Stay Safe, Stay Open
Happy Friday,
That's the message that blinks on and off outside Aspen city limits: stay safe, wear a mask indoors so Aspen can stay open. Seems reasonable yet much of America has failed to implement it.
As I noted on BTV's The Open show Wednesday (LINK - on from min 34 to 42), our Tri Polar world construct suggests the US and the Americas are badly underperforming Europe & Asia in three main areas: the US’s uniquely poor response to the virus, its chaotic reopening which risks impending the economic recovery effort while US Presidential politics ensure a rollercoaster Summer & Fall.
Europe & Asia don't face any of these issues: Asia, 1st in Covid19 and 1st out, is returning to growth led by China with Q2 GDP growth of 3.2% y/y. Europe’s reopening process has been smooth and both regions have demonstrated the ability to handle localized outbreaks (Beijing, Berlin). The supply side clearly has bounced back faster than demand but sustained reopening should alleviate that imbalance.
It may be that it's not Covid-19 alone that ends the US financial asset dominance of the past decade but the combo of the virus and the dismal US response to it that does the trick. ACWX is outperforming the SPY over the past few months while the USD weakens. Dollar weakness would be a great tailwind for non US asset performance.
The USD could be the tail that wags the asset allocation dog. The US fascination with sanctions is leading the Chinese to push for greater RMB usage abroad - watch the China - Iran deal to see if Iranian oil is priced in $ or RMB. Note the Euro at a 4 month high vs the $ while China’s Yuan holds at 7 or stronger notwithstanding all the US negative verbiage. We remain of the view that US - China relations will be a War of Words not a new Cold War.
Economic recoveries across Europe and Asia reinforce the Value/Cyclical tilt many equity markets in both regions offer. The recent tech surge in US equity reflects a lack of confidence in the US economic recovery while proving the point that a broadening out to include Value & Cyclical sectors will be necessary for new highs.
We expect the US to be an OK absolute equity market thru YE but a poor relative performer vs Europe & Asia. That in turn is the best environment for sustained non US outperformance.
The focus in coming weeks will be on Earnings, Stimulus and Science to drive asset values. The US earnings season is off to a good start with the big banks leading the way; we continue to like banks on both sides of the Atlantic… in Europe, peripheral bonds have soared in value - EU banks own a boatload but to date bank stocks have not reflected any of that appreciation.
Stimulus remains necessary, especially in the US given the reopening worries noted above. With Trump trailing badly and talk of a Democratic Blue Wave in Nov expect Phase 4 shortly. This weekend European leaders meet in person for the first time in months to determine the shape of the Joint Recovery Fund… it may be too much to hope for but significant issuance of EU sovereign debt would be smart from a LT Euro POV. As noted before the decade of the 2020s could well be the Decade of Europe.
We have often spoken of speed as Covid-19’s signature: speed of spread, of policy response, market response and now science response. The coming week could bring the first results of the Oxford/Astra joint vaccine effort; it seems increasingly likely that a vaccine could be developed before YE. As we have noted, fighting the Fed is one thing, fighting the global scientific community + the Fed + fiscal policy makers is not a smart nor sustainable move.
Ending on a good note it looks as if the recent wave of new cases in the South and SW of the US is beginning to ebb with week over week case growth now around 12% vs 24% a week ago and 40% in late June. Hospitalizations appear to have peaked and deaths should follow. The NY Fed Q3 GDP nowcast is signalling 10% GDP GROWTH….
Stay Frosty my friends!
TPW Investment Management Team