Greetings for 2018, we hope this year is a successful one for all of our readers. As you will most likely know, MIFID2 has now been implemented, which means big changes for the research market. One of these changes is that you as an institutional investor can no longer receive unsolicited research, or research you are not paying for, unless this is publicly available. This Daily Macroeconomic Briefing constitutes a ”minor non-monetary benefit” because it does not provide access to the underlying publications, and so all subscribers to this newsletter remain compliant under MIFID2. However, if you still wish to unsubscribe, please click the ”unsubscribe” button at the bottom of this email.
Substantive's Top Themes - Best of the Broker Notes
1. Growth is from Mars, Value is from Venus
For those who didn't read Nick Colas and Jessica Rabe when they published the Convergex Morning Briefing, then we would recommend their latest reincarnation from DataTrek, a research firm they founded together in the fall of last year. They're always topical, relevant and on top of most of the emerging trends in markets. Perhaps just as importantly, the daily briefing is well written and entertaining. In their Monday briefing, they take a look at the ''Value versus Growth'' argument. They ask: Will value investing make a comeback in 2018 after a lackluster 12 months of underperformance in US equities? Colas and Rabe reckon that it depends. Are we talking about large caps, or small? And how do you feel about FANG stocks? In short, growth vs. value isn’t just about “Style” any more, they write. It’s about sector and single name concentrations, which they break down in detail in this report to reveal some telling evidence of the imbalances across names included in thes eindexes. Either choice involves some very big bets just now, the report says. Indeed, it may be time to throw the value-growth debate in the trash heap of market history, argue Colas and Rabe. The report shows that both approaches lead to portfolios that dramatically overweight some sectors and leave other notable ones with dangerous underweights versus a style-neutral approach. That pushes portfolio managers into taking unnecessary risk just to stay in their “style box” without any observable benefit to asset owners, they conclude.
2. Asian CBs to Address Financial Risks as Fed Rate Normalisations Acts as Cover
In their Asia preview for the first half of 2018, PantheonMacro argues that the major Asian central banks each see building financial imbalances which they wish to correct through interest rate adjustments. Ongoing Fed policy normalisation will provide the cover and additional impetus to make these moves. In Japan, the BoJ is eager to make adjustments to its yield curve targets, and so the potential for a taper tantrum is real, writes Freya Beamish, Pantheon's Asian chief economist. Meanwhile in China, Chinese GDP growth likely will slow sharply in 2018 to below 4%, in reality, from 6.4% in 2017, as the economy is exposed to Fed rate hikes. Beamish sees a strong possibility that the authorities stop announcing GDP targets. But the official figures will print significantly above the truth, at about 6.4% in 2018, down from their forecast of 6.8% this year, the report says.
3. What a CFA and a Bloomberg Terminal Think of the Bull Market
These days the Bloomberg terminal has the functionality to do all the hard bottom-up valuation work for analysts, so that is left for the analyst to do is analysis at a market level, argues Vincent Deluard in another excellent piece from INTL FC Stone. Analyzing the discounted cash flow models of the 50 largest US stocks, plus the FAANG, Deluard discusses his inputs and Bloomberg math which suggests a 15% overvaluation in US large cap stocks. While, many backward-looking valuation measures support this overvaluation, it is still possible to find value in large caps, concludes Deluard. As for the FAANGs, except for Apple and, to a lesser extent, Google, the market seems to have blindly accepted analysts’ rosy premises for their double-digit growth in the next five years, and a terminal growth rate that is double that of the US economy. In 2018, investors would be well-advised to ‘’check your premises,’’ says Deluard.
4. Japanese Equities: Returns to Hit New Highs
Japan equities was one of the hottest markets as 2017 came to a close, and that was before many foreign investors had even started to become active in that market again. CLSA maintain that a continued cyclical recovery is likely to combine with a secular increase in profitability, plus growing pressure from shareholders and accelerating buybacks will result in returns hitting all-time highs in 2018, writes Nicolas Smith, CLSA’s Japan market strategist in the firm’s 2018 outlook report (Dec 14). Smith was ranked No.1 for Japan strategy in Asiamoney’s Brokers Poll four years in a row from 2013 to 2016. Most recently, Smith has written a couple of interesting in depth reports focussed on Japan bank stocks and small cap stocks. In ”Is the BoJ warming to rate rises?” (Dec 1) he examined whether there has been a sea change in the BoJ’s attitude to banks and what the might means for bank stocks (Pull up a chart on the TOPIX bank index to see how much they have rallied in recent weeks), and ”The case for small caps” (Nov 24) he highlighted the pros and cons of investing in Japanese small caps.
5. Euro Strength; Financial Flows will Trump Rate Differentials
It’s 2004-06 all over again, writes George Saravelos from Deutsche Bank in a report published last week. The Fed is hiking rates, US rate differentials are widening and the dollar has become a G10 high-yielder. This has been extremely $-positive in the past yet the dollar is not responding. Why? Saravelos suggests that current dynamics look very similar to the 2004-06 Fed cycle, where the dollar weakened even as the dollar became one of the highest-yielding currencies in the world. Back then, the dollar’s vulnerability was a sharp deterioration in the current account: weaker flows mattered more than rates. It could be the same again in 2018, he argues, but this time on the financial side. He forecast the euro to trade as high as 1.30 in 2018.