Equity Monthly: Were the Fed and the G20 enough? Equity Monthly: Were the Fed and the G20 enough? Equity Monthly: Were the Fed and the G20 enough?

Equity Monthly: Were the Fed and the G20 enough?

Equities 8 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Our new equity market models are here just in time for what looks like the start of a risk-on move into 2019.

November was a stark reminder of what econometrics have coined "volatility clustering" – the observation that once the market sees big swings, the volatility continues for a while before transitioning into a less volatile state. Last month, global equities rose 1.1% while experiencing a 5.1% move from the peak to bottom as headlines rolled in concerning Trump’s threats of higher tariffs on Chinese goods and GE creditworthiness wobbling scared investors in credit markets. The month ended with a rally as Fed chair Jerome Powell reversed his language on the future level of the Fed Funds Rate, as we elaborated on last week.

With investors in general interpreting Powell’s speech as dovish and implying fewer rate hikes in 2019, global equities rose 2.1% into this weekend’s important G20 meeting and Trump-Xi dinner. Powell’s speech made us increase the potential short-term for equities by twp percentage points. Over the weekend, investors got another dose of positive news as Trump and Xi agreed to a “ceasefire” in the ongoing trade war. I had only put a 25% probability on this event in my recent presentation and judging from the market reaction overnight, the market in general had not priced it in. Based on recent events, we expect global equities to rise by 5-7%, so with today’s 2.5% move in global equities almost a third has already been achieved.

The broader question is whether recent events set equity markets up for a rosy 2019. We remain sceptical of this projection despite our current short-term positive outlook. The global economy is late stage and financial conditions have tightened above the historical average. Equity valuations are not outrageous, but they are not cheap either. Our biggest worry is still credit markets that look very vulnerable due to the significant increase in corporate bonds.

The BBB segment (one notch above junk status) has grown massively – by almost $2 trillion – and several observers of the market including Barclay’s CEO Jes Staley have noted wariness on this market. If we suddenly experience a wave of downgrades it’s questionable whether the market can absorb this without significantly tightening financial conditions even further.

It was positive to observe the Fed putting more weight on the market than the economy in trying to indicate that US rates are close to neutral. Previously, the Fed has focused too much on macro indicators late into the macro cycle, but these are useless as they are backward-looking. Late into the macro cycle, a central bank should pay more attention to markets for clues about financial conditions, credit markets, impact on asset classes from discounting recent rate hikes, et cetera. Overall, we believe December will be a good month for equities as the Fed and the G20 came to the rescue and offered a good excuse for investors to increase exposure in equities as 2019 approaches. 

Introducing new equity market and industry models

We have lacked a more systematic approach to how we look at equity markets and industries, so today we officially launch the models that will underpin our house view on equities. They are not meant to be fancy – they are simple and focused on clarity and transparency.

The universe is all developed equity markets and the six largest emerging markets adding up to 29 markets in total. The model looks at each market as if it were a single stock (an equity market is just an aggregation of single stocks). We use the two classic equity factors of valuation and momentum to supplement each other; historically, cheap valuation precedes good returns and momentum is the effect wherein stocks that have done continue to do well on average. Valuation is measured on EV/EBITDA, and against the market itself rather than not cross-sectionally. Why? Because just like auto stocks are always “cheaper” relative to software stocks, it is not so much the relative valuation that matters but the valuation relative to itself (mean reversion). This is because there are always key drivers/factors for a valuation spread (capital structure, accounting rules, growth etc.). Momentum is the 12-month total return in USD minus the one-month return (this is done to factor out mean-reversion effects).

But why have we included momentum when we just trashed it in October? Going forward, momentum strategies will disappoint on their own due to crowding out effects from quant funds following this factor. However, this effect is mostly used on single stocks in the equity realm. Combining it with another factor also makes the model less dependent on momentum itself. So we use momentum because we believe it adds value in combination with another factor. As a stand-alone factor, however, the future is dim for momentum.

As the equity market model below shows, the most interesting markets are Australia, Brazil and Sweden – all very cyclical economies with links to China. With the current ceasefire and likely risk-on through December, these markets should represent a positive risk-reward ratio. The worst markets according to our model are Italy, Denmark and South Africa. Also, note the difference between the Hong Kong (overweight) and China (underweight) markets; the model basically suggests to get China exposure through Hong Kong.
Equity Monthly
The industry model is built on the same principles as in the equity market model. The only difference is that it only uses industry data on the MSCI World Index, and so only includes developed countries.

There is no clear picture emerging in the industry model with non-cyclical and cyclical industries blended together both in the top and bottom of the ranking. The top spot goes to Media & Entertainment with low valuation and still strong relative momentum; companies in this industry are Alphabet, Comcast, Walt Disney, Charter Communication, Facebook, Tencent etc. (these are not investment recommendations).

Energy stocks are also overweight in the model, driven by attractive valuation and decent momentum. If the recent vibes in the oil market can build into some short-term momentum, then there is a good case for energy stocks.
Saxo equity industry model


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo 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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning 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. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

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 are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.