Julius Baer: Trump, Brexit, China, bonos Europa y materias primas

Redacción - Martes, 24 de Enero

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ECONOMICS The real reason for the Trump trade •The reflationary impact of the policy shift under Trump is the real reason for an improving outlook for US company earnings and hence financial markets. • Early indications of the US earnings season confirm the tailwinds of higher pricing power for company earnings. The rise of protectionism and the “America first” principle are the main worries dominating the headlines the week after the inauguration of Donald Trump as the 45th president of the US. Even though it is prudent not to dismiss the economic risks of such policies, it is also worth highlighting the constructive impact on financial markets: It is reflation at its best. While there is general agreement that the envisaged infrastructure spending and tax cuts will help the economy, provide companies with more pricing power and hence support earnings, the judgement on the “dark” side of Trump’s policy deals is less favourable. As a tougher trade stance is highly likely under Trump, the longer-term impact is rather worrisome. However, import tariffs should drive up inflation in the short term, and the possible relocations of production in the US will serve as another boost to reflate the economy. Pricing power of US companies has already improved, even without Trump’s policy mix, and could strengthen further in the months ahead. First indications from the US earnings season confirm the tailwinds of improved pricing power. 63% of all earnings announcements beat their expectations, while 24% beat them even with both sales and earnings. According to our earnings model, we currently expect US earnings to grow by 7% in 2017, a marked improvement from the 2% earnings growth we estimate for 2016. 

At some point, Trump’s protectionism could become a risk to China’s economic outlook, given the interdependence of the two countries. So far, the Chinese authorities have reported success at stabilising growth, lately at 6.7% for 2016. Fiscal support has helped to keep growth right on target. The transition from investment-led to consumption-led growth is another stabilising factor. However, this last factor highlights a broken relationship, which investors should keep in mind. Solid Chinese growth is no longer sufficient to revive industrial metal prices. We believe that current industrial metal prices reflect high-flying growth expectations, which are unlikely to be met, and thus hold a bearish view on copper.

 

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

 

 

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UK: Supreme Court unlikely to revert “hard Brexit” plans

 

• Prime Minister (PM) Theresa May managed to sell “hard Brexit” plans with an optimistic note, limiting markets’ reaction.

• The Supreme Court will likely force parliamentary approval, but passing such a bill should be a formality and not change the “hard Brexit” plans of PM May. 

 

In last Tuesday’s Brexit speech and in a “copy-paste” action at the World Economic Forum a few days later, Prime Minister May finally delivered her vision for an independent UK. Surprising hardly anyone, she is pushing for a “hard Brexit”, meaning that the UK will not seek continued access to the EU’s single market but will rather try to determine its future trade relationship with the EU through free trade agreements. This is the obvious price to pay for achieving the other objectives on May’s agenda, name-ly a) taking back control of national borders, b) withdrawing from the jurisdiction of the European court of justice and c) pulling out of the EU’s customs union. Labelled “Theresa Maybe” by the “The Economist” magazine because of her repeated wavering, May reacted convincingly and held a blazing speech on the UK’s strengths, which in her opinion include its cultural diversity and global openness. This seems like a strong contrast to the nationalist message that the Brexit vote sent to the world. PM May also looked relaxed on potential punishment by the EU, saying that the EU would harm itself in seeking a punitive deal. Indeed, the UK’s goods trade deficit with the EU suggests that the union profits more from the UK’s demand for imports than the UK profits from export demand from the EU.

Financial markets appear to have been lulled by May’s optimism in a “hard Brexit” with little repercussions: The pound sterling reacted slightly positively despite the “hard Brexit” threat. This can be explained by May’s promise to present the final deal be-fore parliament, which clearly raised hopes for more checks and balances in the negotiation process. Final parliamentary approval will, however, take place in 2019 at the earliest, assuming that the two-year negotiation period is sufficient to finalise a deal. 

Next on the roadmap will be this Tuesday’s Supreme Court’s decision on the government’s appeal of the London High Court ruling from last December. In blocking the possibility for Prime Minister May to trigger Article 50 by using the “royal prerogative”, meaning that May would not be able to initiate the separation process without seeking parliamentary approval first, the High Court had previously raised hopes among Brexit opponents and markets that May would be forced to opt for a softer Brexit. It is widely expected that the Supreme Court will confirm the High Court ruling and hence force May to pass a bill through parliament (this should not be confused with the final parliamentary approval described in the previous paragraph). However, considering the Conservative majority in parliament, we believe that passing a bill should be a formality and not force PM May to reconsider her “hard Brexit” plans. Knowing that this would be most likely necessary, May would hardly have presented “hard Brexit” plans if she had had doubts about her party’s support. We therefore do not expect a strong GBP reaction to tomorrow’s decision and stick to our neutral 3-month outlook. In the surprising case of a rejection, some pound weakening is obviously possible. 

 

David A. Meier, Economist, Julius Baer

 

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China: A stable economy is not enough for metals

 

• A major leadership change in China in the autumn will keep the focus on economic stability. We expect 6.5% growth in 2017.

• The industrial metals are reflecting high-flying growth expectations which are unlikely to be met. We maintain a cautious view on the segment while reiterating our bearish view on copper. 

 

Last week’s GDP data for China have hardly surprised by confirming continued stable economic growth in Q4 2016. This brings total Chinese growth in 2016 to 6.7%, perfectly within the growth target. These stable conditions were maintained by sufficient credit growth. The government is likely to keep the supply of credit ample to engineer only a very mild slowdown in 2017, similar to 2016. Economic stability is paramount as the country will see a major leadership change in the autumn, with up to five of the seven members of the top governing body being replaced. Thus, we revised our forecast for 2017 Chinese GDP growth up-wards to 6.5%. The successful methods which stabilised economic growth last year are likely to be continued: Focus on fiscal support while keeping an eye on financial risks, counterbalancing movements in the real estate sector and discouraging money outflows. A trade war with the US and a major slowdown in the real estate sector represent downside risks to our forecast.

The continued slowdown in fixed asset investment in China is most material to the industrial metals, accounting for more than 50% of steel demand and more than 40% of copper demand. For both, real estate is the key source of demand, followed by infrastructure for steel and manufacturing for copper. Growth in infrastructure investment dropped to just over 5% after peaking at more than 20% last summer. This drop was somewhat offset by stronger manufacturing and real estate investment, which we see as the only positives in the December data. Some weakness in the real estate markets is however looming as regulation has been tightened last year and as oversupply in many lower-tier cities persists. We remain convinced that China’s ongoing transition from investment-led to consumption-led growth should continue to cause headwinds to metals demand over the coming years. On current levels, we believe that metal prices are reflecting high-flying growth expectations which are unlikely to be met. We maintain a cautious view on the segment overall while reiterating our bearish view on copper. Prices have moved too fast too far following the US presidential elections, fuelled by hopes of massive infrastructure spending in the United States, but the actual impact on copper demand should be limited. We continue to see downside for copper prices from today’s levels and reiterate our Short-recommendation.

 

Susan Joho, Economist, Julius Baer, Carsten Menke, Commodities Research Analyst, Julius Baer

 

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FIXED INCOME

 

Bonds: Europe bank debt to benefit from growth momentum

 

• Bonds of European banks will benefit from the improving economic outlook, which translates into better quality of the banks’ assets and lower credit spreads.

• The ECB for its part is not providing any additional stimulus at this juncture, tolerating an upward drift of yields.

 

Bonds of European banks have underperformed the broader market in 2016 because they were not on the shopping list of the European Central Bank (ECB). As readers will recall, the latter is buying bonds of non-financial issuers only to avoid a conflict of interest with its mandate as the single supervisor in the European Banking Union.

In 2017, bank bonds can recoup lost ground. First, bank bonds will benefit from the improvement of the issuers’ asset quality. Historically, the ratio of non-performing loans has risen in recessions and declined in growth periods. With the eurozone economy entering the third year of trend-like growth, the loan losses of the banks are set to decrease. Credit spreads, which move in lockstep with the asset quality of the issuers, are thus projected to narrow in 2017. Bank bonds are thus a suitable instrument to benefit from the improving cyclical momentum in the eurozone. 

 

Bank bonds are also suitable on a relative basis. As outlined above, non-financial bonds outperformed financial bonds in 2016 thanks to the ECB’s purchases. With inflation moving gradually higher and growth stabilising, there is no incentive for the ECB to deliver unlimited monetary support. On the contrary, the ECB has done nothing to eliminate systemic boundaries to its purchases, such as the limitation of ECB holding per outstanding government bond or the scarcity on the repo market created by its purchases. As such, the non-action of the ECB last week has been taken by the bond market as a sure sign that the asset purchases are being reduced over time.  

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

 

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COMMODITIES

 

Entering rough waters as profit taking risks loom

 

Commodity markets could soon enter rough waters as profit taking risks loom large over several segments. In both oil and natural gas, two key components of any benchmark commodity index, hedge funds hold stretched long positions in the futures market. Put differently, current levels mirror lots of optimism about future fundamental support to prices. However, the swiftly reviving North American shale boom challenges the idea of tightening oil and gas supplies for the remainder of this year. Meanwhile, the latest set of Chinese data shows that the old economy represented by fixed asset investments remains soft and slows the country’s growth ambitions. Copper and palladium futures markets are similar to energy currently characterised by significant long positions held by hedge funds. However, hopes of massive infrastructure spending look misplaced and the prospects of softening global car sales from today’s subsidy inflated levels are dismissed. 

The common denominator across commodities is the reflation euphoria mirrored in stretched bullish positioning. Short term set back risks loom over the asset class.

 

Norbert Ruecker, Head Commodities Research, Julius Baer

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