Disclaimer: The following content is an archive of Substantive Research Discovery Trending Themes, as delivered as weekly insights to our paid subscribers. Links to gated content have been removed.

CLSA: AI superpowers; China’s an under estimated force (September 2023)

ChatGPT has sparked a global AI race with lucrative potential, according to this 172-page report from CLSA. While the USA is a strong leader, the firm says China is putting up a fight and it believes it will become the world’s second-largest AI market with over 6% share of global US$1tn AI spending by 2026. CLSA expects AI cloud to be an early beneficiary due to model-as-a-service (MaaS) and large language model (LLM) offerings, while services industries will be quick adopters. The firm sees Baidu, Alibaba and Tencent leading AI innovation in China and, as the cheapest global AI plays, it rates them BUYs. Click here for the full report. Click here if you would like to speak to the analyst.

Ned Davis Research: Tightening bias + rate hikes = bad for bonds (September 20)

The Fed’s dot plot shows one more rate hike this year and fewer rate cuts next year, according to Joseph Kalish at Ned Davis Research. December would be more likely than November in his view. Kalish notes US growth has been revised up and unemployment revised down, while inflation is mixed. With the tightening cycle not necessarily over, there is risk of further downside for bonds, he says. Click here for the full report. Click here if you would like to speak to the analyst.

Quant Insight: Equity investors – you’re watching the wrong part of the bond market (It’s all about bond vol) (September 19)

Last year, macro tourists looked at the bond market and latched onto the inverted yield curve and its role as a lead indicator for recessions, according to Quant Insight. In short, the key macro driver in markets in 2022 was the real rates. That’s not the case in 2023, where bond vol has replaced real rates as the dominant macro driver, and biggest influence on risk assets. Qi set this out in their note, providing several charts and tables that illustrate this point, and why their quant platform is a important tool in the investor tool kit. Click here for the full report. Click here if you would like to speak to the analyst.

MI2 Partners: Global savings – Part II – the fallout (September 20)

Last week in part 1 of his series on global savings, Julian Brigden at MI2 Partners discussed the changing dynamics of supply and demand in global debt markets. In this follow up piece, Brigden assesses the implications of these changes. According to Brigden a mismatch between bond demand/supply threatens higher rate risk premia. Excessive deficits should shift away from monetary to fiscal dominance, pushing R* higher, he says. Central banks may be forced to sacrifice inflation objectives and financially repress markets, says Brigden. He says the fallout would be FX weakness, negative real returns and economic/market volatility. Click here for the full report. Click here if you would like to speak to the analyst.

Apollo: Credit market outlook – high rates and slow earnings growth creating opportunities for credit investors (September 2023)

Apollo’s Torsten Slok has just published his credit market outlook and the three key themes for investors are 1) Up in quality, 2) Large cap, and 3) Low leverage and high interest coverage ratios.

With the Fed on hold well into 2024 and the maturity wall coming, debt refinancings will continue to come in at higher levels of yields.

The bottom line is that the cost of capital has increased significantly, and Fed hikes are biting harder and harder, particularly for companies with weak credit fundamentals. Click here for the full report. Click here if you would like to speak to the analyst.

JP Morgan: Cross asset strategy 3Y to 5Y capital market assumptions – still OW fixed income (September 19)

The ”higher for longer” narrative is gaining for traction, only reinforced by the Fed at yesterday’s press conference. Whilst markets will wax and wane with the short-term noise, it’s important to understand what this will mean for returns over the medium to long term. This piece from JPMorgan explores that very question. The bank says what drives the higher for longer scenario will determine if stocks beat bonds. An AI-driven productivity shock favours stocks but a reversal of previous tailwinds that centres more on geopolitics could favour bonds and cash, says JP Morgan. The late 1990’s and the 70’s/early 80s are good starting points to draw parallels, adds the bank. Click here if you would like to speak to the analyst.

BCA Research: Oil – what could go wrong? (September 21)

Robert Ryan at BCA Research continues to expect Brent crude to trade just above $101/ bbl in 4Q23, and to average $118/bbl in 2024. Higher volatility looms, he says. Ryan expects Russia will cut oil production next year as part of a concerted effort to undermine Biden’s re-election, while oil-demand volatility is set to rise in response to divergent policy imperatives. He continues to favor equity exposure to oil and gas via the XOP ETF; direct exposure via the COMT ETF, and long Dec23 $100/bbl Brent calls. Ryan is getting long Jan-Feb-Mar 2024 Brent futures vs. short the same months in 2025 expecting steeper backwardation as inventories draw and markets tighten. Click here for the full report. Click here if you would like to speak to the analysts.

Clocktower Group: Can Commodities “Survive” the China Malaise? (September 20)

The widening divergence between Chinese risk assets and commodities has been confusing to global investors, writes Clocktower Group, who say that the latest commodity strength – especially the oil rally – is mainly a reflection of US economic reacceleration. They suggest the divergence between Chinese equities and iron ore prices is more interesting and may mark a structural change in the economy. That’s because credit-lighter manufacturing is replacing credit-heavy property and infrastructure investment as the main consumer of steel, and so the macro relevance of steel demand to the Chinese economy has declined. Indeed, Clocktower reckon exports are set to pick up given the recovery of external demand, which may continue to offset the impact of property malaise and thus keep metal prices resilient. That won’t be enough to pull the economy out of the doldrums however. Clocktower say that an export-driven manufacturing recovery will not fundamentally solve China’s problem due to the sector’s inability to facilitate an effective credit expansion. Before the fiscal lever is pulled, the worst is likely yet to come for Chinese risk assets, concludes the report. Click here.