Back for Christmas
One of the advantages of being early to publish a year-ahead piece is that marketing feedback is available before anyone else. Another is being back in the office for the Christmas party. After a month on the road following the publication of our 2016 Outlook (see She's lost control), we reflect on the discussions we’ve had with investors. We were focused on two major risks to markets in 2016.
US credit: The market or the Fed
Our view that the widening US corporate financing gap seen in H1 allied to a spike in debt issuance was a danger sign for both a market-driven financial tightening and changes in corporate behaviour chimed with widespread caution on the US outlook, though the consensus focus was understandably on the Fed. The capex cuts and lowest buybacks this cycle seen in Q3 demonstrate both the market and real-economy consequences of such a dynamic.
Chinese banks understating NPLs… and why it matters
Our view that China’s banking sector risks zombification was met with some debate, though no-one took issue with the understated NPLs. The discussion centred on the possible solutions to the issue, and we run through some of these (with sector sensitivities thrown in). From a global markets perspective there seems no painless way out from this structural overhang.
How to buy Europe
A large majority of investors concurred with the view that domestic Europe has the best investment story in 2016. The issue is how to implement this, with liquidity constraints and not insignificant benchmark risk required. We aim to address this with suggestions on which stocks play best in the Real Estate, Construction, Infrastructure and Regulated Utilities spheres.
Sector calls: Insurance, Industrials and Oil most debated
The general aversion to Insurance from many investors due to its opacity and the unintuitive nature of owning the sector in a low interest rate world meant we had plenty of discussions on its merits. In any case recent newsflow from Allianz and Axa seems supportive. The recent further crash in the crude price is consistent with our view on the risk to Oils, with a big difference in US investors’ attitude to the sector. We continue to argue that Industrials is not the right vehicle to play any improvement in cyclical indicators; structural risks should not be underplayed.