Emerging Markets
This week we are publishing a new thematic chartpack <i>The BCA China Industry Watch</i> in an effort to monitor the growth profiles, balance sheet strength and stock market performances of major Chinese industrial sectors.
Oil markets will continue to be buffeted by Russian overtures to OPEC suggesting a desire to orchestrate a production cut-back, while uncertainty over the Fed's next move keeps markets on edge.
An improvement in the euro area credit impulse is encouraging, but we explain why it is not enough to sustainably boost risk-assets.
China's capital outflows since last year can be broadly grouped into three categories: reduced foreign inflows (and accelerated outflows), domestic firms deleveraging dollar debts, and domestic entities increasing dollar assets. Barring an extreme scenario, the PBoC should have more than enough ammunition to defend the RMB, should it opt to.
Rising demand for U.S. dollars in EM and further yen depreciation, if it transpires, assures global exchange rate volatility will rise. Rising currency volatility, especially in the RMB, will push the global risk premium higher, weighing on global share prices. In Turkey, a wage-inflation spiral is unfolding and the central bank is behind the curve; the currency will plummet further.
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.
Last month, the model outperformed both global and U.S. equities in local-currency and U.S.-dollar terms. For February, the model is aggressively increasing its risk exposure and has included a bet on commodities for the first time since 2012. For equities, the largest overweight remains Europe, but EM and Canada enjoyed significant upgrades. For bonds, the model favors the European periphery.
The Fed will upset the rebalancing of oil markets if it misreads the current sell-off as weakness in oil demand.
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.
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.