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Wednesday, Dec 9

The coronavirus has, of course, been harsher to some than others, but on balance, at least in the developed world, it has prompted governments to support incomes while simultaneously shutting down opportunities to spend those funds. In today’s Macro Briefing, Topdown Charts explains why that situation has, on aggregate, produced a glut of savings that is increasingly likely to produce an economic boom once restrictions disappear. Rosenberg Research issues a note of caution about the prospects for the new “roaring twenties” however, urging equity investors not to get carried away with value as GDP growth is likely to revert back to a relatively tepid trend in the post-pandemic world, while Cornerstone Macro recommends sitting on the fence, or as the firm puts it, the “bar of the barbell”, as the tussle between value and growth continues. Elsewhere, Enodo Economics highlights the five key topics investors should be focusing on in China, while CLSA and Arete Research set out why the developments in chemistry are so important for investors in electric vehicles as they analyse the rate of adoption, penetration and growth.
  1. Consumer demand Inflation Top Down Charts

    1. There’s something about savings

    Callum Thomas at Top Down Charts has issued a note analysing the glut of savings prompted by the response to the coronavirus pandemic and why, along with increasing consumer confidence, there is a good chance it could result in a real economic boom on the other side of lockdown.  There are still multiple uncertainties, but as he explains investors should not lose sight of the fact that consumers – flush with cash – could experience an element of relief-euphoria which could help fuel the rebound boom, after what has in effect been a quarantining of cash. Thomas also provides an analysis on the TIPs market, highlighting the recent correction in breakevens in line with the change in sentiment following vaccine news. So TIPs may not be the screaming buy that they were, but he cautions investors that 2021 could be prone to inflation surprises (as per his above comments on ‘animal spirits,’ and investors still remain relatively underweight.
  2. equity valuations rotation trade Rosenberg Research

    2. Strategizer – a monthly guidebook for active investors

    Dave Rosenberg is of course a well-known and well-respected economist, and for quite some time, a prominent bear. After more than a decade as Gluskin Sheff’s chief economist and strategist, he founded his own research firm, Rosenberg Research at the beginning of 2020. As well as his regular ”Breakfast with Dave” notes, Rosenberg and his colleagues have just expanded the offering with the launch of their ”Strategizer”, a new monthly guidebook for active investors to sit along with their macro research and make their analysis and insights more actionable. Research in the Strategizer is purely model-based and the results are determined by empirical statistical analysis across a variety of metrics that fall under the following broad categories: technicals, fundamentals, valuations, sentiment and positioning. The models generate a score of 0 to 100 for the various asset classes — 0 being the worst for expected forward returns, and 100 being the best for expected forward returns. Over time, this score will shift and help inform investors how much more – or less – exposure they should be adding – or subtracting – in their portfolio. Rosenberg has kicked off the series by introducing his North American equity models. Currently, his US equity model has a score of 10.3, a reading that has historically been consistent with poor forward returns for the S&P 500. This result is primarily driven by very stretched valuations, technicals and sentiment, says Rosenberg; in contrast, positioning and fundamentals are more neutral. His Canadian equity model is a bit more favourable at the moment, with a score of 26.9, a reading consistent with slightly below-average forward returns for the S&P/TSX Composite. The big question at the moment for investors is whether the value trade still has legs, and it is of course one that Rosenberg addresses. He says his work shows that, in order for a true value resurgence, the dynamic of robust economic activity and price growth has to be sustained over many years, not just a couple of quarters. And while the economy has rebounded sharply off its lockdown-induced trough, his base case is that it will eventually settle into its pre-pandemic trend. This, explains Rosenberg, means sub-4% nominal GDP, which is not a backdrop ordinarily consistent with a prolonged period of strength in value stocks. In addition, he notes that many value stocks have very limited exposure to key secular themes in the market which have propelled certain stocks higher in recent months. For these reasons, Rosenberg is inclined to view the current rotation as a trade, and not an outright resurgence in value. Nonetheless, the price action has been convincing, he says, and suggests the value trade will continue to have momentum in the near-term, particularly in the small-cap segment of the market.
  3. barbell strategy growth versus value Cornerstone Macro

    3. Pitfalls of the barbell strategy – buyer beware!

    Michael Kantrowitz at Cornerstone Macro says the consensus on Wall Street appears to be embracing a “barbell” strategy approach to equity investing – with strategists recommending investors have part of their portfolio in high-growth stocks and part in deep-value recovery stocks. He says investors are underestimating the risks of a barbell strategy, however. As he explains, if deep-value stocks sell off, for whatever reason, expensive growth stocks are unlikely pick up the slack. Instead, says Kantrowitz, investors should play the middle (i.e., all bar, no bells) to generate better risk-adjusted returns in the coming months. The report includes the composition of the firm’s Quality Value basket, which beat all major value benchmarks last month.
  4. China debt defaults Equities Trade Enodo Economics

    4. Five things investors need watch on China

    As China’s equity bull-run rolls on while its debt market is rocked by a series of defaults and its relationship with the US is on the cusp of potential change, Diana Choyleva at Enodo Economics has highlighted five areas investors should watch to gauge the likely short-term course of events. As she explains, if any country can be said to have had a “good” coronavirus crisis, it is China, and she reckons shares have further to climb, but smooth sailing is far from guaranteed.  From margin lending, to bank defaults and who Joe Biden invites to his planned “Summit for Democracy”, Choyleva outlines the big risks.
  5. batteries electric vehicles Arete CLSA

    5. The rise and rise of EVs and their range

    In its Theorality daily ideas newsletter, CLSA highlights a story that lithium metal batteries are set to find their way into VW vehicles by 2025, vastly increasing their range. The news, says the firm, increases its conviction that renewables improvement, particularly around the chemistries required to boost their economics, will exceed expectations, thanks to new research tools like specialist AI models and quantum computing. For investors, says CLSA, multiple competitive points of innovation suggest the longer their time horizon, the more the direction of travel in the EV space is increasingly tilted towards upside surprises. That theme is taken up by Jim Fontanelli at Arete Research, whose latest EV market update highlights the strides that manufacturers are making in increasing battery capacity – and hence range. Along with, of course, price, range is the key factor in EV market growth, and he explains why Europe is leading the charge in global EV adoption, and why he expects double digit growth in overall battery sizes out to 2022 in the region.