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Equity & Investment Strategy Team

David Bowers
Managing Director & Head of Research
Ian Harnett
Managing Director & Chief Investment Strategist
Charles Cara
Head of Quantitative Strategy
Richard Mylles
Political Analyst
Aaron Thompson
Research Associate

Equity & Investment Strategy Research

Equity & Investment Strategy Products: Investment Strategy Weekly, Asset Allocation Quarterly, Politics & Themes, Surveys.

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ASR's Multi-Asset Survey : Probability of Global Recession Exceeds 50%
19 Sep 2019
: David Bowers, Charles Cara
Probability of Global Recession Exceeds 50%
Asset Allocators Endorse the Bearish Macro Narrative …
For the first time in the history of the survey, the probability of a global recession
within the coming year has exceeded 50%. Moreover, the majority of those polled think
it unlikely that we will see an improvement in business confidence; nor do they expect
to see higher corporate earnings. Importantly for asset allocators, they put the
probability of a higher US unemployment rate at 61% in what will be an election year.

… But They Have not Gone Maximum Defensive
Faced with this deteriorating macro outlook, asset allocators have turned slightly more
cautious on equities, on US credit and on EM assets. But this looks little more than a
defensive tilt. They continue to put a probability of 55% on stocks beating bonds over
the coming year, and a striking 52% probability on ‘value’ beating ‘growth’. It looks like
investors are placing high hopes on a policy stimulus: 38% of those polled expect a
more positively sloping US yield curve as unemployment rises and inflation stays low.
Three things that also stand out in this survey: (1) there is no conviction about where
the USD goes next over the next 12 months; (2) there is no conviction about where US
10yr Treasuries go over the next 12 months; and (3) there is growing conviction that
gold is the place to be within the commodity complex, rather than oil / industrial metals.

Big Data Analysis: Cautious Outlook Widens Range of Investor ‘Tribes’
Our analysis of ‘tribes’ of panellists shows a big rise in the size of the most cautious
group, almost doubling to a quarter of the panel, who expect a recession that will push
unemployment up and risk assets down. In contrast the number of bulls is unchanged
at 17%. The rest of the panel have less extreme views, and can be differentiated by
whether they see the slowdown impacting credit markets.
ASR Investment Strategy - Eurozone: “a Riddle, Wrapped in a Mystery …”
12 Sep 2019
: David Bowers, Aaron Thompson, Ian Harnett, Charles Cara

How Investors Should Assess the ECB’s Next Move
In the five years since the ECB went “unconventional”, there has been one stand-out winner among eurozone equity markets: France (see chart below). The other majors have all underperformed. France - and the Netherlands - have been the main beneficiaries of the secular outperformance of ‘growth’ and ‘quality’ over ‘value’. The challenge for investors will be to decide whether after today the ECB is “ahead of” or “behind” the curve. If they come away disappointed, resigned to waiting for the Fed to deliver a meaningful policy shift, then the trends of the past 5 years will probably run on a bit longer. However, if Draghi surprises positively enough to sustain a bear steepener of yield curves, then this could be the start of something of a game-changer.

To Assess the ECB Requires an Assessment of Eurozone Real Economy
The eurozone looks close to an industrial recession; indeed, Germany is probably already there. ASR’s Turning Point Indicator suggests that the slowdown could broaden and intensify. But the picture is by no means clearcut: France and Italy have been relatively unaffected so far; consumer confidence remains resilient; and real narrow money growth has been strong. Inside this report we review the mixed evidence.

It’ll Need to be a Big Bazooka
We still see downside risks to the eurozone real economy; for us that raises the bar for what policymakers need to do next. Until we get clear evidence of a policy stimulus big enough to deliver an upturn in world trade growth and a sustained positive shift in yield curves, we will stick with our quality / growth bias.

ASR Investment Strategy - Sector Developments in Eurozone PMIs
5 Sep 2019
: Aaron Thompson, David Bowers
Although many are familiar with the national manufacturing PMIs released each month by IHS Markit, one often overlooked data set that provides an invaluable insight into the manufacturing sector is the Consumer, Investment and Intermediate Goods PMIs released each month for a select group of countries. This dataset allows us to examine in detail the three subgroups of the manufacturing sector; investment goods (goods that enable the production of other goods), intermediate goods (goods that are used as inputs in the production of other goods) and consumer goods (goods intended for final consumption by consumers). In this short note, we use this dataset to take a micro look at the manufacturing sectors of Germany, France, Italy and Spain in order to provide a more granular understanding of the current moves within the manufacturing sector in the Eurozone.
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UK Politics: Don’t be Fooled - No Deal Brexit Risk Remains High
5 Sep 2019
: Richard Mylles

• Parliament is likely to pass anti-‘No Deal’ legislation in September

• This may result in temporary relief for sterling but that relief may be short-lived

• Three things could see no deal risk return: Refusal of Royal Assent for the bill; Judicial review; An election

• An election remains highly likely and could bring with it the risk of a second referendum and a Corbyn government

• UK Political uncertainty is likely to remain elevated for the foreseeable future

Watch: UK Politics: Don’t be Fooled - No Deal Brexit Risk Remains High
Global Asset Allocation - Investing in the 2020 Recession
29 Aug 2019
: Ian Harnett, David Bowers

• The prospect of US recession in 2020 is likely to result in a bear market

• We are ‘Maximum Underweight’ on Equities along with High Yield Credit 

• Fed Funds at 0.25% will see 10yr US Treasury yields fall towards 1%-1.25%

KEY THEME: Recession will Challenge the Excesses Implicit in the New Normal

1.    Excess reliance on Monetary Policy to sustain the ‘muted’ cycle

2.    Excessively Low Rates creating an excess reliance on debt financing

3.    Excess use of US Dollar Debt placing global growth at risk from US policy

4.    Excessively ‘Tuned’ Business Models, built on Globalized capital & trade

5.    Excess Profit Shares assumed to persist even through the recession

EQUITIES: Recession will see Global Equities head towards a bear market as earnings fall -5% to -15% and PEs contract, making us maximum underweight. 

BONDS: UST 30-year yields have led the curve. As Fed easing accelerates, the UST rally will pivot to the front end, even as 10-year yields fall to 1%-1.25%.

CREDIT: With US recession now on the horizon, expect High Yield spreads to widen to 700bp+. A drop in WTI oil prices below $$$$50pb would provide extra fuel.

COMMODITIES: The US recession will challenge activity-exposed Commodities. Brent could test $$$$50p/b and we favour Precious over Industrial Metals.

REAL ASSETS: Low rates tend to support real assets. We prefer Real Estate to Infrastructure, with Hedge Funds providing additional downside protection.

US DOLLAR: There is more room for the dollar to appreciate against emerging and commodity currencies. For a broad-based dollar decline, clear signs of recovery in World ex US growth may be required, which seems unlikely before mid-2020.

Watch: Global Asset Allocation - Investing in the 2020 Recession
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