The RBC Macroscope
Comment of the Day

June 25 2020

Commentary by Eoin Treacy

The RBC Macroscope

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

Eoin Treacy's view

Here is a link to the full report and here is a section from it: 

9.We see a number of reasons why the recent underperformance of the US relative to non-US equities might persist. On page 105 we track the performance of the S&P 500 relative to the MSCI World ex US index. The US has enjoyed safe haven status since the pandemic related drawdown in global stocks began. But like many trades, this one flipped in mid May. The timing makes sense, given that this is also when Value began to outperform Growth within the US. Over the past decade, the Growth/Value and US/nonUS equity trades have tended to move in tandem with one another (page 107). Beyond the style shift, we think a few things contributed to the shift in geographic leadership. First, the US has been extremely overvalued relative to non-US equities, pushing bargain hunters to look outside the US (page 112). Positioning in asset allocation funds in non-US equities was near historical lows as the 2nd quarter began (page 110), suggesting that as these market participants re-engaged with equities that there was more of a need to look outside the US. Going forward with this trade, the outlook for the virus may also come into play. Europe has flattened its curve, but cases in the US are rising again after a long plateau (page 111).

10. Growth has survived another failed leadership challenge. Value has made four serious attempts to assume leadership since the pandemic began, including one starting mid May, but none have stuck (page 125). Growth leadership has taken hold again in recent trading sessions. We remain neutral on a 6-12 month view. Valuations and positioning favor Value (Growth looks overvalued vs. Value, and Nasdaq futures positioning has been elevated among asset managers, pages 144 and 52). But most of our earnings indicators and our expectation that economic growth will be lackluster post pandemic favor Growth (pages 139 – 141).

The Dollar tends to attract interest because the USA is the largest capital market and the Federal Reserve is highly active in deploying support measures for the economy. The supply inelasticity argument supported its value until last year and the subsequently, desire for a safe haven has been a support.

No currency exists in a vacuum and any value judgement is always about relative value. The rising number of cases in the USA and the haphazard way in which the threat of COVID-19 is being handled intuitively should be a headwind. Meanwhile the prospect of better crisis management in the EU is a support for the Euro while the scope for mutualisation of debt burdens is a significant positive. That suggests the current range below $1.14 is a consolidation rather than a meaningful peak.

The biggest change we have seen in recent years for European equities has been their newfound ability to rally with the currency rather than depending on its devaluation to support nominal prices. That suggests investor interest in non US assets

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