Five key investment themes for 2015

Transcription

1 Five key investment themes for 2015 Exiting QE in the US was always going to be a path of uncertainty for central bankers, globally and for markets and investors. There is simply no exact precedent for the recent quantitative easing program in the US and, therefore, the consequences of resuming more normative monetary policies and interest rates. And this uncertainty is compounded as the US is now on a course that diverges from Japan, Europe and China, all of which are heavily committed to their own ongoing QE and growth stimulus programs, as the US moves to increase rates. Richard Iley, Chief Economist at BNP Paribas, speaking at the recent BNP Securities Services event in Hong Kong for key institutional investors and asset managers, entitled Let s Get Real, provided five key themes for 2015 that institutional investors THE FINANCIAL INTELLIGENCE PLATFORM should have regard to and which might provide some clarity in a complex global economic picture. Iley began by reflecting on asset class returns last year and pointed out that the best returning trades in 2014 were long Chinese equities and short oil and the long German 10- year government bonds, but on a hedged basis and short the Euro. Iley remarked that many of the themes for the first quarter of 2015 have remained the same in 2015, with Chinese equities continuing their strong bull run along with German government bonds and with the US Dollar strengthening and the Euro and, to a lesser extent, the Yen weakening. But in the first quarter Japanese equities emerged as the second strongest asset class and European equities improved on a relative basis. Source: Macrobond, BNP Paribas 1

2 Iley went on to highlight BNP Paribas five key investment themes for 2015/2016: US economy and USD continuing outperformance More Euro and Yen weakness to come Japanese and European equities to remain attractive (on a hedged basis) China s equity bull market is not fundamentally based and will reverse Low oil prices will remain for some time US Economy Strength Iley dismissed the recent pockets of poor labour data from the US and argued based on labour data and general economic data trends the US will outperform other leading economies. The markets reacted to (marginally) disappointing data on US jobless claims in April, though much of that uncertainty was removed in May with 223,000 new jobs and a drop in the unemployment rate to 5.5%, after a lackluster first quarter. The main consequence of this strength, Iley predicts, will be two years of steady interest rate hikes, probably beginning in September. This in turn will mean an even stronger US dollar versus the Euro and the Yen, whose currencies are dampened by their own QE. The US dollar bull market has recently gone into reverse, but, as with other commentators, Iley believes that the US dollar will resume the bull run as the economy continues to strengthen and US Dollar rates move upwards. DXY: US dollar spot index 10/12/ /05/2015 Iley commented that BNP Paribas believes the strength of the US recovery is based on the sustained recovery in the US labour market, which has steadily accelerated since Jobless claims are the lowest since 2000; with 5 million job openings; and the labour market reaching the level the Federal Reserve defines as full employment a 5.2%- 5.5% rate and still heading downwards. Iley also points to consumer confidence at its highest since THE FINANCIAL INTELLIGENCE PLATFORM Source: Bloomberg Another consequence of the strength of the US economy, according to Iley, is the impact on the US government bond markets, which he describes as complacent, with the short- end of the curve appearing not to reflect in an environment of rising rates and falling prices. Yields in US Treasury bonds fell again last week (3/5/15) as markets seem to believe that the US jobs numbers contained enough weak data to push bask US Dollar rate increases.. 2

3 More European & Japanese QE Christine Lagarde, now of the IMF, said in a speech last year that: As the crisis has taught us, in times of distress, the potential gains from [international monetary policy] cooperation can be huge. She continued, Think of the coordinated cut in policy interest rates in key countries at the height of the crisis, or the swap arrangements that the Fed instituted with other major central banks. But now, as the US economy emerges fastest from low growth, sluggish employment and low inflation, the G3 (and China) are once again on different and uncoordinated monetary policy courses. On QE generally and particularly with regard to Europe and Japan, Iley commented that a BNP Paribas colleague had remarked that he had never seen a Central bank do QE just once the US had 3 rounds. S&P500 Nikkei 225 By implication a long period of intervention, in Japan and in Europe which has just started its program. As QE continues and, in Europe, is expanded, the first Iley comments that the now consensus view is that the currencies of Japan and Europe that will continue to fall further with BNP Paribas currently expecting Euro:US$ parity by year- end (currently ) and then heading lower in 2016 and the Yen hitting 128 (from currently). Whether QE measures will be effective in raising inflation Iley asserts is a moot point as in the US QE only stabilized inflation and the ECB ambitiously seeks to raise inflation by 0.75% with similar QE measures. However, Iley confirmed that the BNP Paribas view was that Euro Stoxx50 S&P500 versus the Nikkei and Euro Stoxx50 over 5 years - indexed Source: Bloomberg THE FINANCIAL INTELLIGENCE PLATFORM 3

4 the QE programs will have an impact on riskier assets raising demand and prices. So QE programs in Japan and Europe indicate that risky assets and in particular equities, will appreciate as the S&P has done in the US during its own QE program. These asset classes will likely prove attractive option for investors but, with correspondingly weak domestic currencies, on a hedged basis. BNP Paribas currently believes that 22,000 on the Nikkei is a possibility. China Struggles There has been much debate in Asia about the countries that will be the winners and losers from a strong US dollar and the focus has been emerging markets. In addition to reversing fund flows to those markets and raising the cost of capital those countries with large current account and/or fiscal deficits are usually singled out as they are dependent on capital inflows. Indonesia and India both suffered as the Federal Reserve began its tapering in 2013 (the so- called Taper Tantrum). In addition for certain of those countries, including Indonesia and Brazil, they are also dependent on commodity prices in dealing with deficits. But Iley pulls out China as a potential casualty of the forthcoming rises in rates in the US, even though its runs both a current account and fiscal surplus. And he points to the Chinese government s dirty peg between the Yuan and the US dollar as the cause, in a US dollar bull market. China s real (inflation- adjusted) effective exchange rate has gained 19% since July 2014 and has appreciated by circa 50% versus the yen and more than 20% against the Euro. Richard Iley warns that this currency driven downward pressure on the competitiveness of Chinese exporters may lead to stagnant export numbers in an economy struggling with the dampening of growth. THE FINANCIAL INTELLIGENCE PLATFORM Iley describes the effect of the US$ appreciating as a loss of competitiveness at the worst possible time. This factor compounds with significant medium term issues in the real estate market in China. The contribution of real estate to China s overall GDP increased steadily since 2001 and now represents approximately 16% of GDP, according to BNP Paribas and Macrobond and accounts for 23% of GDP growth between 2009 and CNY (Real Effective Exchange Rate) 2010 = 100 Source BNP Paribas and Macrobond Iley warns that the massive over- supply of real estate inventory and the pipeline of new inventory from projects previously started is pushing down real estate prices and CAPEX and that the oversupply will take several years to fully unwind, in a weaker economy. This implies contraction in real estate investment with a consequent effect of depressing the previous lift from real estate to GDP growth. 4

5 China Equities And what of Chinese equities which over 2014 and, again, year to date, have been the most successful asset class? Iley points out that the appreciation of the A share market is not, of course, based on fundamentals. Iley s view is that the current background of fundamentals in China is unappetizing. He says Since Q2 of 2014, when A shares were relatively cheap, the Shanghai Composite Index has risen by 86% and the Shenzhen Index by 93% over the past two years. This growth, he asserts, has been driven by speculation and he points to the margin trading numbers as an indicator of the extent of hot money in the market. Margin lending numbers have reached 125 trillion Yuan or 2% of China s GDP. But Iley also cautioned that the problem with speculative bubbles is that they often last longer than expected. Iley gives the example of the Shenzhen Index which currently has an average trailing P/E ratio over 50, that figure had been as high as 70 in And so although a bubble, the China equity market might yet have some way to go as the government continues to look at ways to stimulate growth in the economy. Equity margin debt outstanding in RMB trillions (sum of Shanghai & Shenzhen exchanges) Oil Iley s view was that it is too early to say that oil has hit bottom with US inventories high, at 480m barrels, the highest since 1930 and climbing at 10m barrels a week. And in a peak oil consumption season. As storage capacity fills, oil will come on to the market and depress prices. Subject of course to geo- political instability. Year Source: Macrobond, BNP Paribas THE FINANCIAL INTELLIGENCE PLATFORM 5

6 This article has been produced by Asia First in conjunction with and with the assistance of, BNP Paribas Securities Services who hosted the event at which Richard Iley spoke. Asia First provided event services to BNP Paribas Securities Services in organizing that event. BNP PARIBAS SECURITIES SERVICES BNP Paribas Securities Services, a wholly- owned subsidiary of the BNP Paribas Group, is a leading global custodian and securities services provider backed by the strength of a universal bank. It provides integrated solutions for all participants in the investment cycle, from the buy- side and sell- side to corporates and issuers. Covering over 100 markets, with our own offices in 34 countries, the BNP Paribas network is one of the most extensive in the industry. We bring together local insight and a global network to enable clients to maximize their market and investment opportunities worldwide. Key figures as of 31 December 2014: USD 8.95 trillion assets under custody, USD trillion assets under administration, 8,134 administered funds and 8,800 employees. To the fullest extent permitted by law, neither Asia First nor any person referred to herein or the organisation that they represent accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this article. All estimates and opinions included in this article are made as of the date of this article. Unless otherwise indicated in this article there is no intention to update this article. This article was produced by Asia First Financial Intelligence Limited. This article is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of Asia First. By accepting this document you agree to be bound by the foregoing limitations. This article is directed to professional clients and should not be used or relied upon, in any way, retail investors. Asia First Financial Intelligence Limited, Suite 1207, 12F, Wing Lok Street, Sheung Wan, Hong Kong. first.com THE FINANCIAL INTELLIGENCE PLATFORM 6