Head of Equity Strategy
Summary: In today's equity update we highlight that macro numbers are doing the best this year against expectations and that it could support equities. Once again we highlight DAX and Nikkei futures as the markets with most momentum as these markets are high beta plays on the global economy. India has been a darling for years but recently growth has come under severe pressure and we highlight the fact that India's equity valuations seem disconnected from macro reality. Finally we focus on Ford Motor that had its debt downgraded to junk status by Moody's.
The equity rally seems to have stopped as equities did not extend gains in Asia session. It seems investors are waiting for the important ECB meeting on Thursday before adding more risk. Recent macro developments do not warrant risk-off here, so our short-term view remains that equities are bid, but longer term our forecast is that the global economy is likely to slip into a recession unless we massive stimulus from both monetary and fiscal policies on top of some US-China trade deal.
Economic surprise index is likely turning positive
The entire year has been a one-way street on bad macro numbers against expectations but luckily for investors that has not spilled into bad returns. Centrals banks made a historic U-turn back in January and February which has elevated risky assets and now macro numbers are no longer disappointing against expectations as measured by the Citi Economic Surprise Index on the G10 countries. The index is likely to push into positive territory very soon and the macro momentum is strong relative to expectations. This could extend the rally in equities.
Nikkei futures still look the strongest on JPY flow
As we have been highlighting the since late last week the DAX and Nikkei futures look the strongest on price momentum. Both equity markets are high beta plays on the macro economy so if risk-on continues these two markets would likely see further momentum. In today’s session Nikkei futures looked relatively strong against a backdrop of more mixed equity markets in Asia. The move is partly currency flows weakening the JPY but also rising sentiment on the macro economy.
Is India a train wreck about to happen?
For years investors have been in love with India. The world’s largest democracy had positive demographics and a low urbanization rate setting the country up for decades of super growth. Everyone piled into the country’s equities getting good returns in both local and foreign currency. But recently the growth engine as been sputtering with news yesterday that car sales in India had it worst ever fall in August down 24%.
On top of that, India’s banking sector has eclipsed Italy as the world’s worst bad-debt pile. We are potentially watching a credit crunch in the making. More strangely is it to see equity valuations in India with MSCI India Index valued at 1.5% dividend yield which makes Indian equities much more expensive than US equities which are already expensive in a developed market context.
Stocks to watch
Ford Motor is in focus as Moody’s downgraded the carmaker’s credit rating to junk status as cash flows and operating margins are expected to remain weak the next two years. It obviously bad for Ford Motor which has been struggling with a weak share price the past five years. The downgrade means higher financing costs which come at a bad time as the economy may slip into a recession within the next 12 months and the car industry is seeing increasing capital expenditures to fund the transition to electric vehicle technology. The company’s debt has a current credit default swap price of 183 basis points which is in line with Bloomberg’s default model. The 1-year default probability is 0.29% which at levels not seen since 2012.
Apple will announce at 17:00 GMT its 13th iteration of the iPhone which is seeing slowing demand. The company is getting around 50% of its revenue from the iPhone so it’s an important event for Apple investors to watch. But Apple understands future growth is not coming from the iPhone but its Services segment (essentially digital sales) and its streaming business in TV and music.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
