Adapt or die, UK election and the Brazilian superstar Adapt or die, UK election and the Brazilian superstar Adapt or die, UK election and the Brazilian superstar

Adapt or die, UK election and the Brazilian superstar

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  In today's equity update we digest the FOMC decision last night that sparked a risk rally in equities and gold as the Fed president Powell opened up for proper QE if needed. We also touch on global leading indicators, UK election, Aramco valuation topping $2trn and take a look at the Brazilian equity market that has been a star performer since 2016.


Yesterday’s FOMC press release gave little to market participants with the key rate unchanged as expected and no major changes in the Fed’s language on the economy and monetary policy. Overall, the Fed is satisfied with the current growth momentum, which has stabilised, against the current policy. The key thing that happened during the press conference sparking a rally in equities and gold while tanking the USD was Fed president Powell’s remarks that the Fed was willing to adapt its strategy on its current liquidity operations which only includes buying Treasury bills.

As we talked about on yesterday’s Market Call podcast there are ongoing structural issues in the US repo market which has been argued by the respected Zoltan Pozsar, an analyst with Credit Suisse that has formerly been with the US Treasury and the Fed, could cause major issues as we get closer to year end. The Fed’s current operations are not QE as it is not buying coupons (duration) but Pozsar’s main argument is that there are too little reserves in the system and the only way to rectify this situation is for the Fed to launch proper QE (that would be QE4) buying various duration levels in the Treasury market. Powell’s comment that the Fed was willing to adapt to an adverse situation in the repo market hinting of QE4 got the rally going.

The immediate implications of QE is a weaker USD and if ECB, which has its first press conference under the new president Christine Lagarde, changes its policy mix following Riksbank in setting policy rates closer to zero, then equities should do well and especially emerging market equities. In our equity update on Monday we wrote about OECD’s global leading indicators suggesting that the global economy has entered a recovery phase following 21 months of declining growth momentum. If it holds that the economy is turning then we are entering historically the best period for equities and especially for emerging market equities.

Source: Bloomberg

Today the UK will have its third election in five years and much is at stake for the UK in terms of political direction and Brexit mandate. Surveys have suggested a firm Conservative majority but the party has slipped in recent surveys so it could get much tighter than currently estimated. The polls close at 22:00 GMT and the earliest results will most likely be announced in the early hours of Friday morning. The UK election is a tough event to trade but in our UK election analysis from two days ago we try to lay out the different outcomes across for GBP and UK equities in addition to expected pivot on fiscal spending etc.

The world has also got its first $2trn market value company as Aramco’s newly floated shares have surged from the IPO price of 32 to 38 in today’s session. In our view the $2trn valuation should be viewed with a grain of salt as only 1.5% of the shares are free floating and they are only listed on the Saudi Stock Exchange. We will know Aramco’s true fair value the day the company lists its shares in a more institutionalized capital market center and the free float goes to at least 10%. Our general view on the global energy sector is still negative with global energy companies only delivering around 7% return on equity which is essentially below the required rate of return for equity investors in the energy sector. In addition the recent OPEC+ cuts are likely not enough to lift oil prices much from here going into 2020.

Source: Bloomberg

Staying with our overweight emerging market equities given the macro outlook it’s worth looking at Brazil as the central bank cut the overnight interest rate by 50 bps. (as expected) sending Brazilian equities higher. In our equity update on Monday we highlighted Brazilian equities as a top play based on historical performance during a macro recovery phase. With monetary policy easing, strong manufacturing PMI, stable GDP growth and high beta to the global economic recovery Brazilian equities could easily be a stellar performer in 2020. The key equity index Ibovespa is one of the best performing indices in emerging markets since the bottom in January 2016 up 191% in USD terms. If we look at valuation the Brazilian equity market is valued at around 25% discount to developed market equities. 

Source: Bloomberg
Disclaimer

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 https://www.home.saxo/en-au/legal/.

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 (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

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

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

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.