Sunday, November 22, 2015
Barclays bets on stock boom
Ian Scott, the bank’s global equity strategist, said the sheer force of liquidity will overwhelm the first interest rate rises by the US Federal Reserve, expected to kick off next month.
Global equities rose by an average 15pc over the six months after the last three US tightening cycles began, on average, and Barclays argues that this time stocks are cheaper.
The cyclically-adjusted price to earnings ratio (CAPE) for the world’s equity markets is currently 18, compared to 25.5 at the beginning of the last rate rise episode in 2004.
This is roughly 14pc below the CAPE average since 1980, though critics say earnings have been artificially inflated by companies borrowing a rock-bottom rates to buy back their own stock.
Mr Scott said the growth of global M1 money – essentially cash and checking accounts – has surged to 11pc in real terms, led by China and the eurozone. This is higher than during the dotcom boom and the pre-Lehman BRICS boom.
It is likely to ignite a powerful rally in equities nine months later if past patterns are repeated, although the lags can be erratic, and the M1 data gave false signals in the mid 1990s.
Barclays said American stocks are trading at a 30pc premium to the rest of the world. This gap is likely to close as emerging markets - "the epicentre of negative sentiment" - come back from the dead. The pattern of foreign fund flows into the reviled sector has triggered a contrarian buy-signal.
Everything hinges on China where real M1 money has ignited after languishing for over a year. Floor space sold is growing at 20pc and house prices have stabilized.
Simon Ward from Henderson Global Investors says real M1 is now surging in China at the fastest rate since the post-Lehman credit blitz, though money data is cooling in the US
Chinese fiscal spending has jumped by 36pc from a year ago and bond issuance by local governments has taken off, drawing a line under the recession earlier this year. "A growth revival is under way and will gather strength into the first half of 2016," he said.
Barclays is not alone in calling the bottom in emerging markets. Amundi Asset Management is cautiously buying, based on a 'soft-landing' hypothesis for China.
Kamakshya Trivedi from Goldman Sachs is also nibbling, though the bank remains bearish on China and has ditched its infamous `BRICS' fund to focus on a more coherent concept.
Mr Trivedi said there is no going back to the "roaring 2000s" but the worst may be over after three years of dire returns. “2016 could be the year emerging market assets start to find their feet," he said.
Capital Economics has been caustic about the BRICS for several years but said the hard data at last point to a tentative rebound for the emerging market nexus as a whole. "All told, there doesn’t seem to have been much justification for the alarmist talk that gripped the markets in the summer," said William Jackson, the group's senior emerging market economist.
Sceptics abound. Nobody knows for sure what will happen to the most indebted countries if the Fed embarks on a serious tightening cycle. Dollar debts in emerging markets have jumped to $3 trillion, and much higher under some estimates.
Private credit in all currencies has risen from $4 trillion to $18 trillion in a decade in these countries. Research by the Bank for International Settlements suggests that rate rises by the Fed ineluctably lifts borrowing costs everywhere.
Barclays said the US rate rise cycle is a tonic for global financial companies. It has raised its weighting for banks, insurance companies, and other finance stocks to 31.9pc.
“We think global banks are severely under-priced,” said Mr Scott. He likes AXA, Banco Popular, Citigroup, JP Morgan, Lloyds Banking, ICBC, MetLife, Intesa San Paulo, among others.
Bonds are likely to suffer if global recovery builds and fears of 'secular stagnation' give way to an incipient reflationary cycle.
The bank said the worst sectors at this phase of the cycle are real estate and utilities.
Materials and commodities may instead make a come back. These are what it calls the "anti-bond" equities. They are trading at a near record 34pc discount to "bond-proxy" sectors.
Materials and commodities may make a come back. Barclays is heavily overweight energy - at 11.9pc against the benchmark 6.8pc - backing Shell, Marathon, Total, Conoco, Suncor, and Valero Energy, as well as the fertilizer group Agrium.
Mr Scott said "value stocks" - underpriced relative to fundamentals - are about to come into their own again. These are trading at the cheapest level relative to "growth stocks" since the dotcom bubble, based on the CAPE measure.
Barclays is betting that the 12pc rout on global stock markets this summer was a false alarm - or a pause to catch breath - along the lines of the Asian financial crisis in 1998. The blast of stimulus that followed in 1998 drove a two-year boom in global equities before the cycle ended.
The bank may be wrong but there are no signs of the complacency and wild 'animal spirits' that typically mark a speculative top. The bull/bear ratio tracked by Investor's Intelligence is far below previous late-cycle peaks.
As long as markets are climbing the proverbial wall of worry, investors can take comfort. Pessimism is a fund-manager's best friend.
Posted by Bud Fox at 12:29 PM