Julius Baer: sobre Brexit, Japón, sector automovilístico y metal

Redacción - Miercoles, 25 de Mayo

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Brexit: Probability lower now

 

After carefully following voting opinion polls and further data related to the UK’s June 23 Brexit referendum, we believe that on the margin the probability of a Brexit has rather dropped over the past days. While online voting intention polls are still very narrow, polls conducted by phone, widely considered as superior in quality, indicate a considerably large lead of the “stay in the EU” camp. This seems to have been acknowledged by the ominous British gambling scene. Therefore, we reduce our assessment of the Brexit probability to 30%, the lower end of our previously reported band of a 30%-40% probability. Accordingly, we trim our British pound forecast to a less aggressive EUR/GBP 0.81 for both the 3 and 12-month perspective. To keep in mind: our view on the GBP remains bearish beyond the Brexit referendum. Based on structural weakness such as the UK’s large current account deficit, macroeconomic factors such as fading UK growth momentum and a slower return of inflation keeping Bank of England rate normalisation delayed, we do not buy in a lasting relief recovery after a “no” vote.

A “no” to the Brexit remains our base case and our GBP outlook is bearish beyond 23 June. A case for hedging against the tail risks of a Brexit remains, under consideration of personal risk preferences and meanwhile higher hedging costs.

David A. Meier, Economist, Julius Baer

 

 

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Japan’s recovery imperilled: Nothing is impossible now 

 

• The latest current and forward-looking macro data bode ill for Japan. It becomes increasingly clear now that Japan’s economic recovery is at risk to stall. 

• Given the meagre policy successes so far and the economic recovery at stake, only one untried option remains for the Bank of Japan (BoJ), i.e. the concept of helicopter money. 

 

Despite a growth surge in Q1 2016, a phenomenon which tends to occur often for Japanese Q1 gross domestic product, the latest current and forward-looking macro data bode ill for the near future. It is becoming increasingly clear that Japan’s economic recovery is at risk to stall. This must be a source of quite some frustration for Japan’s policymakers, as they have gone the farthest of all advanced economies with regard to conventional and unconventional fiscal and monetary policy stimulation measures to trigger a broad-based economic recovery. In fact, the current status of Japan’s economy is worrisome: service-sector sentiment has fallen to the lowest level since April 2014 on worries of weak consumer spending. A stronger yen and slower Asian growth have made the conditions for Japanese foreign trade rather difficult, as the latest heavily contracting figures for April document. Leading indicators such as machinery orders and the manufacturing purchasing managers’ index, as well as its flash estimate for May, all show Japanese industry momentum in significant shrinkage. In comparison to other major economies the Japanese manufacturing weakness clearly sticks out negatively, as our chart below depicts. So far, the BoJ’s lavish quantitative easing policy of government bonds has only enabled a very weak recovery, with year-on-year consumer price inflation near or below zero. In the medium term, the inflation target of 2% p.a. is still highly unrealistic. In fact Japan’s inflation gauges are now negative again. In addition, the BoJ is under pressure not to actively weaken the yen again and become accused of currency manipulation. Its attempt to impress markets with a negative interest rate has failed.

Against this backdrop, Japan could now become the first economy to implement the concept of so-called ‘helicopter money’ (see next paragraph “Can helicopter money work?”); it would have a fiscal character and target sluggish domestic consumption via direct subsidy of the consumer.

 

Janwillem Acket, Chief Economist, Julius Baer

 

 

Can helicopter money work?

 

• Helicopter money means printing money from nothing and distributing it to consumers in order to boost spending and eventually inflation expectations. 

• Helicopter money is a powerful tool to overcome insufficient spending but is a danger when spending is already excessive.

 

Helicopter money refers to the ability of a central bank to create money from nothing. It can be rated as a very powerful tool for economies like Japan which suffer from insufficient spending. Exemplary for this is the fact that the Japanese government nowadays even gets rewarded for taking on additional debt for public spending, i.e. it can issue bonds with negative interest rates. Printing money (and distributing randomly as if dropped from a helicopter) means in accounting terms that a central bank issues a liability which never matures and pays no interest. It has a pre-sent value of zero on the central bank’s balance sheet. The value for households receiving this money is the notional amount printed on the bill. Spending the received money shifts the saving-spending balance and with it inflation and inflation expectations higher. Helicopter money is a danger in a context of already excessive spending, since in this case it easily leads to hyperinflation. However, with too little spending plaguing economies like Japan, it is a powerful tool to end this malaise. Even the announcement alone could achieve a sufficient boost to inflation expectations bringing the economy back to a nominal growth path. The exact relationship between printed money and inflation expectations is both unknown and highly non-linear. Linking the amount of helicopter money to any measure of inflation expectations could be a way to control for this uncertainty. An alternative concept of helicopter money is government financing via buying infinite-maturity bonds with zero interests. Again the present value is zero. However, this route might be less effective, both to boost spending and to increase inflation expectations. The more effective a helicopter money system is designed to boost inflation expectations, the less money actually needs to be printed in the end.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

 

 

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EQUITY RESEARCH

 

Auto sector: stay cautious on the auto manufacturers

 

• Daimler profit warning due to truck weakness and further slow-down in China confirms our cautious sector view.

• We expect further negative news and stay cautious on the auto manufacturers as well as on the suppliers.

 

The news flow in the global auto space continues to be negative. We continue to believe that top-of-cycle concerns are here to stay and should represent a headwind for the car sector. 

Last week, Daimler lowered the FY 2016 guidance for its truck division due to weakness in the NAFTA region and in the Middle East. They now expect the truck EBIT in 2016 to be significantly lower in 2016 compared to 2015 but leave the full-year EBIT guidance for the Daimler group unchanged (slight EBIT increase vs. 2015). However, we would not be surprised to see further cuts (Q1 Mercedes margin was weak and management expects a big back-end-loaded recovery in H2). In our view, the new guidance implies that operating profit in the truck division will be around 10% below the EUR 2.47bn reached last year, which compares to current consensus of 2.5bn and 2.7bn earlier this year. 

 

With regard to the overall global car unit sales, we also believe that the risk is to the downside. While unit sales in the US, Europe and Japan should stabilise at current levels, we see some down-side risk in China. Sales volumes in China have been supported by tax incentives introduced in Q3 last year, with low end, domestically produced cars benefiting the most. Year-to-date retail sales growth in China has slowed to +7% against the same period last year from +16% in Q4 2015. While we still expect some growth over the next 3 months due to weak comparables, we see some risk that car unit sales turn negative when the comparable base is getting tougher in H2 and next year (stimulus package will run out in 2016). In light of the increasingly competitive Chinese car market, we see pricing pressure and margin risk as a real risk. The German car producers are the most vulnerable to a slowing Chinese car market with Volkswagen as the most exposed name followed by BMW and Daimler. However, we would also expect General Motors and Peugeot to be impacted by a slowdown in China. 

In addition, we would be cautious on the car suppliers. In our view, the car suppliers will not be able to decouple from negative industry trends as the manufacturers will pass on margin pressure to the suppliers. In light of the demanding valuation of most car suppliers, we would actually not be surprised to see some car suppliers underperforming the overall sector in the case of a downturn.

 

Patrik Lang, Head Equity Research, Julius Baer

 

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COMMODITIES

 

Precious metals downed by the dollar

 

Better-than-expected US economic data provided support to the US dollar yesterday and in turn weighed on precious metals. Gold and silver lost 1.8% and 1%, respectively, which we attribute to the closing of speculative long positions in the futures market. More recently, these positions had climbed to new record levels, underpinning the very bullish sentiment in the futures market. Meanwhile, demand from physical investors for gold remains solid, which should provide some support to prices. We believe silver is more vulnerable to a lasting correction than gold, given the weaker fundamental backdrop. What is more, silver does not possess the same safe-haven characteristics as gold. Hence, safe-haven seekers should prefer gold over silver. Palladium was the big underperformer yesterday with prices down more than 3%. This is rather surprising, given that sentiment in the palladium futures market had been much less bullish than for the other precious metals. In fact, yesterday’s news of very strong palladium net exports from Switzerland point towards solid global demand. This confirms recent studies from industry consultancies, which see the palladium market structurally undersupplied. Against this backdrop, we maintain a constructive view on palladium and see current weakness as another buying opportunity in the making.

The ongoing rebound of the US dollar continues to cause headwinds to precious metals. Silver is more vulnerable to gold to a lasting correction and does not possess the same safe-haven characteristics. Safe-haven seekers should thus prefer gold. The current weakness should lead to another buying opportunity for palladium.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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