Enjoy Your Memorial Day Staycation!
Happy Friday,
One group that didn't stay home were the Chinese whose May Day vacation period included over 100M domestic trips. Why is that important? Because several weeks have passed with no outbreaks, suggesting China can continue to comfortably open its domestic economy.
China’s Two Sessions National Congress also just opened, in sharp contrast to the US House which just allowed proxy voting for the 1st time in its history. Expect China to announce additional stimulus though perhaps not a formal growth target which seems smart.
As the US ups its anti-China rhetoric one group stands silent - no prizes for guessing it’s the US corporate sector - companies realize that exiting China is a nonstarter, even more so than breaking up NAFTA. Trivium, a China focused research shop, notes that their conversations with foreign companies do NOT suggest a mass run for the exits.
Don't be put off by the heated US - China rhetoric - neither can afford concrete action that further adds to economic weakness.
We noted in our 2H Outlook piece (link) that the one thing Covid-19 has not yet upended is US equity & USD leadership. We also noted that speed is Covid-19’s signature; we expect that to continue in two areas. First, in terms of the speed of science and vaccine development and second in terms of how fast reflation becomes part of the market’s lexicon. Investor positioning is offsides for both.
As the reopening queue expands from Asia to Europe and now to all 50 US states we note that the 1st in, 1st out economies, especially those who handled Covid-19 best, are starting to provide global equity leadership. Still early but China, S Korea, Denmark, Germany are all outperforming over the past month.
We saw the first glimmers of US reflation buying in the Cyclical and Value segments off the bottom of last week’s near 5% pullback. Small Caps, Energy, Miners, Banks led the way back up while Tech lagged. Note Europe & Asia are Cyclical/Value plays. EU Recovery Fund talk suggests glimmers of a turn there as well.
A friend and former MS colleague, Jordi Visser, CIO at Weiss, is on top of the Reflation Case & just put out a VG webinar on his views which dovetail with my own. Do yourself a favor; find and watch it. We laid out our thoughts on the matter here (Webinar link).
Unprecedented liquidity, supply chain disruption, big jumps in delivery times, consumer inflation expectations picking up - Reflation seeds are being sown & very, very few are positioned properly. AAII net bearish is at 09 lows, 10 yr UST at .7%.
Investors should note that they are protected - a V shaped recovery will bring in more buyers, especially once SPY clears the 200dmav (2995) while absent a V, additional stimulus will be forthcoming - after all, it's an election year. History tells us that once economies bottom (and we have bottomed) meaningful equity losses are unlikely.
Spare a thought for the Search for Yield - it remains well and truly in place. Take a look at EMB, the EM $ debt instrument, up over 5% in the past month. US HY remains attractive while on the equity side Japan’s cash rich companies offer a solid yield pickup vs the US.
One fun fact about Japan: it might be the best place in the world to be looking for a job: today, there are 40% more vacancies than job seekers….the country’s lousy demographics have become a positive!
On that cheery note, TGIF, enjoy the long weekend and if you go to the beach be sure to practice social distancing!
TPW Investment Management Team