Today’s briefing looks again at EM equities and how China tech drives much of the underlying direction. Entext suggests ‘peak smartphone’ is seeing many of the names with larger weights in the EM index are losing earnings momentum. Meanwhile, European equities may be a good place to hide, says FC Stone. Oil analysts suggest the next OPEC meeting will be key to the next leg in oil prices, while DataTrek points to the usefulness of US vacation intensions as an economic indicator. Americans are gearing up for comfortable vacation times. This bodes well for the US economy.
Substantive's Top Themes - Best of the Broker Notes
1. BRL: Will the Central Bank do Damage
The Brazilian real has come under considerable pressure in the last few weeks amid the general weakness of emerging market currencies. Against this backdrop, tomorrow's central bank meeting is particularly important, write Commerzbank FX strategists. At its last meeting in March, the central bank surprised the markets with its dovish stance. If it maintains this tomorrow, the BRL could face additional headwind. These implications are discussed in this note. Commerzbank clients can read the full note on the bank’s research portal.
2. EM Equities: Peak Smartphone
With the mobile app landscape certainly becoming stagnant, China tech earnings are under pressure, writes Sean Maher from Entext in this note published April 25th. Contrarily to the argument made in this Data Trek report, Maher argues that the drop of the MSCI China Index, which is concentrated in around 30 – 40 consumer names in tech, and the peak in several tech industries is leading to a larger than expected slowdown in Chinese growth. He maintains his neutral stance on EM equty allocation have downgraded his 2-year long overweight in January, however he points there are increasing signs of earnings weakness beyond China, with both Taiwan and Korea tech companies experiencing particularly weak net earnings revisions. In this report, Maher also discusses those emerging markets which are undergoing contractions and those where economic data seems more promising.
3. Equities; The Quiet American
With all the focus on trade disputes between the US and China and global political tensions, investors may be overlooking the potential of Europe. That is the view of INTL FCStone’s Vincent Deluard, who believes rather than becoming irrelevant on the world stage in the light of power struggles between Trump, Xi Jingping and Putin, there are signs of life on the European continent. He points out that European indices have outperformed the US and China since the announcement of steel and aluminium tariffs. In wars, he says, it is those that sit on the side lines that tend to come off best. Furthermore he believes Macron’s reforms in France, the performance of the Italian equities and the pound all point to bright investment opportunities on the continent, while a discrete growth miracle in Eastern Europe is under-appreciated by investors.
4. OPEC, not Iran Holds Key to Oil Prices.
Yesterday saw the release of OPEC’s monthly report where they forecast rising global demand and a market that could fall into deficit as Iranian oil sanctions bite. Analysts such as Bill Farren-Price from Petroleum Policy Intelligence says that supply issue with regard to Iran has probably been overplayed somewhat, but the truth is, we do not know what it will add up to at this stage, as we have to wait and see whether Europe will hold its course or buckle to US, says Farren-Price. Venezuela probably still more critical in supply terms. Therefore the most immediate issue for the geopol-energy nexus is the June OPEC meeting, where the GCC will be itching to relax the cuts and make up for any putative Iran losses, says Farren-Price, adding that he cannot see why Iran or its friendly neighbour Iraq would agree to that. Therefore, it could be a very rocky meeting for an organization that is already struggling badly to be meaningful without the help of Russia, who as yesterday’s OPEC report showed are hardly cutting anymore .
5. Vacation as an Economic Indicator
Nick Colas and Jessica Rabe at Datatrek have done some off-beat analysis on US vacation trends in a attempt to understand how the Americans might be feeling about their own job security and the state of the economy. Their source material are a collection of travel industry surveys and the use of the Google trends function, which Datatrek often use as part of their research on industry disruption, an underlying theme of their work. So as we head into the summer holiday season what does the data say that might be instructive for investors? From a top down point of view, the US economy is still on solid footing going into the end of Q2. Datatrek shows that it takes a lot to get Americans out of the office, and the Google Trends data shows they are gearing up for summer vacation season. From the bottom up, Datatrek says it would be very cautious on traditional summer travel-related plays even in the face of this good news. That includes hotels, theme parks, and rental car companies. The Internet and mobile has clearly disrupted their business models and pricing power. Online travel companies are the Amazon to their bookstores. And even with a strong summer season, they will feel that impact. Datatrek’s Morning Briefing is a essential morning email if you like to understand disruption, millennial trends and how this interplay’s with markets. And it’s great value for money. Click below to subscribe.