A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Merrill Lynch strategist Michael Hartnett warned clients that market risks are now most acute in bonds and other income-bearing asset classes,
“frothy inflows to government bond, IG, HY, EM debt funds … record $12.9tn of bonds in developed markets with negative yield (25% of total) …record 26% of Euro IG corporate bonds with negative yield. …record 56% share of global equity market cap from tech-heavy US stock market … Extremes: the relative bull trend in assets which promise "yield" and "growth" has become more & more extreme as central bank capitulation to Wall St deepens in 2019.”
“@SBarlow_ROB ML: "Positioning danger is in bonds, not stocks or commodities"’ – (research excerpt) Twitter
Fund managers lose their jobs for underperformance and this can affect equity markets and investor portfolios whether they own actively funds are not. Savita Subramanian from Merrill Lynch described the phenomenon of manager ‘career risk’ in a Friday research report,
“Signs of career risk: investors are now "buying what's working", as the 12-m Momentum factor is overvalued and overowned … Value factors have been discarded, as the median Value factor trades at a deep discount and is 20% underowned by managers … Career risk, loss aversion and herding may be driving [institutional] investor preferences more than usual, our quant work suggests. According to our factor positioning and valuation analyses, active investors are now "buying what's working" more aggressively than usual: our 12-Month Price Momentum factor is almost 25% more overvalued on forward earnings than usual, and this basket of stocks with the strongest returns over the last 12 months are, in aggregate, overweight by both institutional long-only investors relative to the benchmark.’
Portfolio managers, traditional value managers in particular, are moving away from their investment discipline to buy whatever stocks are climbing (showing the most price momentum). This, for a while, causes a ‘rich get richer’ market environment but increasing the risks of a steep market downdraft in the medium term.
“@SBarlow_ROB Subramanian: "Career risk, loss aversion and herding may be driving investor preferences more than usual"” – (research excerpt) Twitter
U.K.-based Morgan Stanley strategist Hans Redeker suggests that central banks are unable to raise interest rates because there’s already too much debt – higher rates will trigger defaults and a sharp slowdown in economic growth,
“The global economy has never been more leveraged. Today’s leverage reduces tomorrow’s growth potential unless accompanied by rising productivity or strong working age population growth. Population and productivity growth do not appear sufficient to compensate for rising leverage, so yields will have to remain low if debt levels are to remain sustainable.”
Continued lower rates will, of course, result in more borrowing and debt, and this will make the global economy even more sensitive to interest rate hikes, necessitating a longer period of low policy rates which will result in more debt and on and on we go.
“@SBarlow_ROB MS: “The global economy has never been more leveraged”” – (research excerpt) Twitter
Tweet of the Day: “ @business A cash crunch at one of China’s best known conglomerates is getting worse as the company said it will not be able to pay its upcoming dollar note” – Twitter
Diversion: “ The Future of the City Is Childless: America’s urban rebirth is missing something key—actual births” – Thompson, The Atlantic