David Fuller and Eoin Treacy's Comment of the Day
Category - General

    A 'Life-Changing' Rally is Shaping up in the Stock Market, Predicts One Fund Manager

    My thanks to a subscriber who forwarded this letter from Market Watch. Here is a brief section:

    “Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is ‘long in the tooth’ and about to end,” he said, adding that investors were also living in fear of the 1987 crash back in 1987.

    Finally, there’s the bull market super cycle.

    As you can see by the chart below, the market’s pattern over the past century has been about 15 to 20 years of economic boom followed by 10 to 15 years of downturn. The cycle that we’re currently in looks to have started with the highs reached in 2013, and Fahmy says he believes it could last for many more years.

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    Can the Synchronous Recovery Last?

    Thanks to a subscriber for this report from Morgan Stanley which has a number of interesting nuggets. Here is a section:

    For the first time since 2010, the global economy is enjoying a synchronous recovery (see chart). The developed markets’ (DM) private sector is exiting deleveraging after several years of slow growth due to a focus on balance sheet repair and, after four years of adjustment, the emerging markets are in a recovery mode. These trends create a positive feedback loop. Indeed, the DM economies account for 60% of emerging market (EM) exports, so as their real import growth accelerates, EM exports are rebounding. What’s more, an improving EM outlook reduces DM disinflationary pressures. 

    How sustainable is this recovery? Typically business cycles end with macrostability risks (price, external and financial) spiking, forcing policymakers to tighten monetary and/or fiscal policy. In this cycle, considering that emerging markets inflation and current account balances are moving toward their central banks’ comfort zones, it is unlikely that macrostability risks will surface soon. Moreover, the emerging markets now have high levels of real rate differentials vis-àvis the US, providing adequate buffers against normalization of the Federal 

    DEVELOPED MARKET RISK. In our view, the key risk to the global cycle is apt to come from the developed markets— most likely the US, considering that it is most advanced in the business cycle. Moreover, the US tends to have an outsized influence on the global cycle, particularly the emerging markets. While price stability features prominently in debating the monetary policy stance of any central bank, financial stability is clearly emerging as an equally important factor.

    How will it play it out? For insight, we can look at history. The late ’60s saw fiscal expansion at a time of strong growth and low unemployment. In the mid ’80s, the US pursued expansionary fiscal and protectionist policies in an improving economy. We look at similarities and differences versus today, analyzing asset class performance by fiscal deficit and unemployment quartiles.

    To that end, private-sector leverage has picked up modestly in the US. In fact, the household-sector balance sheet, which was the epicenter of the credit crisis, had been deleveraging until 2016’s third quarter. Moreover, the regulatory environment has been relatively credit-restrictive. Hence, we see moderate risk to financial stability. However, risks could rise, considering that monetary policy is still accommodative, and particularly so if the administration eases financial regulations. Price stability is a critical risk, too—especially since the core Personal Consumption Expenditures Index inflation rate is close to the Fed’s target and US unemployment is around the rate below which inflation could accelerate. Reflecting this, we expect the Fed to hike rates six times by year-end 2018 (see page 3). We expect other major DM central banks to take a less dovish/more hawkish stance

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    Musings from the Oil Patch May 2nd 2017

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

    As automobiles transition from being completely under the control of a human driver to being totally controlled by machines and computers, several things can happen. If cars can operate without having accidents, highway speeds can be increased, which could reduce vehicle fuel-efficiency, boosting fuel consumption. Fully-autonomous driving will also enable classes of the population currently unable to utilize vehicles, adding more vehicle miles traveled to the nation’s transportation system and increasing fuel consumption. Those classes of people include non-drivers, along with the elderly, disabled and young people. A study by Carnegie Mellon University estimates that this expansion of the driving population could increase vehicle miles traveled by 14%, or adding 295 billion miles of driving annually. That will mean more fuel consumed, regardless of how fuel-efficient the vehicles are that these classes of people utilize. A rough calculation based on vehicles with 30 miles per gallon ratings, means about 675,000 barrels a day of additional gasoline, or approximately a 7% increase on today’s gasoline consumption. Fully-autonomous driving suggests more vehicle use, more miles driven and more fuel consumed. The offset is if fully-autonomous vehicles dominate the growing car/ride-sharing segment of the transportation sector, which could act to reduce fuel consumption. 

    Whether the vehicles of the future are ICE-powered or derive their power from some other fuel source will be influenced by the outcomes of the other two broad trends. For example, if we become a nation of car-sharers, there will be fewer vehicles needed, vehicle miles traveled might decline, although they just as easily could increase. A fully-autonomous vehicle provides the possibility of having a greater impact on fuel consumption than human-driven vehicles. First, cars that don’t have accidents can be made from lighter materials that facilitates more EVs since greater battery weight will be offset by lighter vehicle bodies and frames. That could help EVs overcome some of the range-anxiety challenges for many potential buyers. It could help accelerate the electrification of the automobile fleet, which would have a significant negative impact on vehicle fuel consumption. On the other hand, if ICE powered vehicles remain the popular option, fuel consumption might not be as impacted as in an EV-favored scenario. With fully-autonomous vehicles offering the potential for increased vehicle use, fuel consumption is likely to increase. 

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    Two Frances Collide in Battle to Shape Europe's Future

    This article by John Follain for Bloomberg may be of interest to subscribers. Here is a section:

    Tergnier may be Macron’s toughest sell.

    The town, with a population of 13,000, used to vote Communist and then Socialist. It turned to the National Front as its sprawling rail freight station — once one of France’s biggest — shed hundreds of jobs. Steelworks, a sugar-manufacturing plant and other firms closed down or moved elsewhere leaving the jobless rate at 15 percent. The national average is 10 percent. Thirty-six percent of voters backed Le Pen last month, among her highest votes in the country.

    “Globalization is bad for Tergnier,” said mayor Christian Crohem, 67, who heads a mainly leftist coalition. “We’ve brought more countries into the EU and we’ve allowed businesses to move around, so we’re up against workers from abroad who don’t play by the same rules, it’s unfair competition.”

    He tells the story of a 70-year-old woman who came to see him recently because she didn’t have enough money to feed herself. Sitting in his office, she cried with shame as she asked him for a handout to buy food.

    “That kind of thing really gets to you,” he says. “People here feel abandoned, and so do we, the officials they elect.”


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    Market Leaders to Benefit from Industry Consolidation

    Thanks to subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

    Acceleration in market share gains: Our AlphaWise survey indicated that the low price course strategy is highly effective for leading players to gain market share, thanks to their strong brand name, well established systems, standardized teaching procedures, and strong teaching curriculum development capabilities. We expect the promotional environment in China's K-12 after-school tutoring market will become a new norm, and the low user stickiness in the market will benefit the leading players like TAL and New Oriental, as they're considered top providers for potential switchers. We believe New Oriental's roll out of its low price strategy to over 30 cities and TAL's acceleration in capacity expansion will accelerate their market shares in the coming quarters. Although this may bring some short-term uncertainty to revenue growth and margins when the summer course revenues are booked, we believe this strategy is value accretive to the leading players given they can manage to achieve high retention rate.

    Market demand remains robust amid macro slowdown: According to our AlphaWise survey results, K-12 after school tutoring expenses are the last item to cut among major household expenses during weak financial conditions. Moreover, 24% of respondents intend to increase their spending on tutoring classes in the next 12 months. This shows that education is not only resilient during macro downturns, but also remains a structurally growing sector in China. 

    Good potential for online education: The survey results also show that the acceptance level of online education is very high and 43% of respondents thought online education was as good as offline, but more convenient. We believe this bodes well for future demand for the leading players' online and O2O initiatives, which could bring in incremental revenue opportunities with better operating leverage.


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    New Order: ID>MY>TH>SG>PH

    Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

    Indonesia: buy for the 2H17/2018 recovery? Our earlier worries for equities – politics, tax scrutiny, rising rates, earnings risk – have not disappeared, but we now think an expected period of support for EM currencies will help to keep bond yields and risk-free rates down – a bigger tailwind. This is coupled with improving earnings momentum with an acceleration to 17% growth in 2018, supported by less bank provisioning and increased infrastructure momentum ahead of the 2019 elections and a consumption recovery. Our Focus List includes BBCA, ASII, TLKM, UNTR, LPPF and LINK; our new index target implies 8% upside.

    Malaysia: window still open. We initiate on Malaysia (Malaysia strategy initiation) and position it as our No.2 OW in ASEAN. Interest is back, as evidenced by US$1bn of foreign equity inflows in March. We see room for more outperformance from: 1) upcoming elections, 2) infrastructure pick-up, 3) better commodity prices, 4) return of earnings growth, and 5) currency support. We add IHH Health Care to our Focus List. 

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    The Global Investment Outlook

    Thanks to a subscriber for this report from RBC GAM which may be of interest. Here is a section on bond yields:

    The arguments for higher bond yields
    The global economy is experiencing a cyclical recovery regardless of the political noise, and its performance should remain the key driver of fixed-income markets over the next 12 months. U.S. data releases have been strong and the employment picture continues to improve, leading many investors to prepare their portfolios for reflation. We believe that Trump’s loosening of financial regulations should re-ignite the animal spirits that went missing after the 2008 financial crisis, creating self-sustaining economic growth. Corporate America will likely invest and hire more, pushing up the cost of capital and inflation. 

    Aiding this momentum will be an administration stocked with business-minded department heads and White House advisors. Trump has appointed Steve Mnuchin, a former Goldman Sachs executive, as Treasury secretary and billionaire investor Wilbur Ross to head the Commerce Department. Gary Cohn, the recently departed Goldman Sachs president, is Trump’s top economic counsellor. These appointments help to validate the optimism towards streamlining  regulations and promoting business investment. 

    A tight labour market is another source of economic optimism and will foster inflationary pressures as higher wages embolden consumers to spend more. A higher-inflation, faster-growth environment would be a departure from the slow growth mindset that has prevailed since 2012. 

    Assuming that the government spending materializes as advertised and stokes economic growth, we would expect yields to be pulled higher by competition for capital between Treasury bonds and businesses and individuals seeking loans. Here’s why: capital must be financed either from abroad and/or with domestic savings, and administration proposals aimed at reducing imports would increase the importance of domestic savings as a source of capital. Domestic private savers as a group tend to demand higher compensation for loans than foreign entities, potentially leading to higher rates as growth quickens. 


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