We sold Goldilocks in the last quarter of 2018. It is now
\ntime to buy Armageddon.<\/p>\n
When we wrote our last Quarterly, in early October 2018,
\nthe US equity market had just had its longest losing streak
\nsince the start of the Trump presidency. The key question
\nat the time was if US Equities would enter a bear market
\nand drag other equity markets further down with them.
\nOur answer was and remains: no. This is because the
\nMarket Watcher Supreme is President Trump himself, the
\nsame individual who holds the keys to the trade disputes
\nwhich, in our opinion, played a significant part in the
\nweakness of equity markets. We believed that any
\ncontinuation of a meltdown could be followed by pledges
\nfor more stimulus or maybe, just maybe, a more
\nconciliatory tone versus China.<\/p>\n
Lo and behold, President Trump did make an overture to
\nPresident Xi at the G20 meeting, that started on
\nNovember 30 in Buenos Aires. The two sides agreed to
\npostpone by 90 days the planned tariff increase on
\nJanuary 1 and to initiate talks. Granted, not everything
\nran smoothly from the get-go. It hardly ever does. The
\narrest of the CFO of one of China’s most prominent
\ntechnology companies, Huawei, kept markets doubting
\nthat a deal would ever be possible. Also, a solution to the
\ntrade disputes would be more of a truce, in what will most
\nlikely be a long-term ideologically driven conflict between
\nChina and the US. That said, talks at the time of writing are proceeding and a solution will be a key overhang to
\nbe lifted for equity markets.<\/p>\n
EM outperformed US Equities by a wide margin<\/strong><\/p>\n We have maintained for a while that any positive news on Of course, the trade wars were not the only issue that Time to turn to markets outside the US<\/strong><\/p>\n Well, it is now time to turn to markets outside the US. EM, Take Emerging Markets, for example, where investors Not that everything is perfect in EM. Earnings growth is At the same time, every other issue that was dogging EM Risks remain high<\/strong><\/p>\n Don’t get me wrong, nothing is ever straigthforward, and Look outside the US, Goldilocks scenario doesn’t hold anymore; EM back on the buy list: take advantage of the Armageddon panic; The Damocles swords of 2018 are slowly being pulled back<\/p>\n","protected":false},"author":1,"featured_media":76909,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1809,1655,1657,1651,2087,2068,2020],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/76911"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=76911"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/76911\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/76909"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=76911"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=76911"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=76911"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nthe trade disputes could ignite a rally, more so in those
\nmarkets that had been heavily battered, such as Emerging Market Equities. Even in the doldrums of last December’s
\nmarket volatility, with still a significant lack of clarity on
\nthe trade disputes and all major regional markets posting
\nnegative returns, EM outperformed US Equities by a wide
\nmargin, followed by Europe and Japan. This was no
\nsurprise to us.<\/p>\n
\naffected equities outside the US, over the better part of
\n2018. The Fed tightening at a time when global growth
\nwas potentially being affected by protectionism,
\ngeopolitical concerns in Emerging Markets and Europe,
\nand the dollar strength that ensued all contributed to a
\nperfect storm of potential threats. Eventually, when
\ninvestors realized that this conjuncture of events, which is
\nnot good for equities markets outside of the US, is
\nactually not that great for US Equities either, US Equities
\nalso started to nosedive. Investors began selling the
\nGoldilocks scenario, where US Equities risk premium had
\nreached an historical low versus all other major equity
\nmarkets, because it simply was too good to be true that
\nUS earnings would be unscathed by all the ills that would
\naffect the rest of the world.<\/p>\n
\nEurope and Japan have all underperformed the S&P500 over the course of 2018 (in USD terms). Even with the
\noutperformance last December, they still all closed the
\nyear about 10% behind the US. While geopolitical risk and
\nsome European countries playing with the odds of a
\nrecession are likely to keep volatility high in European
\nEquities for the time being, there is less uncertainty on the
\nhorizon for Japan and EM Equities, as most of the
\npotentially negative catalysts ahead appear to be already
\nexpected and discounted by markets.<\/p>\n
\nhave been discounting an Armageddon scenario with a
\n17% underperformance against US Equities in the 11
\nmonths to November 2018. <\/p>\n
\nslowing down and economic growth in China continues to
\nweaken. For one, we are likely to have more earnings
\ndisappointments in the near term. Yet, earnings growth
\nfor 2019 is still estimated at 9% and a good part of the
\nnegative revisions that we have seen in recent months
\nwere due to direct and indirect consequences of the trade
\ndisputes (as companies have either been directly
\nimpacted or have become more cautious with their
\nspending plans). While a “deal” between Trump and Xi
\nwould not fully reverse the earnings outlook, it would
\ncertainly eliminate a significant overhang. China’s
\neconomic growth will structurally continue to weaken, but
\nthe government can still manage the soft landing with
\nstimulus measures and our investment team expects
\nmore of these later in the year. <\/p>\n
\nEquities in 2018, while it has not disappeared, has started to relieve the pressure. For one, the FED’s recent language is more dovish hinting to a pause in rate increases. While
\nthe balance sheet shrinkage at this stage will most likely
\ncontinue, the fact that the Fed is moving more cautiously
\nindicates that, if the macro outlook would warrant it, a
\npause in quantitative tightening could also be in the
\ncards. With a more dovish Fed, and a less buoyant US
\nmacro backdrop, the US dollar is also likely to pause its
\nascent. In the meanwhile, a number of the geopolitical
\nconcerns that characterized EM besides the trade disputes
\n(such as elections in Brazil and Mexico) are now behind
\nus.<\/p>\n
\nthe risks remain high. Yet, the odds have turned. Those
\nDamocles swords that were hanging over EM are slowly
\nbeing pulled back: the Fed has become more dovish, Xi
\nand Trump are talking, and the Trump administration
\nseems more willing to ink ‘the deal’, and geopolitical
\nconcerns have dissipated. If all this also means a
\nnormalized dollar, as the US economy cools off and the
\nFed errs on the side of caution, this is the recipe that we
\nhave all hoped for: we sold a false sense of Goldilocks,
\nnow we should buy a misplaced fear of Armageddon.<\/p>\n","protected":false},"excerpt":{"rendered":"