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Editor's Note: Hamish Risk | July 30, 2020
What it will take for a continued rally in equities is the focus of today’s Macro Briefing, with a sceptical Pennock Idea Hub arguing that many factors, including a successful coronavirus vaccine and a continued V-shaped recovery will have to converge to prompt such an outcome. Meanwhile, Empirical Research Partners explains why investors in large-cap growth stocks are likely to need to be more selective in future, and Societe Generale charts the latest developments in global trade. Elsewhere, Goldman Sachs puts forward the strengthening case for gold as the currency of last resort and CreditSights sets out what a Biden victory in the US presidential election might mean for credit markets.
credit markets US presidential elections CreditSights
1. Credit perspective: Biden and the blue waveTaking a cue from recent polling and prediction markets, Chris Snow at CreditrSights has assessed the impacts of a Democratic win of the US Presidency and the Senate across the firm’s credit market coverage. On balance, he says he expects a Biden government to be less inclined, as compared to a Trump government, to conform to the demands of the financial markets. Top Biden policy considerations appear to be environmental reform, healthcare access, and social justice, while he has also proposed increased taxes on corporations and high-income individuals, both to fund policy priorities and to achieve economic fairness considerations according to Snow. There are a few pockets where CreditSights’ analysts view a Biden administration as more favourable, he says, notably utilities, hospitals, and health insurance. But generally, Snow says his team sees either neutral or net negative impacts, particularly in basic industry and airlines, due to shifting policy priorities. While he sees Trump as the more market friendly candidate, at least in the short term, he says broader considerations, such as the pandemic and the follow-on impact to the global economy are likely to be more important to risk taking in the market.
gold precious metals Goldman Sachs
2. Gold views – in search of a new reserve currencyThe recent surge in gold prices to new all-time highs has substantially outpaced both the rise in real rates and other US dollar alternatives, like the euro, yen and Swiss franc says Jeffrey Currie at Goldman Sachs. He believes this disconnect is being driven by a potential shift in the US Fed towards an inflationary bias against a backdrop of rising geopolitical tensions, elevated US domestic political and social uncertainty, and a growing second wave of covid-19 related infections. Combined with a record level of debt accumulation by the US government, says Currie, real concerns around the longevity of the US dollar as a reserve currency have started to emerge. For his part, Currie says he has long maintained gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows. Accordingly, with more downside expected in US real interest rates, he says Goldman Sachs is once again reiterating its long gold recommendation from March and is raising its 12-month gold and silver price forecasts.
Global trade SG
3. The great trade meltdown – already reversingThe COVID-19 pandemic has led to a collapse in global trade that puts even the Great Trade Recession of 2008/09 in the shade says Klaus Baader at Societe Generale. He says, however, the trade rebound has already begun, with global trade in goods almost certainly hitting a bottom in April, and likely to have rebounded modestly in May, while trade in services is also likely to begin to recover quickly. In short, Baader says the collapse in global trade this year was faster than in 2008, but narrowly less deep, but unlike the U-shaped recovery path in 2008/09, he expects a more V-shaped one now, at least initially.
growth stocks US equities Empirical Research Partners
4. The big growth stocks by numbersThe Big Growers, the 75 large cap stocks with the very best growth credentials in the market, have been the asset class of choice during the coronavirus pandemic says Rochester Cahan at Empirical Research Partners. He says with the Federal Reserve and a world that’s been forced online in their corner, there are plenty of reasons to like the Big Growers, but, as usual, the question for investors is how long their outperformance can last? Cahan believes from here, the macro backdrop and interest rates are at least as important as the stocks’ own attributes, maybe more so. He explains that having concluded there is not much prospect of higher rates and/or nominal economic growth, investors have been willing to bid up whatever scraps of top-line growth they can find, and most of those roads lead to the Big Growers. A change in the perception that interest rates will stay low forever – most likely catalysed by success in developing a coronavirus vaccine – would therefore be a game changer, says Cahan. He believes the odds are now tilted to the downside for the sector, and thinks it’s now prudent to be extra-choosy in this space given the starting point, with a bias towards Big Growers that actually have some real free cash flow as an anchor. The report provides a list of the firm’s preferred stocks in the sector screened by six select metrics.
Earnings season US equities Pennock Idea Hub
5. What’s the bull case?While the bull case for equities does make some sense, there are many hurdles before the market can blast off into a renewed bull phase, argues Cam Hui at Pennock Idea Hub. He says he has been cautious about the strong performance of equity markets over the last few months, and has therefore taken a closer look at what constitutes the bull case for stocks. It rests, according to Hui, on a continued V-shaped cyclical recovery, supported by easy fiscal and monetary policy, the discovery of vaccines and treatments for the coronavirus pandemic, and a misinterpretation of P/E as a valuation metric. There are, in other words, many moving parts to this scenario and much has to go right, he says, for stocks to continue their advance.