The Quantitative Strategist
Global economy – Passing the baton. Actual and expected global growth expectations remain soft. Until now, healthy consumption growth has outweighed weak manufacturing activity but the recent easing in several service PMIs globally means that world central bankers need to do more to protect and stimulate growth. However, with the monetary policy toolbox nearly exhausted in DMs, the burden falls on EM central banks to provide the stimuli. It is with this perspective in mind, we believe, that the Fed decided to soften its tightening stance. This shift had become necessary in order to break the negative feedback loop between the Fed’s policy and the US$. This is how we are connecting the dots. A weaker US$ and stronger EM currencies should now allow EM monetary authorities to lower policy rates which remain too high relative to inflation. China has already responded as indicated by the surge in monetary aggregates. With inflation falling fast in other large EMs such as India and Russia, global reflationary efforts should start broadening out. Thus, our view remains that the world economy is more likely to surprise than disappoint this year.
Asset mix – Fade the rally of buy the dip? There are no easy ways to delineate bear-market rallies and cyclical bull markets. Thanks to a more dovish Fed and a weaker US$, the magnitude of the rally in credit spreads and the surge in market breadth suggest that the positive sentiment shift toward risky assets could prove more durable than transitory. Valuation is limiting rather than eliminating the potential upside for equities. Our newly calculated fair values for the S&P/TSX and S&P 500 project total returns around 4-5%. We believe stocks could be climbing the same wall of worries seen in the fall of 1998 through EM crisis 1.0. From its 200-day MA reached in October 1998, a point at which many pundits where recommending investors to sell the post-Asian crisis bounce, the S&P 500 rose 21% over the next year. Fast forward 18 years through EM crisis 2.0 and investors are dealing with the same technical backdrop and negative narratives heard in the fall of 1998. The 1998-199 roadmap is not our baseline scenario. However, this is an upside risk scenario which should be weighed against the often mediatized bearish case for stocks
Sector rotation – Introducing the Quest® triangle. This is a proprietary quantitative system providing measures of value, quality and momentum. Relying on composite scores and decile rankings, we are very excited to provide CG clients with a pecking order for stocks within various equity subsectors. In other words, CG clients now have a narrowed list of stocks to play our best sector-based ideas and themes. Speaking of sector strategy, our theme of the year “the late-cycle inflation trade” is slowly taking form, thanks to the US$ plunge. Late-cycle years are characterized by a swift upturn in US headline inflation above core inflation. Remember 1987, 1999 and 2007? Unsurprisingly, commodity and economy-sensitive stocks led markets through these years.
Energy (OW): Could the EIA be underestimating world oil demand and overestimating supply?
Golds (OW): April should show if the rally this year is more than a counter-trend bounce.
Metals (OW): Increase in copper inventories expected to reverse as Chinese copper demand strengthens.
Lumbers (UW): March rally inconsistent with still-rising US wholesale lumber inventories.
Machinery (MW): Liberals’ infrastructure plan only offsets the loss in spending from the oil patch.
Airlines (OW): A stronger CDN$ and headcount reductions favors Canadian vs. US airlines.
US Hypermarkets (UW): The US$ is turning into a headwind through higher import prices.
US Medeqs (OW↑): Lift to OW. No longer overvalued and the weaker US$ is a bone to exports.
Cdn. Banks (MW): Tighter lending standards and weak gross capital formation raise a yellow flag.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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