in New Zealand bond and currency markets.

A lack of confirming growth indicators puts the equity advance at risk. Lift hypermarkets to overweight, stick with homebuilders and fade any small and/or mid cap relative strength.

We are confident that the reward/risk tradeoff to holding equities and high-yield corporate bonds is deteriorating and that rallies in these assets are high-risk affairs.