Finding opportunity in an equity vacuum Finding opportunity in an equity vacuum Finding opportunity in an equity vacuum

Finding opportunity in an equity vacuum

Peter Garnry

Head of Equity Strategy

Global equities were flat going into the week following an earlier rally attempt. The new Italian government, North Korean anger over South Korea and US military drills, weak global macro and higher rates were a strong enough cocktail for equity markets to hold back. At current levels equity markets are right at the middle between the January highs and February lows with a compressed 5% trading range established since late February. Our prediction is that the range trading will continue the coming months. There is no convincing upside catalyst that can take global equities above their January highs. On the other hand, the global macro economy is not bad enough to push equities into a tailspin. Against expectations macro is weak, but the absolute activity level is still sufficiently strong to support equity levels. On balance, there more forces weakening the structure of financial markets than strengthening them. The most key risk going forward is emerging market credit given the trajectory of a stronger USD and rising US interest rates.

Don’t touch Italy

The new Italian government proposed by the League and 5-Star Movement is a big headline risk over the weekend. Investors should have little exposure to Italian equities going into the weekend. Italian equities, government bonds and credit bonds are selling off and our view is that this could continue. While the new government says that their programme is no threat to the euro the reality is that both parties have deep roots in the anti-establishment and anti-euro movements. So far the communicated policies have surrounded debt forgiveness of bonds the European Central Bank has already bought which is de facto a wealth transfer to Italy. In general the ideas floating around from debt forgiveness, guaranteed minimum income to tax cuts will all lead to a worse credit outlook and uncertainty over the fiscal trajectory. Overall the new Italian government will not strengthen the euro area but weaken it and prudent investors should demand an increased risk premium for holding Italian assets. We are underweight Italian equities based on recent political developments. If the political and economic outlook improves then Italian equities could become interesting again as the equity market is very cheap valued at a 50% discount to global equities.

EM credit is the canary in the coal mine

According to a global market risk indicator from Bank of America the market risk remains below the historical average which should be positive for risk assets. However, the leading indicators on global trade (South Korea recently printed negative export growth y/y) are rapidly deteriorating although still positive on an absolute level  and thus despite benign market risk equity markets have failed to stage a comeback. Beneath the calm surface a small EM crisis is brewing with Turkey and Argentina assets selling off although Argentinian equities have stabilised somewhat. The cause of EM pain is weaker countries compared to 2008 across debt-to-GDP, lower current accounts and lower growth potential. Add on top of that, rising US interest rates (with US 10-year yields now at 3.1%) and a stronger USD increasing the refinancing pain as many EM countries have financed themselves in USD during the low interest rate environment. The key indicator to follow is EM credit (see chart) currently down 6% from the peak which is largest setback since late 2016. EM equities are still interesting from a valuation perspective , with the upcoming China A-shares inclusion into the MSCI Emerging Market Index starting on June 1, followed by a second round on September 1. As a result we still have EM equities on overweight in our recent House View from this Monday. In other words, we are still overweight EM equities but we are watching EM credit for any signs that pain is coming through the pipes.

Capitulation on energy

We have been underweight the energy sector for a long time and switched to neutral a couple of weeks ago as the negative price momentum relative to other industries/sectors disappeared. Given this week’s new highs for the year we are switching tactically to being positive energy stocks which will also be reflected in our House View on Monday. The table below shows the top 20 global energy stocks with the highest model score in our equity factor model. In the top we find Colombian Ecopetrol which will play an important role in our 2018 FIFA World Cup stock game (Ecopetrol will represent Colombia) which we will introduce in two weeks. Another important observation in the table is that the majority of companies  in the upstream business and few oil services companies.

Lithium is getting concentrated

Despite only 1.6m sold EVs globally the lithium price has gone up 204% since 2014. Imagine what will happen when annual sales of EVs go to 65m in 2040. It is clear to us that investors should get maximum exposure to lithium, nickel and battery technology instead of playing the EV revolution through the carmakers. In the end the car industry will not change being a low margin business with low ROIC and massive capital invested. As David Flicking is reporting today on Bloomberg the lithium industry is getting more and more concentrated. While it’s bad for consumers/carmakers it’s good news for investors and shareholders in lithium producers. It will keep prices and profitability up. Investors with a long-term horizon on equity markets should have exposure to lithium and battery companies.




Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.