Friday August 13thpetergarnham | August 13, 2021
In today’s Macro Briefing Cornerstone Macro warns against taking TIPS yields as good proxies for the growth outlook, MRB Partners sets out why the bar for outperformance from growth stocks is high and why the best opportunities for outperformance lie in select cyclical sectors such as financials and Rosenberg Research identifies the coming wave of disruptive technologies and which sectors of the economy are likely to thrive. Meanwhile, Applied Global Macro Research reveals the implications of peak growth for global equities and why investors should expect volatility and Eurizon SLJ explains why under the leadership of Prime Minister Draghi, Italy has a good chance of shedding its reputation as one of Europe’s weak links and embarking on much-needed structural reforms.
TIPS US economy US rates Cornerstone Macro
1. What are low real rates telling us?
Whatever you do, don’t take TIPS yields as good proxies for the growth outlook of the US economy—or even a clean read on real rates—they are not, says Roberto Perli at Cornerstone Macro. He says TIPS yields include risk and especially liquidity premiums that muddle the message. The latter, according to Perli, have accounted for most of the volatility in TIPS yields after the onset of Covid and are now extremely compressed, following a Fed model. If liquidity premiums were “normal,” he says the ten-year real yield would be around zero today, which is in the ballpark of where he would expect it to be at this stage in the cycle. So the TIPS market is not spelling doom and gloom for US growth, says Perli. From a market perspective, he says TIPS yields are subject to substantial upside risk if or when liquidity premiums normalise. It’s hard to pinpoint a catalyst for such normalisation with great confidence, says Perli, but reductions of Fed purchases of TIPS may have played a role in the past.
growth stocks US equities MRB Partners
2. US growth stocks – the bar for positive surprises is very high
Salvatore Ruscitti at MRB Partners notes many US growth stocks have benefited enormously from the pandemic, which has accelerated digital transformation and e-commerce, as well as boosted the sales of faster-growing specialty retailers catering to shelter-at-home and personal transportation. He says a fading of these tailwinds is inevitable as the economy re-opens more fully and consumer spending rebalances towards services and other pent-up activities. Indeed, according to Ruscitti, challenging year-over-year comparisons will make it increasingly difficult for growth companies to deliver the big upside surprises in earnings that investors have grown accustomed to. He says looming difficult earnings base effects and elevated valuations keep him neutral on growth stock-heavy sectors such as technology, communication services, and consumer discretionary. The best opportunities for outperformance, says Ruscitti, lie in select cyclical sectors such as financials and energy, whose revenues and earnings have more room to positively surprise.
disruptive technologies US equities Rosenberg Research
3. The coming wave of disruptive technologies
David Rosenberg at Rosenberg Research says throughout the pandemic, industries have had to adapt quickly and as a result, many “disruptive technologies” that had previously been expected years down the line have been brought forward. In this report, he explores four key areas where investors could potentially take advantage of these accelerated transitions: health care, environmental sustainability, supply chains and space. While some areas are highly competitive markets which may not guarantee that investors will see the best returns, says Rosenberg, these are areas that should be on the radar of anyone who aims to understand the economy.
Equity volatility Global growth outlook Global macro investing Applied Global Macro Research
4. Peak growth set to rock stocks
Carsten Valgreen at Applied Global Macro Research says manufacturing PMIs are likely peaking now, and investors are facing a ‘peak growth’ theme in global financial markets. However, he believes the expansion is far from over – there has been no or little tightening of financial conditions, and the past year has left the DM consumer flush in both cash and wealth gains. Growth is highly likely to be at least moderately strong in 2022, says Valgreen, but he is still now cautious on financial markets globally. If history is any guide, he says the easing of the manufacturing cycle – even if to only more normal growth levels – will bring more volatility to financial markets. The norm, says Valgreen, is for equities to consolidate now, with a 10% correction in the S&P500 likely over the next 6 months or so. He doesn’t expect a sustained bear market, but the return outlook across all his different US equity market models for the next year range from about -5% to +10%. Valgreen says a similar view prevails for Europe, Japan and EM even though they are less expensive.
Italy supply side reform Eurizon SLJ Research
5. PM Draghi’s “Koizumi moment”
Stephen Jen at Eurizon SLJ says facing daunting structural headwinds, under the leadership of Prime Minister Draghi, Italy has a good chance of embarking on much-needed structural reforms. If successfully implemented, he says these supply-side reforms could make PM Draghi the ‘Koizumi’ of Italy in helping to turn a staid and stagnant economy around. Jem notes the fruits of the supply-side reforms in Japan implemented under Koizumi only became visible years later. Similarly, he does not expect PM Draghi’s policies – if successfully implemented and in sufficient heft (more than those under PM Monti) – to yield immediate results but should lay the foundation for superior economic performances over time. Investor patience, says Jen, is advised.