BCA Indicators/Model
Weekly Performance Update For the week ending Thu Oct 21, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio
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Total Weekly Return BCA US Portfolio S&P500 TRI 0.81% 2.52% Top Contributors MMP:US TGT:US SHW:US WAT:US GRMN:US Weekly Return 22 bps 16 bps 15 bps 13 bps 13 bps Top Detractors SIM:US KOF:US AMN:US PM:US MBT:US Weekly Return -20 bps -9 bps -9 bps -7 bps -6 bps Top Prospects AMN:US GOOG.L:US KOF:US WAT:US MPLX:US BCA Score 95.32% 92.78% 92.55% 91.15% 90.42% BCA Canada Portfolio
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Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 1.52% 1.89% Top Contributors STN:CA ONEX:CA BTE:CA SMU.UN:CA ATZ:CA Weekly Return 32 bps 24 bps 20 bps 16 bps 14 bps Top Detractors IFP:CA TOU:CA TOY:CA EMP.A:CA H:CA Weekly Return -19 bps -12 bps -8 bps -8 bps -5 bps Top Prospects ELF:CA WIR.UN:CA TOU:CA IMO:CA TOY:CA BCA Score 97.98% 96.59% 96.56% 94.60% 93.58% BCA UK Portfolio
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Total Weekly Return BCA UK Portfolio FTSE 100 TRI 0.88% -0.22% Top Contributors DEC:GB YOU:GB NLMK:GB N91:GB VVO:GB Weekly Return 19 bps 16 bps 15 bps 14 bps 14 bps Top Detractors KETL:GB FXPO:GB BVIC:GB STEM:GB MGNS:GB Weekly Return -20 bps -11 bps -10 bps -7 bps -6 bps Top Prospects VVO:GB ROSN:GB SVST:GB TUNE:GB JHD:GB BCA Score 99.54% 99.09% 98.39% 96.40% 96.39% BCA Eurozone Portfolio
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Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 0.78% 0.52% Top Contributors TTALO:FI SOF:BE BSL:DE SHUR:BE PMAG:AT Weekly Return 15 bps 12 bps 11 bps 11 bps 10 bps Top Detractors ERF:FR SES:IT SOL:IT ARG:FR FSKRS:FI Weekly Return -16 bps -8 bps -5 bps -4 bps -4 bps Top Prospects ROTH:FR HLAG:DE FSKRS:FI STR:AT SOL:IT BCA Score 98.71% 98.00% 97.79% 96.11% 95.97% BCA Japan Portfolio
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Total Weekly Return BCA Japan Portfolio TOPIX TRI 0.69% 0.70% Top Contributors 8097:JP 4958:JP 8739:JP 6676:JP 9436:JP Weekly Return 15 bps 15 bps 12 bps 7 bps 7 bps Top Detractors 3003:JP 2208:JP 9532:JP 8133:JP 9543:JP Weekly Return -11 bps -10 bps -4 bps -3 bps -3 bps Top Prospects 6960:JP 9436:JP 9882:JP 9422:JP 4544:JP BCA Score 99.41% 99.39% 99.23% 98.77% 97.35% BCA Hong Kong Portfolio
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Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI -0.14% 4.23% Top Contributors 316:HK 3306:HK 2768:HK 1600:HK 323:HK Weekly Return 30 bps 19 bps 10 bps 9 bps 9 bps Top Detractors 6118:HK 1708:HK 1277:HK 1967:HK 1866:HK Weekly Return -67 bps -25 bps -13 bps -12 bps -8 bps Top Prospects 1277:HK 746:HK 857:HK 1088:HK 43:HK BCA Score 100.00% 99.66% 98.36% 97.78% 97.05% BCA Australia Portfolio
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Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.76% 1.43% Top Contributors SXY:AU PWH:AU MHJ:AU AVN:AU ZIM:AU Weekly Return 52 bps 21 bps 18 bps 18 bps 18 bps Top Detractors CGS:AU NHC:AU ABB:AU ERA:AU MMS:AU Weekly Return -27 bps -26 bps -13 bps -13 bps -11 bps Top Prospects MHJ:AU RIC:AU BLX:AU ADI:AU CDD:AU BCA Score 99.51% 98.87% 98.07% 97.81% 97.71%
Highlights In our latest balances and forecast estimates, we are lifting our expectation for 4Q21 Brent prices to $81/bbl, and our forecasts for 2022 and 2023 to $80.00/bbl and $81.00/bbl, up $5/bbl and $1/bbl, respectively. Our revised balances reflect deeper physical deficits in the EIA's latest historical data, and higher short-term demand consistent with IEA's expected increase of 500k b/d. This largely is a knock-on effect of tight coal markets in Asia and globally tight natural gas markets. Over-compliance with production-cutting goals likely will force higher oil output from GCC producers to offset declining output from OPEC 2.0 states outside the Gulf. We expect output in the Lower 48 states of the US, which consists mostly of shale-oil production, to average 9.5mm b/d in 2022 and 10mm b/d in 2023, versus 2021 production levels of 9.0mm b/d. The odds of oil prices exceeding $100/bbl by the end of 1Q22 are 12.05%, based on price distributions embedded in market-cleared crude-oil options prices (Chart of the Week).1 At the margin, downside risk is increasing going into winter, due to slower economic growth brought on by tight coal and gas markets globally. Feature The short-term evolution of energy markets globally remains highly uncertain, mostly because it depends so much on the evolution of the Northern Hemisphere winter; policy actions to address tight coal and natural gas markets in Asia and Europe, and OPEC 2.0's reading of short- and medium-term demand. We are lifting our 4Q21 Brent price forecast to $81/bbl from $70.50/bbl, to reflect a marginal increase of 500k b/d in oil demand resulting from the knock-on effects of tighter coal and gas markets in Asia and Europe.2 For all of 2021, we are raising our expected global oil demand to 97.5mm b/d from 97.3mm b/d. Chart of the WeekProbability Of $100/bbl Remains Low
Short-Term Oil-Price Risk Moves To The Downside
Short-Term Oil-Price Risk Moves To The Downside
For 2022 and 2023, we expect slightly higher oil demand – 102mmb/d and 103.3mm b/d, respectively, most of which will come from DM economies at the margin (Chart 2). This lifts our Brent forecasts for next year to $80.00/bbl, and to $81/bbl in 2023 (Chart 3). We expect WTI to trade $2-$3/bbl below Brent. Chart 2Short-Term DM Demand Increases At The Margin
Short-Term DM Demand Increases At The Margin
Short-Term DM Demand Increases At The Margin
Chart 3Brent Forecast Lifted Slightly
Brent Forecast Lifted Slightly
Brent Forecast Lifted Slightly
The uncertainty around our price forecast remains elevated, given the knock-on effects of additional slowing of economic growth in Asia due to lower hydro power output because of drought, and tighter coal and gas markets, as inventories continue to be restocked ahead of the Northern Hemisphere winter.3 Tighter coal and natural gas markets in China and Europe already have led to shutdowns in industrial output particularly in China's and Europe's base metals markets. Countering this bearish impulse is our expectation the roll-out of mRNA-based COVID-19 vaccines will pick up momentum, as joint ventures with the developers of these technologies increase global distribution over the next couple of years.4 Oil Supply Side Remains Well Managed OPEC 2.0 – led by Saudi Arabia and Russia – has consistently managed the level of its production to keep it just below the level of demand for its crude. Producers outside this coalition – the price-taking cohort, in our phraseology – has been managing its output to maintain profitability, which means investor interests are paramount. Both have been responsive to actual demand. Neither is calibrating output to match expected demand. From the EIA’s most recent historical estimates of realized supply and demand, it appears production from both OPEC 2.0 and the price-taking cohort was underestimated in 2H21, or the data-gathering-and-reporting agencies undercounted barrels (Chart 4). This can be seen in the larger physical deficits – i.e., demand in excess of supply – relative to last month's historical estimates, and in the sharply lower OECD inventories (Chart 5). In this month’s modeling, we tweaked OPEC 2.0 supply estimates to reflect the recent high compliance rate of the OPEC 2.0 coalition. According to Reuters, low oil investment in suppliers – chiefly Nigeria, Angola and Kazakhstan – was the primary reason the coalition has been unable to bring all of its agreed-to additional monthly supply increase of 400k b/d to the market.5 This undersupply is expected to continue until the end of 2021 in our models. Chart 4Higher 2H21 Physical Deficits Reported
Higher 2H21 Physical Deficits Reported
Higher 2H21 Physical Deficits Reported
Chart 5OECD Inventories Remain Key OPEC 2.0 Metric
OECD Inventories Remain Key OPEC 2.0 Metric
OECD Inventories Remain Key OPEC 2.0 Metric
We also modified our forecasts for Iranian production to reflect our Geopolitical Strategy colleagues’ belief that a deal between the US and Iran is likely.6 We project Iranian oil supply will reach 2.9 mmb/d by end of Q1 2022, and 3.7 mmb/d by the end of 2022. OPEC's most recent monthly supply-demand estimates caution higher electricity prices due to the coal and natgas shortages in Asia and Europe could lead to lower demand over the winter months. This already is apparent in China and Europe, where heavy electricity users – steel mills and zinc smelters, e.g., – are being forced to shut down production as electricity is rationed. Should this persist – and result in lower oil demand – OPEC 2.0 output could contract. However, with inventories drawing sharply in the OECD, we expect the producer coalition will err on the side of higher output if Brent prices surge to $90/bbl or more this winter. OPEC 2.0 member states do not gain any long-term advantage from higher oil prices when demand globally is contracting and EM economies – the growth engine of global oil markets – are still trying to recover from the COVID-19 pandemic. The price-taking cohort – exemplified by the US shale-oil producers – cannot ramp production quickly enough to fill a physical supply deficit over the course of the winter. We estimate it takes ~ 8 months to assemble rigs and crews, drill pads in the shales, and hook gathering lines up to main lines to move oil to refining centers. Given the level of prices and the shape of the forward curve, we expect US production in the Lower 48 states, which is mostly accounted for by shale-oil production, to average 9.5mm b/d in 2022 and 9.9mm b/d in 2023 (Chart 6). While production in the Permian basin continues to rise, it will not grow quickly enough to address a tightening in global oil markets in the short run (Chart 7). Chart 6Higher US Shale Output Expected
Higher US Shale Output Expected
Higher US Shale Output Expected
Chart 7US Shales Cannot Cover Deficit
Short-Term Oil-Price Risk Moves To The Downside
Short-Term Oil-Price Risk Moves To The Downside
Investment Implications The evolution of global energy markets remains highly uncertain. Markets likely will not be able to form solid expectations until after the New Year begins, owing to weather uncertainty. There are reports already that winter has started early in northern China, but this does not necessarily presage colder-than-normal weather globally for the entire winter.7 We expect markets to remain balanced and for OPEC 2.0 in particular to manage its output in line with actual demand (Table 1). Our intellectual framework for assessing OPEC 2.0's production strategy is grounded in the view the coalition does not want to see oil prices much higher than current levels, given the fragility of the global economic recovery, particularly in EM economies. Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) To Dec23
Short-Term Oil-Price Risk Moves To The Downside
Short-Term Oil-Price Risk Moves To The Downside
We remain long commodity index exposure going into winter, in the expectation colder-than-normal weather will keep energy prices well bid, and oil and natural gas forward curves backwardated. We continue to monitor weather expectations Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Commodities Round-Up Energy: Bullish The EIA expects US households using natural gas will pay just under $750 to heat their homes on average this winter, a 30% increase over last year's level. This is the result of higher prices vs last year, and higher consumption estimates by the EIA, given its weather expectation. This past week, the US Climate Prediction Center raised the odds of a second La Niña to 87%, from it earlier 70-80% expectation. This raises the likelihood of a colder-than-normal winter in the Northern Hemisphere. US natural gas inventories are expected to end the April-October injection season at 3.6 TCF, in the EIA's latest estimate, which will put stocks ~ 5% below the 2016-2020 five-year average. US LNG exports are expected to average 10.7 BCF/d over the Oct21-Mar22 period, which would be a record. Higher prices in Asia and Europe due to stronger demand are pulling US natgas prices higher via exports (Chart 8). Base Metals: Bullish Spot copper traded in excess of $1,100/MT over 3-month forward LME futures this week, as traders globally scramble for product ahead of possible power rationing at copper-refining facilities in China this winter.8 Prices abruptly fell more than 7% from there, following a press report the Chinese government would directly intervene in coal markets to lower prices. Coal and natural gas shortages going into the winter are forcing smelters to shut production in China and Europe. Separately, China reportedly ordered 70% (35/50) of its magnesium smelters to close until year-end, to conserve fuel. Magnesium is critical to producing aluminum sheet and billets. The knock-on effects from lower aluminum supplies could be especially harsh for automobile manufacturers, which have been increasing their use of aluminum. Precious Metals: Bullish Gold was unable to hold last week’s gains as US Treasury yields and the dollar rallied towards the end of the week. The expected normalization of the US Fed’s monetary policy will be bullish for the USD and will push treasury yields higher, which will act as headwinds to gold. We continue to expect a weaker dollar, in line with the view of our colleagues at BCA’s Foreign Exchange Strategy (Chart 9). Chart 8
Short-Term Oil-Price Risk Moves To The Downside
Short-Term Oil-Price Risk Moves To The Downside
Chart 9Gold Prices Going Down Along With USD
Gold Prices Going Down Along With USD
Gold Prices Going Down Along With USD
Footnotes 1 Please see Appendix II beginning on p. 22 in Ryan, Bob and Tancred Lidderdale (2009), "Energy Price Volatility and Forecast Uncertainty," Short-Term Energy Outlook Supplement, US EIA. 2 The 500k b/d estimate is consistent with the IEA's October 2021 Oil Market Report. We are loading most of the 500k b/d increase in demand on OECD consumption, given its dual-fired oil and gas generation capacity. Please see Inflation Surges, Slows, Then Grinds Higher and La Niña And The Energy Transition, for additional discussion. 3 The US Climate Prediction Center raised the odds of a La Niña winter in the Northern Hemisphere persisting from Dec21 – Feb22 to 87% this week. While this increases the odds of a colder-than-normal winter in the hemisphere it is not absolutely certain. That said, prudence will push governments and firms to fill inventories and increase coal and gas production ahead of winter. 4 Please see Upside Price Risk Rises For Crude, published on September 16, 2021 for discussion of the global mRNA vaccine rollout. 5 Please see As OPEC reopens the taps, African giants losing race to pump more, published by Reuters on September 27, 2021; Please also refer to OPEC+ struggles to pump more oil to meet rising demand, published by Reuters on September 21, 2021. 6 Please see Third Quarter Outlook 2021: The Pivot To Asia Runs Through Iran, published by BCA’s Geopolitical Strategy on June 25, 2021. 7 Please see Early start to China's winter heating season bullish for gas, coal demand published by S&P Global Platts on October 19, 2021. 8 Please see LME 0-3 Copper Backwardation Surged to above $1,000/mt on Oct 19 published by metal.com on October 20, 2021. Investment Views and Themes Strategic Recommendations
Highlights UK GDP is on track to overtake pre-pandemic levels. This will strengthen the case for the BoE to tighten monetary policy. That said, markets are aggressively pricing in a hawkish BoE. This creates room for near-term disappointment. The post-Brexit environment still remains volatile, especially vis-à-vis Northern Ireland. This opens a window to tactically go long EUR/GBP. Ultimately, the pound is undervalued on a longer-term basis. GBP/USD should touch 1.45 over the next 12 months. Feature Chart I-1A Robust Recovery In UK Growth
An Update On Sterling
An Update On Sterling
The UK recovery has been progressing smartly (Chart I-1). GDP growth is on track to increase by 7.25% this year, and 6% next year, according to the Bank of England (BoE). This is well above potential, and will eclipse growth in other developed economies. Markets have reacted accordingly. The pound is marginally higher versus the dollar this year, despite broad-based USD strength. Gilt yields have risen versus most developed market long rates. The OIS curve is already discounting at least 3 rate hikes by the BoE next year, much higher than most other developed market central banks (Chart I-2). The risk is that it creates downside risks for sterling in the near-term, even if the longer-term outlook remains bullish. Chart I-2A Violent Repricing In Interest Rate Expectations
A Violent Repricing In Interest Rate Expectations
A Violent Repricing In Interest Rate Expectations
Robust Domestic Conditions Most measures of domestic demand in the UK remain robust. The employment rate is higher than in the US, with unemployment fast approaching NAIRU (Chart I-3). Projections from the BoE no longer forecast an acute impact from the expiration of the furlough scheme. Unemployment should hit 4.25% in 2022, pinning it close to the lows of the last several decades. Chart I-3The UK Versus US Jobs Recovery An Employment Boom
The UK Versus US Jobs Recovery An Employment Boom
The UK Versus US Jobs Recovery An Employment Boom
Robust labor market conditions are beginning to shift bargaining power to workers. Vacancy rates are closing in on fresh highs relative to unemployed workers and wages have inflected noticeably higher (Chart I-4). The BoE has noted that compositional effects could have exarcerbated the pace of wage increases, with most job losses aggregated in sectors with lower pay. As the economy progresses towards full employment, wage growth will moderate from current levels, but will still be very robust by historical standards. Inflation has been the wild card in the UK. The headline inflation print is currently 3.2%, while core CPI sits at 3.1%, well above the MPC’s 2% target. Meanwhile, the 10-year CPI swap rate has shot up to 4.2%, brewing expectations that higher inflation could become entrenched (Chart I-5). This has pushed up bets that the central bank could turn even more hawkish. Chart I-4Employees Are Gaining Bargaining Power
Employees Are Gaining Bargaining Power
Employees Are Gaining Bargaining Power
Chart I-5Will UK Inflation Be Transitory?
Will UK Inflation Be Transitory?
Will UK Inflation Be Transitory?
From a big picture perspective, the acute increase in money supply growth stemming from aggressive easing by the BoE has stimulated economic activity. As such, the velocity of money is rising sharply in the UK (Chart I-6). To prevent a potential overheating of the economy, the BoE will need to raise rates. This is bullish for cable. Finally, house price inflation in the UK remains robust. While this has been a global phenomenon, surveys suggest that the pace of house price increases will accelerate in the coming months (Chart I-7). With the most negative interest rates in the G10, this will be cause for concern for the BoE Chart I-6Money Velocity In The UK
Money Velocity In The UK
Money Velocity In The UK
Chart I-7Will The Housing Boom Be Sustained?
Will The Housing Boom Be Sustained?
Will The Housing Boom Be Sustained?
The Policy Response Chart I-8The BoE Will Withdraw Emergency Monetary Settings
The BoE Will Withdraw Emergency Monetary Settings
The BoE Will Withdraw Emergency Monetary Settings
On the monetary policy front, the BoE is acting accordingly. Asset purchases are slated to end soon, with the central bank having bought £869bn of its £895bn target (Chart I-8). In fact, two members of the MPC voted at the last policy meeting to reduce this target by £35bn, which would have effectively ended QE. Meanwhile, markets are priced for at least three interest rate hikes over the next 12 months. We agree that tighter monetary policy is warranted over the longer term. However, our bias is that market expectations for interest rate increases may have overshot, a potential setup for disappointment in the very near term. Offsetting Factors Inflation in the UK could prove transitory, and fall much faster than the market expects. According to BoE forecasts, inflation should settle closer to 2% by the end of next year. Yet the market is still pricing in very sticky inflation in the UK. The 5-year inflation swap currently sits at 4.4%, while the 10-year sits at 4.2%. These are very high numbers which are susceptible to downside surprises in the coming months. A firm trade-weighted pound will be the first catalyst for lower inflation. Historically, a strong GBP has dampened inflationary pressures through lower input costs (Chart I-9). It is remarkable that there has been a strong divergence between the currency and inflation expectations in the current regime. This can be partly attributed to a pandemic-related surge in restaurant and hotel costs, high transportation costs, and a surge in housing utilities, all amidst an electricity shortage (Chart I-10). Global supply chains are also under siege. Chart I-9The Inflation Overshoot Will Not Persist
The Inflation Overshoot Will Not Persist
The Inflation Overshoot Will Not Persist
Chart I-10Transport And Utility Inflation Could Prove Transitory
An Update On Sterling
An Update On Sterling
However, energy costs in Europe could modestly subside in the coming months. The opening of the Nord Stream 2 pipeline, connecting Russia with Europe, will help alleviate the euro zone energy crisis. For the UK in particular, the opening of the 1,400 MW undersea cable with Norway this month should assuage the electricity shortage. The pace of house price appreciation may also temper going forward. The UK holiday stamp duty, introduced in July 2020, expired last month. Under the scheme, taxes paid on property purchases were exempt to a ceiling of initially £500,000 until March 2021, and eventually £250,000. Housing in the UK has been supported by low interest rates and higher savings, factors pushing up global real estate demand, but the pickup in housing transactions ahead of the expiry of the rebate should ebb. The post-Brexit environment also remains volatile, especially vis-à-vis Northern Ireland. Significant checks exists on goods from the UK to Northern Ireland, even if they are slated for final consumption. This is leading to delays, and hampering UK businesses. The UK has been pushing back strongly against this, asking for an adjustment to the Brexit agreement. So far, the UK trade balance with the EU has been recovering, but overall, balance of payments dynamics remain a negative (Chart I-11). As we go to press, Europe’s Brexit negotiator, Maros Sefcovic, is being pressed by member states to draw up retaliatory measures, should the UK default on its agreement. Chart I-11The UK Trade Balance With The EU Is At Risk
An Update On Sterling
An Update On Sterling
Finally, the pound is also being held hostage to global macro dynamics. The UK runs a basic balance deficit. This means portfolio inflows, both in equities and bonds are needed to finance the trade deficit. These portfolio flows accelerated this year, but are now relapsing (Chart I-12). The risk is that a correction in global equity markets could exarcebate this trend (Chart I-13). Chart I-12Portfolio Flows Into The UK Have ##br##Slowed
Portfolio Flows Into The UK Have Slowed
Portfolio Flows Into The UK Have Slowed
Chart I-13The Pound Is Susceptible To A Market Correction
The Pound Is Susceptible To A Market Correction
The Pound Is Susceptible To A Market Correction
Trading Opportunities The pound is likely to fare well over a cyclical horizon. Our 12-month target is 1.45 with a best-case scenario above 1.50. This target is based on mean reversion towards fair value. On a real effective exchange rate basis, the pound is about 15% below the mean. This is lower than where it was after the UK exited the Exchange Rate Mechanism in 1992 (Chart I-14). Over time, the pound will converge towards the mid-point of this historical range, pushing it near 1.50. Our in-house PPP models suggest the pound is undervalued by 12%. Our models on average revert to the mean over three years, suggesting the pound could revert to fair value in the next 12-to-18 months (Chart I-15).1 Our intermediate-term timing model suggests the pound is 0.5 standard deviations below fair value, and will also gravitate towards 1.50 over the next year or two. This model incorporates risk variables such as corporate spreads and commodity prices that drive fluctuations in the pound (Chart I-16). Chart I-14The Trade-Weighted Pound Is Cheap
The Trade-Weighted Pound Is Cheap
The Trade-Weighted Pound Is Cheap
Chart I-15GBP/USD Is Cheap On A PPP Basis
GBP/USD Is Cheap On A PPP Basis
GBP/USD Is Cheap On A PPP Basis
Chart I-16GBP/USD Is Cheap On A Competitive Basis
GBP/USD Is Cheap On A Competitive Basis
GBP/USD Is Cheap On A Competitive Basis
However, in the near term, the pound could relapse versus other G10 currencies. EUR/GBP: Interest rate expectations are bombed out in the euro area, relative to the UK. This is occurring at a time when PMI data remain relatively upbeat in the eurozone (though rolling over, Chart I-17). A modest reset in relative rate expectations could ignite EUR/GBP. We are initiating a long position at 0.846, with a stop loss at 0.835. GBP/JPY: The pound has rallied hard against the yen this year. Yet, real interest rates in the UK have cratered relative to Japan, as inflation has overshot in the former. The trade balance with Japan is also deteriorating, one year after a free-trade agreement was signed (Chart I-18). This divergence cannot last as relative trade surpluses/deficits have driven the exchange rate over the last three decades. We expect the yen to modestly outperform the pound in the next 3-to-6 months. AUD/GBP: The Aussie should outperform the pound. First, the cross has tremendously lagged levels implied by relative terms of trade. Even if commodity prices relapse, the margin of safety will remain very wide. Second, investors are massively short the Aussie relative to cable. From a contrarian perspective, this will pull AUD/GBP higher (Chart I-19). Chart I-17Buy EUR/GBP For A Trade
Buy EUR/GBP For A Trade
Buy EUR/GBP For A Trade
Chart I-18GBP/JPY Is Vulnerable In The Short Term
GBP/JPY Is Vulnerable In The Short Term
GBP/JPY Is Vulnerable In The Short Term
Chart I-19AUD/GBP Still Has Upside
AUD/GBP Still Has Upside
AUD/GBP Still Has Upside
Overall, sentiment on the pound remains ebullient, and our intermediate-term technical indicator has yet to hit capitulation lows (Chart I-20). This is modestly negative in the short term. That said, should the dollar experience broad-based weakness, as we expect, the pound might underperform the crosses, but will fare well against the dollar. Chart I-20Cable Will Hit Capitulation Lows Soon
Cable Will Hit Capitulation Lows Soon
Cable Will Hit Capitulation Lows Soon
Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Strategy Report, "Updating Our PPP Models," dated November 13, 2020. Trades & Forecasts Strategic View Cyclical Holdings (6-18 months) Tactical Holdings (0-6 months) Limit Orders Forecast Summary
Weekly Performance Update For the week ending Thu Oct 07, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio
Market Monitor (Oct 7, 2021)
Market Monitor (Oct 7, 2021)
Total Weekly Return BCA US Portfolio S&P500 TRI 1.95% 2.18% Top Contributors EPD:US SHW:US AMN:US DECK:US WMG:US Weekly Return 21 bps 15 bps 14 bps 13 bps 13 bps Top Detractors KOF:US WAT:US BRKR:US SIM:US SC:US Weekly Return -10 bps -9 bps -1 bps -1 bps -0 bps Top Prospects ESGR:US WAT:US IT:US ANAT:US GOOG.L:US BCA Score 95.90% 93.71% 93.36% 93.04% 92.73% BCA Canada Portfolio
Market Monitor (Oct 7, 2021)
Market Monitor (Oct 7, 2021)
Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 1.57% 1.81% Top Contributors NVEI:CA BTE:CA RUS:CA SMU.UN:CA IMO:CA Weekly Return 55 bps 26 bps 19 bps 14 bps 13 bps Top Detractors ELF:CA CSH.UN:CA AND:CA DSG:CA EMP.A:CA Weekly Return -11 bps -10 bps -7 bps -5 bps -4 bps Top Prospects ELF:CA TOU:CA WIR.UN:CA IMO:CA CS:CA BCA Score 97.05% 95.90% 95.26% 93.82% 93.69% BCA UK Portfolio
Market Monitor (Oct 7, 2021)
Market Monitor (Oct 7, 2021)
Total Weekly Return BCA UK Portfolio FTSE 100 TRI -1.16% -0.10% Top Contributors AGRO:GB ROSN:GB DEC:GB SVST:GB JHD:GB Weekly Return 20 bps 17 bps 14 bps 12 bps 8 bps Top Detractors TUNE:GB KETL:GB YOU:GB FXPO:GB FDM:GB Weekly Return -47 bps -27 bps -16 bps -16 bps -14 bps Top Prospects VVO:GB ROSN:GB EMIS:GB NFC:GB AGRO:GB BCA Score 99.55% 97.59% 97.09% 96.88% 96.87% BCA Eurozone Portfolio
Market Monitor (Oct 7, 2021)
Market Monitor (Oct 7, 2021)
Total Weekly Return BCA EMU Portfolio MSCI EMU TRI -0.26% 0.80% Top Contributors JMT:PT VRLA:FR TTE:FR SES:IT EDNR:IT Weekly Return 21 bps 11 bps 10 bps 10 bps 9 bps Top Detractors SRT:DE ARG:FR MVV1:DE IPS:FR VID:ES Weekly Return -29 bps -16 bps -15 bps -13 bps -13 bps Top Prospects 094124453:BE FSKRS:FI HLAG:DE STR:AT ROTH:FR BCA Score 99.50% 99.19% 99.01% 98.79% 98.78% BCA Japan Portfolio
Market Monitor (Oct 7, 2021)
Market Monitor (Oct 7, 2021)
Total Weekly Return BCA Japan Portfolio TOPIX TRI -1.86% -4.46% Top Contributors 5019:JP 7327:JP 4928:JP 9509:JP 7958:JP Weekly Return 9 bps 8 bps 7 bps 6 bps 5 bps Top Detractors 8739:JP 3003:JP 4544:JP 9882:JP 1417:JP Weekly Return -34 bps -30 bps -18 bps -15 bps -13 bps Top Prospects 9882:JP 6960:JP 9436:JP 9422:JP 4966:JP BCA Score 99.88% 99.85% 99.43% 99.42% 99.20% BCA Hong Kong Portfolio
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Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 1.11% 0.51% Top Contributors 43:HK 855:HK 857:HK 329:HK 323:HK Weekly Return 51 bps 30 bps 29 bps 23 bps 13 bps Top Detractors 316:HK 3306:HK 1193:HK 811:HK 2768:HK Weekly Return -19 bps -19 bps -17 bps -13 bps -10 bps Top Prospects 1277:HK 746:HK 857:HK 3306:HK 6868:HK BCA Score 100.00% 99.81% 98.24% 97.19% 96.99% BCA Australia Portfolio
Market Monitor (Oct 7, 2021)
Market Monitor (Oct 7, 2021)
Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.50% -1.02% Top Contributors CDD:AU CVW:AU ERA:AU NHC:AU SXY:AU Weekly Return 42 bps 31 bps 22 bps 21 bps 14 bps Top Detractors SFR:AU PWH:AU 360:AU AUB:AU ZIM:AU Weekly Return -24 bps -16 bps -16 bps -13 bps -10 bps Top Prospects MHJ:AU RIC:AU AVN:AU GOZ:AU PL8:AU BCA Score 99.31% 98.40% 98.30% 98.04% 97.86%
Weekly Performance Update For the week ending Thu Sep 30, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio
Market Monitor (Sep 30, 2021)
Market Monitor (Sep 30, 2021)
Total Weekly Return BCA US Portfolio S&P500 TRI -1.89% -3.15% Top Contributors EOG:US NFG:US CBRE:US CQP:US ESGR:US Weekly Return 15 bps 10 bps 4 bps 3 bps 3 bps Top Detractors MRNA:US GOLF:US IT:US TGT:US GOOG.L:US Weekly Return -53 bps -23 bps -20 bps -17 bps -16 bps Top Prospects ANAT:US ESGR:US TX:US GOOG.L:US WAT:US BCA Score 94.97% 94.96% 94.82% 94.25% 93.48% BCA Canada Portfolio
Market Monitor (Sep 30, 2021)
Market Monitor (Sep 30, 2021)
Total Weekly Return BCA Canada Portfolio S&P/TSX TRI -1.35% -1.80% Top Contributors PXT:CA IMO:CA TOU:CA WN:CA L:CA Weekly Return 24 bps 22 bps 20 bps 10 bps 6 bps Top Detractors GIB.A:CA NVEI:CA CSU:CA CRON:CA TOY:CA Weekly Return -23 bps -22 bps -17 bps -17 bps -15 bps Top Prospects ELF:CA LNF:CA CS:CA RUS:CA IGM:CA BCA Score 98.19% 95.55% 95.03% 94.95% 94.00% BCA UK Portfolio
Market Monitor (Sep 30, 2021)
Market Monitor (Sep 30, 2021)
Total Weekly Return BCA UK Portfolio FTSE 100 TRI -2.22% 0.20% Top Contributors GLTR:GB TEP:GB ROSN:GB CNE:GB NVTK:GB Weekly Return 19 bps 15 bps 15 bps 14 bps 5 bps Top Detractors MXCT:GB BBOX:GB SGRO:GB KLR:GB TRMR:GB Weekly Return -40 bps -24 bps -23 bps -21 bps -17 bps Top Prospects VVO:GB AGRO:GB SVST:GB BPCR:GB N91:GB BCA Score 99.60% 99.07% 98.78% 97.49% 97.49% BCA Eurozone Portfolio
Market Monitor (Sep 30, 2021)
Market Monitor (Sep 30, 2021)
Total Weekly Return BCA EMU Portfolio MSCI EMU TRI -2.61% -3.15% Top Contributors RDSA:NL EDNR:IT MVV1:DE BFF:IT FLUX:BE Weekly Return 26 bps 14 bps 13 bps 8 bps 2 bps Top Detractors HLAG:DE MELE:BE IPS:FR BSL:DE ALTA:FR Weekly Return -71 bps -26 bps -25 bps -24 bps -23 bps Top Prospects 094124453:BE FSKRS:FI SOL:IT STR:AT HLAG:DE BCA Score 99.87% 99.77% 99.75% 99.22% 98.95% BCA Japan Portfolio
Market Monitor (Sep 30, 2021)
Market Monitor (Sep 30, 2021)
Total Weekly Return BCA Japan Portfolio TOPIX TRI -0.41% 0.12% Top Contributors 5021:JP 8334:JP 9436:JP 9543:JP 3468:JP Weekly Return 20 bps 14 bps 14 bps 12 bps 9 bps Top Detractors 6960:JP 4928:JP 3132:JP 4544:JP 4966:JP Weekly Return -22 bps -21 bps -11 bps -9 bps -8 bps Top Prospects 6960:JP 9882:JP 9728:JP 4928:JP 9436:JP BCA Score 99.93% 99.66% 99.51% 99.28% 99.05% BCA Hong Kong Portfolio
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Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI -0.70% 0.32% Top Contributors 2686:HK 1735:HK 182:HK 1277:HK 6118:HK Weekly Return 105 bps 80 bps 62 bps 22 bps 10 bps Top Detractors 1967:HK 710:HK 316:HK 323:HK 329:HK Weekly Return -102 bps -63 bps -39 bps -32 bps -24 bps Top Prospects 1277:HK 746:HK 857:HK 323:HK 3306:HK BCA Score 100.00% 99.80% 98.86% 98.38% 98.07% BCA Australia Portfolio
Market Monitor (Sep 30, 2021)
Market Monitor (Sep 30, 2021)
Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.31% -0.65% Top Contributors MMS:AU YAL:AU SGF:AU GRR:AU SXY:AU Weekly Return 35 bps 21 bps 16 bps 15 bps 15 bps Top Detractors UWL:AU AVN:AU AST:AU AGL:AU BXB:AU Weekly Return -27 bps -10 bps -9 bps -9 bps -8 bps Top Prospects MHJ:AU ZIM:AU AVN:AU ADI:AU PL8:AU BCA Score 99.44% 99.21% 98.90% 98.75% 98.71%
The BCA Score factor model, the quantitative pillar of the Equity Analyzer platform, is built around a core of factors that aim to optimize risk-adjusted returns in systematically rebalanced portfolios. In particular, the low volatility and low beta factors, which tend to reduce the aggregate standard deviation of portfolios, are crucial for lowering the denominator (and thus boosting the value) of our primary risk-adjusted measure, the Sharpe ratio. However, during strong equity bull markets, a low volatility tilt can come at the expense of excess returns relative to benchmark, especially in a large cap stock universe. In this insight, we explore how a straightforward use of the Beta factor scores can improve the performance of BCA score strategies during these phases. Understanding Sharpe Although convenient, the simple Sharpe ratio represents only one type of utility function for investors. While it does simultaneously measure historical reward versus risk in a single metric, it does not necessarily differentiate between a safe, defensive portfolio and a riskier, high-beta portfolio. Consequently, a low-risk strategy with a Sharpe ratio greater than or equal to that of a benchmark index can still be subject to periods of negative excess returns, especially during equity bull markets. With regards to the BCA Score model, we have found that this can be an issue within the global large-cap universe (top 25% by market cap.), where the BCA Score factor return premium is lower compared with the small and mid-cap segments.1 In this size segment, portfolios constructed around the BCA Score tend to have excellent downside protection relative to cap-weighted market indices, but struggle when markets heat up. This is reflected by a few key portfolio statistics that typically arise during large-cap backtesting, namely, a strong Sharpe ratio, low beta (less than 1.0), but an upside benchmark capture ratio below 50%.2 To improve this situation, we can target the Beta factor itself when setting up our backtest parameters. Targeting The Beta Score Mathematically speaking, if we can raise the aggregate beta of our portfolio relative to benchmark, we should be able to improve the upside performance of the portfolio (though likely at the expense of some downside protection). Fortunately, since BCA Score strategies already excel when the benchmark is struggling, we can sacrifice some of this downside protection by selecting stocks with more exposure to the broad market. Since the Beta factor ranks a stock’s sensitivity to our global cap-weighted market index, it’s an obvious target for raising the aggregate beta of any strategy relative to a cap-weighted benchmark. Recall that within the BCA Score ranking system, lower beta stocks are assigned a higher score. Therefore, if we filter out stocks scoring highly on beta as part of our stock selection process, we can increase our overall exposure to the broad market. As further empirical evidence that targeting the Beta factor could be beneficial for large firms, we observed that post GFC (2009-03-31 to present), the top decile of low beta stocks underperformed the MSCI World Index on average (Chart 1). This is characteristic of a prolonged bull market where the downside protection offered by Beta does not come into play as frequently. Despite this, over the same period the Sharpe ratio of the Beta top decile surpassed that of the MSCI World index due to a constant and steady growth (Chart 2). Chart 1Beta Across Cycles
Strategy Analysis: Augmenting Your Portfolio With Beta
Strategy Analysis: Augmenting Your Portfolio With Beta
Chart 2Recent Beta Performance
Strategy Analysis: Augmenting Your Portfolio With Beta
Strategy Analysis: Augmenting Your Portfolio With Beta
Implementing Higher Beta Portfolios As mentioned above, our goal is to increase the aggregate beta of our BCA Score strategies to capture more upside in the broad market. To achieve this when backtesting EA strategies, we can add a Beta score entry filter in “Step 3 – Selection Strategy” of a backtest configuration (Figure 1). The filter shown in Figure 1 will ensure that stocks in the top 30% by Beta score (ranked globally) will not enter the portfolio. Figure 1Beta Score Filtering
Strategy Analysis: Augmenting Your Portfolio With Beta
Strategy Analysis: Augmenting Your Portfolio With Beta
To test the effectiveness of this filter, we created a sample large-cap strategy using the EA Backtest module, and swept through different values of the Beta entry condition ranging from 50% to 100%. The base strategy is equal-weighted, rebalanced monthly, and selects the top 100 by BCA Score from a universe of the top 500 global stocks by market cap. The portfolio aims to be representative of a general strategy that picks a subset of the top ranking stocks from a pool of large-cap firms. The key statistics from the portfolio simulations are presented in Table 1. We can interpret the results as follows: Adding a Beta score entry filter with decreasing threshold increases the aggregate beta of the portfolio relative to benchmark. Higher beta portfolios have lower Sharpe ratios but more consistent outperformance when the benchmark is up (Upside Capture). Lower beta portfolios have higher Sharpe ratios but more consistent outperformance when the benchmark is down (Downside Capture). The cumulative performance (CAGR) of the base portfolio (without beta restrictions) is still highest over the entire sample, however, high beta portfolios have had stronger returns during the latest market cycle. Table 1Beta Breakdown*
Strategy Analysis: Augmenting Your Portfolio With Beta
Strategy Analysis: Augmenting Your Portfolio With Beta
Overall, we can conclude that allowing for higher beta stocks to enter the portfolio has been beneficial for large-cap portfolios over the last ten years. Investors in this space who wish to achieve better tracking relative to cap-weighted indices may consider tilting their portfolios in this direction using a Beta filter when screening or building strategies. In support of this, BCA Research’s 12-month outlook on equity markets is bullish as monetary policy remains easy, lockdowns continue to ease, and inflation shows signs of cresting. On the other hand, we caution that straying too far from the defensive nature of the model increases the risk of heavy drawdowns during market corrections. Current risks to the equity market include stretched valuations in the S&P500, the collapse of Evergrande in China, and the risk that inflation does not subside as expected. Considering these two sides, it is therefore sensible to take a middle-of-the-road approach when using Beta to take on more market exposure in a screen or stock strategy. Footnotes 1 The effect of company size on factor returns is demonstrated in Chart 1 of the Documentation section: https://ea.bcaresearch.com/#/docs/performance 2 The benchmark capture ratios can be accessed via the “Performance” tab when viewing backtest results.
Weekly Performance Update For the week ending Thu Sep 16, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio
Market Monitor (Sep 16, 2021)
Market Monitor (Sep 16, 2021)
Total Weekly Return BCA US Portfolio S&P500 TRI -0.24% -0.40% Top Contributors AN:US EOG:US GOLF:US KOF:US SAFM:US Weekly Return 34 bps 30 bps 8 bps 5 bps 2 bps Top Detractors CQP:US MRNA:US UGI:US PFE:US DUK:US Weekly Return -14 bps -11 bps -11 bps -10 bps -9 bps Top Prospects BRK.A:US SC:US MPLX:US ESGR:US PFE:US BCA Score 96.34% 95.76% 95.14% 94.82% 94.64% BCA Canada Portfolio
Market Monitor (Sep 16, 2021)
Market Monitor (Sep 16, 2021)
Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 0.02% -0.43% Top Contributors TOU:CA PXT:CA AND:CA ECN:CA IMO:CA Weekly Return 45 bps 21 bps 20 bps 15 bps 13 bps Top Detractors CFP:CA CRON:CA LNR:CA TOY:CA L:CA Weekly Return -24 bps -13 bps -12 bps -12 bps -12 bps Top Prospects LNF:CA ELF:CA WIR.UN:CA CFP:CA RUS:CA BCA Score 97.84% 96.35% 96.27% 95.53% 94.44% BCA UK Portfolio
Market Monitor (Sep 16, 2021)
Market Monitor (Sep 16, 2021)
Total Weekly Return BCA UK Portfolio FTSE 100 TRI -1.75% 0.05% Top Contributors ROSN:GB EMIS:GB IMB:GB SVT:GB KLR:GB Weekly Return 18 bps 15 bps 5 bps 4 bps 4 bps Top Detractors MXCT:GB FXPO:GB CNE:GB TRMR:GB AAL:GB Weekly Return -48 bps -37 bps -27 bps -22 bps -21 bps Top Prospects SVST:GB GLTR:GB BPCR:GB FDM:GB VVO:GB BCA Score 99.58% 98.43% 98.11% 97.85% 97.70% BCA Eurozone Portfolio
Market Monitor (Sep 16, 2021)
Market Monitor (Sep 16, 2021)
Total Weekly Return BCA EMU Portfolio MSCI EMU TRI -0.84% -0.39% Top Contributors HLAG:DE OMV:AT RDSA:NL MELE:BE IRE:IT Weekly Return 32 bps 18 bps 11 bps 10 bps 2 bps Top Detractors TTALO:FI BSL:DE CDI:FR TL5:ES FSKRS:FI Weekly Return -33 bps -20 bps -18 bps -13 bps -13 bps Top Prospects FSKRS:FI STR:AT LOG:ES BFF:IT EDNR:IT BCA Score 99.53% 99.47% 98.58% 96.15% 96.08% BCA Japan Portfolio
Market Monitor (Sep 16, 2021)
Market Monitor (Sep 16, 2021)
Total Weekly Return BCA Japan Portfolio TOPIX TRI 0.33% 1.23% Top Contributors 5021:JP 4966:JP 5020:JP 8334:JP 3132:JP Weekly Return 16 bps 15 bps 11 bps 11 bps 11 bps Top Detractors 7244:JP 3290:JP 4326:JP 8117:JP 9543:JP Weekly Return -26 bps -13 bps -11 bps -9 bps -8 bps Top Prospects 6960:JP 9882:JP 9436:JP 4544:JP 2208:JP BCA Score 99.93% 99.33% 99.11% 98.49% 98.22% BCA Hong Kong Portfolio
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Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI -3.36% -4.01% Top Contributors 857:HK 1735:HK 2686:HK 6118:HK 506:HK Weekly Return 42 bps 21 bps 14 bps 8 bps 5 bps Top Detractors 710:HK 836:HK 991:HK 1277:HK 323:HK Weekly Return -80 bps -37 bps -34 bps -32 bps -23 bps Top Prospects 1277:HK 98:HK 316:HK 6868:HK 323:HK BCA Score 100.00% 99.50% 98.59% 98.35% 98.31% BCA Australia Portfolio
Market Monitor (Sep 16, 2021)
Market Monitor (Sep 16, 2021)
Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 1.24% 1.36% Top Contributors YAL:AU BFG:AU MMS:AU SXY:AU SGF:AU Weekly Return 32 bps 27 bps 25 bps 16 bps 15 bps Top Detractors BXB:AU SDG:AU AGL:AU SGLLV:AU CDA:AU Weekly Return -27 bps -17 bps -11 bps -10 bps -7 bps Top Prospects SDG:AU GRR:AU PIC:AU PL8:AU RIC:AU BCA Score 99.91% 99.55% 99.38% 98.89% 98.59%
Highlights The odds of a stronger recovery in EM oil demand next year are rising, as vaccines using mRNA technology are manufactured locally and become widely available.1 This will reduce local lock-down risks in economies relying on less efficacious COVID-19 vaccines – or lacking them altogether – thereby increasing mobility, economic activity and oil demand. Our global crude oil balances estimates are little changed to the end of 2023, which leaves our price expectations mostly unchanged: 4Q21 Brent prices are expected to average $70.50/bbl, while 2022 and 2023 prices average $75 and $80/bbl, respectively (Chart of the Week). The balance of risks to the crude oil market remain to the upside in our estimation. In addition to a higher likelihood of better-than-expected EM demand growth, we expect OPEC 2.0 production discipline to hold, and for the price-taking cohort outside the coalition to continue prioritizing investors' interests. We remain long commodity index exposure – S&P GSCI and COMT – and, at tonight's close, will be getting long the DFA Dimensional Emerging Core Equity Market ETF (DFAE) on the back of increasing local mRNA vaccine production in EM economies. Feature As local production of COVID-19 vaccines employing mRNA technology spreads throughout EM economies, the odds of a stronger-than-expected recovery in oil demand next year will increase. The buildout of production and distribution facilities for this technology is progressing quickly in Asia – e.g., Chinese mRNA tech joint ventures are expected to be in production mode in 4Q21 – Latin America, Africa, and the Middle East.2 Accelerated availability of more efficacious vaccines globally will address the "fault lines" identified by the IMF in its July 2021 update. In that report, the Fund notes a major downside risk to its global GDP growth expectation of 6% this year remains slower-than-expected vaccine rollouts to emerging and developing economies.3 The other major risk identified by the Fund is too-rapid a winddown of policy support in DM economies, which would lead to tighter financial conditions globally. Our global demand expectation is driven by GDP estimates from the IMF and World Bank. The implication of that assumption is the powerful recovery in DM oil demand seen this year will slow while EM demand picks up next year (Chart 2). We proxy DM oil demand with OECD oil consumption and EM demand with non-OECD consumption. We continue to expect overall oil demand to recover by just over 5.0mm b/d this year and 4.4mm b/d next year (Table 1). Chart of the WeekOil Forecasts Hold Steady
Oil Forecasts Hold Steady
Oil Forecasts Hold Steady
Chart 2Higher EM Oil Demand Expected in 2022
Higher EM Oil Demand Expected in 2022
Higher EM Oil Demand Expected in 2022
Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) To Dec23
Upside Price Risk Rises For Crude
Upside Price Risk Rises For Crude
Global Oil Supply To Remain Steady Hurricane Ida will have removed ~ 30mm barrels of US offshore oil output by the time losses are fully tallied, based on IEA estimates. Even so, in line with the US EIA, we expect offshore US oil production will recover from the damage caused by the storm in 4Q21 and be back at ~ 1.7mm b/d on average over the quarter. This will allow oil prices to ease slightly from current elevated levels over the balance of the year. Inland, US shale-oil output remains on track to average ~ 9.06mm b/d this year, 9.55mmb/d in 2022 and 9.85mmb/d in 2023, in our modeling (Chart 3). We expect production in the Lower 48 states of the US to remain mostly steady going forward. Production from finishing drilled-but-uncompleted (DUCs) shale-oil wells is the lowest it's been since 2013. Output from these wells will remain relatively low for the rest of the year. This supply was developed during the COVID-19 pandemic, as it was cheaper to bring on than new drilling. For 2022 and 2023 overall, our model points to a slow build-up in US shale-oil output as drilling increases. Going into 2022, we expect continued production discipline from OPEC 2.0, and for the coalition to continue to manage output in line with actual demand it sees from its customers. The 400k b/d being returned monthly to the market over August 2021 to mid-2022 will accommodate demand increases. However, it will be monitored closely in the event demand fails to materialize, as has been OPEC 2.0's wont over the course of the pandemic. Chart 3US Shale-Oil Output Mostly Stable
US Shale-Oil Output Mostly Stable
US Shale-Oil Output Mostly Stable
Oil Markets To Remain Balanced We see markets remaining balanced to the end of 2023, with OPEC 2.0 maintaining its production-management strategy – keeping the level of supply just below the level of demand – and the price-taking cohort led by US shale-oil producers remaining focused on maintaining margins so as to provide competitive returns to investors. On the demand side, EM growth will pick up as DM growth slows. Given our fundamental view, global crude oil balances estimates are little changed to the end of 2023 (Chart 4). This allows inventories to continue to draw this year and next, then to slowly rebuild as production increases toward the end of 2023 (Chart 5). Falling inventories will keep the Brent forward curve backwardated – i.e., prompt-delivery oil will trade higher than deferred-delivery oil. Chart 4Markets Remain Balanced...
Markets Remain Balanced...
Markets Remain Balanced...
Chart 5...And Oil Inventory Continues To Draw
...And Oil Inventory Continues To Draw
...And Oil Inventory Continues To Draw
The backwardated forward curve means OPEC 2.0 producers will continue to realize higher delivered prices on their crude oil than the marginal shale-oil producer, which hedges its production 1-2 years forward to stabilize revenue. This is the primary benefit to the member states in the producer coalition: a backwardated curve pricing closer to marginal cost limits the amount of revenue available to shale-oil producers, and thus restrains output to that which is profitable at the margin. Investment Implications Our supply-demand outlook keeps our price expectations mostly unchanged from last month's forecast. We expect 4Q21 Brent prices to average $70.50/bbl, while 2022 and 2023 prices average $75 and $80/bbl, respectively, as can be seen in the Chart of the Week. WTI prices will continue to trade $2-$4/bbl below Brent over this interval. With fundamentals continuing to support a backwardated forward curve in Brent and WTI, we continue to favor long commodity-index exposure, which benefits from this structure.4 Therefore, we remain long the S&P GSCI and the COMT ETF, which is an optimized version of the GSCI that concentrates on positioning in backwardated futures contracts. The upside risk to oil prices resulting from increasing local production of mRNA vaccines in EM economies that had relied on less efficacious vaccines undoubtedly will increase mobility and raise oil demand, if, as appears likely, the impact of this localization is realized in the near term. This also could boost commodity demand generally, if it allows trade and GDP growth to accelerate in EM economies, which supports our long commodity-index view. The rollout of mRNA technology into EM economies also suggests EM GDP growth could increase at the margin with locally produced mRNA vaccines becoming more available. This would redound to the benefit of trade and economic activity generally.5 It also could help unsnarl the movement of goods globally. The wider implications of a successful expansion of locally produced mRNA vaccines leads us to recommend EM equity exposure on a tactical basis. At tonight's close, we will be getting long the DFA Dimensional Emerging Core Equity Market ETF (DFAE). As this is tactical, we will use a tight stop (10%) for this recommendation. Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish Natural gas demand is surging globally. Record-breaking heat waves in the US are driving demand for gas-fired generation required to meet space-cooling demand. In addition, in the June-August period, the US saw record LNG exports. Europe and Asia are competing for the fuel as both prepare for winter. Brazil also has been a strong bid for LNG, as drought there has reduced hydropower supplies. In Europe, natural gas inventories were drawn hard this past winter as LNG supplies were bid away to Asia to meet space-heating demand. This is keeping Europe well bid now as winter approaches (Chart 6). The US Climate Prediction Center last week gave 70-80% odds of a second La Niña for the Northern Hemisphere winter. Should it materialize, it could again drive cold artic air into their markets, as it did last winter, and push natgas demand higher. Our recommendation to get long 1Q22 $5.00/MMBtu calls vs short 1Q22 $5.50/MMBtu calls last week was up 17% as of Tuesday's close. We remain long. Base Metals: Bullish The slide in iron ore prices from its ~ $230/MT peak earlier this year can be attributed to weak Chinese demand, and the possibility of its persistence through the winter and into next year (Chart 7). The world’s largest steel-producing nation is aiming to limit steel output to no higher than 2020 levels, in a bid to reduce industrial pollution. According to mining.com, provincial governments have directly asked local steel mills to curb output. Regulation in this sector in China will continue to reduce prices of iron ore, a key raw material in steel production. Precious Metals: Bullish The lower-than-expected reading on the US core CPI earlier this week weighed on the USD, and propelled gold prices above the $1,800/oz mark. While markets expected lower consumer prices for August to diminish the Fed’s resolve to taper asset purchases by year-end, we do not think the lower month-on-month CPI number will delay tapering. The timing of the Fed's initial rate hike – expected by markets to occur after the tapering of the central bank's asset-purchase program – will depend on the US labor force reaching "maximum employment." According to BCA Research's US Bond Strategy, this criterion will be met in late-2022 or early-2023. Low-interest rates, coupled with persistent inflation until then, will be bullish for gold prices. Chart 6
Upside Price Risk Rises For Crude
Upside Price Risk Rises For Crude
Chart 7
CHINA IMPORTED IRON ORE GOING DOWN
CHINA IMPORTED IRON ORE GOING DOWN
Footnotes 1 Please see Everest to bring Canadian biotech's potential Covid shots to China, other markets published on September 13, 2021 by indiatimes.com. 2 Examples of this include Brazil's Eurofarma to make Pfizer COVID-19 shots for Latin America, published by reuters.com; Biovac Institute to be first African company to produce mRNA vaccines, published be devex.com; and mRNA Vaccines Mark a New Era in Medicine, posted by supertrends.com. The latter report also discusses the application of mRNA technology to other diseases like malaria. 3 Please see Fault Lines Widen in the Global Recovery published 27 July 2021 by the Fund. 4 Backwardation is the source of roll yield for long-index exposure. This is due to the design of these index products, which buy forward then – in backwardated markets – roll out of futures contract as they approach physical delivery at a higher level and re-establish their exposure in a deferred contract. 5 The lower realized efficacy of Sinopharm and Sinovac COVID-19 vaccines and high reinfection rates in economies using these vaccines are one of the key risks to our overall bullish commodity view. Please see Assessing Risks To Our Commodity Views, which we published on July 8, 2021. It is available at ces.bcaresearch.com. Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades
Weekly Performance Update For the week ending Thu Sep 09, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio
Market Monitor (Sep 9, 2021)
Market Monitor (Sep 9, 2021)
Total Weekly Return BCA US Portfolio S&P500 TRI -0.82% -0.95% Top Contributors MRNA:US ESGR:US GOLF:US IT:US CQP:US Weekly Return 43 bps 9 bps 8 bps 4 bps 2 bps Top Detractors CLH:US MMM:US SCCO:US SAFM:US UGI:US Weekly Return -14 bps -14 bps -11 bps -11 bps -10 bps Top Prospects BRK.A:US ESGR:US PFE:US TX:US SC:US BCA Score 96.87% 96.51% 96.24% 95.65% 95.55% BCA Canada Portfolio
Market Monitor (Sep 9, 2021)
Market Monitor (Sep 9, 2021)
Total Weekly Return BCA Canada Portfolio S&P/TSX TRI -0.56% -0.39% Top Contributors TOU:CA ELF:CA AND:CA CFP:CA L:CA Weekly Return 23 bps 19 bps 12 bps 12 bps 6 bps Top Detractors CS:CA PXT:CA TOY:CA CRON:CA LNF:CA Weekly Return -25 bps -17 bps -16 bps -15 bps -12 bps Top Prospects RUS:CA LNF:CA WIR.UN:CA CS:CA PXT:CA BCA Score 99.13% 98.53% 96.83% 95.17% 94.04% BCA UK Portfolio
Market Monitor (Sep 9, 2021)
Market Monitor (Sep 9, 2021)
Total Weekly Return BCA UK Portfolio FTSE 100 TRI -0.73% -1.93% Top Contributors NFC:GB VTC:GB AGRO:GB MXCT:GB NVTK:GB Weekly Return 18 bps 13 bps 12 bps 10 bps 9 bps Top Detractors INCH:GB CCH:GB SVST:GB GLTR:GB KETL:GB Weekly Return -19 bps -17 bps -13 bps -9 bps -9 bps Top Prospects SVST:GB BPCR:GB VVO:GB FDM:GB CKN:GB BCA Score 99.26% 97.45% 96.94% 96.41% 96.39% BCA Eurozone Portfolio
Market Monitor (Sep 9, 2021)
Market Monitor (Sep 9, 2021)
Total Weekly Return BCA EMU Portfolio MSCI EMU TRI -0.08% -1.23% Top Contributors BSL:DE HLAG:DE VETO:FR ALTA:FR SOLV:BE Weekly Return 37 bps 18 bps 10 bps 8 bps 4 bps Top Detractors SON:PT TUB:BE BEKB:BE CAF:FR ALB:ES Weekly Return -12 bps -11 bps -10 bps -10 bps -9 bps Top Prospects STR:AT LOG:ES HLAG:DE IPS:FR EDNR:IT BCA Score 99.25% 98.98% 97.88% 95.40% 94.66% BCA Japan Portfolio
Market Monitor (Sep 9, 2021)
Market Monitor (Sep 9, 2021)
Total Weekly Return BCA Japan Portfolio TOPIX TRI 2.19% 4.10% Top Contributors 9432:JP 4326:JP 4471:JP 7244:JP 9543:JP Weekly Return 20 bps 19 bps 15 bps 15 bps 15 bps Top Detractors 3290:JP 6960:JP 3468:JP 4966:JP 3459:JP Weekly Return -9 bps -4 bps -4 bps -3 bps -2 bps Top Prospects 6960:JP 4694:JP 9436:JP 4544:JP 9882:JP BCA Score 99.86% 99.00% 98.58% 98.48% 98.44% BCA Hong Kong Portfolio
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Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 2.75% -1.33% Top Contributors 710:HK 2686:HK 6118:HK 1277:HK 836:HK Weekly Return 81 bps 70 bps 29 bps 25 bps 24 bps Top Detractors 1735:HK 2232:HK 590:HK 98:HK 182:HK Weekly Return -25 bps -16 bps -16 bps -12 bps -7 bps Top Prospects 1277:HK 98:HK 691:HK 6868:HK 435:HK BCA Score 100.00% 99.44% 99.15% 98.19% 97.91% BCA Australia Portfolio
Market Monitor (Sep 9, 2021)
Market Monitor (Sep 9, 2021)
Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI -1.88% -1.22% Top Contributors CAJ:AU SOL:AU BSE:AU YAL:AU AST:AU Weekly Return 26 bps 19 bps 16 bps 7 bps 6 bps Top Detractors SWM:AU OCL:AU HSN:AU SGF:AU CDA:AU Weekly Return -30 bps -28 bps -27 bps -25 bps -21 bps Top Prospects GRR:AU SDG:AU PIC:AU PL8:AU BHP:AU BCA Score 99.73% 99.69% 99.57% 99.42% 99.03%
Weekly Performance Update For the week ending Thu Sep 02, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio
Market Monitor (Sep 2, 2021)
Market Monitor (Sep 2, 2021)
Total Weekly Return BCA US Portfolio S&P500 TRI 1.49% 1.54% Top Contributors AMN:US MPLX:US CQP:US PSA:US CBRE:US Weekly Return 21 bps 17 bps 17 bps 14 bps 14 bps Top Detractors GOLF:US ESGR:US NUE:US AN:US TGT:US Weekly Return -9 bps -8 bps -7 bps -7 bps -4 bps Top Prospects ESGR:US TX:US SC:US BRK.A:US PFE:US BCA Score 98.20% 97.97% 97.36% 96.72% 96.04% BCA Canada Portfolio
Market Monitor (Sep 2, 2021)
Market Monitor (Sep 2, 2021)
Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 1.76% 1.48% Top Contributors CTS:CA PXT:CA CS:CA GIB.A:CA TOU:CA Weekly Return 44 bps 41 bps 22 bps 20 bps 19 bps Top Detractors RUS:CA AND:CA TOY:CA NWC:CA WIR.UN:CA Weekly Return -17 bps -13 bps -9 bps -8 bps -4 bps Top Prospects RUS:CA WIR.UN:CA LNF:CA HCG:CA PXT:CA BCA Score 99.37% 96.68% 95.39% 94.62% 94.14% BCA UK Portfolio
Market Monitor (Sep 2, 2021)
Market Monitor (Sep 2, 2021)
Total Weekly Return BCA UK Portfolio FTSE 100 TRI 3.18% 0.74% Top Contributors MXCT:GB NVTK:GB NFC:GB INDV:GB ROSN:GB Weekly Return 59 bps 36 bps 23 bps 19 bps 18 bps Top Detractors VTC:GB EMIS:GB BPCR:GB AAF:GB POLR:GB Weekly Return -10 bps -2 bps -1 bps -1 bps 1 bps Top Prospects SVST:GB CKN:GB FXPO:GB ROSN:GB VVO:GB BCA Score 99.31% 98.34% 96.50% 96.41% 96.39% BCA Eurozone Portfolio
Market Monitor (Sep 2, 2021)
Market Monitor (Sep 2, 2021)
Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 1.18% 1.30% Top Contributors ALTA:FR FSKRS:FI BSL:DE FDJ:FR CDI:FR Weekly Return 25 bps 21 bps 18 bps 17 bps 15 bps Top Detractors STO3:DE FLUX:BE LEG:DE TL5:ES SOLV:BE Weekly Return -23 bps -11 bps -8 bps -7 bps -6 bps Top Prospects HLAG:DE LOG:ES STR:AT ALB:ES SOLV:BE BCA Score 99.13% 98.84% 97.66% 96.37% 95.01% BCA Japan Portfolio
Market Monitor (Sep 2, 2021)
Market Monitor (Sep 2, 2021)
Total Weekly Return BCA Japan Portfolio TOPIX TRI 1.22% 2.52% Top Contributors 1417:JP 8117:JP 4047:JP 9432:JP 4326:JP Weekly Return 19 bps 18 bps 15 bps 15 bps 14 bps Top Detractors 4694:JP 6960:JP 6676:JP 7994:JP 3290:JP Weekly Return -11 bps -10 bps -7 bps -6 bps -4 bps Top Prospects 6960:JP 4694:JP 4544:JP 7994:JP 6676:JP BCA Score 99.76% 98.74% 98.47% 98.44% 98.28% BCA Hong Kong Portfolio
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Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 4.57% 2.78% Top Contributors 2686:HK 1967:HK 710:HK 316:HK 1277:HK Weekly Return 92 bps 75 bps 59 bps 40 bps 35 bps Top Detractors 329:HK 2232:HK 1735:HK 289:HK 98:HK Weekly Return -31 bps -17 bps -12 bps -10 bps -5 bps Top Prospects 1277:HK 98:HK 1606:HK 691:HK 323:HK BCA Score 100.00% 99.77% 98.52% 98.31% 98.01% BCA Australia Portfolio
Market Monitor (Sep 2, 2021)
Market Monitor (Sep 2, 2021)
Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.80% 0.68% Top Contributors YAL:AU NHC:AU SWM:AU MMS:AU SDG:AU Weekly Return 34 bps 29 bps 20 bps 16 bps 16 bps Top Detractors VRT:AU GRR:AU BLX:AU AGL:AU CAJ:AU Weekly Return -21 bps -17 bps -15 bps -14 bps -11 bps Top Prospects GRR:AU PIC:AU SDG:AU PL8:AU CAJ:AU BCA Score 99.66% 99.53% 99.45% 99.11% 99.04%