The Magnificent SevenThis week’s holiday-shortened data docket could whet expectations for Q4 real GDP growth, but will unlikely cause any “material reassessment” of the outlook for Fed policymakers. As such, failing a considerable divergence in the data, the week’s economic calendar events are unlikely to trigger much of a rise out of investors.
From the institutional side things, only a “trade if you have to “mentality should prevail over the next two weeks. However, this should not preclude investors executing small tranches of their 2020 game plan if the price is right.
Let’s peek into the 2020 crystal ball, where the US election will inevitably drive portfolio allocations this summer. But for the next 4-8 weeks based on everything I have read and views from the smart folks I’ve had the good fortune to be associated with over the years, themes related to the rebound in global growth as the tail risks around trade and Brexit appear less daunting are giving rise to the Magnificent Seven trades for 2020
1. Global growth rebound led by China and Germany as loose financial conditions, a leap forward on Brexit, and the US/China trade truce restore manufacturing confidence.
2. Long oil
3. Fed on hold.
4. Short USD, long AUD, long EMFX, especially Asia.
5. Long GBP as FDI returns and real money buys.
6. Long European equities vs. USA on relative valuation. This trade is
widespread every year and never works.
7. Long carry.
The Magnificent Seven
The Phase 1 (P1) agreement and UK elections have cleared up tail risks, but the market is now transcending that euphoria. While P1 is already reflected in stock prices, positioning is still relatively light, and with plenty of capital yet to be deployed, markets could even push significantly higher supported by the global growth rebound.
Oil prices should continue to benefit from the positive developments in the US-China trade. With a more constructive global macro outlook than at any time in the last year, oil is well-supported by both fundamental factors and sentiment now. The seasonal demand slow-down in 1Q could be an issue for this bullish view. But a rebound in global manufacturing combined with a slowing trajectory of US production growth, which could be a significant variable in the equation next year, oil prices look poised to springboard higher on the reflationary trade. Mind you, much of this view is based on OPEC+ staying the course on production cuts.
Forecasting Fed policy is always a wild card at best, but taking the FOMC policy guidance at face value, a Fed on hold throughout 2020 is just about entirely baked into the cake. And while not fantastic news for the gold bulls, who most desperately need a dovish pivot the Fed for the yellow metal to explode higher, the” lower for longer” interest rate policy should continue to offer support for global risk markets. But when it comes to Fed forecasting, this is a tough job after all only 10 % of macro forecaster expected the Fed to cut in 2019, and we got three of those!
Absent the tail risk from trade, the macro should favor steeper curves in Asia (particularly in low yielders), and scope for catch-up in FX spot returns in more export- and equity-sensitive currencies like KRW and MYR.
But with the MYR looking “cheap” relative to other local units, with an undervaluation (my model) correlated between -3 to -7 %. I think the MYR could be the sleeper trade entering 2020 and absent the tail risk from trade; there is significant scope for export and equity flow-sensitive currencies like the Ringgit to perform well.
The MSCI world index has reached a new record high, led by the US and Europe, while currencies most sensitive to changes in equity prices have barely risen off their 2019 lows.
In G-10, AUD offers some significant value in a global growth reflationary scenario as the front end is still pricing in significant RBA policy action that could get priced out under reflation.
The million-dollar question, will the much-touted 100 billion Pounds of real money buying appear in early 2020? Or will I inflows wait for more certainty on the structure of the new EU vs. UK relationship?
But the removal of political negativity means GBP’s focus should switch rapidly to economics. This might only mark the start of the Pounds rally, possibly paving the way for “Cable “to move towards 1.45 by end-2020 on real money inflows.
The market is the overweight US stocks and underweights the world, so with a trade truce likely to boost global manufacturing and improve investors sentiment in both EU and Asia. “Real money” in its never-ending chase for yield investors might rotate into the undervalued pockets in EU and Asian stocks, and with even greater voracity if the improving run of soft economic data starting to show up in the hard data.
While US equities are far from past their prime, Asia is too big to ignore with booming demographics, an infrastructure spending spree, and FDI renaissance. While it’s impossible to say, 2020 will be the year of the Asia bull, but it’s hard not to play the “long game” outlook in ASEAN stocks.
The long carry and bond sensitive currencies have performed well as global bond yields have fallen, I’m just not sure if the narrative plays out this year as global central banks are walking back from the cliff edge of the negative rate abyss.
Join me on Bloomberg TV at Noon SGT today discussing my 2020 outlook
This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader