Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
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“This week I’ll detail Goldman Sachs’ client guide to market volatility, why global asset allocations might cause more selling in equities, some context to the ominous yen carry trade and suggest a book that objectively changed how I think my way through the world”
Market Factors: The sell-off was likely a lucrative opportunity
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BofA Securities analyst Vivek Arya sees a rebound for select semiconductor stocks,
“Volatility could persist through NVDA earnings (Aug-28) and then into Sep, historically the worst month for SOX, down 70% of the time. US elections and ongoing geopolitical tensions add an extra layer of uncertainty. However, if history is any guide, SOX could recover starting in October, with CQ4 and CQ1 the two strongest quarters for semi stock performance (7-10.5% avg. returns, 400bps+ ahead of SPX, since 2010). Note also we are only in Quarter 4 of this upcycle that started in Sep’23 and has produced 28% SOX returns, while prior upcycles have lasted 10 quarters and generated 67% average SOX returns … Concerns about the return on investment (ROI) on high AI capex is valid but premature and inconclusive in our view, since: 1) AI capex will be front-loaded, similar to past hardware projects such as 3G/4G/5G network upfront deployments that lasted 3-4 years, 2) AI capex is as much defensive (protecting search, social or ecommerce dominance) as it is offensive (new revenue streams), 3) Enterprise and sovereign AI adoption has yet to start in a big way, and 4) NVDA flagship Blackwell AI product, best suited for AI, has not even started to ship yet … Our base case remains for a SOX rebound likely in Q4 as seasonal headwinds dissipate. 1) Three stocks that we expect would outperform in our baseline benign rebound scenario: NVDA, AVGO, and KLAC, the most profitable vendors in their respective end-markets. 2) If, however, volatility remains enhanced and demand worsens, then in a slower, more “recessionary” scenario, we would highlight stocks that have outperformed historically including CDNS, SNPS and AVGO”
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The yen carry trade is the volatility-inducing monster under the bed for some market pundits with much of the anxiety arising from the inability to quantify the position. Goldman Sachs foreign exchange analyst attempted to put the yen’s influence in context,
“Limited data availability presents a challenge to confidently assessing “how much is left,” but substantial holdings among longer-term investors leave room to run. That said, subsequent unwinds should be broadly slower-moving as, based on futures positioning alone, roughly 90% of speculative shorts appears already undone. Despite the sharp unwinds, we believe that coincidental timing of disappointing earnings and a “perfect storm” of JPY-positive factors—including softer macro data, Yen supportive intervention, and a surprise BoJ hike—best explains the unusually tight correlation between the sell-offs in USD/JPY and the Nasdaq over the past few weeks, rather than deep leverage from the carry trade … the BoJ’s plan to continue hiking rates—but not the Fed’s readiness to cut. Deputy Governor Uchida’s remarks last week demonstrate the BoJ is willing to adjust policy in response to market volatility to avoid rapid and significant Yen appreciation …Though we have not flipped to being Yen bulls, the carry unwinds “still left” will probably reinforce any periods of Yen appreciation. Moreover, the marginally higher probability of a US recession (our economists now have it at 25%) increases the attractiveness of the Yen as a portfolio hedge”
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In a separate report from BofA Securities, the monthly global fund manager survey [FMS] highlighted the results of rising market volatility,
“Cash levels up from 4.1% to 4.3%, investors OW stocks down from 51% to 31%, capex optimism drops to 9-month low; but core optimism on soft landing (76%) & US large cap growth stocks unbowed…just that investors now think Fed needs to cut harder to guarantee no recession (60% say 4 or more Fed cuts next 12 months) … 55% say monetary policy “too restrictive”, highest since ‘08…93% predict lower short rates, 59% lower bond yields; despite JPY vol shock net 63% still believe Japanese yen undervalued (vs 72% in July … August defensive rotation into bonds, cash, healthcare, out of stocks, Japan, Europe, tech; OW in bonds largest of ‘24; “long Magnificent 7″ still #1 most crowded trade (albeit less crowded) and equity preference for US vs RoW & large cap growth stocks undimmed by volatility. FMS Contrarian Trades: long commodities vs stocks, long RoW vs US equities, long small cap value vs large cap growth; long consumer discretionary vs healthcare.”
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Diversion: “A Photographer’s Prairie Odyssey” – Macleans