Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategist Simone Arel highlights U.S. leading economic indicators that continue to deteriorate (my emphasis),
“U.S. Conference Board Leading Economic Index (LEI) slipped 0.3% month-over-month (to 116.2) in August, missing consensus (-0.1%) and delivering its sixth consecutive monthly drop. According to the report, only initial jobless claims and the yield spread contributed positively to the indicator last month, while building permits weighed heavily on the index. On a 6-month annualized basis, the LEI is running at -5.3% pace, which is clearly a bad omen for economic activity. ... The ISM Manufacturing and the LEI tend to follow each other closely over time and the steep drop in the LEI suggests that the ISM could be heading into contraction territory in coming months. ... LEI drops of 5%+ on a 6-m annualized basis have usually been accompanied by a recession. Similarly, a sustained drop in the LEI to CEI ratio (ratio of the leading to coincident indicators) usually precedes recessions ... The ratio has been on a downward path since December. Unfortunately, deterioration in leading indicators don’t bode well and the odds of a soft-ish landing are diminishing fast.
“‘The odds of a soft-ish landing are diminishing fast” (Scotiabank)’ – (research excerpt, chart) Twitter
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BofA Securities chief investment strategist Michael Hartnett remains extremely bearish. His weekly Flow Show report was typically succinct,
“Great Bond Bear Market thus far a doozy … 2022 global govt bond losses on course for worse since 1949 (Marshall Plan), 1931 (Credit[1]Anstalt), 1920 (Treaty of Versailles); bond crash threatens credit events & liquidation of world’s most crowded trades … Long US$, long US tech, long private equity (-47% from highs) … True capitulation is when investors sell what they love & own… inflation/rates/recession shocks are not over, plus bond crash in recent weeks, means highs in credit spreads, lows in stocks are not yet in; … Drivers of high 21st century PE all reversing … QE, fiscal austerity, free movement of trade, people, capital, geopolitical peace; new regime of higher inflation means secular view remains cash, commodities, volatility to outperform bonds & stocks; and inflation in things we don’t have enough of … Energy, workers, places to rent, food, raw materials, good infrastructure, military equipment (the deflation will be in things … Government debt, office space, mobile phones, streaming content) … 20th century PE of 15x more credible”
“BofA’s Hartnett ... still bearish” – (research excerpt) Twitter
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Credit Suisse global strategist Andrew Garthwaite is recommending an overweight position in emerging markets equities (although he is underweight equities relative to bonds and cash).
This is interesting for domestic investors as the MSCI Emerging Markets index has been historically correlated with the S&P/TSX Composite index once currency is taken into account.
Here’s Mr. Garthwaite,
“We upgrade GEM to our top overweight. Why? i) Currencies offer very deep value (discount to PPP [purchasing power parity] is equivalent to that at the peak of the Asian financial crisis despite much better fundamentals); ii) P/E and P/B relatives to DM [developed markets] are close to 15-year (or further) lows; iii) CS HOLT CFROI [cash flow return on equity] above DM for the first time in 11 years; iv) GEM in general are much further along with monetary tightening than DMs (as they started earlier); v) Earnings revisions, PMIs [purchasing managers indices] and GDP are improving sharply relative to DM.
“The catalyst is China easing and the dollar stabilising. Our main overweights are China, Thailand and Brazil. "
“CS: “We upgrade GEM to our top overweight.”” – (research excerpt) Twitter
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Diversion: “You’ve Never Seen Neptune Look Like This” – Gizmodo
Tweet of the Day:
Scott Barlow