WEEKLY – Investment Adviser – 22 August
|MSCI World||+13.4%||CHF Corp||+4.1%|
|S&P 500||+16.7%||US Govt||+8.1%|
|Stoxx 600||+11.0%||US Corp||+13.4%|
The Whale season is open
Populist policy-leaders provoke serious casualties
Turkey started a few months ago, courtesy of President Erdogan. The Turkish Lira collapsed following his outright and unjustified firing of the Central Bank’s President. Erdogan condemned ¨too restrictive monetary policy and too high rates¨.
Then Argentina experienced a dark Monday. Macri’s electoral defeat at primary elections turned into markets and currency routs. The likely comeback of Kirchner & Co, next October, is reminiscent of dire economic times. Sounds like the ¨humiliation¨ of the country recourse to the IMF in 2018 and the entrenched stagflation are no longer acceptable for key stakeholders. Peronist policymakers have a good chance to comeback.
Trump, like other autocrats, cannot help but discredit the Central Bank. In doing so, he questions the independence of the Fed. This fuels market volatility, just like his destructive mania to use tariff, as a weapon of persuasion.
Populist leaders are manoeuvring. M. Salvini might well be next one
The improbable – but not impossible – firing of J. Powell would be dramatic
The private sector is treading the same path
Deutsche Bank – in its current structure – is probably in a terminal phase. The aborted merger with Commerzbank and the latest tentative restructuring clearly miss amplitude, ambition and vision. For sure, Corporate Germany is not used to be in such a weak domestic and external position. But the sclerosis of the country before such a quasi-systemic risk is pathetic. The so-feared risk of domino effect to the whole German banking system might eventually erupt, if a serious recession unfolds.
General Electric is attacked by the glorious Madoff’s whistle-blower. An accusing 175 pages-long report was made public on August 18th. Company is supposedly an Enron-like fraud… Before that (ultimate?) assault, lots of questions have been raised in past years over the sustainability of the company, namely with regards to its gigantic underfunded pension fund liabilities and its opaque financial transactions. Fear is palpable…
The collateral damages of a much too long financial repression are becoming more visible as global growth evaporates. During these high uncertainty / crisis periods, financial markets tend to resemble dynamite fishing. Turkey and Argentina proved to be medium-size fishes. The key question is “who is going to be the whale, at the end of the sequence!?”
The “Damned Ball”
The eventual growth deceleration is neither favourable for populist leaders facing close elections, nor for feeble financial juggernauts
Endangered actors of significant importance might jeopardize growth and financial stability
Ample liquidity will prove an illusion, when a crisis unfolds
Our cautious stance and allocation remains unchanged
Currencies. Still desynchronized Norges Bank
Like most of cyclical sensitive currencies, the NOK is trading back to its weakest ever-reached level, like in December last year when the risk aversion was at its peak. Since then, the Norwegian central bank hiked rates twice. The big question was whether policymakers would explicitly hint at a third move in September. Amid rising global uncertainty, the central bank has decided to keep all options open.
The Norges Bank mentioned that its rate outlook has barely changed since June. While oil prices have dropped, the NOK has significantly weakened to level not factored by policymakers in their forecasts. Global interest rate expectations have dramatically fallen this year. This is supposed to translate into a lower Norwegian interest rate path too. Most of this move was already there before the June meeting.
Therefore, at the end, the decision to opt against signalling a September rate hike is logical. A rate rise at the next meeting still should not be completely ruled out. If the central bank plan is to tighten again this year, a December move looks much more likely.
The NOK remains one of the cheapest currencies amongst developed countries.
- NOK will be in the hands of global economic and risk sentiment over the coming weeks/months
- At the current level, it is an interesting alternative to EUR investments as the yield spread is wide
Currencies. The risk of a no Brexit deal has increased
After a series of very disappointing data in the UK, of which the latest is none other than the GDP for Q2, we are seeing some relief. The UK economy shrank by -0.2% during Q2, the first negative GDP growth figure since 2012. UK wage growth has hit another post-crisis high amid ongoing skill shortages in the jobs market. This has boosted the inflation. At 2.1%, July CPI numbers were a bit higher than expected. This are key reasons why it is probably too early to be talking about Bank of England rate cuts. A no deal Brexit has undoubtedly become more likely in recent days.
The EU looks unlikely to offer anything big, and Parliament faces an uphill battle to stop a prime minister set on exiting without a deal. Even so, an election looks highly likely – and facing voters in the early stages of no deal would be very risky for the prime Minister Conservative Party.
The two main support areas are 1,15 and 1,20. While the economic surprises are improving, the GBP should be the last currency to use for a positive shift in global risk appetite. The GBP remains penalized by the rising probability of early elections or a hard Brexit, with both being bad news for GBP.
- A lot of bad news are already well discounted at the current level
Equities. Huawei arrives with its HarmonyOS
The US embargo on Huawei is pushing the Chinese group to reduce its reliance on US products / systems. Huawei announced that it would implement on its smartphones its own open source operating system, HarmonyOS.
It is an ambitious bet, but possible, while others had tried, before failing, like BlackBerry or Microsoft. HarmonyOS will compete directly with Google’s Android. Today, the Operating System market is a duopoly between iOS that equips iPhones of Apple and Android for all other smartphones, including Chinese. If Blackberry and Microsoft failed to win, it was because they were attacking a market “controlled” by iOS and Android. On the other hand, if Chinese smartphone manufacturers adopt HarmonyOS in a context of wide technology war between the United States and China, Huawei has every chance in a Chinese market that has 800 million users. In such a large market, Huawei will be able to quickly test and correct any system errors.
Chinese manufacturers account for 47% of the global smartphone market (ranking before US embargo on Huawei): Samsung 23%, Huawei 18%, Apple 14%, Oppo 10%, Xiaomi 10%, Vivo 9%, LG 3%, Motorola 3 %, other 10%. Android’s market share is 86%.
HarmonyOS is destined for all supports, PCs, smartphones, tablets, TV, connected objects, and Huawei will invest $1 billion in applications, because without application, the OS (operating system) will not work. To encourage application developers for Harmony, Huawei wants to reduce its commissions by more than 50% compared to those of Google and Apple. To succeed, Huawei must seduce the developers. In the immediate future, Huawei is not thinking of replacing Android on smartphones, but HarmonyOS is a serious plan B in case of total war with the United States.
Google has a lot to lose if the technological war gets tougher. Android is an open source, so Google does not make money on Android.
The 2 main sources of revenue are avoiding charges to put the Google search engine on another OS – search engine that generates significant advertising revenue – and Google Play Store (Music, Books, Games, Movies & TV) which takes a 15% commission on each sale; Google Play generated revenue of $ 25 billion in 2018 (+27% over 2017), accounting for 20% of the Alphabet Group’s total revenue. For comparison, Apple’s App Store had revenue of $46.6 billion in 2018.
Source : SensorTower
- The implementation of HarmonyOS is a risk for Google
Equities. Energy, a disliked sector
Crude prices are not rising despite geopolitical tensions in the Persian Gulf and embargoes on Iranian and Venezuelan oil exports. Houthis rebels from Yemen, aligned with Iran, have attacked one of the largest Saudi oilfields using drones. But fears of a global recession dominate on prices and the situation is different from the years 1973-1981 with the United States self-sufficient in oil today.
Despite high dividend yields, over 5% for majors, investors are leaving a sector where the demand for oil will decline with the expansion of the electric car and restrictive measures on fossil fuels. Global fund managers are no longer interested in a sector that accounts for only 5% in global indices.
The weight of the oil sector in the S&P 500 has declined significantly since 1980, from 30% to 5% today
The bulls argue that oil demand remains strong and that OPEC (30% of global oil production) has a leeway of 3 million barrels/day to “control” prices. They also doubt the model of American shale extraction. US production has risen at the expense of worrying debt and significant losses. Since 2014, 174 US oil and gas companies have applied for bankruptcy protection to restructure more than $100 billion in debt. The demand for the protection of US bankruptcy law by Weatherford (oil services) in June is an alarm for the oil services sector. Schlumberger, Halliburton or Baker Hughes have seen the price of their shares at 15-year lows.
US shale producers have accumulated $184 billion in negative cash flow since 2010
Oil services are under pressure of producers, which have to meet shareholders requirements through higher dividends and share buy-back programs. Austerity in oil services will dominate and mergers and acquisitions should accelerate to reduce costs and gain pricing power vis-à-vis producers.
There is no geopolitical risk premium on oil prices. It is not certain that the oil sector will rise if prices rise because of a military escalation. In the immediate future, it would be a shock of supply and not of demand; then later, a bearish shock on demand due to new fears of global recession. In general, the energy sector outperforms in times of accelerating economic growth; today it is the opposite.
- Underweight the oil sector
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