Risk-on is coming a bit off today but global equities remain close to all-time highs despite dismal macro reading coming through and earnings growth expected to dip into negative this month. South Korea’s President Moon delivered today a depressive outlook for the economy and the statement is backed up by South Korean exports down 20% y/y again in October (the first 20 days). As the South Korean economy has been one of the best leading indicators on the global economy since 2008 this data holds a high weight in our decision-making and judgement of the global economy, and even more so of the Chinese economy. Outside the narrow scope of South Korea, the global trade volume data released by CPB shows the worst global trade environment since 2009 when the economy was still healing from the financial crisis in 2008.
Strong
equities can only be explained by massive substitution effect from low real
rates on bonds and strong beliefs among investors that policy makers will
engineer a rebound to come in 2020. But this is a high stake poker play and
something we alluded to in our equity
update yesterday. US equity
valuations are moving into danger zone given the macro backdrop, falling
profits and the fallout from potentially higher rates. But maybe everyone
outside equities are just wrong and equity investors are right this time. Given
equities are a long duration asset class forecasting its returns and valuation
is difficult, so don’t be too optimistic on the behalf of equity investors.
Yesterday
we talked about the substitution effect from bonds into stocks with robust
dividends and price performance. Today we are accompanying this with a chart to
illustrate the effect. The shaded areas show periods of significant rise in the
among of negative yielding bonds. In
both periods, but especially the recent one, minimum volatility stocks have
seen their valuation multiples expansion way beyond S&P 500. This is a sign
of substitution effect away from bonds and into supposedly safe stocks. However,
this substitution effect comes with risk as the move makes the minimum volatility
factor trade more crowded and too such an extent that some observers of equity
factor returns are sounding
the alarm. With US minimum volatility stocks trading at a 29% valuation
premium to S&P 500 which trades at a 40% valuation premium to global
equities ex. North America you get the picture of just how expensive this
segment is.
A key driver
behind the stock US equity market has been a relentless upward move in EPS
which has been driven by both higher nominal net income but also lower
outstanding shares as companies have bought their own shares. This stands in
sharp contrast to European equities that have used the equity market for
issuances on a net basis. According to
Goldman Sachs aggregate
buybacks in the US will fall 20% in 2019 which means that one of the
strongest marginal buyers of equities is holding back. On balance this is not
good news for US equities.
The
earnings season is in full swing and the results are slightly better than
expected from Novartis, UBS and AMS, and forward EPS estimates on S&P 500
were raised a bit yesterday. In extended trading last night, Halliburton was
the stark reminder of the worsening environment for energy stocks as the
company issued a bleak Q4 outlook. The most important US earnings today are
UPS, United Technologies and P&G each delivering insights into the logistics,
industrial and consumer sectors of the economy. But for overall equity sentiment and the attempt to make new highs in
the S&P 500 Index the key earnings this week to watch are those from
Microsoft (Wed, aft-mkt) and Amazon (Thu, aft-mkt). Our
views on Amazon and what investors will focus on were published yesterday.
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
– Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
– Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
– Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)
![Peter Garnry](https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/peter-garnry-400x400.png?mw=48)