.
Marcuard's Market update by GaveKal Research
In a world of aggressive monetary easing, we find that Japan and the US are in the lead. The Bank of Japan is doubling its balance sheet over two years, inviting the massive stock of Japanese savings to seek a new home. And despite the buzz created by Jon Hilsenrath’s Wall Street Journal article on the “map” for a Federal Reserve’s stimulus exit strategy, the Fed is unlikely to change course any time soon as the US central bank always tends to follow long rates (when long rates rise, the Fed hikes and vice versa). With Japanese money pouring into long bond all over the world, there is no threat of the Fed hiking any time soon. But meanwhile the ECB balance sheet is shrinking (as the low-cost LTRO loans are repaid by the commercial banks), while the new Chinese leadership is also attempting to slow the growth of both the financial sector and the local authorities’ balance sheets.
If nothing else, this “relative aggressiveness” of the world's major central banks (the Bank of England and Swiss National Bank are at least as aggressive as the Fed) means that the role of the “deflationary shock absorber” that Japan occupied so well for the period of August 2008-2012 (as the BoJ sat on its hands while everyone else was doubling/tripling the size of their balance sheet) will likely now be played by China and the euro area. Logically, this should mean that China and the EMU will be the two zones where currencies should drift up (as the yen did when the BoJ was inactive), and where stocks will likely underperform bonds (except perhaps the high income yielding, domestic consumption oriented stocks?). Of course, this could change rapidly should either the European Central Bank or the People’s Bank of China decide to follow the BoJ's lead and revolutionalize monetary policy.
In China, an abrupt change in monetary policy is unlikely from a government keen to prevent real estate prices from surging further. In euroland, the ECB is unlikely to create ripples in the months preceding the German elections in September, and is thus likely to pursue the current status quo of marginal easing. This is not to say that the ECB will not change its stripes in the autumn, once past the German election and with bankruptcies/economic numbers in Europe being horrible. At this point, the ECB may well come out all guns blazing in a bid to devalue the euro (and please French and Italian policymakers). Until then, however, we tend to believe that portfolios should broadly follow these trend lines:
– Continue to overweight the US and, within the US market, remain with the low-beta, more defensive names who will benefit from Japanese inflows.
– Continue to overweight on ASEAN, where companies are delivering growth and where funding costs are shrinking.
– Maintain a high exposure, hedged if possible, to Japanese equities.
– Within China, avoid falling into the value-trap of “cheap” cyclical stocks and instead focus on high dividend yielding equities.
– Hedge the overall equity exposure by either owning long-dated German bunds (to cushion against a new euro shock) or renminbi bonds. This latter asset class should prove attractive as the RMB steadily gains.
– Underweight commodities and European equities, at least until the ECB starts to expand its balance sheet once again. Unfortunately, this is unlikely to happen until the Fall.
Disclaimer: This information may not be construed as advice and in particular not as investment, legal or tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance. Investments in foreign currencies are subject to exchange rate fluctuations. Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission (CySec) under License no. 131/11.
