Weekly – Investment Adviser – 24 October
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In search of Iconoclasts
An obsolete ¨Washington consensus¨
This consensus, which emerged in the early 90‘s, was based on 10 economic policy prescriptions, setting up a standard package for the IMF, the world banks and the US Treasury to address crisis in developing countries. It has gradually become a prominent global doctrine. It actually encompasses topics like macro-economic stabilization, global trade and investment, etc. In short, it essentially promotes orthodox and neo-liberal ideas. Over the past years, this school of thoughts showed its limits. Entrenched disinflation, negative policy and markets interest rates, growing inequality favored the emergence of populist leaders and their inappropriately simplistic – demagogic – answers.
Bernanke, Draghi and Lagarde managed to interpret the Washington doctrine up to its limits
More radical decision-makers are therefore needed to address new challenges
Kristalina Georgieva, a Bulgarian woman, has succeeded C. Lagarde as head of the IMF as of October 1st, 2019. Not only is she the first citizen of a developing country to head this mammoth supranational organization. She also holds a PhD in economics from the Karl Marx Institute in Sofia. Her thesis was on ¨Environmental protection policy and economic growth in the US¨. A few days ago, she attended her first expert panel whose central topic was ¨Can central banks fight climate change ?¨. The debate focused on related financial stability risks. Panelists discussed how central banks should adjust regulatory and monetary policy frameworks to ensure an orderly transition to a green economy. They discussed how to spur the development of green financing, including green bonds. Ms. Georgieva suggested developing a taxonomy for “green” and advocated for central banks to use more interventionist approaches to facilitate investment in “green” industries…
Governor Mark Carney will probably leave a (certain) mark in Central Banking history. Not really when it comes to his actual actions, as head of the UK central bank. But rather as a free and turbulent thinker. Indeed, he recently criticized the dangerous prominence of the USD, advocating for a new – global – digital (say crypto) currency. This opinionated Canadian not only has the courage of his convictions. He also develops a non-conformist vision of future central banking.
In 2017, he launched the Network for Greening the financial system. So far, 46 central banks and regulators joined it. Among them we find the Central banks of UK, Canada, Mexico, Finland, France, China, Australia, Germany, Switzerland and the ECB. As well as the Luxembourg CSSF, BIS and the IMF.
One of its goals is to integrate the climate change factor into economic forecasts. The group analyses its tentative impact on monetary policy (through higher uncertainty and volatility). Participating regulators attempt to apprehend the potential impact on the private sector (like for instance on insurance and mortgage in coastal areas). On more practical things, this group also issues multiple guidelines about central banks portfolios, along the line of SRI objectives and ESG integration. For now, these recommendations are non-binding. But a survey among NGFS members shows that 25 out of the 27 respondents have already adopted SRI principles in their investment approaches or are planning to do so.
So far, the group has proved quite discreet in the medias. The absence of the Fed, as one of its members. probably explains for it. But, interestingly, the New York State financial regulator joined it last September. A harbinger for a near Fed attendance?
Financial repression has stretched the boundaries of economic policies to the extreme in the last ten years
This is fueling a shift in the mindset of central banks and a willingness to serve as an example
- A new generation of visionary leaders is needed beyond supranational organizations
- This is namely required in the UK, Germany, Hong-Kong, etc.
Currencies. One step forward, two steps back-ward
The Brexit psychodrama will never end. After more than 3 years of political turmoil triggered by the referendum, Britain departure from the EU is still not completely baked in. On Friday, UK Prime Minister Johnson was able to reach a deal with the EU on Brexit. This deal takes the backstop out of the equation but puts an economic border in the Irish Sea. However, over an unusual Saturday parliamentary session, lawmakers voted to withhold support to this deal. MPs voted in favor of an amendment withholding approval of his Brexit deal until legislation to implement it is in place. The amendment tabled by former Cabinet minister Sir Oliver Letwin was intended to force him to comply with the so-called Benn Act requiring him to seek a Brexit extension. This skips Johnson hope of finalizing his exit plan.
By consequence, Johnson formally sent a letter, he never wanted to send, asking the European Union to delay Brexit until January 31st. The European Council President Tusk said he will start consulting EU leaders on how to react. This may take a few days, as a unanimous vote is required to grant an extension. Now the possible outcomes are ranging from delaying Brexit, including a general election or a second referendum, to a battle in court, or a chaotic and economically damaging exit without a deal. The game changer remains the Democratic Unionist Party, the former Johnson allies. Their 10 votes made the difference between defeat and victory. They had supported him until last week, when he signed a Brexit deal that creates a customs border in the Irish Sea, which they angrily denounced. If Johnson can hold that coalition together for two weeks, he might have a chance.
The CHF has initially bounced with the general sentiment improvement and outflows from safe-haven assets at the benefit of riskier ones. The EUR/CHF largely follows the GBP/USD, trading back around 1.10 for the first time since mid-September. The USD/CHF has weakened too.
- Hopes of reaching a Brexit deal before month-end have rapidly vanished
- The recent GBP price-action is overdone
- Risk sentiment will stay the main CHF driver
Equities. Netflix, mixed results
In 3Q19, profits exceeded expectations, as did the number of international subscribers. But the revenues and the number of subscribers in the United States were lower than expected. In the United States, the growth of new subscribers will slow down, because the Netflix penetration rate is high and the competition is harsh with Disney (Disney+ and Hulu), Apple TV+, NBCUniversal (Peacock), WarnerMedia (HBO), Amazon, Comcast (Xfinity), CBS-Viacom, Roku, Discovery and YouTube. Internationally, Netflix can still develop, but it must consent to huge investments to produce content, resulting in negative free cash flow estimated at $ 3.5 billion in 2019 and a deterioration of the balance sheet.
- Aggressive cash burn situation and growing competition make Netflix a more risky investment
Equities. Results, the week ahead
Factset maintains a 4.7% decline in S&P 500 profits for 3Q19. The positive results of the Healthcare and Financial sectors have been offset by the downward revisions of the Energy sector. This week, 25% of the S&P 500 companies will release their results.
The most important publications: Monday Halliburton, Tuesday Lockheed Martin, McDonald’s, Novartis, Procter & Gamble, United Technologies, UBS, UPS, Wednesday Boeing, Caterpillar, Daimler, General Dynamics, Eli Lilly, eBay, Ford, Microsoft, PayPal, Tesla, Thursday Amazon, 3M, Danaher, Intel, Visa, and Friday Verizon, AB InBev, Eni.
- An important week for earnings
Equities. Swiss watch exports jumped
Swiss watch exports jumped 10.2% in Swiss francs in September, thanks to an extra working day. In volume, exports fell by 7.2%. If they progress in price, it is thanks to the precious metal and bimetallic watches. Bad news for Swatch: plastic watches are down by 17.6% in volume and 7% in francs. Exports to Japan rose sharply with +31.6% in Swiss francs, but they benefited from purchases before the 2% VAT increase from October 1st.
Two important markets are still in the doldrums, Hong Kong (political crisis) and Great Britain (no-end Brexit). The stock prices of Swatch and Richemont came up last week with the optimism of a Brexit with a deal. But Brexit is an endless story and protests in Hong Kong continue.
- Swatch and Richemont are not buying opportunities
Equities. Rebound in car sales in September in Europe
Car sales jumped 14.5% in September, but the base of comparison is very favorable, as in September 2018, sales dropped by 23.5% due to the introduction of the new WLTP anti-pollution test standards. Over the first 9 months of 2019, new registrations are down 1.6%.
Renault’s profit warning shows that the environment remains difficult: economic slowdown, decline in sales of diesel cars, difficulty in adapting the engines to the new WLTP standards, technological transition (hybrid, electric motors, connectivity, autonomy) generating significant costs. The decline of the Chinese market is a source of serious concern for European and American manufacturers.
- Underweight the automotive sector
- We prefer Volkswagen, which is well diversified and is contemplating a Lamborghini IPO at $11 billion.
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