Emerging Markets are the least owned equity market globally and has seen zero recovery in sentiment/inflows since the lows. 4 pillars:
a) There are expectations for a larger fiscal support than the market is pricing which increases the global growth impulse.
b) The odds of a blue democratic sweep increased to 60% yes, 40% no, on PredictIt which have been correlated to (EM over DM) and easing global trade with China.
c) Vaccine progress should benefit those Emerging Market countries hit the largest during the pandemic. For example, Brazil’s bovespa is down -41% YTD in USD.
d) MSCI EM EPS are already starting to inflect.
The underweight is -550bps of AUM.
1. Emerging Market equities have seen outflows in 27 out of the past 36 weeks, including the 3rd largest and longest outflow streaks since 2000.
2. GS Research estimates that the flow gap is now +$133B of EM stocks to buy to get back to trend.
Over the past week, another company reinstated a dividend that was cancelled during the crisis (the 4th S&P 500 member to do so, leaving 34 constituents with suspended dividends), 3 more companies hiked their payouts (SBUX, LEN, and CAG), 3 companies announced new dividends in line with their previous payouts, and there were no new cuts or suspensions.
Nordea sums it up well;
“We took a look at the empirics and it doesn’t make for good reading for the Fed. 85% of all PCE price observations since 2012 were below target, while 88% of core PCE prices were below target and inflation has not even averaged above 2% for 12 months rolling once during the past decade. It will be a big struggle for the Fed to win the AIT battle and more QE may be needed.”
Our take on VIX is not cheap enough to buy, not expensive enough to sell…this “take” will probably change as we approach elections.
Gamma though is to be owned…
At 7.16/18 earlier this year “everybody” saw the Yuan going lower. After the huge bullish move in the Yuan, most see mighty Yuan going even stronger.
The Biden narrative has been strong in several assets, Yuan and solars (TAN) are two of them.
As we have outlined for the past two months, interest rate differentials between US and China has been a strong force for the Yuan bid, but we ask ourselves if people are discounting a little too bullish scenarios for several of the Biden plays?
“Commercial real estate remains a pressure point for banks and while there are some greenshoots in several parts of the country, New York City is unfortunately the sad little puppy dog of the US real estate market. That’s the message from a panel discussion we hosted earlier this week, and subsequent news flow hasn’t done much to assuage those concerns – many investors focused in on news that Citizens foreclosed on a SoHo retail property that was once worth over $100mn”
Generally speaking, how likely is “Tax Reform” to pass in the event of a blue sweep? 5 things to note…
1. Dems will still likely have a slim majority in the US Senate with a meaningfully-sized group of moderates…
2. The economy will still be in “recovery mode” and the optics around tax increases would likely be unfavorable…
3. They won’t need to “pay for” all of their spending with the Fed monetizing the debt…
4. The bigger priority is spending, revenue raising less so…
5. Tax change is a notoriously difficult…
1, SPX to test and fail 3600
3, Q4 stocks to front run vaccine
4, Q4 equity capitulation driven by low and stable credit spreads and bond/fx volatility (note MOVE moved big this week)
5, Top comes between elections and inauguration
6, Peak policy… >$21tn of fiscal & monetary stimulus in 2020 will simply not be followed by another $21tn in 2021 (lucky to get >$2-4tn)
7, Blue wave went from consensus bear to bull in a few months…time to focus on taxes and regulation shortly…