Stocks – Emerging Markets at new highs
World leaders praise domestic consumption to reduce global imbalances and interestingly, the MSCI Emerging Market index is trading at new highs relative to the MSCI World index – an outperformance that has been evident since October 2008 (well seen world leaders)! Anyway, last week’s setback in Western stocks are by several market pundits already called to be the recovery peak, and while the bears might be right evidence appears scarce in our opinion. As we see it most investors have been climbing the wall of worry during the post March recovery meaning that they are underperforming and underexposed and with most economic forecasters expecting improving macro statistics still downside risk appears limited! Further, with yields stable and low, a weak US dollar providing global liquidity, stable commodity prices and leading stock indices still dominated by a sequence of higher lows since March we find it premature to run scared. We are structurally bullish.
Bonds – Encouraging... if anything
Public uproar about ballooning deficits will definitely see politicians focusing on creating a plan on how to get the house back in order, but this is hardly a plan which will become a market moving theme right now. Rather, leading central bankers continue to assure that they will provide amble liquidity and low interest rates for an extended period… to make sure they don’t kill the economic recovery before it ever became sustainable (as Japan did a decade ago). Since summer central bankers have continued their attempt to convince market operators of their very cautious path towards removing the ultra accommodative monetary policies ultimately, and with e.g. German 2-year yields trading at record lows we believe that the pricing of next years’ interest rate hikes could be premature! And judged by the widespread lack of any clear downside price dynamics in Bunds and Treasuries recent price action must be considered encouraging… if anything. Overall, we continue to expect prolonged trading ranges in yields and that the yield direction will be guided by the two transient investment themes: 1) “supply fear and exit strategies” and 2) “high real yields and hesitating central bankers”.
Commodities – Ranging at best
Most commodities are priced in US dollar and consequently, it is important to track the global commodity price performance in all major currencies to get a better grasp of the underlying forces. Now, global commodities haven’t been able to produce and maintain new recovery highs since June! Consequently, global commodities continue to provide signs of stabilising, and this should remove a concern to a continued global economic recovery.
Currencies – JPY soars contrary to forecasters' expectations
With world leaders embracing domestic consumption in surplus countries forces already dominating currencies appear to gain more traction i.e. weak GBP and USD and strong EUR, JPY and select EM currencies (not least Asians). Interestingly, a stronger JPY is clearly not expected according to the consensus forecasts which could trigger more JPY buying within the short term. Now, with BOE and Fed among the most dovish the attack against these currencies continue receiving a tailwind from the news flow, and with market action lacking real evidence of any serious reversals (e.g. clear upside price dynamics in the traded US dollar index) recent currency themes should continue. Valuation considerations do not appear of much interest currently. Consequently, we still favour our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD.
And below you find the historic performance of four main asset classes, courtesy of Nordea Markets, click to enlarge.
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