Economy
It is highly unusual for equities to enter a bear market without the economy going into recession. Since we see the risk of recession as low, we recommend a neutral allocation between bonds and equities.
The oversold bounce is not supported by policy or profits, and should be treated as countertrend. Lift machinery to neutral and differentiate between pharmaceuticals and the unwinding of the biotech mania.
Any recovery in risk assets and selloff in safe havens is unlikely to extend into the cyclical horizon.
While cyclical factors have contributed to the recent trade slowdown, there are many longer-term structural forces that will pose headwinds to globalization. A lack of aggregate demand will constrain growth and hurt trade in a global economy attempting to increase savings. Meanwhile, the bulk of economic dividends from free trade have already been reaped. The direct casualties from slowing global trade are economies with large export sectors: most commodity-producing countries and some south-east Asian nations.
The U.S. corporate re-leveraging cycle is far more advanced than is widely believed. Corporate health looks only mildly better excluding the troubled energy and materials sectors. Mushrooming leverage ratios are not restricted to junk issuers either.
The U.S. corporate re-leveraging cycle is far more advanced than is widely believed. Corporate health looks only mildly better excluding the troubled energy and materials sectors. Mushrooming leverage ratios are not restricted to junk issuers either.
Central banks follow backward-looking indicators but economies follow forward-looking indicators. So which indicators should investors follow? And what is the current message? Also, we see signs that London is cooling.
Corporate profits are more sensitive to selling prices than to volumes. Falling prices even amid mildly rising volumes could produce a meaningful profit contraction. Stay with deflation trades. In particular, maintain the short EM stocks / long U.S. 30-year Treasurys position. Indian stocks are still pricey and will deflate further in absolute terms.
There are no signs of broader financial stress in the Chinese corporate sector. The most recent financial market turmoil has had no systemic damage to corporate sector balance sheets. We are leaning against being overly bearish. Current valuation readings, particularly for Chinese H shares and Hong Kong stocks, on a historical basis have never been sustainable.
The declining correlation between risk assets and Treasury yields suggests that the market perceives monetary policy to be overly restrictive. Historically, this has led the FOMC to adopt a more dovish policy stance.