Economics Research

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 Team

Dominic White
Head of Economics
Michael Hessel
Political Economist
Raphael Olszyna-Marzys
Ben Blanchard

Economics Research

Economics Products: Absolute Strategy Weekly, Economics Quarterly, Newsflow Monitor.

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ASR Investment Weekly - Signs of Weaker Growth to Stress HY and Basic Materials
17 Aug 2017
: Dominic White, Raphael Olszyna-Marzys, Ben Blanchard, Michael Hessel, Philip Isherwood, Ian Harnett, Zahra Ward-Murphy, Chris Turner, Stefano Di Domizio, David McBain

Please see below for full contents

Economics: Early signs of a peak in growth
A second-half slowdown in global growth has been one of our central views this year. To what extent are the data starting to confirm that forecast? We think the business surveys and other timely indicators suggest annual global trade growth peaked in the second quarter of the year. Though the recent easing of Chinese financial conditions and rebound in US M1 growth present something of a challenge to our view, the monetary data presently look consistent with some further slowing in the second half. Significantly, there are signs that the inventory cycle is turning again. Rising inventory levels could signal a peak in pricing power and corporate earnings growth.

Multi-Asset: Why we stay cautious on US HY (and US small cap equities)
US High Yield bounced back quickly from last week’s wobble but we remain cautious. Notwithstanding slightly positive net returns over the past three months, HY spreads have edged higher. This has been concentrated in sectors suffering pricing pressure. The downtrend in US credit spreads that began in Q1 2016 was facilitated by accommodative central banks’ policies but was not supported by trends in corporate credit quality. As ECB QE is reined in, US credit spreads have room to adjust higher. Consistent with this, we retain a negative medium-term view on US small cap equities versus large cap, although in the short-term our Sentiment Barometer Indicator suggests a relative bounce for small caps.

Equity Strategy: Underweight Basic Materials as H2 decelerates
Basic Materials have picked-up with commodity prices since mid-June, but remain flat vs. the market ytd. Our Underweight stance rests on our Very Underweight Basic Resource stance (vs. Modest Overweight for Chemicals) and our view that China and Global growth will decelerate in H2. This isn’t good news for commodity prices or Basic Materials. The 13% discount is there for good reason: EPS growth is past ‘as good as it gets’.
 PODCAST: Click to hear Phil’s accompanying podcast

• A peak in global growth? We assess the evidence, by Dom

Key Views & Forecasts

• Why we stay cautious on US HY (and US small cap equities), by Chris

Sentiment extremes and markets on the move, by David

Multi-Asset open trade recommendations

Underweight Basic Materials as H2 decelerates, by Phil

Watch: ASR Investment Weekly - Signs of Weaker Growth to Stress HY and Basic Materials
ASR Investment Weekly - How Politics and EPS undermine Eurozone Equities
10 Aug 2017
: Philip Isherwood, Zahra Ward-Murphy, Michael Hessel, Ben Blanchard, Raphael Olszyna-Marzys, Chris Turner, David McBain

Please see below for full contents

Equity Strategy: Eurozone: good economic profile, weaker EPS outlook
Investors have embraced the Eurozone economic story. But, as Emerging Market investors know too well, a good economics story is not necessarily the same as a good Equity one. Our Economics team continue to be more bullish than Consensus on the Eurozone. However, our Equity Strategy stance on Eurozone Equities is Modest Underweight. We fear that the forward EPS profile for the Eurozone isn’t the same as the economic one. And, as Zahra discusses, our 3m PMI DI has fallen to its lowest level in almost two years. This signal that growth is starting to decelerate suggests that Equities could underperform Bonds in the near-term and that Cyclicals could underperform Defensives. Our Price DIs suggest weakening pricing power and that earnings growth may be close to peaking.
 PODCAST: Click to hear Phil’s accompanying podcast

Economics: Pressure off Europe, but clouds remain
The latest EU-wide opinion poll survey shows a broad pick-up in public sentiment towards the EU and single currency. Yet three things still concern us: first, there are still some country outliers, notably Italy, where attitudes towards Europe remain persistently sceptical. The ECB also suffers a significant trust deficit, suggesting political pressure could continue to weigh on Mario Draghi’s decisions in coming months. And the East-West rift over the future shape of Europe appears to be borne out in the survey, even if fears of more exits appear misplaced.

Multi-Asset: Looking for cheap ways to hedge risk scenarios
Volatility is low across asset classes – but particularly depressed relative to history in Japanese equities. We suggest strategies involving Nikkei options for both risk-bearish and risk-bullish scenarios, taking advantage of the historically low level of Nikkei implied volatility relative to USD/JPY and Nasdaq vols. In FX, EM implied volatility looks oversold versus DM vol. Within that, IDR vol looks low relative to CAD vol.

• Eurozone: good economic profile, weaker EPS outlook, by Phil

• PMI 3m Diffusion Indicator Suggests Equity Market Pullback, by Zahra

Eurobarometer: gauging pressure points, by Michael

• Absolute Surprise: a test for capex, by Ben

• Key Views & Forecasts

• Implied volatility: where are the opportunities?. by Chris

• Sentiment extremes and markets on the move, by David

• Multi-Asset open trade recommendations

Watch: ASR Investment Weekly - How Politics and EPS undermine Eurozone Equities
ASR/WSJ NewsFlow – Bad news takes a summmer break
8 Aug 2017
: Michael Hessel, Dominic White

The ASR/WSJ Global Composite Newsflow Indicator (CNI) of macro activity rose in July to stand at 56.8, compared with a 54.7 reading in June. 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). The move marks a break with the trend of the past 3 months. It also appears consistent with the equity-to-bond returns ratio, which remains above its trend level.

• 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. The biggest increase was seen in the Economic component which rose back up to levels seen in Q1 of this year (Chart 2). The Inflation measure, which has fallen close to 50 pts in the past few months, also rose slightly. Yet it remains at levels rarely seen in the series’ 20 year history (Chart 5). Worryingly, the Monetary Policy sub-indices ticked up (pointing to tighter policy) in parallel with these subdued levels (Chart 7).

• Media sentiment was generally more positive vs recent months across all regions, with the exception of the UK which was flat (Charts 8-13). The eurozone Economic NewsFlow was particularly positive, rising to levels last seen in 2007 (Chart 26).

• Our Global Policy Uncertainty NewsFlow has fallen to its post-GFC average. This has happened as European political risks failed to materialize, and as investors have cooled their interest in President Trump’s policy plans (Chart 50).

ASR Investment Weekly - Navigating Brexit Risk with the ASR UK Domestic & International 100s
3 Aug 2017
: Charles Cara, Chris Turner, Stefano Di Domizio, David McBain, Dominic White, Raphael Olszyna-Marzys, Michael Hessel, Ben Blanchard

Please see below for full contents

Equity Strategy: Navigating Brexit Risk with the ASR UK Domestic & International 100s
Brexit and Sterling volatility have shown that UK sales exposure is an important driver of stock performance.  So we have constructed an index to measure the performance of the UK-focused part of the UK market.  The index lacks the commodity exposure of the FTSE100 and is more exposed to the UK consumer.  The PE valuation of the index reveals that UK sales exposure has switched from being a positive to a negative factor, and is currently trading at a discount of 20% or 25% when sector adjusted.
 PODCAST: Click to hear Charles’ accompanying podcast

Multi-Asset: The USD Bear & EUR Bull Cases Revisited
EUR/USD’s rally has, unusually, been accompanied by a drop in EZ real 2y swap rates vs. US. On this occasion, real 10y rate spreads do a better job of rationalising EUR’s rally, which is consistent with expectations of ECB tapering – a force for Bund curve steepening – being the key driver. Near-term, EUR/USD is stretched from both positioning and sentiment angles. But, over an 18-24 month horizon, we still look for a move in EUR/USD to 1.30 as the large net bond outflows from the Eurozone in recent years are at least partially reversed.

Economics: Getting Ahead of the Macro Policy Agenda – Summer Reading List
In this year's summer reading list, we cover six topics that we think are essential reading for investors. To start, three issues that are front and centre of the policy debate: monetary policy normalisation, the changing nature of labour markets, and the corporate saving glut. We also focus on three issues that may have garnered less investor attention than they perhaps deserve: the One Belt, One Road project, the rise of authoritarianism, and health inequality.

• Navigating Brexit Risk with the ASR UK Domestic & International 100s, by Charles

EUR ‘overbought’ but long-term outlook still bright, by Chris

Sentiment extremes and markets on the move, by David

Multi-Asset open trade recommendations

Getting Ahead of the Macro Policy Agenda – Summer Reading List, by the Economics Team

• Absolute Release: ASR leading indicators, by Ben

Key Views & Forecasts

Watch: ASR Investment Weekly - Navigating Brexit Risk with the ASR UK Domestic & International 100s
ASR Investment Weekly - 20th July 2017
20 Jul 2017
: Dominic White, Michael Hessel, Raphael Olszyna-Marzys, Ben Blanchard, David McBain, Chris Turner, Stefano Di Domizio, Zahra Ward-Murphy
Watch: ASR Investment Weekly - 20th July 2017
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