A detailed analysis identifying the trends that matter, incorporating the dynamics of political risk, the business cycle and other proprietary indicators.
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Economics ResearchEconomics Products: Absolute Strategy Weekly, Economics Quarterly, Newsflow Monitor.
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Our pillar core views are pro-Quality and Earnings delivery. Our 3 Major Overweights all combine positive Earnings profiles, higher Quality and lower B/S risk with a recent de-rating. And, as macro surprise peaks, we move U/W in Autos & Parts, Travel & Leisure and Basic Resources joins Oil & Gas. But it’s not ‘all about Cyclicals vs. Defensives’: like Utilities, Insurance is lower Quality and joins it as Major Underweight, and Health Care is cut to Neutral. The Quality story is there: the Earnings one isn’t.
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Macro Beta: Neutral - allocated framework weight 0%
Our Activity Surprise Indicator and PMI Diffusion Indicators pointed to strong macro momentum. But we may be nearing the best of the growth acceleration, as activity surprise has peaked. As the reflation narrative gets tested by policy delay and lack of detail, for now, we neutralise the Macro Beta pillar in our framework process.
Relative Valuation: modest positive – allocated weight 10%
High overall Equity market valuations suggest some focus within the market on relative cheapness: low valuation is a protection against event risk and market risk. We do have a positive weight of 10% on relative valuation in our process. But, for now, we believe that Quality and Earnings delivery are the key characteristics.
Forward Earnings: Positive – allocated weight 40%
We are not in a growth-rich world: we anticipate a near-term improvement in EPS growth, but 12m fwd expectations are likely to be disappointed. We allocate a 40% weight to our Earnings pillar, which checks growth with revisions and EPS Surprise. Delivery, not promises, matter if growth underwhelms and EPS uncertainty rises.
Balance Sheet Strength: modest positive – weight 10%
Low profits growth and uncertainty act to highlight balance sheet risk. But potential bankruptcy risk doesn’t guarantee disaster. Recessions are the trigger for mass corporate default, and our 6m probabilities are sub-10%. Quality and Earnings delivery provide protection. For now, we weight Balance Sheet Strength at 10%.
Quality: Positive – allocated framework weight 40%
A backdrop of macro surprise peaking, uncertain EPS growth and rising funding costs promotes persistent cash flow generation and higher debt comfort. Quality is an obvious way to protect against risk, while the relative valuation of Quality is now unstretched. Quality as a characteristic will command a premium: pillar weight 40%.
Sector recommendations: they reflect broader ASR views
Our Sector recommendations have a more Defensive tilt. This chimes with other ASR tenets: that Macro momentum is to fade; a more selective view on reflation; bond yields to rise, but modestly; and incipient credit and market risk. Change is possible, but the realpolitik is that it’s difficult to engineer and harder to deliver.
ASR Equity Strategy: Global Sector recommendations & changes
We continue to think that global growth could soften in 2H17. If this is the case, it could undermine the sense that the global economy has entered a ‘reflationary’ regime. Nevertheless, improving domestic demand dynamics should see the eurozone perform relatively well. Especially if, as we expect, Emmanuel Macron defeats Marine Le Pen to win the French presidency.
(Regime) change is not always for the better
• Fading stimulus in China could cause global growth to soften in 2H 2017 …
• … and weaken the sense that a ‘reflationary’ economic regime is emerging
• Regimes appear to shift when recessions undermine economic institutions
• Protectionism could compete with reflation to define the next regime
PODCAST: Click here to hear a briefing by Dom
Eurozone to fend off softer global growth
• We expect eurozone growth to pick up to 1.9% in 2017
• Stronger domestic demand should remain the key driver of the recovery ...
• ... and boost core inflation towards the end of this year
• The ECB could announce a further tapering of QE in September
PODCAST: Click here to hear a briefing by Raphael
Populists falling short of Paris
• Emmanuel Macron, not Marine Le Pen, is likely to win the French election
• French vote is less vulnerable to forecasting errors vs those in US and UK
• If ‘perfect storm’ saw Le Pen elected, we are sceptical of eurozone survival
• Economy could provide tailwind for Macron, but buy-in from Europe needed
PODCAST: Click here to hear a briefing by Michael
1. What if the US labels Germany a currency manipulator?
2. Whose problem is the dollar? Maybe the Fed’s
3. What if the IMF pulls out of the Greece deal?
Economics: Watered down (animal) spirits
ASR/WSJ Global Composite NewsFlow Index: 60.7 in February (61.5 in January)
· The ASR/WSJ Global Composite Newsflow Indicator (CNI) of macro activity fell in February to stand at 60.7, compared with a 61.5 reading in January. Global CNI readings of around 50 have tended to be associated with stock returns keeping pace with bond returns on a year-on-year basis (see Chart 1). After rising almost uninterruptedly since September, this month’s CNI fell back slightly. A commensurate fall in the equity-to-bond returns ratio mirrored this move.
· Our proprietary NewsFlow indicators are created by searching the Dow Jones Factiva database for ‘positive’ and ‘negative’ macroeconomic news stories, counting them, and then calculating the difference (the ‘net’ news flow). The searches are done in English, so the global series will be dominated by stories from and about the Anglo sphere. But they still capture global trends well.
· The Global CNI is built up from six sub-indices – see Charts 2-7 on pages 2 & 3. At the global level, only the Economic and Labour Market sub-indices rose on the month. Yet, with the exception of the Revenues component, all the CNI’s sub-components remain elevated relative to history (Charts 2-7).
· In the US, the fall in Inflation NewsFlow stands out. It could be that US Monetary NewsFlow, pointing to the most intense ‘chatter’ about tighter policy in a decade, has reduced news coverage of increasing inflation (Charts 17 & 19).
· The elevated CNI continues to grate against some of our policy-focused charts. Our Global Policy Uncertainty indicator has ticked back up to levels seen previously only during the Eurocrisis and US Fiscal Cliff standoff. (Chart 50).
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