Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
I was struck by a paragraph in a research report by BofA quantitative strategist Savita Subramanian with the heading “What happens in China doesn’t stay in China,”
“China’s importance to US companies has gone from 0 to 90% based on correlations between China GDP and S&P 500 EPS since 2010. Close to 80% of the S&P 500′s margin expansion since 1990 has been driven by globalization (tax, labor arbitrage, supply chain efficiency gains). Direct sales exposure of S&P companies [to China] is a low ~5% but indirect risks are great: earnings for major sectors are now more tethered to China GDP than US GDP, and our economist just cut China GDP … Institutional investors have lightened their exposure to US companies with top decile China exposure … But valuations have risen, and this basket now trades at close to a record 25% average premium to peers”
The high correlation between Chinese GDP and S&P 500 profits does not, of course, prove causation. Still, it’s something to watch.
“@SBarlow_ROB Sentences to ponder (BofA):” – (research excerpt) Twitter
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Citi’s global asset allocation research team has dropped base metals to underweight, thanks to a potential decline in Chinese housing prices,
“Citi Commodities Research recently outlined Three red flags for metals, focussing on weak China construction, China credit tightening and weak Global and China PMI internals, namely new order less inventories. During the 2014 episode of the housing downturn in China copper had meaningful downside. Notably, Citi Commodities Research have downgraded their copper forecast, seeing it trade 0-3m at $8,800/t (from $11,000/t prior forecast). To our mind a base metal underweight is the clearest expression of likely weakness in Chinese growth, combined with a bullish CGB position. It also is a partial hedge for our cyclical equity overweights.”
The firm remains bullish on natural gas and oil prices.
“@SBarlow_ROB Citi downgrades base metals” – (research excerpt) Twitter
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Also from BofA, chief investment strategist Michael Hartnett’s weekly report on global asset flows contained some interesting bearish-tilting tidbits (my emphasis),
“The cost of shipping a 40-foot container from Shanghai to LA/Rotterdam/New York 18-months ago was $2k; it’s now $12k/$14k/$16k respectively (Chart 3); ¾ of G20 CPI jump since ‘21 due to higher shipping/commodity costs (OECD) … Pessimism over passage of $1tn BIB (Bipartisan Infrastructure Bill) scheduled Sep 27th & $3.5tn BBB (Build Back Better) Reconciliation caused 2nd biggest outflow ever from infrastructure funds and largest consumer funds outflow YTD… Bubble Zeitgeist: majority “full-invested bears” but anecdotal ratio of clients in “melt-up” vs “melt-down” camps currently 8:2 … History says best way to hedge “bubble” is via “long leadership, long distressed” barbell, i.e. long leadership of bull (today = IG, tech, biotech…) & long distressed, cyclical plays (today = EM, energy, small cap) as investors chase laggards (only market that outperformed Nasdaq in ‘99 TMT bubble was Russia).”
“@SBarlow_ROB Bubble Zeitgeist (BofA)” – (research excerpt) Twitter
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Diversion: “Herding, Warfare, and a Culture of Honor” – Marginal Revolution
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