Can the bull market continue? - Presentation to Momentum Think Tank 2020 Steven Bell, Chief Economist - Momentum Global Investment ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Private and confidential Can the bull market continue? Presentation to Momentum Think Tank 2020 Steven Bell, Chief Economist 21st September 2020
Key Issues The virus: is it winning? US politics: likely outcomes, likely impact Can the bull market continue? 2
Tracking Covid-19 US second wave turns, possibly in Europe too …new cases tumble in key US states 80,000 7% Daily Coronavirus New Cases Daily % Increase in Total Coronavirus Cases Increase in Confirmed Cases (7 day m.a.) 70,000 Daily Cases (7 day mov. ave.) 6% Arizona Florida 60,000 5% 50,000 US 4% Texas 40,000 South Carolina 3% 30,000 2% California 20,000 Nevada Europe 10,000 1% 0 0% Mar Apr May Jun Jul Aug Sep 01 May 22 May 12 Jun 03 Jul 24 Jul 14 Aug 04 Sep Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 . • Europe had been outperforming the US but the gap has narrowed markedly • Global daily cases of COVID-19 continue to rise. Daily deaths have fallen from their peak. • Medical progress in therapeutics and testing has been remarkable. Oxford vaccine trials are critical as it is months ahead of rivals and could be available in large quantities by the autumn. Uncertainty remains until results are published and analysed. The recent halt to the trial is worrying but probably not critical. Past performance is not indicative of future performance. 3
Second Waves in Europe Daily % increase in Total Coronavirus cases 3.0% Increase in Confirmed Cases (7 UK 2.5% France day m.a.) 2.0% Spain 1.5% 1.0% Netherlands 0.5% Germany Italy 0.0% 01 May 01 Jun 01 Jul 01 Aug 01 Sep Source: BMO Global Asset Management and Bloomberg as at 7 September 2020 4
Tracking Covid-19 Some EM countries are suffering badly … …but infections among the UK general public are flat 90,000 Daily Coronavirus New Cases % testing positive for COVID-19 80,000 0.5 Daily Cases (7 day mov. ave.) India 70,000 0.4 60,000 50,000 0.3 Brazil 40,000 0.2 30,000 20,000 0.1 Russia 10,000 Mexico Saudi Arabia 0.0 0 6 May to 20 May 3 Jun to 17 Jun to 1 Jul to 15 Jul to 29 Jul to 12 Aug to Mar Apr May Jun Jul Aug Sep 19 May to 2 Jun 16 Jun 30 Jun 14 Jul 28 Jul 11 Aug 25 Aug Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 Source: ONS, as at 3 September 2020 . • The virus seems to be out of control in certain EM where social distancing is impractical and health care systems are inadequate • A high quality UK study of infection within the community (excluding those in hospital etc.) shows a rate of incidence that has been flat since lockdowns were eased. Separate data show a sharp rise in new cases and a limited national lockdown has been reimposed. Past performance is not indicative of future performance. 5
A global recession 2020 growth forecasts are edging up except in UK .. …and data surprises remain positive 6 50 125 Forecasts GDP Growth 4 40 100 Global Economic Forecast GDP (% year / year) 2 30 Surprise Index 75 (Goldman Sachs) 20 50 0 Canada 10 25 EM Index -2 Index 0 0 -4 US -10 -25 -6 -20 -50 Euro Area -8 -30 Global Economic -75 Surpise Index (Citi) -10 -40 -100 UK -12 -50 -125 Jan Feb Mar Apr May Jun Jul Aug Sep 2015 2016 2017 2018 2019 2020 Source: Bloomberg, as at 3 September 2020 Source: Bloomberg, as at 3 September 2020 • Recent data for European economic activity have come in in weaker than expected. With strong second waves in France and Spain and a more modest second wave in Germany, hopes of rapid recovery have receded. • UK data have recently come in much stronger than expected but reimposed lockdown raises risks. • Despite the well-documented problems with the virus in the US, recent data, notably on housing and the labour market have been strong. This is a significant surprise. . Past performance is not indicative of future performance. 6
Massive monetary and fiscal support Central banks cut rates aggressively… …along with very large fiscal support 80 US Budget Balance (% of GDP) Recession 5 Cumulative Interest Rate cuts in 70 60 0 OECD countries 50 % of GDP -5 40 30 -10 6m rolling sum 20 -15 10 Consensus Forecast 0 -20 2000 2003 2006 2009 2012 2015 2018 1970 1980 1990 2000 2010 2020 Source: BMO Global Asset Management and Bloomberg as at September 2020. Note: Central Banks/ countries considered are Source: BMO Global Asset Management and Bloomberg as at September 2020. ECB, Fed, BoE, Australia, Canada, Chile, Denmark, Hungary, Iceland, Israel, Japan, South Korea, Mexico, New Zealand, Norway, Poland, Sweden, Switzerland and Turkey. • Cutting interest rates helps a little but non-traditional measures by central banks help more. Fed buying credit, QE to infinity and measures by ECB notable. • Huge fiscal response underway. Many of the massive US measures expire soon and a new package is needed. Progress has been limited. Past performance is not indicative of future performance. 7
Pledged Fiscal Packages Budgetary measures Non-budgetary measures Source: IMF, Fiscal Monitor, April 2020 and update June 2020; IMF, World Economic Outlook; BIS calculations. Estimates focus on government discretionary measures that supplement existing automatic stabilisers, which differ across countries in their breadth and scope. AEs = AU, CA, DE, ES, FR, GB, IT, JP and US; EMEs = AR, BR, CN, ID, IN, KR, MX, RU, SA, TR and ZA. For regions, weighted averages based on GDP and PPP exchange rates. 1 Equity injections, asset purchases, loans and debt assumptions, including through extra-budgetary funds. 2 Guarantees on loans and other contingent liabilities such as loans channelled through public financial agencies. • Huge support globally is unevenly distributed and hard to gauge. • The US has led the way of fiscal support but many lower income countries have been unwilling or unable to do much on this front. Loan guarantees have been a big feature in many countries, notably Japan and Germany (who can easily afford it) and Italy (who cannot). Past performance is not indicative of future performance. 8
Long-term US real rates fall ever lower Risk-free rate is very low… …but US jobs needs continued fiscal support Yield on 10 year US inflation protected security 5000 17.0 1.5 Peak = 1.16 15.0 1 4000 US 13.0 Claims (thousands) 0.5 Unemployment 3000 Rate 11.0 % % 0 Average US Initial Jobless 9.0 2000 2017 = 0.44 Claims (4 week -0.5 moving average) 7.0 Latest 1000 -1 = 5.0 -0.99 -1.5 0 3.0 2017 2018 2019 2020 1990 1994 1998 2002 2006 2010 2014 2018 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 • The yield on 10-year US Treasury Inflation-Protected Securities - a key component of the discount rate for assets like equites whose income is likely to rise with inflation – fell heavily since late 2018 and has recently hit a record low. • Massive fiscal support, notably in the US has cushioned the blow of sudden, sharp, deep recession. Many forecasters are worried about further economic weakness as fiscal support is withdrawn. Many measures expired at the end of July and a new package is needed. But low interest rates limit the pressure to reduce deficits. Past performance is not indicative of future performance. 9
US economy now stronger than Europe again 60 US Composite PMI Index 50 40 30 Eurozone 20 10 Sep 17 Mar 18 Sep 18 Mar 19 Sep 19 Mar 20 15 Composite PMI Index US - Eurozone 10 5 0 -5 Sep 17 Mar 18 Sep 18 Mar 19 Sep 19 Mar 20 Source: BMO Global Asset Management and Bloomberg as at 7 September 2020 10
US Economy: High Frequency Measures Big Data Mobility Measures US Daily Travel, dining measures YoY Change 160 20 140 0 Driving Mar 20 Apr 20 May 20 Jun 20 Jul 20 120 -20 100 Walking Homebase Total -40 80 Hours Worked 60 Transit -60 US TSA Traveler 40 -80 Throughput 20 -100 OpenTable Seated 0 Diners Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 -120 • The recovery in mobility data has largely flattened since mid-June. Sources: U.S. Transportation Security Agency, Opentable, Homebase, Bloomberg, Apple Mobility Trends Reports. Data through August 2, 2020. 11
Politics and Policy Image source: istock photo 12
Who will win the US election? Trump approval rating has fallen Betting markets pricing Democrat clean sweep 48 100 Trump Approval Rating 90 46 80 Democratic Controlled House 70 44 60 Democratic President 50 % % 42 40 40 30 20 Democratic Controlled Senate 38 10 36 0 2017 2018 2019 2020 Sep 19 Nov 19 Jan 20 Mar 20 May 20 Jul 20 Sep 20 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 • US election is a major risk for this year and Trump’s approval rating has fallen significantly since the virus struck • Betting markets and polls suggest the election will be very close but the odds on Democrats regaining the Senate and the White House have risen • The race remains close Past performance is not indicative of future performance. 13
Europe Purchasing managers’ indices bounce … …but markets see continue low inflation Euro Area PMIs German 10y Breakeven 70 1.6 1.4 60 1.2 50 1 PMI Index Manufacturing % 40 0.8 0.6 30 0.4 Services 20 0.2 10 0 2017 2018 2019 2020 2016 2017 2018 2019 2020 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 Source: BMO Global Asset Management and Bloomberg, as at 7 September 2020 Europe is well on the way to easing the lockdown and the economy has responded. But second waves are evident in many countries and lockdown easings have been delayed or reversed Past performance is not indicative of future performance. 14
UK overtakes Europe 60 Composite PMI Index 50 UK 40 30 Eurozone 20 10 Sep 17 Mar 18 Sep 18 Mar 19 Sep 19 Mar 20 8 UK - Eurozone Composite PMI Index 4 0 -4 -8 Sep 17 Mar 18 Sep 18 Mar 19 Sep 19 Mar 20 Source: BMO Global Asset Management and Bloomberg as at 7 September 2020 15
UK High Frequency Data shows strong pick up Electricity Usage normalised for temperature Spending Trends and long term trend 115 30 Online Spending Trends (28 day and 7 20 Electrical Power Actual Load 110 10 day averages, % y/y) Total Usge (5 day m.a.) 105 0 100 -10 -20 95 -30 90 Offline -40 85 -50 80 -60 Jan 20 Mar 20 May 20 Jul 20 Jan Feb Mar Apr May Jun Jul Aug Sep Source: Barclays, as at 7 September 2020 Source: Barclays, as at 7 September 2020 Past performance is not indicative of future performance. 16
China versus the world China’s PMIs back close to pre-covid levels… …and the rest of the world is catching up 60 70 Global Services Jan10-Dec19 Avg: 53.2 Construction Jan10-Dec19 Avg: 59.9 Current: 65 55 Current: 60.2 51.9 60 50 Current: Global Manufacturing Jan10-Dec19 Avg: 51.7 55 55.2 45 PMI Index 50 Current: Non-Manufacturing Jan10-Dec19 Avg: 55.1 Current 40 45 : 51.0 51.8 Manufacturing Jan10-Dec19 Avg: 51.0 35 40 35 30 30 25 25 20 Source: BMO Global Asset Management and Bloomberg as at 7 September 2020 Source: BMO Global Asset Management and J. P. Morgan as at 8 September 2020. • China’s more severe lockdown has limited second waves and allowed almost complete recovery. • The RoW was catching up fast but second waves and higher infection rates means that lockdowns in the US and parts of Europe have been reimposed or easings delayed. EM countries like India and Brazil are still suffering badly from the virus. Past performance is not indicative of future performance. 17
Emerging Markets EM easing on all fronts… …EM PMIs above DM 50 Composite PMIs Recession 60 Cumulative Interest Rate cuts in 45 55 Emerging Markets EM (largest 15 by GDP) 40 35 50 30 45 PMI Index 25 40 6m rolling sum 20 35 15 Developed Markets 30 10 5 25 0 20 2000 2003 2006 2009 2012 2015 2018 2018 2019 2020 Source: BMO Global Asset Management and Datastream, as at September 2020 Source: BMO Global Asset Management and Bloomberg, as at September 2020 • Emerging market central banks have turned incrementally dovish year-to-date motivated by slowing growth expectations, continued disinflation and monetary policy easing in developed economies. There is plenty of headroom for sustained policy accommodation. • The shift in monetary policy stance seems sustainable given the dovish shift in DM central banks; a broad-based slowdown in both export and domestic EM growth; continued disinflation from lower energy prices Past performance is not indicative of future performance. 18
Earnings outlook improves… 2020 EPS heavily revised down… …but Q2 results have beaten low expectations 40 20 MSCI All Country EPS Growth S&P 500 2020 Quarterly EPS 30 10 EPS Growth (% y/y) % growth (year / year) 2021 20 2017 0 2018 2013 2014 10 -10 Q4 2016 2012 2019 Q1 0 -20 2015 Q3 -10 -30 2020 Q2 -20 -40 -30 -50 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jan Feb Mar Apr May Jun Jul Aug Sep Date forecast made Date Forecast Made Source: BMO Global Asset Management and Datastream, as at September 2020 Source: BMO Global Asset Management and Bloomberg, as at September 2020 • EPS forecasts for 2020 have been slashed but projections for 2021 are above 2019. Q2 reporting season has seen a high % of companies beating analysts’. Significant beats on a cap-weighted basis are less impressive. With economic data surging, estimates for earnings in 2020H2 may start to improve but a setback to economic recovery in the US and Europe could lead to a double dip unless a vaccine come to the rescue. Past performance is not indicative of future performance. 19
…and could improve further Bounce in EPS forecasts … …and guidance is strong US Earnings 30% 75 50 Earnings Revisions (%, 4w mov av) 40 20% S&P 500 Earnings Revisions S&P 500 12m forward ((Upgrades - Downgrades) / Total) EPS Growth (%yoy) 30 EPS change (% yoy) 10% 20 0% 50 10 Index -10% 0 -20% -10 -30% US Company Profit 25 -20 Outlook Index Model -40% -30 estimate -40 -50% -50 -60% 0 1998 2001 2004 2007 2010 2013 2016 2019 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Source: BMO Global Asset Management, Bloomberg and Datastream, as at September Source: BMO Global Asset Management, Bloomberg and Datastream, as at September 2020 2020 • The recent Q2 earnings season at -35% y/y is the worst since the GFC but came in better than expected. EPS surprise (+22%) for those that have reported has been the strongest since 2009 but sales surprise has not been as strong (+2%). U.S. companies profit-outlook index, compiled by Bloomberg and based on corporate revisions to forecasts was recently at a record high and remains elevated. Past performance is not indicative of future performance. 20
What news on a vaccine? Classification: only to be shown if not public • Phase 1/II trials in UK show Oxford vaccine is safe and produces T-cells and antibodies • Phase III trials started in June. Recent halt to trials may merely be temporary setback • 100 million doses ordered by UK, 300 million by US, 300million by EU • 30mn due in the UK by September, US may have the vaccine by 3 November • Moderna started Phase III trials in late July. 9 vaccines in Phase III trails • High probability that one or more of the vaccines will be successful Source: BMO Global Asset Management 21
Classification: only to be shown if not public Conclusions: The virus is fighting back but wil probably be defeated by a vaccine. This would be a game changer US suffering serious second wave, Europe’s second wave is gathering force Political uncertainty headed higher in the US. Major market implications Life will never be the same again but pre-covid levels of economic activity and earnings regained by end 2021. Risk assets would receive boost from good news on a vaccine 22 22
Acronyms, definitions and explanations EPS = earnings per share. P/E = ratio of share price to earnings US CPI and PCE deflator There are two common measures of inflation in the US today: the Consumer Price Index (CPI) and the Personal Consumption Expen ditures price index (PCE) The CPI gets more press, it is used to adjust social security payments and is the reference rate for Treasury Inf lation Protected Securities (TIPS) and inflation swaps. The Federal Reserve, however, states its goal for inflation in terms of the PCE. Core consumer prices exclude volatile for and energy. In Japan the core measure excludes fresh food (notably fish); the core core measure also excludes food and energy. Trimmed mean inflation excludes the extremes of price movements. The closely-followed US PCE version compiled by the Cleveland Federal Reserve excludes the bottom and top 8% of monthly movements. We think it is a better measure of underlying inflation than the core. Purchasing managers’ indices, PMIs The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. An index of construction is also provided for a few countries. In China, we tend to use the indices complied by the National Bureau of Statistics. The Canadian PMI relates purely to manufacturing which is more volatile; we use a six month moving average. Breakeven inflation This is derived either directly from the swap market or as the difference between the yield on conventional government bonds and their inflation-protected equivalent. 5x5 measures the 5 year breakeven inflation rate 5 years ahead. BOC. Bank of Canada, BoE Bank of England, Fed, FOMC the FOMC is the rate setting body in the US, part of the Federal Reserve FTA a free trade agreement that imposes zero tariffs between the countries concerned Sources: BMO GAM, Cleveland Federal Reserve, Investopedia 23
You can also read