Equities
The sinking global credit impulse warns that reflation has not overwhelmed deflationary forces. Financials will continue to suffer, while utilities and retail drug stores will benefit.
The Fed has reason to delay the next rate hike until at least September, even if volatility subsides after the June 23 Brexit vote.
Gold stocks have regained traction after a brief interlude in the bull market, and the path forward remains bullishly skewed. The Fed took a slightly dovish turn at this week's FOMC meeting, reinforcing that they remain in reactive mode, thereby sustaining rising policy uncertainty (second panel). Given our bias to expect economic disappointment, the odds are good that policy will need to remain accommodative, with real interest rates staying in negative territory for a prolonged period. That is a plus for a zero yielding asset such as gold. With world economic expectations continuing to grind lower (shown inverted, top panel), the appeal of owning gold stocks as a portfolio hedge remains attractive, particularly given that sentiment towards the yellow metal is far below prior extremes. Stay overweight.
The previous Insight showed that broad macro conditions point to a reduction in managed care risk premiums. This outlook brightens further when considering recent cost inflation trends. The latest inflation reports showed that the cost of physician services is growing at a slower rate, and the relentless advance in pharmaceutical price inflation is also finally cooling. With health insurance pricing power likely to stay on the upswing (third panel), given that premiums are set on a trailing cost basis, there is a window for the group to show more robust profit margins. As a result, industry return on equity (ROE) should continue to handily outpace overall ROE, arguing for a better-than-market valuation multiple. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5MANH - UNH, AET, ANTM, CI, HUM, CNC.
Health insurance equities are on the cusp of breaking out to new all-time highs relative to the broad market, despite the headwinds facing any net creditor, namely low running yields. The macro tide is turning decisively in favor of this non-cyclical group. The S&P managed care index outperforms when overall relative consumer spending on health care decelerates and/or contracts, as it implies that insurance claims will decelerate, reducing costs to managed care providers. When this occurs, the risk premium associated with the group diminishes. The opposite is also true. Thus, the decisive downturn in health care spending growth opens the door to a re-rating, particularly given that cost inflation appears to be ebbing, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5MANH - UNH, AET, ANTM, CI, HUM, CNC.
Three strategies that could win whatever the outcome of Britain's referendum on EU membership. And what to look out for in the final days before the vote.
The overall retailing sector is still struggling with aggressive price discounting, as the retail price deflator hit its lowest level since the 1990s. Consumers have a high propensity to save, which is making it difficult for traditional retailers to manage and budget. The contraction in intermodal railcar shipments and rising retail inventory-to-sales ratios reinforce that conditions remain extremely difficult. However, there are some bright spots. Yesterday's retail sales report showed that pharmacies are enjoying a boom in top-line growth, while hypermarkets are finally regaining traction. On the flipside, restaurants continue to lose sales momentum, which bodes particularly ill for profitability given that labor costs are running at a high-single digit inflation rate (please see Monday's Weekly Report for more details). We are negative on retailers, with the exception of hypermarkets and retail drug stores, both of which warrant above benchmark status.
Airline stocks have been walloped of late, as the downside of an industry with high operating leverage is beginning to rear its head. The past few years of low oil prices and decent demand encouraged a large investment in capacity, which is now leaving the industry with an inability to fill planes at an attractive profit margin price point. Indeed, revenue per passenger mile is contracting and our proxy for global CPI airfares has plunged. We doubt that improvement is imminent, given that fuel prices are back on the upswing, and leading business cycle indicators continue to warn that retrenchment in travel budgets is a higher probability than expansion. Against this backdrop, airfare price concessions are likely to remain intact, or even intensify, to the detriment of airline revenue and profitability. We are sticking with a high-conviction underweight stance. The ticker symbols for the stocks in this index are: BLBG: S5AIRL - DAL, LUV, AAL, UAL, ALK.
The fundamental reason behind the debt buildup in the Chinese economy is rooted in its high savings and banking-centric intermediation system. It is wrong to focus solely on the liability side of the economy. Viewed from a balance sheet perspective, China's debt situation is much less dire than commonly perceived.