BCA Indicators/Model
EM corporate credit spreads are too tight according to our fair value model. Such expensive valuations in conjunction with a strong sell signal from our Corporate Financial Health (CFH) Monitor signify that the EM corporate credit market is very vulnerable. The CFH Monitor currently heralds a major relapse in EM risk assets. A new relative value recommendation: long Russian and Chilean / short off-shore China corporate credit.
The DM Country Model favored Italy again at the expense of Spain mostly on liquidity change. Japan and the U.K. remain the largest two underweights.
We reveal what our most-trusted leading indicators are predicting about the major economies, and end with a provocative conclusion.
In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.
Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.
The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.
The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.
The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.
The Brexit vote has ended the reflation trade, but does not represent a "Lehman moment" either. Stick close to benchmark in terms of broad asset allocation, and watch European bank CDS for signs that another financial crisis is brewing.
The median voter theory is one of the few genuine theories of political science. It assumes that voters have limited policy priorities and that politicians want power. Therefore the latter will adjust their stances to satisfy the largest swath of voters. The median voter in the Anglo-Saxon world is shifting to the left, and regardless of what happens in the Brexit referendum or the U.S. election, this shift will be the most consequential development for markets.