Market Watch. December 2019 II

Market Watch. December 2019 (II)

A modest global growth pick up in 2020

Central bank policy stance: Stress in the US repo market forces the Fed to provide liquidity and to buy short maturing treasury bonds. The ECB has restarted their bond buying program. The bank of Japan keeps regularly investing into equites and bonds, while the Swiss national bank intervenes to hinder further swiss frank appreciation.

Closer look at the US: the Fed keeps saying that this is not QE4, economically speaking all these actions have the same effect as the former QE program. From this angle risky assets are well supported and might keep going up in Q1 2020. The impact on GDP growth is still positive but the effectiveness of extra stimulus is diminishing. The impeachment process is most likely going to end without effect. The impact on the economy is neglectable.

However, considering recent events, such as the election in the UK and the phase I trade deal, we see more support for risky assets. The mini trade deal has improved the growth outlook for China and the US. The reduction of tariffs and the Chinese acquisition of US agricultural products will add around 0.3% of GDP growth in both countries.

These political events took place after the PMI survey was conducted. We do see that for the 4th time in a row the global indicator is improving, which means globally we can expect some modest growth pick up.

The economic situation in emerging markets has improved. This is reflected in rising emerging market equites which have recently broken out of their long-term downtrend.

This rather positive picture is reflected by rising US treasury yields and a normalized (i.e. not inverted) yield curve. The Fed is on hold which is as well indicating that the US economy doesn’t need further stimulus.

For 2020 we see some risks which already have kept us busy in 2019. Phase II deal will be challenging to achieve. A free trade agreement between the UK and the Eurozone is very unlikely to be completed throughout 2020 and might result in a no-deal Brexit. The Eurozone keeps growing at a very low pace. Germany will not implement fiscal stimulus. The French pension fund reform is stocked, and the country stands still. New Italian government crisis may happen, and the fiscal stimulus might end.

Currencies, Commodities, Equity & Bond Indices

Risky assets have rallied before the phase I trade deal was announced. The trade deal between China and the US rolls back some tariffs, new announced tariffs on both sides are postponed and China buys more US  agriculture products.  Normally, market participants react with selling risky assets. Based on the old saying “buy the rumor sell the fact”.  However, this time we have seen a risk-on rally.

All major equity markets are up in December. US tech with more than 5% leads the pack.

Bonds are up across the board as well. Nevertheless US investment grade and US high yield spreads have reached the tightest level in 2019. For 2020 the spreads cloud will widen anytime in case of fear of new recession or new turbulences in the trade talks.

Gold has lost further ground which is a normal reaction in a risk-on mode.

Risk-on after Brexit and a Phase I Trade Deal

Liquidity

The British pound sharply increased after the result of the election was published. The prime minister announced that in 2020 he wants a free trade agreement with the Eurozone signed in order to decrease pound to the starting level, otherwise there will be a no-deal Brexit by the end of next year. The gains that GBP has made after the election were eroded within hours. It is very unlikely that such a deal can be negotiated within 11 months, as normally such negotiations last for years.

The Swiss franc keeps appreciating although the SNB regularly intervenes in the FX market. At the same time the negative interest rate policy gets under political pressure. Nevertheless, we do not see any other solution for the SNB rather than keeping rates below zero while the ECB keeps its rates steady.

US dollar kept weakening against the Euro and other currencies which support investments in emerging markets.

Equities

Risk-on drives all markets up. Four months ago the global fund manager survey showed a significant underweight of equities and fears of a recession in 2020. The actual survey shows the opposite. Equities are overweighed and cash levels, which are used as a confirmation indicator, are at the lowest levels of recent 6 years.

The main fears are still the outcome of the trade war (Phase II deal) and the US election. Still, the recession fears have not made it into the top 10 risks.

For 2020 we might see that emerging market equites might outperform developed equity markets. This is exactly what is happening in December. These markets are cheaper priced and might profit from a weakening US dollar. Technically they have broken its downtrend, which, if confirmed, might further support these markets.

Fixed Income

The US yield curve stayed normally shaped. Yields are upward sloping across the whole maturity spectrum. The real move was in corporate bonds, where the spreads have reached the tightest level in 2019. We consider US high yields and Latin-American corporate bonds too expensive and keep them underweighted. Consequently we see value in Asian bonds. Key players in Chinese real estate market still offer a relatively high return for the taken risk.

Alternative Investments

Gold: The consolidation has continued in December due to the risk-on mode after a phase I deal was announced. Nevertheless the chart looks like we have reached bottom in November. For hedging purposes gold positions are still to be considered.

Oil: The oil price is creeping further up. The two main drivers are the risk-on mode and the latest OPEC announcement to cut the production by 500’000 barrels a day.

Cooper: Dr. copper has risen in December more than 7%, while year to date is up only around 3%. This lead indicator points as well to faster growth in 2020.

Chinese Real Estate

Blackfort Capital never stops seeking for better investments for our clients. Just recently our portfolio managers had a series of meetings with Gazprombank and other research providers discussing new fixed income opportunities in China.

Much attention was dedicated to the discussion of Chinese real estate market, which suggests stable and attractive yields in the quickly developing framework of Chinese urbanization.

Based on an initial coverage bond list from Gazprombank we used this opportunity to enlarge our bond coverage of this sector.  Our team has examined the most promising of those bonds in details and you can find their outlook below.

Investments covered:

Country Garden 6.15% 2025

Agile Group 6.7% 2022

Logan Property 6.5% 2023

Newmont GoldCorp

Disclaimer

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