The end of Q1 is rapidly approaching, and what a year this quarter has been! Obviously a lot has changed since the start of the year, and the situation is fluid to say the least. So I thought it would be helpful to take a quick 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 proved completely wrong - at least at this juncture (still 3 quarters to go!).
So this is quite a good exercise to go through in terms of the "where to from here?" -- is it time to double down on some of the original calls, or to make a course change...
Aside from all that's been going on in markets, I've also been very busy making a series of changes to our institutional reports, including: a new weekly cross-asset sentiment pack, a rejig and expansion of the monthly chartbook (now called the market cycle guidebook), and next week I will be launching the new quarterly slide deck ...and there are still a few other enhancements on the agenda I'm working on as well. These have been well received by clients, and in times like these the value of good research goes up (so from a business standpoint I can honestly say I am actually doing better than ever, despite all the chaos, so definitely grateful for all the support and glad I put the work in to make that possible).
Anyway, on with the charts!
[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 -- there's 2 things to mention on this one. First: the OECD has suspended updates to the composite leading indicators (basically the data for the March release did not reflect the pandemic effects yet, so they didn't want to present misleading info). Anyway, it's fair to assume that most cycle/economic indicators will collapse short-term (much like what we saw in China). Just about every country has a fiscal and monetary stimulus package implemented to offset this... I would think of this as "economic life support" >> a ventilator for the economy. So the updated view for this one is basically expect nothing much from the economy in the immediate term -- the global synchronized rebound idea has been put in self-isolation for now. I do think however that on the other side of this the growth rebound will be far greater than anyone expects as a potent combination of base effects, pent up demand, and powerful stimulus takes hold. But that is a topic for later.
"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: what's changed for this one is that EM central banks have been busily introducing a further round of monetary easing, but what's also likely to have changed is that initial cyclical upturn is likely to see an abrupt fizzling out. However, what stays the same is that we could still well see EM leading the ultimate rebound as China having taken its medicine already on the virus with its sharp and resolute shutdown, gets back to business. Assuming China manages to stay on top of the virus, I would be closely watching China as an analog for the rest of the world.
"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: in the wake of the corona crash, defensive assets have become more expensive (as investors crowd into safe havens), and growth assets have fallen to really very cheap levels (but more so for global ex-US equities and commodities). I would definitely be doubling down on this one: over the longer run, valuations speak for themselves, particularly at extremes, and now is about as extreme as it gets.
"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: much like commodities and global ex-US equities, TIPS went from cheap to really cheap. So again, double down on this. But in terms of catalysts, clearly TIPS are tied in with the whole EM equities/commodities/EMFX etc complex... which are all showing up as cheap (thus attractive from a valuation standpoint), but obviously there will be some water to go under the bridge as EM and commodities face very real near term headwinds. Sentiment towards these assets has already been resolutely cleaned out, which is a good start, and stimulus measures will help - but stimulus will have to speak louder than the near and pressing shock and awe headlines. We'll definitely get there eventually, as a tipping point is reached.
"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]."
5. US Equity Valuations: this chart saw quite the change from the start of the year. Back at the start of the year it was a case of absolute valuations look expensive, but relative valuations look cheap. Now it's a case of absolute valuations don't look that expensive anymore, but relative valuations look the cheapest in years. Essentially a reset or winding back of the market clock. In hindsight it shows the risk of going in/staying in when absolute valuations are lofty.
"US Equity Valuations: the downside of likely higher bond yields is that all else equal it will squeeze the ERP (equity risk premium), which in contrast to absolute valuations, still looks cheap/attractive. Indeed, you can argue it's quite rational to be bullish equities even as absolute valuations are historically high if the equity risk premium provides enough of a cushion."