My Market themes: Sat 11/01/20

11th Jan '20 by Edmund Shing

12 comments 1430 reads

Stockopedia is great for sourcing bottom-up information on individual stocks, but there seems to be precious little discussion of overall market themes.
So I want to start posting here on a weekly basis, highlighting global market themes that I spot and find significant for my investing. This is the first edition...

(all comments welcome, of course)

1.Macro trends – liquidity remains strong

Central banks keep pumping liquidity into the global economy: Led by the Federal Reserve,
central banks continue to prop up the banking system, which in turn leads to easier financial conditions and plentiful liquidity, which is a situation that risk assets like equities love.

US Primaries (Feb/Mar): Biden consolidates his lead to be the Democrats’ candidate:
Joe Biden remains a clear front-runner to be the choice of the Democrats. This is relatively market-friendly, certainly when compared to the more radical Warren or Sanders.

But it is not all plain sailing for markets and risk – Bernie Sanders continues to take the more radical vote away from Warren, and remains a clear second favourite… Were Sanders to catch up to Biden, I think US equity markets might catch a fright and drive a volatility spike.

Eurozone economy picking up sharply! Look at the Eurozone economic surprise index (orange line), demonstrating accelerating positive momentum and outpacing economists’ expectations. This means that economists have been too gloomy onb the Eurozone economy, and will need to upgrade their forecasts.

This is generally good for more cyclical sectors and stocks in Europe, e.g. in industry-heavy Germany.

2.Cross-asset trends – gold has been shining

Gold hit a 7-year high this week: driven up by rising fears over US-Iran geopolitical tensions (which have since eased back), the gold price hit a new 7-year high above $1600/oz before dropping back. The trend in precious metals, led by gold, remains solidly positive in the medium-term, driven by central bank easing and fast money supply growth.

Are long-term bonds back in fashion here? As an example, I show below the TLT ETF which tracks 20-year US Treasuries. Note how this ETF has tested the $135 level 3 times but failed to break down, suggesting that a bounce off this level could be more likely.

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letap73

11th Jan '20

Thank you very much for your musings with regards to the macro scale - as you say much of the discussion concentrates on individual stock. With this in mind I look forward to your weekly contributions and the comments/perspectives of the many well informed posters on this site.

Laughton

Yes, thanks from me too Edmund. Very keen for you to continue.

Some of my best (and safest) holdings over the past few years have been macro led rather than individual stocks. So big holdings for me are Gold, Silver, Japan, Vietnam, India, a Europe CAPE ETF, a global agriculture fund and fairly new addition of Brazil.

William K

Thank you Edmund. I look forward to reading more from you. The top down approach is particularly important when it comes to buying commodities and investing overseas as one has to factor in the currency risk, Trade Wars and the Middle East situation etc. I'd be interested in your views on currency movements, especially the GBP:USD - is the pound going to strengthen further against the dollar or has it peaked at around $1.30-1.35?

TB_Investor

Enjoyed that Edmund, look forward to reading more

Edmund Shing

Hi thank you for your kind comments so far.

So on GBP, this is a tricky currency clearly because of the ongoing Brexit negotiations with the EU, which are going to start in earnest from the end of January. Newsflow of the progress of these talks, combined with any news of a more fundamental Cabinet reshuffle, will no doubt impact sterling over the next few months.

While the major influence on sterling, the Brexit negotiations are not the only driver of GBP direction. The Bank of England also remains a key influence, as we have seen recently with the surprise comment from Mark Carney that the BoE is considering a rate cut (lower interest rates may be good for the housing market, but not so good for GBP).

ING, for instance, see a potential rate cut at the 7 May BoE meeting. This will depend crucially on the evolution of domestic economic growth and also of inflation.

For me, and this is very much a personal opinion, a potential positive sterling catalyst could be Boris Johnson reshuffling his Cabinet to be less dominated by Brexiteers, with more moderates added to reflect the best talent available within the Conservative Party ranks.

This could then suggest that the Prime Minister is open to compromise with the EU in order to get an agreement with the EU on the post-2020 relationship over the line by the end-2020 deadline, which by all accounts is extremely ambitious.

I am watching two economic drivers in particular to judge whether the recent GBP rally can be sustained:
1) Does consumer growth stay strong? On the one hand, the housing market has returned to modest growth, a clear positive. But on the other, retailers have in general reported a pretty poor Christmas trading period, suggesting weak consumption trends.

2) Will investment return? There is now less near-term political uncertainty on the back of the passing of the Withdrawal Agreement (finally), and a government with a large majority not at the mercy of minority parties like the DUP or factions like the European Research Group. But is that enough to persuade companies to invest in the UK? So far, too early to tell.

What do the charts say? They are a little inconclusive at the moment. But from the GBP/USD chart below, I would at least say that the near-term rising trend has not been broken yet, with the set of rising lows continuing.

Against the euro, we see a similar inconclusive pattern - but again, the predominant trend of lower highs (for the euro) suggests stronger GBP...

My bias then overall from the fundamental and technical outlooks is for sterling to strengthen further in the medium-term, and I am hoping to see GBP revisit 0.83 against the euro sooner rather than later. But this requires some strength in the domestic economy, and thus for the BoE to keep rates steady rather than cut.

Hope that helps,

Edmund

Rojo

12th Jan '20

Really useful and I look forward to reading more

That does help a lot. Thanks Edmund. These are uncertain times indeed. A substantial part of my portfolio is in USD so I'm hoping the GBP won't rise much above $1.35. One of my worries is that Trump will lower US interest rates and weaken the dollar, and he may do this to boost the US economy and his election chances later this year.

Howard Marx

The US Central Bank (like the UK Central Bank) is independent.

Therefore Donald Trump has no more ability to alter US monetary policy than Boris Johnson has in altering UK monetary policy.

I do hope you're right Howard.

marowa

Excellent information Edmund, thank you very much!

JohnWR

14th Jan '20

Thanks Edmund for such a clearly presented and informative post, I look forward to reading more.

betjeman

28th Jan '20

great post Edmund - Thank you

My Market themes: Sat 11/01/20

1.Macro trends – liquidity remains strong

2.Cross-asset trends – gold has been shining

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Edmund Shing

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