Monday, September 13thHamish Risk | September 13, 2021
In today’s macro briefing we highlight the rising prospects of ”rapid tapering” from the Federal Reserve, with Goldman Sachs now placing a 70% probability of a November announcement following recent media reports that Fed planning is at a very developed stage. Dave Rosenberg dissects the “Ten market rules to remember” published by Wall Street luminary Bob Farrell back in 1998, to understand where markets are today, which we found quite illuminating. TS Lombard examine China’s new ”Common Prosperity” policy and urge all investors to dig deep into what it means for investing in China, not only to manage risk, but also to identify the ‘next big thing.’ Japan has recently been back in the spotlight with global investors and with elections due soon, many are reevaluating the equity opportunity. Goldman have been relatively early on their bullish call. Others are following. Finally, in our ESG section today ESG specialist research firm, Sustainable Market Strategies, explores social inequalities as an investable theme.
QE tapering The Fed Goldman Sachs
1. The rising odds of a ”rapid” Fed Tapering
Goldman Sachs were out with a note overnight on their reaction to this WSJ article which said that the Fed might possibly announce the beginning of tapering at their November meeting, and that tapering might be done at a rapid pace. Goldman now see 70% odds of a November announcement (vs. 45% previously) and 10% odds of a December announcement (vs. 35% previously); This begs the question of what might be considered ”a rapid pace?” . In the piece Goldman forecast of USD15 billion for a monthly pace of tapering. Interestingly, other notable analysts, argue that tapering could potentially be even more rapid. Stephen Jen, from Eurizon SLJ Research wrote in a note to clients this morning that USD20 billion a month is also possible. He says the faster the tapering, the earlier the Fed will be in a position to contemplate rate hikes, if inflation persists, which he says is very bullish for the dollar. If you’d like to read the full note from both of these firms click here to contact us directly.
Equities Market cycles Rosenberg Research
2. You can’t fool mother nature – an economist’s interpretation of Bob Farrell’s market rules
Bob Farrell is a Wall Street legend, and to many, was revered as the “dean of technical analysis.” He well known for his “Ten market rules to remember” which he published back in 1998. The applicability of these rules are just as relevant today as they were then and David Rosenberg from Rosenberg Research, one of Farrell’s many mentorees, recently published a note explaining how Farrell’s rules can be applied to today’s markets, and what conclusions we can draw from this. Rules 1 to 4 are critical, says Rosenberg, as they speak directly to how we should be treating markets that exhibit extreme behaviour, remembering that everything is cyclical in nature and how critical it is to challenge one-sided consensus opinion. Indeed, Rosenberg notes currently, the S&P 500 is trading in the top 10% of all historical periods back to 1928 relative to the 50-month trend line; and the smoothed CAPE multiple is in the top 1% of valuations in recorded history. All this, he adds, comes after a doubling in the market price in barely over a year, which is unprecedented. This speaks, says Rosenberg, to a market that is excessively overvalued.
China TS Lombard
3. China – common prosperity
Beijing’s focus on social welfare is part of the overarching political idea of common prosperity and is not yet fully understood by markets, according to Jon Harrison at TS Lombard. He says steep discounts following the latest regulatory onslaught are likely to attract bargain hunters, but he cautions that risks will remain elevated for the next 12 months. How far MSCI China can fall depends upon the detailed implementation of current and future legislation further complicated by any hidden political and personal objectives of the parties involved, says Harrison, who adds the growing conflict of interest between China’s regulation and that of the US and others is an additional uncertainty. What is known, however, is the emerging shape of the regulatory framework, much of which already in place, and the overarching political objective of “common prosperity”, he says. Unfortunately for markets, says Harrison, even as the regulatory and legislative framework begins to emerge it will likely take several years for the practical details of implementation to become clear. This, he says, spells protracted uncertainty for markets.
japanese equities Goldman Sachs
4. Japan equities; Further upside through year-end; political update
Kazunori Tatebe at Goldman Sachs says after showing a rebound in late August, Japanese equities gained further upward momentum after Prime Minister Yoshihide Suga announced on 3 September that he would not run in the LDP leadership race. He says the political developments over the past few days lend weight to his bullish stance looking through year-end, and he sees upside risk for TOPIX exceeding his year-end target of 2100 (which is under review). While Tatebe thinks Japanese equities are poised to head higher regardless of which candidate wins the LDP leadership, he says the degree of market reaction might differ depending on the actual line-up. Based on the public announcements and policy stances of the three leading contenders, he currently sees Taro Kono as the candidate likely to be most favoured by the market. From a tactical perspective Tatebe continues to focus on “going-out” stocks, high-beta large caps, and stocks on which foreign funds are overweight.
ESG Sustainable Market Strategies
5. The rising momentum of the ”S” in ESG; No person left behind
Social inequalities, along with climate change, are now at the forefront of government rhetoric, and incentives, taxation and regulations should follow suit according to Sustainable Market Strategies. The firm believes good corporate citizens will have a tailwind, while companies that fail to understand the new landscape may struggle. The evidence for increasing inequalities is overwhelming, especially in the United States says SMS and the 2017 tax cuts have only exacerbated the situation. Indeed, the firm believes the Trump era will likely come to be seen as an inflection point: the end of a period characterised by upward redistribution favouring the rich toward a more downward redistribution helping the poor. Social inequalities as an investable theme will become more interesting as the fair players attract capital and government policies favour fairer behaviour, says SMS.