Stay focused on beneficiaries of falling yields, market internals are not risk-on; UK to keep outperforming, FX hedged; Remain OW EM vs DM
Should one join the latest bounce? It might struggle to sustain – positioning not cleaned out, political uncertainty to stay, activity could weaken…
and IBEX. Many pundits used the event as an opportunity to convert to bears, and we have seen a deluge
of apocalyptic-like warnings over the subsequent days. These could be the reasons for the encouragingly
resilient market performance seen last week. From a contrarian’s standpoint, it might be tempting to
turn more bullish and to look to add risk in a portfolio. The question is, should the latest bounce
continue and morph into a full-blown tradeable rally, such as the one we had in the Feb-April timeframe?
We do not believe that we will see a sustained upmove. Positioning is not washed out, market internals
are not positive and political uncertainty will linger, despite some hopes for a compromise resurfacing
last week. The financial industry clearly underestimated – and likely continues to underestimate – the antiestablishment
shift in politics seen over the past few years. We advise to fade the most recent bounce, as:
1) Positioning is not depressed. Retail outflows suggest positioning is light, but HF beta is in fact
elevated and speculators are net long SPX futures. Seasonals are not attractive. Contrarian sentiment
indicators are not particularly subdued, as seen in Bull-Bear at mid range.
2) Political uncertainty is bound to linger, with elevated headline newsflow risk. Perversely, if the initial
fallout from the UK decision does not end up being too negative, this might embolden other parties to
follow suit.
3) Activity is subdued. The Feb-April rebound was accompanied by an improvement on this front, with
global restocking drive and an upturn in China. We think this support will be missing this time around. The
consensus view on the Street is that US real GDP growth will run at 2% pace in 2H. In contrast, the latest
business expectations reading within US services PMI is the lowest on record. Chinese
manufacturing PMIs are unwinding the bounce seen in Q1.
4) EPS revisions have turned negative again. The hurdle rate for the rest of ’16 is very optimistic –
S&P500 EPS are expected by consensus to accelerate from $27 in Q1 to $32 in Q4, which would be a
new all-time high. Even using these lofty consensus EPS projections, the P/E multiple for the S&P500 is at
the top of the range, at 17.9x for ’16e, not offering much upside potential.