Monthly Outlook November 2017 - Macro Picture

发布时间：2017-11-08

Shanggu Asset Management (Asia) Limited

Monthly Outlook November 2017

Macro Picture

US

• President Trump named Powell as the next Fed Chairman.  The present monetary policy is likely to be continued.
• Fed is patient in rate hike.

Europe

• ECB will cut its monthly bond purchase to EUR 30 billion per month from January and maintain its buying until the end of September 2018.
• As quantitative easing can still be extended in terms of size and duration, rate hike cycle is less likely before 2019.

Japan

• Abe retained two-thirds of majority in the House of Representatives.
• Bank of Japan will maintain the easing monetary policy.

China

• President Xi talked about the ’new era’ of Chinese power during the Chinese party congress.
• China’s GDP came in at 6.8%, in line with market expectation.
• PBOC imposes measures on the property market, and contains leverage in the system.

Asset Allocation - Equities

US Equities

S&P 500 has risen by 15.7% YTD, trading at 21.87x PE.  However, caution should be taken due to: (a) The unwinding of “Trump Trade”, and (b) Valuation concerns. It is evident from the relative performance of global cyclicals over non-cyclicals that investors are unwinding their asset reflation trades, as the Trump Administration continues to flounder on its fiscal agenda. Without the economic/earnings kicker from fiscal stimulus, it is hard to justify the elevated valuation for US equities.

The key factor underpinning US equities has been the resilience of its corporate earnings.  Almost 79% of companies’ earnings beat market expectation. Much of this robust momentum, however, was attributed to the technology sector (it registered the largest proportion of earnings surprises in recent quarters).  But with so many expectations embedded into this space, even slight earnings disappointments could trigger profit-taking in technology stocks, dragging the broader index lower. We, therefore, keep underweight in the US equities.

Europe Equities

We assign neutral rating in the European equities.  The sharp rally in the euro has been a cause for concern for European equities. Since the start of the year, the EUR/USD has increased 10.6% to 1.164 (as of 31 Oct). According to conventional wisdom, a strong euro is typically negative for European exporters as well as companies with large non-euro denominated revenue.  The relationship between the euro and European equities has historically been unstable, and it is therefore not possible to conclude with certainty that euro strength will necessarily translate into sustained weakness for domestic equities.

While we believe that broad euro strength will not derail domestic equities, some sectors

will perform better than others in Europe. We prefer domestic consumption plays over

sectors with huge global exposures. Our preference is premised on two factors: (1) Correlations show that domestic consumption sectors like utilities, telecoms, and financials have a lower inverse relationship with the EUR/USD; and (2) Euro strength translates to disinflationary pressure domestically, prompting the European Central Bank (ECB) to maintain broad monetary accommodation. This is positive for domestic consumption plays.

Japan Equities

We maintain a neutral view on Japan, but two factors may be constructive: Firstly, the dollar index finally bottomed in September 2017, and then started weakening; Secondly, Prime Minister Shinzo Abe’s Liberal Democratic Party and its coalition partner Komeito scored a land-slide victory on 22 Oct 2017, making Abe the most powerful prime minister in post-war Japanese history.  The political stability means a continuation of ‘Abenomics’, which have already borne fruit.  As the TOPIX trades at 16.3x PE, we expect the index will stabilize around the current modest level.

China Equities

Overweight rating is given to HK/China equities.  As the Hang Seng Index trades at 13.8x PE, funds have been flowing into the HK stock market.  Banks and Insurance companies may get benefit from the buying spree.  I.T sector is likely another candidate in this round of repricing process.

Asset Allocation – Bonds

Emerging Markets (EM) Bonds

A combination of several factors such as: i) US President Donald Trump’s inability (so far)

to implement his policies, some of which were perceived to be positive for growth and

inflation; ii) The absence of a pick-up in inflation in most markets; and iii) Rising geopolitical tension, which led to a pause in US Treasury rates, has supported a better-than-expected return for EM bond investors.

It remains a challenge, however, for EM bond investors to find value. Yields have fallen

further through the year. We believe there are still selective opportunities in the BBB/BB rating buckets, although investment at this point is more for coupon carry than meaningful price appreciation.  Any temporary correction will likely be seen as a buying opportunity, given the technical strength of the market.

Disclaimers & Important Notice

Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable. However, we do not verify such information. We do not guarantee its accuracy or completeness, nor do we take responsibility for any loss occasioned by reliance placed upon the contents hereof. Any statements nonfactual in nature constitute only current opinions, which are subject to change. SG International Group Limited (or one of its affiliates) or their officers, directors, analysts, or employees may have positions in securities or commodities referred to herein, and may, as principal or agent, buy and sell such securities or commodities. An employee, analyst, officer, or a director of SG International Group Limited, or its affiliates, may serve as a director for companies mentioned in this report. Neither the information nor opinion expressed in this report shall constitute a solicitation to buy or sell any securities. There may be instances when fundamental, technical, and quantitative opinions may not be in concert. This firm (or one of its affiliates) may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report.

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