Blotter: Listen to the boy who cried wolf
One of the more common clichés I bandy about is that if you are early, you are wrong. Now it is all well and good to be a long-term investor who can absorb a near term loss in order to maximize returns on a multi-year view, but the reality is that, at any given point in time, if the P&L on a strategy is negative, then the only agnostic conclusion at that point in time, is that your view is incorrect. Price action is judge, jury, and executioner and while an investor with a broader horizon, has the time for the situation to reverse, an assessment at any point in time has to be based on the current price. Particularly in fixed income and currency investing where “fair value” plays less of a role, being correct on timing can be as important as the fundamentals.
Picking tops and bottoms may be next to impossible but it doesn’t make it any less relevant. Hence, my stance that emerging market assets provide wonderful value on a two to three-year view based in my benign global inflation outlook, a fully priced Fed (for the next 12 months), a solid global growth and profits environment and concerns about the USD, China and trade that appear overstated, are mute if the market has, temporarily, deemed it otherwise. I am currently the boy who cried wolf, reiterating time and time again, the positive outlook for global risk assets, especially in EM. At last, I think, finally, the market is starting to listen.
I will elaborate further in a longer piece on Monday, but several of my scenarios are playing out, scenarios that I believe will eventually dispel many of the overblown concerns about the emerging world. Firstly, the Fed and the market look in alignment about the outlook for policy over the course of the next 12 months. Rates will rise every quarter until June 2019 when cash rates will be at the assumed long-term neutral rate, a place I believe that the Fed could pause. If I am right, rates won’t rise across the curve and if sustained, interest rates will cease to be a threat to all risk assets. Secondly, if rates are capped, what is the catalyst for further USD strength? I believe the USD is stuck in a range for the Dollar Index (DXY) between 89-95 for at least, the balance of the summer. The DXY chart looks like a rejection of higher prices and many battered EM currencies finished the week with strong gains. Oil’s 5% bounce post OPEC the catalyst, but the rationale isn’t relevant. A rangebound USD equals enormous pain for short carry strategies over the summer months and this will eventually lead to strong buying of EM equities.
Thirdly, China fears are overdone. On three separate occasions this week, clients and friends mentioned the phrase “Minsky Moment” when discussion Chinese credit. Bearishness is excessive, devoid of the reality that China has come off the boil, but little more. Oh, and you don’t think that the Chinese won’t turn on the fiscal and monetary taps if President Trump’s trade rhetoric starts to hurt growth? They are already hinting at this, and we know global assets will respond positively. The Shanghai composite has lagged the SPX by 1000bps this year and NASDAQ by 2000bps. Do you really want to be underexposed to China at these levels with government support coming? The thematic model portfolio will rotate 5% of our China exposure from index to a property basket, a sector that would benefit from a fiscal stimulus
There is more that I will walk you through on Monday but with the Fourth of July holiday coming up, a historically strong time for assets, EM should rip higher for the next several weeks.
The RBNZ meets this week. On Monday German Business Climate, and US New Home Sales. Tuesday, US Consumer Confidence. Wednesday, US Durable Goods. On Thursday, German CPI and US GDP. On Friday, Japanese CPI and IP, UK GDP. Chinese PMI on Saturday.