Economy

Your feedback is important to us. Please take our client survey today Highlights Portfolio Strategy An easy Fed, the drubbing in the US dollar, the opening up of the global economy, poor pharma operating metrics and the specter of a “Blue Wave” more than offset the likelihood of a COVID-19 vaccine and oversold technicals, and compel us to cut pharma exposure below benchmark. This downgrade of the heavyweight pharma index also pushes the S&P health care sector down to a neutral position. Recent Changes Downgrade the S&P pharmaceuticals index to underweight, today. Trim the S&P health care sector down to a benchmark allocation, today. Table 1 Feature On the eve of the election, the SPX oscillated violently last week as it became evident that there will be no agreement on a bipartisan fiscal package. Thus, the odds are rising of a mega fiscal package next year irrespective of the election outcome. The longer politicians wait the larger the stimulus bill will end up being. Realistically now a fresh fiscal impulse is pushed out to late-January at the earliest, casting a dark cloud over the current quarter’s economic and profit growth prospects.   In mid-October we highlighted that positioning remained stretched in both VIX and S&P 500 e-mini futures, which warned that investors were prematurely betting on subsiding volatility. Similarly, we cautioned that VIX options activity corroborated the stretched positioning message as investors were piling into VIX puts and neglecting to buy any election protection in the form of VIX calls. The final blow came early last week when the equity vol curve inverted with the VIX spiking north of 40 and implying that the SPX would move by +/- 12% in the next 30 days. Given so much fear priced in the VIX, last Thursday we decided to close our election protection in the form of VIX December 16, 2020 expiry futures that we held since our July 27 Special Report we penned with our sister Geopolitical Strategy on the rising odds of a contested US election. Our view remains that the SPX could glide lower into the November election before rallying into year-end courtesy of receding election and fiscal policy uncertainties. Nevertheless, at the risk of getting overly bearish a few offsetting observations are in order. While there is a chance that the VIX will continue to roar as it did early in the year and push the equity vol curve deeper in backwardation, our sense is that the correction that commenced in early September is close to running its course. Historically, Chart 1 shows that the VIX curve inversion is typically short-lived and more often than not serves as a launchpad for the SPX. Chart 1Correction Enters Third Month With regard to market internals, a flurry of M&A activity has propelled the Philly SOX index to all-time highs in absolute terms and to nineteen-year highs versus the SPX. IPO activity has also resumed and the Renaissance IPO exchange trade fund is on a tear breaking out recently to uncharted territory. Moreover, the SPX advance/decline line is also probing all-time highs and signaling increased participation beyond the top 5 tech titans (Chart 2). While the Fed has been a bystander of late – trying to exert some pressure on Congress to pass a fresh stimulus package – and the fiscal circus continues unabated in Washington D.C., both the money supply release and the American Association on Individual Investors confirm that a lot of dry powder remains on the sidelines. The implication is that as election uncertainty recedes then this idle cash courtesy of the sloshing liquidity will make its way through the markets. In other words decreasing cash balances push the SPX higher and vice versa (Chart 3). Chart 2Market Internals: A Few Rays Of Light Chart 3Lots Of Dry Powder Meanwhile, following up from last week’s debt discussion we delve deeper into the non-financial corporate sector’s debt profile. The pandemic has pushed non-financial business debt to an extreme almost on a par with nominal GDP (top panel, Chart 4). The big difference this cycle is that, according to Moody’s, subordinated debt that has defaulted sports a recovery rate in the teens, a far cry from previous recessionary troughs (second panel, Chart 4). The overall junk bond recovery rate is near 25 cents on the dollar plumbing historical lows (a recent Bloomberg article highlighted that COVID-19 has ushered in this “new era of US bankruptcies” with ultra-low recovery rates).1 The risk remains that the default rate will continue to rise (bottom panel, Chart 4): the longer the fiscal stimulus package takes to arrive the higher the bankruptcies will be.   Importantly, the deep cyclicals (tech, industrials, materials and energy) net debt-to-EBITDA ratio has crossed above 1.5x during the recession on the back of cash flow ails. In fact cyclicals have been paying down net debt in absolute terms during the pandemic (bottom panel, Chart 5). Chart 4Beware Low Recovery Rates Chart 5Debt Saddled Defensives In marked contrast, the defensives (health care, consumer staples, utilities and telecom services) net debt-to-EBITDA ratio is hovering near 3x, as these debt saddled sectors have not been able to pay down net debt. Not only is net debt roughly $2tn, but it also comprises 50% of the broad market’s net debt at a time when the market cap weight is close to 30% (Chart 5). Taken together, the relative debt profile clearly favors cyclicals at the expense of defensives and we continue to recommend a cyclicals versus defensives portfolio bent. One neglected part of the Baker, Bloom and Davis policy uncertainty has been the trade-related uncertainty. The pandemic has put the trade dispute in the back burner. Moreover, the odds remain high of a Biden win; at the margin, a Democratic President will be less hawkish on trade and will try to deescalate global trade tensions. This backdrop is a de facto positive for cyclicals/defensives, especially given our view of a reopening of the global economy in 2021 (Chart 6). This week we continue to augment the cyclical/defensive bent of our portfolio by taking a defensive sector down a notch. Chart 6Cyclicals Benefit From Dwindling Trade Uncertainty Comatose Big Pharma shares broke down recently and we are compelled to downgrade exposure to underweight on the eve of the US election. While a short term reflex bounce may be in the cards, we would sell that strength as relative share prices are teetering and are on the verge of giving up 25 years of relative returns (top panel, Chart 7). Stiff macro headwinds, tough operating metrics and hawkish political rhetoric more than offset positive COVID-19 vaccine-related news.  On the macro front, the Fed’s ZIRP bodes ill for defensive pharma equities. The Fed was uncharacteristically quick this recession to drop rates to the lower zero bound to reflate the economy. As a result, safe haven equities, Big Pharma included, typically trail the broad market as the economy gets out of the ER and into the recovery room (middle & bottom panels, Chart 7).  Importantly, relative pharmaceutical profits are highly counter cyclical: they rise with the onset of recession and collapse as the economy stands back on its own two feet. Currently, as the COVID-19 hit to the world economy has transitioned to a V-shaped recovery, the reopening of the economy into the New Year will continue to knock the wind out of relative pharma profitability (global manufacturing PMI shown inverted, middle panel, Chart 8). Chart 7A Tough Pill To Swallow Chart 8Sell The Pharma Counter-Cyclicality Similarly, an appreciating greenback has historically been synonymous with pharma outperformance and vice versa (third panel, Chart 8). Keep in mind, Big Pharma make the lion’s share of their profits domestically further cementing the positive correlation with the US dollar. This local profit sourcing represents one of the main reasons why politicians on both sides of the aisle are after domestic pharma profits (more on this below). Worrisomely and likely tied to the domestic nature of the industry’s profit extraction, the debasing of the US dollar fails to provide any export relief. In fact, exports have been historically positively correlated with the greenback (bottom panel, Chart 8). Pharma prices are on the cusp of contracting. Importantly, President Trump’s late-July executive order “to allow importation of certain prescription drugs from Canada”2  among other provisions is a direct blow to the profit prospects of Big Pharma (second panel, Chart 9). Other operating factors also weigh on pharma earnings. Industry shipments have risen to a level that has marked prior peak growth rates. Any letdown on the demand side coupled with the recent inventory build, will lead to pricing power losses. Tack on accelerating productivity losses despite recovering pharma industrial production and factors are falling into place for a relative profit driven underperformance phase (Chart 9). With regard to the election outcome, a Biden win accompanied by a Senate flip to the Democrats would be the worst possible outcome for the pharmaceutical industry, as we posited in our recent Special Report penned with our sister Geopolitical Strategy services on sector implication of a “Blue Trifecta”, and reiterate today (Chart 10). Chart 9Pricing Power Blues Nevertheless, we are cognizant that definitive news of a COVID-19 vaccine will likely lift Big Pharma, but only temporarily, as cyclical forces will more than offset the positive vaccine news. Finally, with regard to valuations and technicals, pharma is not offering compelling value but rather is a value trap and we would use any reflex rebound to lighten up exposure to this defensive industry (Chart 11). Chart 10Heightened “Blue Sweep” Risk Chart 11Value Trap Netting it all out, an easy Fed, the drubbing in the US dollar, the opening up of the global economy, poor pharma operating metrics and the specter of a “Blue Wave” more than offset the benefits of a COVID-19 vaccine and oversold technicals. Bottom Line: Downgrade the S&P pharmaceuticals index to underweight today. The ticker symbols for the stocks in this index are: BLBG – S5PHARX, JNJ, PFE, MRK, LLY, BMY, ZTS, CTLT, MYL, PRGO. A Few Words On Health Care The Big Phama downgrade to underweight also pushes the S&P health care sector to a benchmark allocation from a previously modest overweight stance. This leaves the S&P medical equipment index as the sole overweight in this defensive sector that enjoys cyclical and structural tailwinds (especially in emerging markets that are instituting the health care safety nets the developed markets already enjoy) more than offsetting the safe haven characteristics that typically overshadow health care outfits (second panel, Chart 12). Moreover, we are putting the S&P health care sector on downgrade alert as we reckon most of the positive profit drivers are already reflected in cycle high relative profit growth figures and are at major risk of deflating if our thesis of a global reopening of the economy takes shape in the New Year. Our relative macro driven EPS growth models corroborate that earnings are at heightened risk of major disappointment next year (Chart 13). Chart 12Stick With Health Equipment Chart 13Put The S&P Health Care Sector On Downgrade Alert Bottom Line: Trim the S&P health care sector to neutral today and also put it on downgrade watch.   Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com   Footnotes 1     https://www.bloomberg.com/news/articles/2020-10-26/bond-defaults-deliver-99-losses-in-new-era-of-u-s-bankruptcies 2     https://www.whitehouse.gov/presidential-actions/executive-order-increasing-drug-importation-lower-prices-american-patients/   Current Recommendations Current Trades Strategic (10-Year) Trade Recommendations Size And Style Views October 26, 2020 Favor small over large caps July 27, 2020 Overweight cyclicals over defensives June 11, 2018 Long the BCA Millennial basket  The ticker symbols are: (AAPL, AMZN, UBER, HD, LEN, MSFT, NFLX, SPOT, TSLA, V). January 22, 2018 Favor value over growth

Highlights Outsized daily moves were the rule for the S&P 500 last week as surging COVID-19 infections and tightening election polls highlighted the uncertain road ahead: Stocks sold off and the VIX spiked as the US set new daily infection records, European countries imposed a new round of strict lockdowns and narrowing polls pointed to increasing odds of a messy election outcome. We continue to believe more fiscal stimulus is needed, but households are doing just fine in the aggregate, … : Apartment rent collections and consumer credit performance have yet to betray any signs of post-CARES Act weakness, and the personal income report showed that aggregate household financial positions improved for a sixth straight month in September. … and studies focusing on households at the lower end of the income and wealth distributions do not reveal signs of distress: Payday loan transaction volumes have collapsed despite the recession and an analysis of Chase Bank customer activity showed that the unemployed received enough aid to double their savings and increase consumption while the CARES Act taps were open. Feature We will be holding a webcast next Monday, November 9th at 10:00 a.m. Eastern time in lieu of publishing a Strategy Report. Please join us with your questions to make it a fully interactive event. We will resume our regular publication schedule on the 16th. Markets sold off worldwide last week as surging COVID-19 infections in Europe and the US raised the specter of a new round of lockdowns. As French President Macron put it while announcing France’s new limits, “[The] virus is circulating … at a speed that even the most pessimistic forecast didn’t foresee. The measures we’ve taken have turned out to be insufficient to counter a wave that’s affecting all Europe.” Until December 1st, barring a dramatic reversal in new infections, bars, restaurants and non-essential retailers will close, and domestic travel and public gatherings will be banned, though schools will remain open. Germany implemented similar measures, albeit with gentler limits on retailers. Though the seven-day average of US cases made a new high last week as the third wave accelerated (Chart 1), we do not expect lockdowns on a par with spring’s draconian measures. We also were not fazed as pre-election stimulus hopes were snuffed out for good. We think last week’s slide simply reflected the considerable uncertainty surrounding the pandemic and the size, composition and timing of the next round of fiscal stimulus intended to combat it. We have been more cautious over the tactical 0-to-3-month timeframe than the cyclical 3-to-12-month timeframe because we expected that stocks would eventually stumble while the outcome of the policymakers-versus-the-virus contest appeared to be in doubt. Chart 1Daily New COVID-19 Infections: United States We continue to believe that policymakers have the capacity to stave off the virus’ economic impacts for all of 2021, if need be, and that they will eventually rediscover the will to use it. The path from here to there could be contentious and drawn-out, however, depending on the election results. A blue wave that puts the Democrats in control of the White House and the Senate would be the most stimulus-friendly outcome, but it became less likely last week as the universe of polls tracked by our geopolitical strategists showed the president rallying in several key battleground states. They argue that the president’s re-election chances are better than the pundits realize and that the joint probability of a Biden White House and a Republican Senate is rising. We could easily see stimulus negotiations becoming protracted and bitter under that scenario, with no agreement being reached until after the economy sustains some heavy blows. Households Are Still Holding On, In The Aggregate … According to several key data series we’ve been monitoring to track households’ financial health, the big blows have not yet begun to land. Through the week ended October 27th, apartment rent collections were a good bit better than they were in August and September, and were within one-and-a-half percentage points of their year-ago level, where they have remained since May (Table 1). Investors and economy watchers are rightly concerned about households’ ability to meet their financial obligations three full months after the weekly $600 unemployment insurance (UI) benefit supplement expired, but the National Multifamily Housing Council’s rent tracker shows that they are continuing to keep up with their single largest expense. Although their stocks sold off last week on rent declines of as much as 20% at properties in coastal cities, the six apartment REITs in the S&P 500 all reported third quarter rent collections well above the landlords in the NMHC’s sample (Table 2). The end of the weekly $600 supplemental unemployment benefit checks does not appear to have been a watershed event, ... Table 1Apartment Tenants Are Still Paying Their Rent Table 2S&P 500 Residential REIT Rent Collections Consumer credit performance held up through September, updated TransUnion data showed, confirming the signal from the SIFI banks’ third quarter earnings reports. September delinquencies in auto loans and unsecured personal loans ticked up from their August level, but all categories, ex-autos, are well below their September 2019 delinquency rates and auto delinquencies are only five basis points above their year-ago level (Table 3). While it is possible that September marked the beginning of some erosion, consumer credit has performed far better than expected given double-digit unemployment across April, May and June; leading 30-day delinquency series are not sending worrisome signals (Chart 2); average credit card balances keep coming down and the share of borrowers in forbearance programs is falling across all four loan categories. ... as the broad mass of American households are still paying their rent and servicing their debt. Table 3TransUnion Consumer Loan Delinquency Data Chart 2A Slight Pickup Is Coming … And In The Lower Reaches Of The Distribution Widely available data series reflect aggregate consumer health, but are not granular enough to provide insight into the condition of household finances across the entire wealth and income distribution. Such insight could be useful: the most vulnerable households have the highest marginal propensity to consume, and a real-time read on how they’re faring would shed some light on pending changes in economic activity at the margin. Several internal discussions about the robustness of the recovery have come down to how much longer households in the lower quintiles might be able to hold on. Their plight will figure heavily into how soon the next round of fiscal aid is needed and how large it will have to be. Veritec Solutions creates databases that allow states to monitor payday lenders to ensure that loans comply with laws and regulations. It recently released data showing that weekly payday loan transactions across seven states have cratered relative to year-ago transactions, bottoming around -65% in the second week of May before recovering to -46% through the second week of October.1 In the two years preceding the onset of the pandemic, payday transaction volumes had been trending downward at an annual rate of about 5%, consistent with what one might expect nine and ten years into an expansion, as accelerating wage gains allowed lower-income households to share some of the spoils. If those households were suffering, as one would expect in a recession that has disproportionately wiped out lower-skilled services jobs, an inferior-good industry like payday lending should be thriving. Given that payday loan transaction activity has not picked up meaningfully since the federal UI benefit supplement ran out at the end of July (transactions were down just under 50% year-over-year in the week ended August 1st), lower-income households do not yet appear to be under any particular duress. A separate study analyzing checking account and credit card data from Chase Bank customers focused on the impact of CARES Act measures on unemployed households. The median unemployed checking account balance roughly doubled between the end of March and the end of July, as inflows exceeded outflows in all four of the intervening months, consistent with the aggregate personal income data. Unemployed Chase customers used up nearly two-thirds of their pandemic savings in the month of August, however, raising some questions over how far their CARES Act support can stretch. That support boosted consumption while the transfers were flowing, with unemployed households' spending outpacing spending by households that kept their jobs, reversing the typical pattern. Spending by the unemployed tumbled in August once the $600 federal supplement expired and further declines are likely in store as savings dwindle and the stopgap weekly $400 joint federal/state supplement disappears, but the ranks of the unemployed are shrinking and fewer households will need help going forward. What Comes In And What Goes Out September Personal Income bounced a little bit after declining in August, modestly topping estimates and exceeding February’s pre-pandemic level for a sixth consecutive month. In the aggregate, households socked away close to another $100 billion over and above the baseline savings they might have amassed in the absence of the pandemic. (To calculate the baseline, we assume 4% annual nominal disposable income growth since February and a constant 8.3% savings rate (Table 4).) Looking ahead, the bottom line is that, with $1.2 trillion of excess savings, households are in a position to serve as a bridge to the next round of fiscal aid if they so choose. Table 4Excess Savings Keep Piling Up Chart 3Huge Fiscal Transfers And Sharply Reduced Spending Have Put Households On A Sounder Footing With COVID-19 infections surging even before the clocks were turned back and the bulk of the country had yet to contend with wintry temperatures, a consumption surge is unlikely. Holiday travel, to highlight one seasonal component of spending, will likely be very weak. When the personal income data came out Friday morning, however, we could not help but think that households’ need for the next round of stimulus may not be quite so pressing (Chart 3). Fiscal support from Washington is desperately needed at the state and local government level, however, and the longer it is withheld, the greater the likelihood that public employee layoffs will erode many households’ savings cushion. While the flow of fiscal aid has slowed and will continue to slow once funding for the $400 weekly UI supplement patch is exhausted, CARES Act assistance also had a stock effect that has not yet played out. Households built a war chest of savings that may be able to tide them over for longer than the consensus of observers assume. Investors have benefited from betting on policymakers so far this year, and we will continue to do so. We expect that the next round of stimulus, whenever it arrives, will turn out to be bigger than it needs to be. That may not be ideal for markets and the economy in the long run, but we expect it will be very good for the former over the next year or two. Investment Implications The available data paint an encouraging portrait of aggregate household financial conditions through the end of September. Solid October apartment rent collections support the view that nothing changed too much last month, and the personal income release showed that households continued to add to their formidable war chest of pandemic savings through September. Aggregate data can mask isolated soft patches, and it is possible that unemployed households are nearing the end of their rope three months after receiving the last of their supplemental benefit checks. From that perspective, it was encouraging to learn that pawn shop owners and other small-dollar lenders have been as lonely as the Maytag repairman. They represent lower-income households’ last resort for making ends meet and the 50% year-over-year falloff in their business suggests that the beneficial effects of the CARES Act’s support for the highest marginal-propensity-to-consume households have not run out. It's been a lousy recession for pawn brokers, debt collectors and repo men so far, and it won't get any better if Washington delivers a new round of aid soon after Election Day or Inauguration Day, as we expect. With COVID-19 gathering fresh momentum in the US and Europe, the policymakers-versus-the-virus framework that has guided our thinking since the spring remains as relevant as ever. The Fed has done nearly all it can, leaving the fight from here to fiscal policymakers. While the January makeup of Congress and the White House is highly uncertain, most Senate/White House combinations point to a sizable fiscal package soon after the election or the inauguration. We therefore remain sanguine about the prospects for risk assets over our cyclical twelve-month timeframe, even if there are some near-term bumps before the election dust settles and an effective vaccine can be developed. We reiterate our tactical (equal weight equities, underweight fixed income and overweight cash) and cyclical recommendations (overweight equities, underweight fixed income and equal weight cash), along with our below-benchmark duration recommendation within bond portfolios.   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com Footnotes 1 The study with the data, "Update: COVID-19 Impact Study on Small-Dollar Lending," is available at https://www.veritecs.com/update-covid-19-impact-study-on-small-dollar-lending/. Accessed October 27, 2020.

Highlights A Biden victory with a Republican Senate (28% odds) poses the greatest risk to the global reflation trade. The US is the most susceptible to social unrest of all the developed markets. Europe is stable relative to the US, but political risks are rising as new lockdowns go into effect. Emerging markets are also susceptible to social unrest – even those that look best on paper. Chile and Thailand have more downside due to politics, despite underlying advantages. Turkey and Nigeria are among those at risk of major unrest in a post-COVID world. Book gains on EUR-GBP volatility, Indian pharma, and rare earths. Cut losses. Feature This week saw a long-awaited risk-off move in global financial markets. A new wave of COVID lockdowns plus the US failure to pass a fiscal package finally registered with investors. Over the past two months we have argued that rising COVID cases without stimulus would produce a pre-election selloff that would drive the final nail in President Trump’s re-election bid. That should still be the case (Chart 1).  While we are sticking with our view that Biden will win, we have upgraded Trump’s odds from 35% to 45%. We are focused on Trump’s momentum – not alleged polling errors – in Florida and Pennsylvania, and Biden’s loss of altitude in Arizona, as these trends open a clear Electoral College path to another Trump victory (Chart 2). Nevertheless Biden is tied with Trump among men and leads by 17 percentage points among women. He is also in a statistical tie among the elderly.  Chart 1COVID Rising + Stimulus Falling = Red Ink Chart 2Trump's Momentum In Swing States   Even assuming Trump’s comeback proves too little, too late, it could produce a contested election in which Trump has constitutional advantages, or a Republican Senate. Either of these two scenarios would extend the election season volatility for one-to-three months. Our updated US election probabilities are shown in Table 1 alongside the odds from the popular online betting site PredictIt.org. Table 1There Is A 72% Chance The Post-Election Policy Setting Will Favor Reflation A Biden victory with a Republican Senate (28% odds) is the only deflationary scenario in the near term, since fiscal stimulus will be reduced in size and uncertain in timing. However, assuming financial market pressure forces senators to agree, this is actually the best outcome over the full two-year Senate election period, since neither tariffs nor corporate taxes would rise. Notably Treasury yields have risen regardless of election scenario, but there is little doubt that this scenario poses the greatest risk to the global reflation trade (Chart 3). Why does this election matter? Trump’s re-election would prolong US political polarization and “maximum pressure” foreign and trade policy. Trump must win through the constitutional system, not the popular vote, so a win would push polarization up. Polarization at home, including Democratic opposition in the House of Representatives, would drive him abroad. By contrast, a Biden win would include a popular majority and might include a united Democratic Congress, which would result in a clear popular mandate and would concentrate Biden's administration on an ambitious domestic agenda.   A Biden victory with a Republican Senate (28% odds) poses the greatest risk to the global reflation trade. Hence Trump’s election would bolster the USD and US equity outperformance, along with global policy uncertainty relative to the United States (Chart 4). Whereas Biden’s election, if it also brings a Democratic Senate, would bolster global equity outperformance, cyclical equities, and US policy uncertainty relative to global. Chart 3Republican Senate Less Reflationary Chart 4Trump Would Boost US Equity Outperformance   The election will have a geopolitical fallout. First, Trump is still president through January 20 regardless of outcome and could take aggressive actions to seal his legacy and lock the Biden administration into conflict with China or Iran. Second, a contested election would create a power vacuum in which other nations could seek to take advantage of American distraction. Third, a Trump victory spells strategic conflict with Iran and China, and either could try to seize the advantage by acting first. Fourth, a Biden win spells confrontation with Russia and ultimately China, and both countries would test his resolve early in his administration. Diagram 1 summarizes these key market takeaways of the US election scenarios. This week we provide our monthly GeoRisk Update with a special focus on our COVID-19 Social Unrest Index and implications for select developed, emerging, and frontier markets. Diagram 1Scenarios For US Election Outcomes And Market Impacts The United States The market can get hit by negative surprises after the US election just as easily as before.1 The US is a powder keg of social and political angst, ranking the worst among developed markets in our COVID-19 Social Unrest Index (Table 2). The lower a country ranks on the list, the less stable it is and the more susceptible to unrest. Social unrest becomes market-relevant if it weighs on consumer or business sentiment, or if it causes a major change in government or policy. Table 2The US Is The Developed Market Most Susceptible To Social Unrest The first US risk is a contested election. By rallying in the swing states in the final weeks of the election, Trump has increased the likelihood of a disputed outcome. Armies of lawyers will descend upon the swing state election boards. The Supreme Court’s intervention in Florida in 2000 has incentivized political parties to seek a judicial intervention, especially if they think they are losing the popular vote narrowly. Mail-in counts, recounts, and other disputes could push up against the December 14 Electoral College voting date. Worse, if the Electoral College is hung, the House of Representatives would have to decide the outcome in January. Volatility and risk-off sentiment would predominate. Emerging markets are showing the first signs of upheaval in the wake of this year’s crisis. The second risk is resistance to the election results. If Trump wins on a constitutional technicality, the country faces widespread unrest. This would be relevant to investors if it paralyzes major cities, exacerbates the COVID outbreak, or snowballs into something big enough to suppress consumer confidence. If Biden wins on a technicality, the country faces not widespread unrest but isolated pockets of potentially armed resistance or domestic terrorist attacks. The FBI, DHS, and recent news events have confirmed the presence of armed or violent extremist groups of various ideological stripes that pose a rising threat in the current climate of pandemic, unemployment, and polarization.2 They could strike any time after the election.     Europe And Brexit Chart 5European Lockdowns Push Up Political Risk Europe and Canada have reinstated lockdowns in response to their rise in COVID-19 cases. The surge in political risk is evident from our GeoRisk Indicators (Chart 5). These lockdowns will not be as draconian as earlier this year as the death rate has been found to be lower than once feared. While most governments have time on the political clock to take a hardline approach today, at the start of what could be a nasty winter season, they do not have so much leeway in 2021. Greece, Spain, Italy, the UK, and France are next in line for social unrest, after the US, in our index, Table 2 above. These countries are also vulnerable because fiscal support is not as robust as elsewhere, as can be seen by our global fiscal stimulus tracker (Chart 6). France is in better shape than the others and marks the dividing line – the 2017 election was a turning point in which the political establishment unified to defeat a right-wing populist challenge. President Emmanuel Macron’s popularity is holding up decently and it will now be buttressed by his tough stance against a spate of radical Islamist terrorist attacks. Extremist incidents will continue to be a problem, given the lockdowns and economic slump. Macron will focus on economic reflation in 2021 leading up to an election for which he is clearly favored in spring of 2022. Anything that derails his political trajectory before that time is of great importance for Europe’s political future, since Macron will be the de facto leader once Angela Merkel steps down in October 2022. Italy and Spain will be ongoing sources of political risk. Italy was the first major European hotspot of the pandemic, and euroskeptic attitudes are quietly ticking back up, but the ruling coalition and especially Prime Minister Giuseppe Conte have received popular backing for their handling of the crisis. Spain, on the other hand, has seen Prime Minister Pedro Sánchez lose support, while conservative parties tick up in popular opinion. These two countries are candidates for early elections when the hens come home to roost for the pandemic and recession (Chart 7). Chart 6More Stimulus Needed In Europe Chart 7Europe’s Leaders Fare Better Than Others   The other major countries with looming elections in 2021-22 are seeing relatively positive outcomes in popular opinion (e.g. the Netherlands, Germany). The exception is the UK, which is on the lower end of the social unrest index and is in the midst of internal disruption due to Brexit. Our assessment remains that Prime Minister Boris Johnson and the Tories will have to accept a trade deal with the EU over the next month (Chart 8). They can afford to leave on paper, but the economy would suffer and Scotland’s nationalists would be empowered to attempt secession. Our European Strategist Dhaval Joshi believes a Biden win in the US will hasten Johnson’s capitulation. We don’t expect much more upside in our GBP-EUR volatility trade after the US election result is known (Chart 9).  Chart 8Go Long Sterling Chart 9Close EUR-GBP Volatility Trade Chart 10Trump Would Weigh On Euro Trump’s re-election would be negative for the European Union’s economic and political stability (Chart 10). It would portend a greater trade war, Middle Eastern instability and refugees, Russian aggression, or European populism. By contrast, Biden will not use sweeping tariffs to resolve trade tensions, will seek to restore the 2015 nuclear deal with Iran, will suppress anti-establishment politics, will seek a multilateral approach to China trade tensions, and will only substantially aggravate the Europeans by being too aggressive on Russia. EM: Chile And Thailand Emerging markets are showing the first inevitable signs of upheaval in the wake of this year’s global crisis. What is critical to note about our Social Unrest Index for EM is that even if a country ranks high on the list overall, it could still face significant sociopolitical upheaval. This is manifest in the top-ranked countries of our list – Chile, Malaysia, Thailand, Russia, Indonesia – all of which have already seen some degree of social and/or political unrest in this crisis year (Table 3).  Table 3Even Emerging Markets That Look Good On Paper Are Susceptible To Unrest The best example is Chile, which is top-ranked in the index but ranks ninth in the “Household Grievances” column, which measures inequality, inflation, and unemployment. The latter measure helps explain how Chile erupted last fall and again this fall in mass protests. Chart 11Political Risk Weighs On Chile Over the past week Chileans voted overwhelmingly in a referendum to revise their constitution with a constitutional convention that will be elected, i.e. not overdetermined by current members of the National Congress. The constitutional revision process is ultimately a positive way for a country with good governance to assuage its household grievances. But the process will continue through a revision process in April 2021, the November 2021 general election, and a final referendum in 2022, ensuring that political risk persists. Chilean assets have fallen short of their expected performance based on global copper prices, suggesting that they have upside in the near term (Chart 11). Positive news is driven by macro fundamentals, including Chinese stimulus, but political risk will periodically put a cap on rallies by highlighting Chile’s transition to expansive social spending, higher debts, and hence future currency risk. Thailand’s case is different, as it is not household grievances per se but rather the ongoing governance problem that is triggering mass protests. The governance problem stems from regional disparities in wealth and representative government. Modern society and pro-growth populism have repeatedly clashed with the royalist political establishment and its military backers over the past 20 years and that process is set to continue. Chart 12Thailand Not Fully Pricing New Instability Cycle The newest round of the crisis will build for some years and ultimately culminate in some degree of bloodshed before a new political settlement is achieved. Typically, over the past 20 years, Thai political unrest creates a buying opportunity for investors. But the previous major wave of unrest, from 2006-14, occurred during the lead-up to the all-important royal succession. Now the succession is “over” and it is not clear that the new king, Vajiralongkorn, will live up to his father’s legacy as a successful arbiter of society’s conflicts. It is possible that he will overreact to domestic opposition and abuse his powers. Our Emerging Markets Strategy has downgraded Thailand in its portfolio, showing that the economy is suffering from insufficient stimulus as a negative credit impulse offsets public spending during the crisis. Thai equities do not offer relative value within the emerging market space at present (Chart 12). Most likely Thai political troubles will continue to provide a buying opportunity, but at the moment the risks are not sufficiently priced. If Chile, Malaysia, and Thailand are already experiencing significant political risk despite their high rankings on our index, then Brazil, South Africa, Turkey, and the Philippines face even greater challenges going forward. We have written about Brazil recently – we continue to see a rising political risk premium there (Chart 13). We will update our views on South Africa and the Philippines in forthcoming special reports. For now we turn to Turkey. Turkey: One Step Forward, Two Steps Back Turkey scores near the bottom of our Social Unrest Index. The regime of President Recep Tayyip Erdogan has been in power for nearly two decades, is suffering cracks in public support, is continuing to suffer the inflationary consequences of populist monetary and fiscal policy, and is embroiled in a range of international adventures and conflicts, now including Nagorno-Karabakh. After a brief pause of tensions in September, we argued that President Recep Tayyip Erdogan’s retreat would be temporary and that geopolitical tensions would re-escalate. They have done so even sooner than we thought. The lira is collapsing, as registered by our GeoRisk Indicator, which is once again on the rise (Chart 14). Chart 13Brazilian Political Risk Nearing 2018 Levels Chart 14Turkish Political Risk Spikes Anew   Relations with Europe have worsened significantly. Aggressive rhetoric between Erdogan and Macron in response to France’s treatment of French Muslims and handling of recent terrorist incidents has led to a diplomatic crisis: Paris recalled its ambassador. The episode highlights both Erdogan’s increased assertiveness vis-à-vis the EU as well as his Neo-Ottoman bid to become the leader of the Muslim world. Erdogan has called for a boycott of French goods (alongside similar popular calls in various Muslim countries). The European Commission warned Turkey could face punitive action at its December summit.   The feud in the eastern Mediterranean is also escalating. Turkey’s Oruc Reis seismic research vessel was once again sent out on an exploratory mission in contested waters on October 12. The mission’s duration was extended multiple times.    The EU may impose sanctions as early as December. Brussels' response to Turkish provocations may include targeted anti-dumping measures, likely on steel and fish. There have also been calls to suspend the customs union, but this would require the conflict to rise above rhetoric as it would harm EU investments in Turkey. Turkey is growing even more assertive in its neighborhood with its support for Azerbaijan in the conflict with Armenia. Tensions with Russia are rising yet again. Erdogan is already overextended in Syria and Libya, and recently threatened to launch a new military operation in northern Syria if Kurdish militants do not relocate from along Turkey’s border. The warning follows a Russian airstrike on Turkey-backed Syrian rebels in Idlib earlier this week – the deadliest strike in Idlib since March. Provoking the United States, Turkey also tested its newly purchased Russian S400 missile defense system on October 16. This was swiftly followed by US warnings that Turkey faces US sanctions under the Countering America’s Adversaries Through Sanctions Act if it operationalizes the system. The risk of punitive action would rise under a Biden presidency as he is more likely to adopt a tougher stance on Erdogan than President Trump. Chart 15More Downside For Turkish Lira These developments all point to a continuation in geopolitical tensions, as Erdogan flouts various risks and constraints. Turkey’s relationship with NATO allies is continuing to deteriorate meaningfully. The lira’s collapse is also in response to economic developments. After a surprise 200 basis points rate hike in September, the CBRT disappointed markets by keeping the benchmark 1 week repo rate on hold at its October 22 meeting. Investors had hoped that the September hike marked a reversal of Erdogan’s unorthodox policies. However, the October decision disconfirms this hope, as the central bank is instead opting for stealth measures to raise the cost of funding (e.g. limiting funding at the benchmark rate and thus forcing banks to borrow at higher costs; widening the interest rate corridor to give itself more room to raise the weighted average cost of funding). These decisions come amid rising inflation, debt monetization, a loss in foreign interest in Turkish equities and bonds, and deteriorating budget and current account balances. All point to further lira weakness (Chart 15). Bottom Line: The TRY faces downside pressure from the deteriorating geopolitical and economic backdrop. Although the EU has so far shown restraint in penalizing Ankara, its stance has not dissuaded Erdogan from adopting a provocative foreign policy stance. Moreover tensions with the US are at risk of escalating due to the possibility of a Biden presidency. Economic factors also point to continued weakness as monetary policy is too loose and the CBRT has not abandoned Erdoganomics. Nigeria: No Political Change Waves of protests have erupted across Nigeria in recent weeks, largely driven by the country’s youth. Protests center on calls to end the special anti-robbery squad (SARS), an arm of the national police service, which has long been accused of extrajudicial killings, torture, extortion, and corruption. Most recently, dozens of soldiers and police officers approached the scene of a major protest site in Lekki, a large district in Lagos, and opened fire, killing 12 people. The violence fueled outrage toward the government and security forces. To quell unrest, the government announced that SARS would be disbanded and promised a host of reforms. Demonstrators are skeptical of government promises without clearly specified timeframes. After all, previous incumbents have suggested police reform would be expedited. This has yet to happen, so we do not expect national policy to meet public demand. Moreover, President Buhari is a former military dictator who has maintained a hard line on security matters. He is in his final term in office and not legally required to step down until 2023. While discontent grows toward the government for social injustices, the Nigerian economy remains vulnerable and imbalanced. The local currency is facing considerable risk of major devaluation stemming from strains on its balance of payments, as BCA’s Emerging Markets Strategy pointed out in a recent report. Low oil prices and weak FDI inflows will foster various imbalances impeding the nation’s structural adjustments and its potential growth rate. The US election will act as a positive catalyst for markets in the short run as long as it produces a clear result and resolves the US fiscal stalemate. Nigeria’s current account excluding oil has been structurally wide, a sign of weak domestic productivity and an uncompetitive currency (Chart 16). Foreign currency reserves stand at $36bn, barely above foreign debt obligations at $28bn. FDI inflows have reached their second lowest point over the past decade, weighing on productivity growth, which is near 0%. A positive for Nigeria’s macro fundamentals is that public debt is low, at 23% of GDP, decreasing the likelihood of a sovereign default in the near term. Government officials refrained from large COVID fiscal relief, keeping spending in check. Coupled with low debt servicing costs, of which the foreign share only represents 2% of government revenues, a currency depreciation to improve competitiveness would not make public debt dynamics a concern. Nominal GDP is above short-term rates (Chart 17). Hence there is room for the currency to fall and government spending to pick up into next year to support the economy.  Chart 16Nigeria Struggles With Economic Rebalance Chart 17Nigeria Has Fiscal Firepower   In the post-dictatorship era, oil revenues knit the country’s predominantly Muslim north with its oil-rich and predominantly Christian south. The country has struggled to rebalance the economy in the wake of the 2014 oil shock. Crude production has fallen from over 2 million barrels per day to around 1.6 million bpd since 2010, and Nigeria struggles to meet its modest OPEC quotas. The current global crisis could have a negative long-term impact as rig counts have fallen again. We expect global oil demand to be supported in 2021, as lockdowns will be less stringent the second time and global fiscal stimulus will keep coming. And while Buhari’s age and poor health make him vulnerable, he is not without reserves of political strength. He is seen as someone who has kept up a good fight against the Islamist militant group Boko Haram. Considering that he is a northerner and a Muslim by faith, this strategy has helped ease sectarian tensions across the country, strengthening his grip. The problem is that the size of the global crisis could upset even the most stable of petro-states. Like most of sub-Saharan Africa, the youth population is large – the median age is around 18. If global oil demand relapses amid the second wave of the pandemic and a lack of domestic and global stimulus, the country will suffer yet another wave of unemployment. And if policy remains hawkish, sociopolitical troubles will be amplified.  Nigeria’s impact on global oil prices is limited – it only provides 2% of global oil supply – but it could become a contributor to rising unplanned outages if instability gets out of hand. Bottom Line: The SARS protests are not likely to threaten overall government stability, but mounting economic pressures could exacerbate social unrest, and the negative feedback with security forces. This could deliver a significant blow to the aging Buhari’s government if he does not enact expansionary fiscal policy to smooth out the external shocks. Investment Takeaways Chart 18Biden Good For Global Trade Rebound The US election will act as a positive catalyst for markets in the short run as long as it produces a clear result and resolves the US fiscal stalemate. But a contested election is not unlikely and a deflationary risk arises in the 28% chance that Biden wins while Republicans retain the Senate. Stimulus would still be agreed but its size and timing would be uncertain, prolonging the selloff. Therefore we are updating our portfolio to book some gains and cut some losses. We are booking gains on our EUR-GBP volatility trade for a return of 13%. We are closing our long Indian pharmaceuticals trade for a gain of 12%. We are throwing in the towel on our long defense and aerospace trade for a loss of 21%. And we are closing our rare earths basket trade for a gain of 5%. We are closing two pair trades and re-initiating them as absolute longs: long China Play Index relative to MSCI global stocks (0.1% return) and long ISE Cyber Security Index relative to the NASDAQ (-6.8%). Chinese reflation and global cyber-attacks will remain relevant themes.  The inverse of Trump, Biden is positive for the euro, negative for the dollar, and supportive of global trade. However, a range of higher taxes and levies on corporations suggests that his administration will ultimately weigh on S&P global stocks relative to those at home. And while Biden appears softer on China, we consider this a mispricing, as he has largely coopted Trump’s and Sanders’s trade agenda (Chart 18). Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com Roukaya Ibrahim Editor/Strategist Geopolitical Strategy RoukayaI@bcaresearch.com Guy Russell Research Analyst GuyR@bcaresearch.com Chart 19China: GeoRisk Indicator Chart 20Russia: GeoRisk Indicator Chart 21UK: GeoRisk Indicator Chart 22Germany: GeoRisk Indicator Chart 23France: GeoRisk Indicator Chart 24Italy: GeoRisk Indicator Chart 25Canada: GeoRisk Indicator Chart 26Spain: GeoRisk Indicator Chart 27Taiwan: GeoRisk Indicator Chart 28Korea: GeoRisk Indicator Chart 29Turkey: GeoRisk Indicator Chart 30Brazil: GeoRisk Indicator   Geopolitical Calendar Footnotes 1  There have been strange warnings in recent days – an unidentified aircraft intercepted over a Trump rally in Arizona, a Saudi warning of a potential Houthi attack on Americans, and a Chinese warning of a potential US drone attack against Chinese assets in the South China Sea. None of these have amounted to anything, and the idea of a US drone attack on China is absurd, but investors should be cautious nonetheless, particularly because a range of state and non-state actors will have an incentive to take actions once the US outcome is known. 2  Please see FBI Director Christopher Wray, “Statement Before The House Homeland Security Committee,” Washington DC, September 17, 2020, fbi.gov; Department of Homeland Security, “Homeland Threat Assessment,” October 2020, dhs.gov; Tresa Baldas and Paul Egan, “More details emerge in plot to kidnap Michigan Gov. Whitmer as suspects appear in court,” USA Today, October 13, 2020, usatoday.com.   

Highlights Global risk assets have more downside in the near term. The US dollar is primed to rebound. Without major fiscal stimulus in the US, the upside in the greenback will be substantial. China’s business cycle recovery will continue but Chinese stocks and China-related plays are over-hyped and will experience a setback. For equity and credit investors, we recommend maintaining a neutral allocation to EM versus their DM counterparts. Feature Global risk assets have been in a twilight zone. On the one hand, there has been enormous uncertainty related to the US elections, the US fiscal stimulus and the impact of renewed social mobility restrictions on economic activity, especially in Europe. On the other hand, ultra-accommodative central banks, zero or negative interest rates on risk-free investments and the possibility of positive news on the COVID-19 vaccine front have until recently precluded a carnage in global risk assets. What will be the path going forward? We believe the risk-off period in global markets will continue in the near run, i.e., there will be a dusk before a sunrise. Hence, investors should maintain dry powder at the moment. Several negative outcomes have a non-trivial probability of occurring over the very near term. Chiefly these include a contested US presidential election or a Republican Senate under a Biden presidency acting as a constraint on large fiscal stimulus. Chart I-1The US Needs $1.5tn (7.4% Of GDP) Of Fiscal Stimulus In 2021 To Have A Neutral Fiscal Thrust Needless to say, without a large fiscal stimulus package, the US is facing a fiscal cliff. According to the US Congressional Budget Office, the fiscal thrust will be negative 7.4% of GDP in 2021 if no further stimulus is enacted (Chart I-1). The fiscal thrust is the change in the cyclically-adjusted budget deficit. Even if the cyclically-adjusted budget deficit as a share of GDP remains the same, fiscal thrust will be zero. Hence, to achieve a positive fiscal thrust in the US, the fiscal stimulus must be greater than 7.4% of GDP or above $1.5 trillion.  Even though Congress eventually approves a large fiscal package, there is a risk that the economy will slip in the interim. To emphasize, we do not mean there will be no fiscal stimulus. The point is that a large fiscal package is possible only if markets riot. With equity and credit markets still richly priced relative to their fundamentals, the carnage in global risk assets will likely continue.     With equity and credit markets still richly priced relative to their fundamentals, the carnage in global risk assets will likely continue. Chart I-2The US: Lower Inflation Expectations, Higher Real Rates And A Stronger Dollar In the absence of a large US fiscal package and amid falling oil prices, US break-even inflation expectations will drop and the TIPS (real) yields will bounce in the near term (Chart I-2). A rebound in TIPS (real) yields will induce a bounce in the US dollar (Chart I-2, bottom panel).  Provided that the primary risks presently stem from DM rather than Chinese growth, we recommend maintaining a neutral allocation to EM within respective global equity and credit portfolios. Why not overweight EM versus DM? First, the rebound in the greenback will weigh on EM financial markets. Second, outside China, Korea and Taiwan, EM fundamentals are poor. Net-net, odds of EM out- and under-performance versus DM are, for now, balanced. China: Peak Stimulus, Equities And Commodities China’s business cycle recovery is intact. However, Chinese equities have become fully priced and are at risk of a setback (in absolute terms) along with global share prices. Notably, there are several elements that could trigger a meaningful setback in Chinese stocks. First, the money and credit impulses are about to peak. The top panel of Chart I-3 shows that changes in commercial banks’ excess reserves ratio lead the credit impulse by about six months. The drop in the excess reserves ratio since May foreshadows the top in the private credit impulse. Interbank rates – shown inverted in the bottom panel of Chart I-3 – point to an apex in the narrow money (M1) impulse. Authorities have been shrinking commercial banks’ excess reserves at the PBoC since May/June.  Tightening liquidity conditions in the banking system have led to higher interbank rates as well as government and corporate bond yields. Higher borrowing costs will weigh on money and credit growth. Second, the loan approval index of the PBoC banking survey has rolled over (Chart I-4). This implies that bank loan origination will subside going forward. Chart I-3China: Money/Credit Impulses Are At An Apex Chart I-4China: Loan Growth To Moderate Finally, fiscal stimulus is also peaking. Chart I-5 shows that the issuance of local government bonds is set to dwindle in the coming months. A peak in stimulus does not herald an immediate end of the recovery in the business cycle. China’s combined credit and fiscal spending impulse leads the business cycle by about nine months (Chart I-6). Therefore, even as the credit and fiscal spending impulse reaches an apex, the Chinese mainland’s economic activity will stay firm in H1 2021. Consequently, corporate profits will continue to recover. Chart I-5China: Fiscal Stimulus Is Peaking Chart I-6China: The Economy Will Continue Recovering What do all these imply for share prices? In periods when borrowing costs rise along with accelerating profit growth/improving net EPS revisions, share prices could still advance (Chart I-7). Hence, peak stimulus is not a sufficient reason to turn negative on share prices. Chart I-7China: Share Prices (ex-TMT), EPS Expectations And Corporate Bond Yields That said, there are some signs that the Chinese equity market is overbought and over-hyped, making it vulnerable: A major IPO often marks a top in an asset class. Chart I-8 illustrates that Goldman Sachs’ IPO in 1999 preceded the secular top in US equities, IPOs of KKR and Blackstone in 2007 took place before the US credit bubble and the LBO boom unraveled; and finally, Glencore, the largest commodity trading house, went public in 2011 at the very peak of the secular bull market in commodities. In this respect, will Ant Group’s upcoming IPO mark a major top in Chinese or new economy stocks? Time will tell. Chart I-9 illustrates that Chinese IPO booms were historically associated with equity market tops. The current surge in Chinese IPOs – in various jurisdictions including China, Hong Kong, and the US – is a symptom of an over-hyped market. Chart I-8A Major IPO Often Marks The Top in Respective Asset Classes Chart I-9China: Booming IPOs = An Equity Market Top? Finally, new economy stocks in both the US and China have risen by about 20-fold since January 2010. Both in terms of duration and magnitude, their rallies are identical to the bull market in the Nasdaq 100 index in the 1990s (Chart I-10). The striking similarity with those episodes as well as current euphoria among investors about FAANG and Chinese new economy stocks warrant caution. In regard to commodities, in recent months we have been arguing that China is entering a commodity destocking cycle following the major restocking cycle that occurred in April-August. As Chinese imports of key commodities temporarily diminish due to destocking, commodities prices will relapse. Importantly, investor sentiment and net long positions in some key commodities are very elevated, suggesting overbought conditions (Chart I-11). Chart I-10FAANG And Tencent Have Been Tracking The Trajectory Of Nasdaq 100 In The 1990s Chart I-11Investors Are Very Bullish On Copper Critically, global mining stocks have been dropping since early September and are signaling a relapse in industrial metals prices (Chart I-12). In brief, commodity prices and commodity plays remain vulnerable. Chart I-12Global Mining Stocks Point To A Relapse In Industrial Commodities Prices Bottom Line: Marrying the positive outlook for China’s business cycle on the one hand with an  impending potential correction in global stocks, the peak in Chinese stimulus and signs of Chinese equity investor euphoria, we conclude that the risk-reward profiles of Chinese stocks and China-related plays in absolute terms are unattractive. That said, we continue recommending overweighting Chinese stocks within an EM equity portfolio. From a cyclical perspective, Chinese corporate profits will outperform EM and DM corporate earnings because China has dealt with the pandemic much better than almost all other countries. An Update On Currencies And Local Fixed-Income We have been shorting a basket of EM currencies – BRL, CLP, ZAR, TRY, KRW and IDR – against an equally-weighted basket of the euro, CHF and JPY. This strategy remains intact. However, we believe the US dollar is primed to stage a major rebound, in general, and versus EM currencies, in particular. Therefore, US dollar-based investors should hedge their currency risk or short the same EM currency basket versus the greenback. In EM local fixed-income markets, we have been receiving 10-year swap rates but have not recommended owning cash domestic bonds because of currency risk. We continue to recommend investors receive 10-year swap rates in the following markets: Mexico, Colombia, Russia, China, India and Korea. We have also been recommending long positions in domestic bonds in certain frontier markets like Egypt, Ukraine, and Pakistan. The global risk-off phase will cause their currencies to relapse versus the US dollar, raising the possibility that local bond yields will rise. Therefore, investors who are long these markets should close these positions.   Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Equities Recommendations Currencies, Credit And Fixed-Income Recommendations