INVESTMENT STRATEGY Jeanne Asseraf-Bitton Global Head of Market Research - Lyxor
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SEPTEMBER 2019 INVESTMENT STRATEGY Jeanne Asseraf-Bitton Global Head of Market Research Contact email CrossAssetResearch@Lyxor.com. Slides updated as of September 17, 2019 Important Notice: For investors in the European Economic Area, this material is directed as clients (actual or potential) who meet the definition of a “Professional Counterparty” or “Eligible Counterparty” under the Markets in Financial Instruments Directive (“MiFiD”), and any products or services described which fall within the scope of MiFiD are only available to such clients. This communication is a marketing communication within the meaning of MiFiD. MARKET RESEARCH >> INVESTMENT STRATEGY
Second massive growth re-pricing so far this year BBG Consensus 2020 US 1.8%; EMU 1.1%; China 6% ? Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 2
Trade war/truce until US elections, impairing trade & growth Talks & tensions to continue USMCA stalled in Congress US-China: 15% tariffs on new $125bn tranche eff. Sept 1 Dec 15 delay for $160bn: cell phones, laptops, consoles, toys… Proposed rise from 25% to 30% on the $250bn tranche on Oct 1st + 2 weeks US-Japan / US-EU : Talks to resume. Auto restrictions (Nov 13th), wine vs. GAFA, Airbus… Next, US exit from WTO? Deflationary impact on growth (0.5% of US GDP) & equity market Distrust / Capex / Consumer IT sector (imports & exports) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 3
World manufacturing contraction to bottom in Q1 2020 Limited contagion to services ⟹ No global recession in 2020 Mfg recession unlikely to bottom before Q1 2020 Time for policy stimulus to kick-in Time for inventories to be worked down Little risk of global recession before 2021 Monetary easing Fiscal stimulus Solid US consumer Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 4
China: further stimulus in Q4 So far, stimulus hardly reined in the slowdown ▼ consumption ▲ debt service ▼ exports ▲ tariffs Massive tax cuts & fiscal spending front loaded in H1 Monetary stimulus in Q4 (except for property sector) Reform: 1Y MLF rate Banks’ LPR = MLF+credit spread RRR cuts: ⟺ RMB900bn liquidity addition announced for in Q4 Rate cuts likely in October Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 5
Yuan allowed to depreciate USDCNY moved to offset overall impact of US tariffs USDCNY target of 7.06 as 25% tariff on $200bn Imports from China ($bn) 550 Pre-tariff USDCNY level 6.34 Tariffs on US on Weighted "Offsetting" imports Amount additional Cumul USDCNY from China ($bn) tariff 25% 50 2.3% 2.3% 6.48 10% 200 3.6% 5.9% 6.71 15% 200 5.5% 11.4% 7.06 25% 300 13.6% 25% 7.93 Goldman Sachs, Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 6
Accommodative fiscal polices Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 7
New round of monetary easing unfolding Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 8
Negative yielding debt piling up ≈ 30% of bonds outstanding (market value) > INVESTMENT STRATEGY 9
Neutral+ Gold for its safe haven feature Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 10
Trade war / Recession hedges ▼EM / China equity ▼CNYUSD ▼Japan / EMU equity ▲Defensives ▲Gold ▲US Treasuries Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 11
Oil: supply to match pressures on demand (Brent target $65) Drone strike on Abqaiq plant Impact ⋝ 5mbd Reserves could cover 15M US-Iran de-escalation unlikely Venezuela & Libya output stalling but risks of further fall OPEC+ committed to curb output. Possible moderation in US output growth Saudi Aramco may wait to rev up its IPO plans (late 2020?) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 12
EURUSD in a trading range USD long positions stretched. Reduced EUR shorts Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 13
The endless Brexit uncertainty BoJo cornered to negotiate with EU or delay until Jan 31st Parliament wary of BoJo and of current polls Oct 31: Brexit deadline Dec 31, 2020: end of transition Scenarios Current Deal No-Deal Remain 16/09/2019 Probabilities 50% 50% 0% BoE Rate (level) 0.75% 0.75% 0.25% 0.75% Gilt 10Y (level) 0.716% 0.80% 0.00% 1.00% GBPUSD (% chge) 1.245 +5% -15% +15% Equity (UKX, % chge) 7356 +5% -10% +10% Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 14
US assets MARKET RESEARCH >> INVESTMENT STRATEGY 15
US Recession unlikely in 2020 (presidential election) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 16
Worrying signal from consumer surveys’ spread but … CCI (5000 households) Closely related to job market MCSI (500 households) More sensitive to personal finance situation (gas price) Employment typically lagging Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 17
…solid fundamentals for US consumption Low-income earners: 0 wage acceleration Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 18
US capex-led productivity recovery jeopardized by trade war Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 19
US upward pressures on wages amid full employment Strike @GM Labor market dynamics still positive (high opening rate, Manpower outlook) US labor participation to stall (re-entrance demographics) >0 High corporate margins suggest solid job creations > INVESTMENT STRATEGY 20
US Headline inflation likely to firm up before yearend Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 21
Fed (un)easy stance DOTS: 1 hike late 2020 Implied: 4 cuts over N12M Our take: 2 cuts in Sept. & Dec. QE back in October when: . UST cap (from $30 to $15bn last May) ends . Agency & MBS reinvested in UST (up to $20bn/month) Macrobond Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 22
US Treasuries – Domestic vs. Global drivers Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 23
US Treasuries – O/W Short duration Target 10YY: 2% in 12M (RR 1.1% BE 1.6% TP -0.7%) Longed-for recovery in term premium ! QE comeback Massive foreign interest Tariffs deflationary threat Target 12M 10Y UST = 2% Neutral 10Y UST ( ) ≈ 0.5% Target 12M 2Y UST = 1.5% O/W 2Y UST ( ) ≈ +2% Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 24
S&P 500 Sales growth slowdown Update of our forecasts with nominal growth @4%, DXY @100 and WTI @57 +1% due to buyback effect S&P 500 sales per share growth decelerating to low single digit in 2018: 9.3% 2019: 3.5% 2020: 4.5% (vs. +5.5% BBG) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 25
S&P 500 margin compression covered by tax cuts … for now Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 26
US Equity: Neutral with a defensive bias Unit labor cost up +2%, partly passed on in selling prices Margin compression 0.5% in Q4 EPS stalling in 2019, close to revised consensus Consensus over-optimistic at +10% for 2020 & 2021 Risk premium recovered Equity concentration risk (top 9 stocks = 25% mkt cap) S&P 500 yearend top-down consensus at about 2950 Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 27
US Equity concentration risk AAPL, MSFT, GOOGL, AMZN, FB, BRK/B, JNJ, JPM, XOM Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 28
O/W US Quality: overperforms in slowdowns, strong balance sheet O/W US Staples: EPS resilience, high ROE, no longer overvalued Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 29
Neutral US Financials: flatter yield curve, cyclicality, full valuation O/W Dividend Aristocrats: depressed valuation, low beta Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 30
Neutral US IT: slowdown in semi, trade tensions Neutral US Growth vs. Value: too early to favor Value Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 31
Neutral Healthcare: improving fundamentals but policy risk U/W Utilities: valuation overstretched Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 32
US High Yield O/W for the ST Bloomberg, Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 33
US High Yield: challenging fundamentals longer term Bloomberg, Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 34
EMU & UK Assets MARKET RESEARCH >> INVESTMENT STRATEGY 35
EMU weak macro backdrop to persist Trade war (mfg recession, auto) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 36
EMU weak macro backdrop to persist (2) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 37
EMU fiscal stimulus to mitigate the slowdown Sensitivity to trade war, China growth & Brexit German recession Driven by external sector Despite domestic demand shift (minimum wage +4%, public sector +8% 3Y) Consensus (BBG) +1.1% in 2019 & 2020 Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 38
EMU muted inflation prospects Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 39
EMU muted inflation prospects (2) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 40
ECB uninspiring all-in to revive inflation expectations Deposit rate -10 bps to -0.5% Tiering €1200 excess reserves 800 @0% & 400@-0.5% About 0.7% of bank earnings Open-ended QE $20bn/month TLTRO3 Sept until mid-2020, maturity 3Y, rate -0.30% Growth forecasts trimmed GDP 1.1% in 2019 ; 1.2% in 2020 Inflation forecasts slashed in 2020 to 1.0% (vs previous 1.4% &1.2% in 2019) Tactical long breakeven closed Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 41
U/W German Bunds (Target 10YY: -0.3% in 12M ( ) ≈ -2%) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 42
Tactical long on Italian spread Italy Tactical buy, target @120 bps Political crisis averted for ST Budget execution slippage likely controlled Poor fundamentals (persistent lack of growth, debt/GDP @ 131%) Spain Neutral Best growth profile in EMU Turning to primary surplus in 2019 Debt-to-GDP on a mild downtrend (2014 >100% 2019 @96.2%) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 43
Europe Credit: Prefer HY to IG Persistent hunt for yield O/W High-yield ECB stance to remain loose Low default risk expected Solid cash-flow generation Slight deleveraging of corporate balance sheet Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 44
EMU Equity hurdles: Lower growth and PPI to weigh on margin, consensus EPS down to +1.5% in 2019 but optimistic at +10% in 2020 Ibes, Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 45
U/W EMU equity Financials’ value trap & struggling auto sector. Valuation vs. growth & political risks Bloomberg, Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 46
Neutral EMU Banks: Persistent profitability issue Tactical buy closed: at target & post ECB Ibes, Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 47
U/W EMU Cyclical vs Defensive Economic slowdown; trade & Brexit risks (incl Autos tariffs); Relative valuation Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 48
O/W EMU Large caps vs Small caps economic slowdown, wage inflation not supportive of Small caps Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 49
Neutral UK Equities DY >4%; fair valuation; EPS flattish in 2019 Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 50
Japan & EM Assets MARKET RESEARCH >> INVESTMENT STRATEGY 51
Japan trade-related recession Consensus BBG +0.9% in 2019, +0.3% in 2020 ▼Bus. & Cons. Confidence Activity & labor market peaked Consumption negative payback likely in Q4 post-Oct. tax hike Capex impaired by trade war impact on business sentiment Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 52
JP subdued inflation Growth at potential Wage downward reversal Inflation likely to remain well below BoJ target BoJ continued trimming its inflation forecasts ▪ 0.8% in FY18 ▪ 1.0% in FY19 [0.8% x tax hike] ▪ 1.3% in FY20 [1.2% x tax hike] Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 53
BoJ status quo Natural QEE tapering amid scarcer pool of JGBs (JGB purchases running at 1/2 target) BoJ >43% JGB market Change in policy unlikely Japan growth slowing but not below potential JPY▲ tighter financial conditions Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 54
USDJPY mixed prospects Growth & Rate differentials & yen carry trade Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 55
U/W Japan Equities Sensitivity to global trade ; further downside to 12MF EPS already @-6% Fair valuation Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 56
O/W EM Debt (HC) Fundamentals rather supportive Dovish Fed, ECB, BoJ Local CBs leaning on easing side Chase for yield to foster inflows Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 57
Caution on EM Equities Sensitivity to trade tensions Monetary & fiscal policies in neutral/easing mode (China, India, Russia, Brazil Indonesia, Korea …) 12MF EPS already revised sharply down to ≈ -11% Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 58
Caution on EM Equities (2) Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 59
EM Equity: uneven trade impact & valuation warrant dispersion Macrobond, Lyxor AM MARKET RESEARCH >> INVESTMENT STRATEGY 60
EM Equities – Country positioning (1/3) China: Remain strategically U/W Taiwan: Remain Neutral China wishing to delay escalation without The eco pulse is decelerating, but early strategic concessions; US likely to keep signs of benefits from supply chain tariffs and to avoid further increases. substitution (tech export to US up) Extra drag on China GDP is partially Monetary & fiscal push being gradually offset by increased stimulus. stepped up LT China transition drag LT diplomatic risk premium as US & Greater financial access only LT positive China raise stakes A (weak) truce in sight, but poor upside Not cheap and limited relative upside given limited trade pricing India: Remain Neutral Sth Korea: Downgrade to U/W Key challenges remain intact: 1) revive Could ultimately benefit from tech supply growth through consumption, 2) fix high chain revamping but growth is rapidly unemployment through reforms, 3) fix slowing, amid trade war, slowing China weak financial system and NPL, 4) and USD strength navigate alliance with US while resisting Japan sanctions hitting key industries pressure onUS imports from India (incl. tech & chem.) likely to worsen. Not Steps to reinforce territorial integrity and systemic, but another challenge to face LT Kashmir struggle means tail risks Not cheap, declining margins, with high But isolation from the trade war, cheap beta to tech & China. Further downgrade valuation and attractive tactical backdrop until some trade clarity returns MARKET RESEARCH >> INVESTMENT STRATEGY 61
EM Equities – Country positioning (2/3) Indonesia: Remain O/W Thailand: Downgrade to U/W Resilient macro pulse. Trade war impact Weaker macro & export pulses due to mitigated by monetary easing and fiscal global demand and tourism expansion amid tame inflation and low Strong resilience to trade war could be budget deficit tested by tariff escalation; Greater fiscal Risk from C/A dependent on liquidity support to mitigate impact conditions Stable military junta sponsored- LT upside from US & China supply chain government; support for infrastructure revamping and Chinese investments and China’s Belt & Road Cheap after the recent correction Risk: 2024 elections Rich valuation Mexico: Downgrade to U/W Despite limited fiscal slippage and Brazil: Upgrade to O/W inflation under control, unfavorable Accelerating macro pulse, driven by backdrop from slowing US, uncertain capex and consumption. Further progress USMCA ratification, and US pressures conditioned by reforms ahead of election Likely to benefit from the trade war. Limited catalyst until budget clarity. Equities’ limited correlation to China Proposal based on +17% oil output… Valuation getting stretched, but further Negative macro pulse upside from lower rates amid tame Cheap but limited ST upside inflation MARKET RESEARCH >> INVESTMENT STRATEGY 62
EM Equities – Country positioning (3/3) Russia: Upgrade to O/W The macro pulse lost traction, but fundamentals should help weather sanctions and oil volatility Low public debt, positive C/A boosting FX reserves. Budget assumes oil price at only $40/b. Strengthening trade ties with non-Western partners Extra US sanctions being considered on Russia-Germany pipeline. But no obvious will from US/EU to escalate Lower risk premium, oil prices >$60/b, affordable valuation and high carry, and relative trade war isolation look attractive MSCI EM Sector & Country Weights (as of 2019) MARKET RESEARCH >> INVESTMENT STRATEGY 63
CROSS ASSET RECOMMENDATIONS UW N OW EMU Equities US Equities US Staples EMU Cyclicals vs Defensives US Growth vs Value EMU Large vs Small Japan Equities US Small vs Large Indonesia Equities EM Equities US Cyclicals vs Defensives Brazil Equities Equities China Equities EMU Banks Russia Equities South Korea Equities UK Equities Mexico Equities Taiwan Equities Thailand Equities India Equities 10Y German Bund 10Y US Treasury 2Y US Treasury EU Credit IG Italy BTP vs German Bund Fixed US Credit IG US Credit HY Income EU Credit HY EM Debt USDJPY EURUSD FX USDCHF GBPUSD Commodities Copper Brent Gold L/S Equity Directional Special Situations L/S Equity Market Neutral FI Multi-Strategy Merger Arbitrage Hedge Global Macro Systematic L/S Credit Funds Global Macro Discretionary EM Global Macro CTAs MARKET RESEARCH >> INVESTMENT STRATEGY 64
Agenda Sep 18: Fed meeting (projections) Sep 17-30 UN GA meeting with probable trade talks (Trump/Abe/Xi…) Sep 30: WTO dispute settlement body (US/Airbus) Oct 1: Japan consumption tax hike Oct 31: Juncker EU Commission President term ends Oct 31: Draghi ECB Governor term ends Oct 31: new Brexit deadline Nov 13: Decision on potential restrictions on US imports of autos from EU / Japan Nov 30: Donald Tusk EU Council President term ends Dec 11: WTO appellate body at risk (down to 1 member!) unless the US allows the appointment of 2 judges Jan 2020: BoE Carney mandate ends 2020 : US exit WTO? MARKET RESEARCH >> INVESTMENT STRATEGY 65
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