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Equity Monthly: Embrace volatility as trade war could escalate

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Equity Monthly: Embrace volatility as trade war could escalate

By Peter Garnry, Head of Equity Strategy

As the books for the first half of 2018 were closed on Friday, the disappointing reality was clear to investors: almost all asset classes delivered flat or negative returns. Only momentum stocks (mostly technology shares) seemed to deliver strong results of around 7.5% for the first half. The biggest casualties were emerging market bonds (minus 10%) and equities (minus 5%) driven lower not only by the escalating trade war between the US and China, but also because of increasing financial pressure due to a stronger USD and higher US interest rates weighing on financial conditions.

Emerging markets could easily become the biggest victim in the second half if current trends continue. One thing stands clear in July: volatility will pick up as trade war headlines intensify and increase in frequency. Our overall message in July is to stay defensive and cautious as things could easily get more ugly before things turn around.

Emerging market equities (blue) versus bonds (black, source: Bloomberg)

Emerging market equities (blue) versus bonds (black, source: Bloomberg)

Stay defensive

Our dynamic asset allocation strategy (called Stronghold, which is a high-end service Saxo Bank offers to clients) went quite defensive in February due to the volatility shock altering the market structure and illuminating the fact that that tail-risks are constantly lurking around the corner.

In our Q1 Outlook, we highlighted that equities would soon take a hit as macro surprises would likely turn negative. While that call has been proven right, things have only become worse. We remain defensive on global equities as no firm positive catalyst is seen as ready to take equity markets to new highs. With the escalating trade war between the US and its biggest trading partners, uncertainty is going up and macro data will soon start to show the initial havoc from the tit-for-tat trade tactics.

In terms of industries, we recommend underweight exposure to semiconductors, industrials, and especially the car industry as these industries will become the battleground of the ongoing trade war. The best way to protect your portfolio (save for going all-cash or heavily into bonds) is to reduce cyclical sector exposure and increase exposure to health care, consumer staples, utilities, and telecom.

Outside these sectors, we believe software companies can also provide a good shield against volatility due to expected strong earnings in Q2.

Source: Saxo Bank

Source: Saxo Bank

Underweight trade surplus countries

June showed quite clearly where investors believe the biggest pain will be felt from the trade war. All countries with a significant trade surplus against the US performed worse than global equities. These countries are Canada, Mexico, Germany, China, Japan, and South Korea. It is our recommendation that investors reduce exposure to these countries for now. In the short term, China stands to lose the most as its hand is the weakest; the Chinese economy still needs a strong export sector to print high growth rates and thus an escalating trade war with the US is not in Beijing’s interest.

Single stocks

For the regular reader it should be no surprise that we run our equity research by quantitative methods. Our flagship model is called Equity Radar and is basically a factor model scoring around 1,800 global stocks across seven parameters: value, yield, quality, leverage, momentum, reversal, and volatility.

The table below shows the model’s top 20 picks based on the total score (a simple average of the seven factor scores). What has been interesting to note lately is that more Chinese companies have moved into the top 20 list; the main driver has been the reversal factor tied to the recent decline in Chinese equities.

Please note the two semiconductor stocks (Micron Technology and SK Hynix) in the list. While we are tactically negative on semiconductors, we do not overwrite the Equity Radar model with our tactical views on industries and sectors.

The top 20 global stocks based on our global equity factor model (source: Bloomberg, Saxo Bank)

The top 20 global stocks based on our global equity factor model (source: Bloomberg, Saxo Bank)

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Not company earnings, not data but vaccines now steering investor sentiment

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Not company earnings, not data but vaccines now steering investor sentiment 1

By Marc Jones and Dhara Ranasinghe

LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.

Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.

Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.

“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.

“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”

The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.

Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.

But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.

(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)

SHOT IN THE ARM

Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.

Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.

Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.

“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.

The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.

Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.

“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”

The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.

Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.

Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.

Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.

“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”

(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)

(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)

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BlackRock to add bitcoin as eligible investment to two funds

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BlackRock to add bitcoin as eligible investment to two funds 2

By David Randall

(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.

The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.

The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.

A BlackRock representative declined to comment beyond the filings when contacted by Reuters.

Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.

Bitcoin tumbled 10.6% in midday U.S. trading Thursday.

Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.

“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”

There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.

BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)

(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)

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Bitcoin slumps 10% as pullback from record continues

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Bitcoin slumps 10% as pullback from record continues 3

LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.

The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.

Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.

(Reporting by Julien Ponthus; editing by Tom Wilson)

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