Well, we're nearly done with the year - and what a year it has been so far. But with Q4 looming, it's not over yet! Despite all the immediate concerns, pretty soon we'll need to start casting the gaze deeper into 2021.
So as has become tradition, it's time for a timely progress check on the "10 Charts to Watch in 2020". In the original article I shared what I thought would be the 10 most important charts to watch for multi-asset investors in the year ahead (and beyond).
In this article I have updated those 10 charts, and provided some updated comments.
With all that's gone on, some of my initial thoughts and expectations from the original article got set slightly off track in some cases, and went wildly wrong in others. So this is quite a good exercise to go through in terms of the ever present "where to from here?" question.
[Note: I have included the original comments from back at the start of the year, so you can quickly compare what I'm thinking now vs what I said back then]
1. Global Economy -- this somewhat unusual leading indicator of leading indicators chart is basically pointing to a V-shaped recovery headed into 2021. And at least for now we have actually started to see the global OECD composite leading economic indicator (which in practice tends to be more of a coincident indicator) turning up. I guess it is worth noting the exception/cautionary in that chart, namely 2002 - where an initial rebound was short lived, and in fairness there remains a lot of uncertainty around the virus and (geo)politics and all the rest of it. But as the shock passes and stimulus works its way through, an economic rebound and eventual boom is a case of "when", not "if".
"Global Economy -- a turning point in the global economic cycle: 2019 basically saw a global manufacturing and export recession. Yes Recession. But looking forward, I have a growing list of leading indicators pointing to a recovery in 2020, and the below is one of them. The diffusion index of OECD leading indicators has made a clear turnaround after reaching a decade low. I will be watching for a turn up in the main global indicator (and for the diffusion index to continue to edge higher/stay higher)."
2. Emerging Markets: Speaking of stimulus, while it has very much been a global effort, one particular standout to me is this chart of Emerging Market monetary conditions. This composite indicator shows EM central banks have been aggressive in easing policy - and interestingly enough it's EM ex-China that have been doing a lot of the heavy lifting. Probably the only cautionary on this chart is that the incremental easing has begun to taper, but it's a long cry off tightening, and it transmits to growth and asset prices with a lag. But overall I would say it's an unequivocally positive datapoint for EM.
"Emerging Markets: a big part of the 2020 recovery thesis is the global monetary policy pivot. Not many have noticed, but EM central banks have been particularly aggressive in easing policy (and by the way, they have the most traditional policy ammunition available). Given some of the cycle indicators have already begun to stabilize for EM I have a strong degree of confidence that we will see a cyclical upturn across emerging economies in the coming months and quarters."
3. Growth Assets vs Defensive Assets: this is one of my all time favorite charts, and it really helps in giving a bird's eye view of the multi-asset landscape and in framing the risk vs reward opportunity set... Defensive assets are extremely expensive - perhaps no surprise, given the still substantial demand for safe assets and global surge in central bank asset purchase programs. What's interesting though is while growth asset valuations have rebounded sharply, it's still yet to reach extremes. Makes me wonder if we'll get to a point in the near future where both growth and defensive assets are extreme expensive (in that case I guess you could argue that cash would be undervalued!).
"Growth Assets vs Defensive Assets: this chart says it all in terms of where investors have been positioned, and it tells you that defensive assets may not necessarily be “safe” given such expensive valuations. Indeed, a global economic rebound could well make defensive assets a source of risk, rather than a hedge of risk."
4. TIPS breakevens: in terms of valuations, TIPS breakevens (aka market-based inflation expectations) continue to trade at historically cheap levels -- albeit MUCH less so than back in the dark depths of March. Although it is a contentious issue and nearly everyone seems to have a strong opinion on it, I see the path of least resistance as skyward for inflation. Part of that is to do with the substantial stimulus efforts, a likely "once bitten, twice shy" approach by policy makers in the wake of the 2018 policy mistake, and my views on commodities (but more on commodities in chart 7).
"TIPS breakevens look cheap, and should rebound if we get better growth. This will also tend to put upward pressure on bond yields (i.e. nominal yield = real yield + inflation expectations). This is closely tied in with the commodities picture [chart 7]."