Pivot To Growth

995 words – a 3 minute read.

The sense of stale bearishness we have written about recently is supported by the latest AAII investor sentiment survey which showed more bears than bulls for the 36th straight week – a record. Continued EU equity fund outflows as noted by BofA while European equity outperforms is another example (EU equity +19% QTD & back above Russian invasion levels).

Perhaps the latest & greatest example comes from the wrong headed media headlines noting weak China trade figures & concluding China is slowing. The real story, playing out in China stocks and global commodity prices ex energy, is that China is exiting Zero Covid months ahead of schedule. Rather than being stuck & under pressure as many media outlooks suggested President Xi recognized reality and moved fast. Even China bulls like GS didn’t expect this until the Spring.

China pivoting to growth is perhaps the single biggest positive for the global growth outlook one could ask for. And yet risk assets are selling off because of growing recession fears. C’mon people, focus forward!

We continue to see it differently from many. Chinese leadership has shifted from pandemic control to economic recovery as job one. We expect the move off Zero Covid to be followed by a significant policy response, likely to encompass both fiscal and (“targeted and forceful”) monetary policy. In a fascinating twist, rather than give this major policy pivot maximum publicity it was what was not said that made the point. The words “Dynamic Zero Covid” did not appear once in the latest Politburo meeting readout.

Much as with our other 2H keys: the pace of US inflation’s decline & the path of EU energy prices, the speed at which China is moving off Zero Covid is likely to come with milestones one can follow, much like blazes on the AT. For example, next week is China’s Central Economic Work Conference (CEWC) which will lay out the growth target for 2023 – we expect something around 4-5%. Following that we expect specific policy measures to support the domestic economy as external demand weakens; look for policy support to drive housing sales, the property sector more broadly and stimulate consumption. With Nov CPI coming in at 1.6% China has room to ease.

China going for growth suggests falling global recession risk, better commodity demand, stronger EM FX & a weak USD as 2023 unfolds – very much in keeping with our view of stability ahead. DXY just broke below its 200dmav for 1st time since June 2021 – its longest such streak ever – dollar weakness just getting started. Others worry about more Fed rate hikes & recession risk which we view as in the price; we focus on the upcoming EM Central Bank rate cutting cycle & its implications for a new global growth cycle.

We updated our model portfolios this week and always we ran through the technical positions as part of our monthly process. TLT, the long duration UST ETF, has had a major move as recession is priced into bonds – rising roughly 17% for the month. However, it has not come close to its 200dmav and is very overbought. At the same time, the GS Commodity Index, represented in ETF form by GSG, fell roughly 13%. Now GSG is roughly 60% energy so it reflects the oil selloff but at post Russian invasion lows this dichotomy suggests opportunity. We note iron ore prices are up 6 weeks in a row and Dr. Copper is acting much better.

As we see it recession fears lead to lower rates and a weak USD, supporting non US equity as we have seen over the past month. No recession leads to stable earnings, a flat SPY & better opportunities ex US.

The SPY’s 5 day selloff has helped work off the ST overbought condition many of our holdings faced after the sharp run up in Oct-Nov. As such we are now in good shape to respond to next week’s November CPI print and Fed meet which will likely mark the beginning of the Fed easing up on its rate hiking cycle, downshifting from 75 bps per meeting to 50 bp before going on hold.

With quite strong performance in both October & November and positioned for the shift from macro headwinds to tailwinds, from chaos to stability and from USD strength to weakness we did not make many changes to our models.

We continue to see the set up for non US equity OP to be the best in many years going back perhaps to the last such big EM run in 2002. A flat SPY next year, which is the general consensus & one we don’t disagree with, coupled with continued USD weakness is the best non US equity set up one can ask for. We think EU inflation can fall below the US next year while a BOJ policy shift could have big implications for Japanese FX and equity. The Fed going on hold opens the door for EM rate cuts, likely in China and Brazil in the next few Quarters if not months.

We maintain a significant OW to non US equity spread across both EAFE & EM; we OW Credit vs Sovereign, especially US & EM HY (EM HY was a top 5 performer last month) and a continued OW of the broad commodity complex. We expect stability to bring about a return to animal spirits in the year ahead and look for both the Climate & Innovation spaces to gain new $ as the new growth areas. Solar looks to be breaking out as we write.

So this month we made very few changes – adding to our Global Multi Asset (GMA) model’s metals & mining exposure to gain additional exposure to China’s growth pivot while adding to China related health tech to offset the risk that the growth pivot will lead to a China Covid surge  in our TPW 20 Thematic Model.