Newsletter| Recent Newsletters
Editor's Note: Hamish Risk | October 28, 2020
In what may seem like a lifetime ago, MXN was central to the market reaction during the 2016 US presidential election campaign and may yet find itself in the spotlight in 2020, albeit for very different reasons. In today’s Macro Briefing, Exante Data explains why the prospect of a Democrat clean sweep offers a huge tactical opportunity for investors to go long of the Mexican currency. Meanwhile TMI Data Science outlines why the momentum behind dollar weakness, a key component of the global reflationary trade, may be fading. Meanwhile, sector winners and losers from the US elections are at the forefront of investors minds. For some sectors the outcomes are binary, for others, it is more nuanced. The oil and gas sector maybe one of those. The view that a democratic sweep is the death knell of the sector maybe presumptuous, according to a report from Morningstar. With the elections grabbing so much attention, this week’s 5th Plenum of the Chinese Communist Party seems less prominent than in the past, but is no less important. Rhodium Group highlight what investors should look out for this week. The plan, when the full details are released next month, should have important medium and long-term asset allocation implications for investors looking to allocate into China’s equity markets. Leaving recent outperformance aside, index inclusion and enhanced liquidity are just a few examples of factors that are reinforcing the investment case. So we highlight the recently published China A-Shares primer from Goldman Sachs, who go as far to say that it has become a must-have market for global investors.
Mexico MXN Exante Data
1. US election and Mexico’s recovery – High conviction trade MXNJens Nordvig at Exante Data highlights the potentially positive impact of a Democrat clean sweep in the US election on the MXN. He believes the combination of a Biden presidency and Democrat Senate will produce a very aggressive stimulus package that will dramatically support US growth. Nordvig believes this will have a positive impact on MXN given Mexico’s economy has the highest exposure to US demand than any country in the world, with a shift from service to goods consumption boosting Mexico’s balance of payments, which should also be improved by increased remittances and higher bond flows. Positioning, he says, is also supportive for MXN, with real money investors holding very moderate positions in the currency after the Covid-19 pandemic wiped out longs earlier in the year, while CTAs and hedge funds, while currently long of the currency, are not holding extreme positions and have potential to add more. As the world’s second-most traded EM currency, Nordvig says the MXN should also receive support from the boost in sentiment globally produced by an aggressive US stimulus package. He warns against getting carried away, however, given the spectre of Covid-19 still looms large, threatening a fresh downside risk to global growth. That is why Nordvig views his bullish stance on MXN as a tactical view into the US election rather than strategic multi-month opportunity. Indeed, once the result of the election becomes clear, he expects a quick, sharp move that could take USDMXN below 20.00.
Alternative data reflation trade US dollar TMI Data Science
2. Big data sentiment indicators suggest caution on USD weakness and reflation narrativeTMI Data Science is an alternative data provider utilizing Natural Language Processing to build leading indicators, forecasts and trading strategies via unstructured data across a wide array of asset classes. TMI’s Elan Gore has released a couple of timely notes that feed into themes that we’ve highlighted in recent briefings, suggesting that dollar weakness cannot be relied on to further fuel the global reflationary trade and support equity markets. In the first note, he explains how TMI’s text-mined CNY diffusion index, which measures the relative momentum of renminbi-positive versus renminbi-negative expressions in the global media, is showing signs of peaking as a result of fears over potential Chinese FX intervention to stem the value of the currency in an attempt halt the tightening of domestic financial conditions. Gore says the signal from the index has now turned neutral on CNY, which has appreciated by 9% since August, at a time when expectations of a comprehensive so-called blue wave victory for Biden and the Democrats in the US presidential election is driving US inflation expectations higher. Gore notes that the rise in inflation breakevens seems to have been driven by the ”blue wave” rather than the expectations of higher corporate earnings, where indicators remain subdued this earnings season. In the second piece, meanwhile, he reveals TMI’s text-mined EUR Leading Indicator has recently crossed into negative territory, driven primarily by Covid-19 second wave news and expectations of further easing from the ECB. In addition, Gore finds that USD–negative expressions in the global financial media have been declining sharply in recent weeks, and are now at levels last seen in April. Despite broad net short dollar positioning reversing quite sharply, he notes EUR net long positions remain outstandingly elevated. With potentially stale positioning and greater uncertainty in the final stretch ahead of US elections, Gore says the giant EUR net long is at risk of being unwound.
Oil and Gas US presidential elections Morningstar
3. The US oil and gas industry does not need a Trump win to thriveWeaning America off fossil fuels will take multiple decades, even if Democrats sweep Congress in November, says Dave Meats at Morningstar. He says a Biden win would reduce US gasoline consumption, but the demand impact would be modest initially, and as only US demand would be affected, this isn’t a needle mover for global oil prices. A congressional sweep could lead to a repeal of the Tax Cuts and Jobs Act, which could modestly hurt US energy firms via increased corporate taxes and reduced allowances for deductions, adds Meats, but it would neither affect the marginal cost of supply, nor alter the global cost curve for crude oil. He says a Democratic election win would not change his view that most oil and gas stocks are deeply undervalued, even if the Senate flips as well. Democratic policies could reduce fair values by 10%-20% at the most, typically, says Meats, but his top picks, Schlumberger, Pioneer Natural Resources, Cabot Oil and Gas, and Enterprise Product Partners, would all still look cheap in such scenarios. It would, he adds, take some fairly extreme policy shifts, unpalatable to moderate Democrats and Republicans alike, to affect his mid-cycle forecast for WTI of $55 a barrel.
China 5-year plan Rhodium Group
4. Plans are nothing, but planning is everythingVincent Zhu at Rhodium Group has issued a note outlining what investors should look for as the Chinese Communist Party sets out its 14th five-year plan after its conclave on October 29, a document that may not have much short term impact for investors, but which has the potential to drive medium and long-term asset allocation decisions. Few details will be issued in the statement issued immediately after the meeting, but a more detailed document with policy guidelines is likely to be released the following week, he says. Among the most important elements to watch, says Zhu, is the presence of a longer-term GDP target. Targets, he says, have always featured in past plans, but the days of China doubling GDP every decade are in the past, and Beijing may gain policy flexibility by eliminating a target. In addition, says Zhu details should be released on how China plans to implement its “dual circulation strategy”, which could include measures to support domestic consumption and changes to technology and industrial policy goals in the face of a more hostile external environment. Investors should also look out for changes to China’s environmental and energy policies that support Beijing’s recent pledge of carbon neutrality by 2060, he adds.
China A-shares Goldman Sachs
5. China A shares in anatomy – “A” primer for global investorsKinger Lau from Goldman Sachs has issued a note explaining why China A shares have become a must-have market for global investors. As he explains, 2020 has been an unprecedented, challenging, and eventful year, but China is likely to deliver 2.0% GDP growth and A shares have gained 15% year to date, outperforming almost all major economies and equity markets globally. According to Lau, the economic resiliency and respectable equity market returns amid the Covid-19 disruptions and continued external pressures reinforce what he views as an underappreciated investment case for A shares as one of the largest, most liquid, growth-orientated, dynamic, under-owned, and strategically important asset classes in a diversified global portfolio. Accordingly, given the ongoing structural shifts in corporate fundamentals, market microstructure, regulatory framework, accessibility, global capital allocation, and index composition in the second largest equity market in the world, he has refreshed his China A primer with more than 194 exhibits aimed at helping global investors better comprehend and engage with what he describes as this “have-to-have” market.