A digital ink osmosis joint.
Q4 2018 Macro Themes
- Quad 4
After a likely nine consecutive quarters of accelerating economic growth domestically, investor consensus is positioned for the so-called “fiscal impulse” to perpetuate further upside. Unfortunately for new-wave U.S. equity and credit bulls, our[Hedgeye] GIP model is suggesting the now-record acceleration in U.S. Growth (and inflation) that we prospectively and accurately identified two years ago is coming to an abrupt end. In the presentation, we shall detail the catalysts for the aforementioned inflections and the associated investment implications of the U.S. economy joining the “globally synchronized slowdown” identified in January- not the least of which is an anticipated upside capitulation in the U.S. Dollar.
- Cycle Peaks
Two of the most underappreciated risks heading into Q4 of 2018 among investor consensus are the cyclical peaks in corporate profit growth and corporate profit margins – both of which have important sector and style factor implications. We’ll [Hedgeye] detail why investors would do well to adopt a defensive posture with respect to their respective portfolios as the associated rotation out of the domestic Momentum, High Beta, and Growth style factors could be quite violent given current positioning.
- Long Housing
Quad 4 represents a macro environment typically characterized by falling rates, a more dovish policy lean and outperformance in defensive yield and select interest rate sensitive equities, including Housing. The unprecedented late-cycle fiscal stimulus has cultivated an interesting, and somewhat anomalous macro condition set as it elevates the prospects for a further acceleration in wage inflation and the potential for households to see improved consumption capacity at the same time that both headline growth and inflation are slowing and yields are making lower highs. It’s within this broader setup and against a backdrop of significant 2018 underperformance that we’ll [Hedgeye] explore a contrarian long position in Housing.
Legacy Macro Themes
- Global Divergences (January 2018)
Employing a predictive tracking algorithm for all the investable economies in the world would suggest in contrast to the “globally synchronized growth” narrative headline coming into 2018, the GIP model is signaling quite the opposite and that outcome should perpetuate a number of meaningful pivots in asset allocation terms throughout the investment management landscape.
- Short/ Underweight Emerging Market (Janaury 2018)
The first half of 2018 saw a tremendous pickup in cross-asset volatility- albeit from at.near all-time lows – throughout the emerging markets investment universe. With explanations of what caused this market event as numerous as the number of strategists who didn’t see it coming and as bountiful as those that are calling for it to end purely as a function of “attractive valuations”, we[Hedgeye & I] don’t believe a bearish biases on EM in fully priced in. As such, we [Hedgeye & I (by way of coattail emulation) will anchor our decision making process in the data, and the (ever increasing) robust processes to detail why EM assets are likely to continue to be a drag on fund performance with respect to the intermediate term (3 months or less).
- Strong Dollar
A U.S. Dollar Index well of its YTD lows has already inflicted some major pain in consensus macro views that were long of things like commodities and emerging market financial assets heading into Q2 2018. Moreover, our [Hedgeye & my own*early-scattered-version) GIP modeling process for all of the world’s major economies signals the global trend of decelerating growth is just getting started- an outcome that is likely to increasingly afford to miss, from emerging market USD-denominated assets. We [by way of Hedgeye] will dig into the wide-reaching implications of further USD strength that investors can’t afford to miss, from emerging market USD-denominated credit risk to corporate profit deterioration.
Global Macro Risk Monitor
G10 GIP Model Summary
The AUG Export and Import growth figures decelerated to a state of YoY contraction, highlighting the ongoing drag on the global economy stemming from waning Chinese demand – a drag that has weighed materially on Argentine economic growth amongst other headwinds (including the tightening of global dollar liquidity). Further, the recording of new multi-year lows in Consumer Confidence in SEP imply a near-term rebound in Argentine growth is unlikely.
The SEP Manufacturing, Services, and Composite PMI data were all confirming of Australia’s economic slowdown on a quarterly average basis in 3Q18E – as was the SEP Melbourne CPI proxy. The preponderance of key high-frequency growth data in Australia can be characterized by a state of trending deceleration, which is supportive of our #Quad4 forecast for the economy in the two quarters ended 1Q19E.
The AUG Industrial Production data, SEP Manufacturing, Services, and Composite PMI figures, and the SEP Export and Import growth figures were confirming of the ongoing slowdown in Brazilian economic growth. Moreover, the SEP IGP-M CPI and AUG Manufacturing PPI figures were equally confirming of the inflationary pressures bubbling underneath the hood in the Brazilian economy. Investors chasing Bolsonaro’s ascent to the top of the Brazilian presidential polls are likely to be sorely disappointed when they realize the outlook for reform is likely to be as limited as it was under Temer’s leadership – especially with several more quarters of #Quad3 on the horizon.
The sequentially softer SEP CFIB Business Barometer Index and SEP Markit PMI data were both suggestive of a soft ending to 3Q18E on the economic growth front, which dovetails perfectly into our #Quad4 forecast for the upcoming quarter. Canada continues to present investors with an unexciting opportunity set, outside of the pending reversal inflation embedded in our forecasts. 6-month USDCAD risk reversals look attractive in the context of that view.
Every month since June when Beijing signaled a change in its policy bias (from tightening to easing), global asset allocators have been calling for a bottom in Chinese economic growth. Unfortunately the trend in Chinese growth data – particularly within the “Old China” economy (as most recently confirmed by the SEP Manufacturing PMI release) – mirrors the negative returns experienced by valuation-centric investors who bought China and/or EM too early. All told, we are keen to reiterate our bearish bias on China ahead of what is likely to be a final leg down for economic growth on the mainland amid cycle-peak comparative base effects over the next two quarters.