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Repaso a los mercados

Mark Tinker, responsable de AXA IM Framlington Equities Asia - Domingo, 28 de Agosto

Market mechanics and sector rotation as well as results season means there is actually a lot of activity beneath the otherwise apparently calm surface of equity markets
The China 2.0 story continues to drive stock names in Asia and the announcement on the Shenzhen Connect is a positive addition to the narrative of China steadily opening up its capital markets and should help Hong Kong equities
Central Bankers at Jackson Hole will almost certainly be asking ‘where next?’ now that we have reached negative policy rates. Both debt monetisation and fiscal stimulus are likely to be topics for discussion

Equity markets remain very quiet and remarkably steady, in fact the S&P500 has now gone 30 days without a move greater than 1 per cent. This is obviously partly down to the holiday season, but also a lack of follow through on some of the fears that dominated the first half of the year such that there is no new ‘narrative’ and no forced buying or distressed selling. However, while the indices may be treading water, there is a lot going on beneath the surface. Here in Asia the results season is keeping us busy and benchmarked investors are in many cases struggling with strong sector rotation. As noted last week, the China 2.0 stocks continue to shoot the proverbial lights out with numbers – Tencent the latest – and with both Tencent and Samsung at all-time highs there is doubtless some scrambling to get ‘up to weight’ in some of the mega cap stocks. And it is not just tech names doing well; last week, another of our favoured China 2.0 stocks, Australian company Treasury Wines also produced blowout numbers beating its own updated projections of only six weeks ago as it continued to move upmarket and take advantage of Chinese consumers’  growing demand for higher end wines.


Oil had a strong week again last week as it rallied to the top of its recent range, leaving it more than 10 per cent up on the month and over 20 per cent up from its August 2nd low. Increasingly it looks like traders (those not at the beach at least) are expressing macro bets on the economy through commodities rather than equities as an asset class. However, this is nevertheless adding to the rotational effects within equity markets and as one analyst from Europe noted this week, even though the materials stocks are a relatively small part of the overall Stoxx 600 index, their dramatic rally (+75 per cent) year to date will have left managers who were underweight the sub sector lagging by around 160bps. As with the Tech megacaps in Asia, this has left benchmarked managers scrambling to buy stock in the sub-sector, but as this analyst noted (and I would tend to agree) these particular market mechanics appear to be fading, so as with the oil price itself, we may get a pull back.


An ongoing lesson from observing market mechanics is to be sceptical that the sharp squeeze in the stock price is necessarily telling us anything about the macro environment. For example, the oil analysts continue to expect oil prices to rise towards their assumed cost of production (around $70bbl) which if true would be ‘good’ for inflation and bad for emerging markets (EM) (as well as good for oil stocks). However, I am not convinced, not least because the traditional model of oil supply and demand tends to assume a near vertical supply curve (i.e. supply cannot adjust in the short run) and yet as we have seen thanks to the fracking revolution, supply can come back very quickly. There is also the demand side and personally I believe that the growth of pure electric vehicles (EV) and hybrids will be a lot faster than anyone in the auto industry will admit. The idea that the EV will be 25 per cent of the market by 2025 seems to me like those in 1999 suggesting that within five years DVDs would be 25 per cent of the market leaving the other 75 per cent to VHS cassettes. Be that as it may, but even the traditional auto industry is changing the dynamics; for example, we know about the drive towards autonomous vehicles which everyone from Ford to Volvo to Uber and Lyft are talking about, but what should not be overlooked is that these taxis will not only increase the utilisation rate of the overall fleet (currently most cars are parked 96 per cent of the time) but they will be heavily biased towards space and fuel efficiency over the current style and ‘performance’. Interesting that in addition to their Leaf project this week Nissan and Renault announced the development of a new petrol engine that they claim is 27 per cent more efficient than their existing models and will replace diesel engines, so even without EV or hybrids, the demand for oil based transportation fuel is being rapidly altered.


One area of equities that does appear to still be benefiting from asset allocation however is emerging markets. Flows into emerging market equities continue to surge, the Institute of International Finance Portfolio Flows tracker suggested non-resident flows into EM funds reached $24.8billion in July after $16.7billion in June. This is partly due to a recovery in economic sentiment, flows began to pick up in February and March as the great panic over China subsided, but it also looks like emerging markets have benefitted from the Brexit vote as a form of ‘not Europe’. As we said at the time, concern over the UK also spread to Europe, notably the banks, and as we have observed in the past international investors appear to allocate not just between EM and developed markets (DM), but increasingly in geographic buckets, US and European EM, or US, Europe, Asia and EM. As such moves in one area can say just as much about expectations in a different region. We also now have a new dynamic, the cost of currency hedging, especially for bonds. As we discussed last week, one example of this is that Japanese insurers can no longer generate any positive return from US Treasuries due to the cost of hedging the Yen exceeding the available yield. One side effect of this may be to keep the savings ‘in the region’ in Asian or EM bonds, or even as some are suggesting moving into higher yielding dollar assets such as Hong Kong equities which thanks to the peg are effectively some of the highest yielding safe “US dollar” equities around.


In terms of market news out of Asia, last week I discussed the upcoming announcement on the Hong Kong Shenzhen Connect, something which we had expected to happen ahead of the G20 meeting in two weeks’ time, only for it to be announced almost immediately after the note was published! The idea of a Shenzhen Connect to follow on from the Shanghai Connect was very popular in early 2015 as the Shanghai Composite bubble was building, but rapidly fell out of favour as the bubble burst. Some are now taking the announcement as evidence that the Chinese authorities are bullish on equities or that they are now more comfortable about capital flight, but we would rather see it as all part of the long term strategic plan to open up China’s capital markets to international capital. The Shenzhen Connect adds another 673 stocks to the investable universe of offshore investors, much of it more closely associated with China’s new economy while for the southbound investor a further 120 small caps are added making just over two thirds  of the total Hong Kong Stock Exchange market cap available. Interestingly, while there are still daily quota limits, there is no aggregate quota (a cumulative total) for Shenzhen and it has been abolished for the Shanghai Connect. This was at risk of becoming an issue for Southbound Shanghai flows which had already reached 80 per cent of the aggregate quota while Northbound was running at only around 40 per cent of the aggregate quota. As such the decision not to extend the aggregate quota but do away with it entirely is a positive move and is likely to lead to a further narrowing of the A share H share premium.


Which brings us to another important asset allocation point: if commodities are the new equities, then it looks increasingly like higher yield equities are the new credit. The reach for yield has become so urgent that even when high yielding quasi bonds disappoint on earnings (one example given recently was Nestle) the stock doesn’t go down, so long as the dividend isn’t under threat, so keen are the owners to get the coupon in a world of negative bond yields. In many senses this is a duration argument; if equities are long duration versus bonds, then the further bond investors are pushed along the duration curve, the closer they get to substituting ‘short duration equities’ for long duration bonds. In this sense high yielding equity is starting to be treated as a spread product over bonds, although the job of the equity manger/analyst still remains difficult, as the qualitative judgement around dividend risk (itself a derivation from earnings projections) continues to be the key driver of returns.


The so called reach for yield is continuing and the distortions that quantitative easing (QE) is producing in markets are staring to put pressure on policy makers. The policy maker bandwagon starts up again in September with the G20 in China, but this week also sees the annual Central Banker ‘offsite’ at Jackson Hole in Wyoming. Since the financial crisis, this has tended to attract a lot of attention for insights into policy and this year perhaps more than most, given the fact that monetary policy, even unconventional monetary policy appears to have run out of road. Last year, one of the key discussion points that came from the meeting was the notion that the US Federal Reserve had effectively become the Reserve Bank to the world and as such decisions on interest rates needed to look beyond simply the needs of the US economy. In fact as we have discussed many times, the US economic data as imbedded in the Taylor Rule model has not been driving US interest rates for a number of years, rather that they were focussed on financial market stability and so in effect all we were acknowledging last year was that it was global not just US financial markets.


This year however, it looks likely that the discussions will be more existential, asking questions such as “what is the future for monetary policy?” as well as (hopefully) the more general questions as to why the favoured economic models are failing to predict economic behaviour. One recent example from the data is that in countries where short rates are now negative, Germany, Switzerland, Denmark, Sweden and of course Japan people are saving more, not less as the conventional wisdom/models insist they should. The experience of Japan should mean this is not a surprise and as discussed before, in an economy that is deleveraging its balance sheet, cutting the return on savings in order to reduce the cost of borrowing will not result in more borrowing. It will result in more saving. Meanwhile the legacy of cheap corporate borrowing, particularly in the high yield bond market has led to over-investment in many commodity areas which as discussed earlier means prices are falling due to excess supply, not a failure of demand. It will also be interesting to watch how the consumer price index (CPI) indices start to move when, as looks increasingly likely, the shelter component starts to turn down. This is essentially rental prices, which, thanks to similar dynamics of cheap borrowing and excess investment means that many of the major urban centres are seeing rental rates falling. Anecdotally looking to rent a two bed flat in central London for a year, the market is flooded with property and I was able to (easily) secure a reduction in the quoted price of around 20 per cent. Similar stories abound in Hong Kong for residential and retail units are even better (or worse depending on your perspective).


The whole notion of trying to ‘defeat deflation’ by trying to stimulate excess demand via leverage in order to achieve a targeted level of inflation when there is so much excess capacity is clearly failing, , but it is nevertheless calling into question much of the conventional thinking. There is a growing sense that not only will politicians demand more of a role for fiscal policy in stimulating growth, but that central bankers will actively push them to do so.


The issue for long term investors is that all of the monetary solutions offered by central bankers have in my opinion not only caused more problems than they have solved, but, in the view of many investors, have actually caused the very problems of low growth, mis-allocation of capital, lack of liquidity in markets and problems matching assets and liabilities! As the table illustrates, the perception of many top down central bankers is that following the global financial crisis (GFC) in 2008, the solution to market failure, misallocation of capital, pension fund deficits and low growth was a combination of macro prudential regulation of banks and an environment of ultra-low interest rates and central bank purchase of ‘low risk’ assets. The failure of economies to respond to the treatment has tended to be met with the recommendation that they need to simply do more of the same. 

Central bankers read from the top down

  • Market failure
  • Misallocation of capital
  • Volatility, lack of liquidity
  • Macro prudential regulations, risk weighting of banks' capital
  • Pension fund deficits
  • Significantly below trend growth
  • Low interest rates
  • Quantitative easing

Long term investors read from the bottom up


From a bottom up perspective however, it looks like the supposed cure is actually causing the symptoms to get worse and that the ‘next’ market failure, in my opinion, will not be despite attempts to prevent it by the authorities but rather as a direct result of their interference.


We thus face two sets of pressure on the central banker – the desire by politicians of all stripes to manage their economy via fiscal policy rather than leaving it to ‘independent’ central bankers, and the increasing evidence of the problems being stored up for the long term savings and investment industry as a result of the distortions being produced by unconventional monetary policy. Even worse, the one true stimulus that central bankers such as Kuroda, Draghi and now Carney managed to achieve was via the exchange rate and what we have now seen in Japan is an end to that model too.  Since Japan experimented with negative interest rates the Yen has strengthened by over 22 per cent  and last week New Zealand’s cut in rates was greeted with an increase in the value of the New Zealand dollar . Politicians and policy makers tend to ignore the law of unintended consequences as much as they can and prefer to try and fix the new problems with new policies rather than abandoning the original bad policy, so that even if there is some rowing back, it is likely that we will also need markets to help produce the answers.


To some extent the market is already forcing some of these solutions through; regulators in Taiwan and Korea have already relaxed rules governing the ability of pension funds and insurance companies to invest in equities. The long awaited debt equity switch may finally be permitted to happen. It may also mean that some of the intended consequences start to come through. As discussed last week the Japanese insurance industry is being forced to consider other sources of yield now that the cost of hedging US Treasuries back into Yen exceeds the yield available. The fact that this high cost of hedging is largely due to a new and different set of macro prudential regulations for US money market funds (MMFs) is somewhat ironic, but if it means that Japanese insurers not only diversify into equities as the central banks want, but that they also stop driving down global bond yields, then some of the unintended consequences will start to reverse. Of course, with three month US Libor now at 81bps thanks largely to the MMF regulations, the spread over Fed funds is now at its highest level since 2011 meaning that while policy rates haven’t changed, monetary policy is tightening for corporates - which is a whole different sort of unintended consequences.


To conclude, market dynamics are driving rotation within equities that is tending to squeeze more cyclical stocks. But the longer term story is the reach for yield, which continues to distort all markets and has now reached into higher yielding equities which are being treated in many cases as a form of credit – especially ‘low risk’ stocks with well covered dividends and strong balance sheets. This is a global story but in Asia it seems to be benefitting some higher yielding Hong Kong stocks which are seen as being dollar pegged as the excess savings in Asia are being circulated more within the region.