1 As measured by the Chicago Board Options Exchange Volatility index (VIX) from Datastream, as at 27 June 2017. The index, at 11.06, is hovering around record 20 year lows. The last time it was this low was in early 2016; many commentators point out that it preceded one of history’s biggest market sell-offs in 1997.
2 The “Trump” rally, which saw the US Dollar trade weighted index rise some 4¾% to its early 2017 peak (and rising some 7½% from its mid-2016 low), has since fallen as investors digest the implications of a possible higher “Trump“ budget deficit. Source: The US Federal Reserve Board from Datastream, as at 27 June 2017.
3 The European Central Bank, the Bank of Japan and the Peoples Bank of China.
4 Global M1 growth has exceeded global nominal GDP growth, these excess funds are “free” to invest in global assets.
5 Based on the Fed’s projections and the consensus economic forecasts, this ratio is forecast to fall to 19% by end 2019 and 15% by end 2020.
6 The 30 day Fed Funds Futures have discounted two of the Fed’s three anticipated hikes this year (and project rates to be only around 1.75% in early 2020). Source: Bloomberg, as at 27 June 2017.
7 The media focus on the increase in civilians employed from the 2009 low resulting from the 2008 financial crisis. This number is an apparently impressive 15½ million. The number of additional civilians in jobs since the start of the crisis, however, is only 6¾ million. Of this number, the number of civilians aged 55 and over accounted for 8¾ million. In other words, for those in the 25 ~ 54 age group, there are still 1½ million fewer in jobs than was the case when the crisis hit.
8 The US Citigroup Economic Surprise index fell from a peak of 58% in mid-March 2017 to a low of -78.6%, as at 16 June 2017. Source: Citigroup, Bloomberg, as at 27 June 2017.
9 “With the earnings season almost complete, Topix companies beat Q4 F3/17 consensus net income estimates by 10.8%. Operating income & revenues are also topped consensus estimates by 3.2% and 0.2% respectively. Reported F3/17 EPS and DPS have reached new all-time highs”. Source: Morgan Stanley MUFG, as at 18 May 2017.
10 As measured by the “Z” score in (Fig.4).
11 This figure contrasts with the 30-year average of 6¾% and a negative one standard deviation of 5½%. In contrast, the prospective earnings yield for Eurozone equities is 6¾%, Japan 7% and Asia (ex Japan) 7½%. Based on the IBES Consensus Forecasts from Datastream, as at 27 June 2017.
12 According to Institute of International Finance, EM Debt Monitor March 2016, the bulk of the rise was in local currencies with foreign debt, particularly US debt being repaid. Bank of America Merrill Lynch (January 2016) estimated that only 28% of Asian debt was in US Dollar. They further estimated that around 23% of Asian sales were in US Dollar. In other words, companies were generating sufficient dollars to service their dollar debt. According to Worldscope (from Datastream as at 31 May 2017) emerging market net debt rose some 400% between 2006 and 2014 (it has since stabilised); the net debt to equity ratio, however, rose from a low 27% to an acceptable 46% and has since fallen to 41%. It is a similar story in Asia (ex Japan). Debt fears are exaggerated.
13 US Federal Reserve Board from Datastream, as at 27 June 2017. Fig.4. Eastspring Investments, MSCI and IBES from Datastream, as at 22 June 2017.
14 Using the consensus forecasts for US budget and current account deficits from Consensus Economics Inc., as at 10 April 2017.
15 As at May 2017, the ratio is projected to ease from -5.8% to -6.3% by end 2018.
16 Tactically, they could retreat if investors persist in tying a strengthening yen (if our peaking dollar analysis is correct) with weaker equities. While this yen/equity link was relevant in the past, it is much weaker today. Whereas, for example, overseas production account for only 2% of total production in the early 1980s, it now accounts for around 22%. Source: Cabinet Office, Japan from Datastream as at 31 May 2017.
Fig.1. MSCI, Barclays Capital, JP Morgan, London Bullion Market and the Commodity Research Bureau from Datastream, as at 22 June 2017. All indices are total returns in local currencies (unless indicated otherwise). Note that past performance is not indicator of either present or future performance. 1In local currencies unless otherwise indicated. 2In US Dollars.
Fig.2. Bank of America Merrill Lynch Global Government Bond index and the Thomson Reuters’ Asia (ex Japan) Equity index from Datastream, as at 22 June 2017. Both series are in US Dollar. Any opinion or forecast is subject to change without prior notice. Note that past performance is no indicator of present or future performance.
Fig.3. IBES consensus 12-months forward earnings per share forecasts from Datastream, as at 22 June 2017.
Fig.4. Eastspring Investments, MSCI and IBES from Datastream, as at 22 June 2017. 1The “Z” valuation is a composite measure giving equal weighting to the variation of the historical price to book ratio from its long-term trend and the variation of the prospective price earnings multiple from its long-term trend over a 10-year period. The two outer dotted lines represent the limits within which around 70% of all world values lie. 2Asia Pacific (ex Japan). 3Based on 9 years data.