Global Cross-Asset Strategy
11 September 2020
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Global Asset Allocation
Position for convergence of 'K-shaped' recovery by
tilting towards cyclical assets
Strategy
We retain a pro-risk allocation in our model portfolio, given the strong rebound in
global growth, a tailwind from light investor positioning, the cheap relative
valuation of equities, and policy support. The Tech- and Momentum-led
correction over the past week removed some froth from overextended segments of
equity markets, and reset already light macro and systematic positioning even
lower.
The sources of global demand are broadening, from a surge in consumer goods
spending, to inventory rebuilding, a rebound in global capex, and improvements in
the US service sector. This prompted our economists to revise their 3Q20 global
growth forecast sharply higher in recent weeks to 35% ar.
The ‘K-shaped’ recovery, which saw technology surge while cyclical market
segments lagged, was driven by the response to virus and political trends, but is
not sustainable in our view. We expect economic and political convergence of this
‘K-shaped’ recovery, or unwind of the “new normal”, supported by improving
virus trends and narrowing political odds, which began over the past week but has
further to go. On the virus side, new US cases are declining and will likely
continue to fall since there are no large states that have yet to see widespread
outbreaks to significantly boost new cases, fatality rates are falling as treatment
improves, and vaccine availability is likely nearing. While US elections are a risk,
the implications are larger for internal rotation than overall direction, and markets
are already pricing in a substantial risk premium for this event.
We maintain an OW in pro-cyclical assets given the above-mentioned drivers,
with OWs in Equities, Credit and Commodities vs. an UW in Government Bonds
and Cash. Our expectations for convergence of the ‘K-shaped’ recovery leads to
our preference for Value/Cyclical segments and laggards during the pandemic
recovery, which we implement regionally by going UW US vs. RoW equities, and
via an OW in cyclical sectors and Value stocks vs. an UW in Momentum, Tech
and bond proxies. Within Commodities, we rotate from precious to base metals
given the rich valuation of the former vs. real yields, and tailwind for the latter
from strong China demand.
Asset Allocation
Global Cross-Asset Strategy
Marko Kolanovic, PhD AC
(1-212) 622-3677
@
. Morgan Securities LLC
Nikolaos Panigirtzoglou AC
(44-20) 7134-7815
@
. Morgan Securities plc
John Normand AC
(44-20) 7134-1816
@
. Morgan Securities plc
Bram Kaplan, CFA AC
(1-212) 272-1215
@
. Morgan Securities LLC
Mika Inkinen
(44-20) 7742 6565
@
. Morgan Securities plc
Major Asset Classes Active
Weights
Prior
Month
Δ UW |
OW
Equities 6% 6%
Govt. Bonds -10% -10%
Corp. Bonds 5% 5%
Commodities 4% 4%
mailto:@
mailto:@
mailto:@
mailto:@
mailto:@
Cash -5% -5%
Source: . Morgan.
See page 41 for analyst certification and important disclosures, including non-US analyst disclosures.
. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Global Market Strategy
Market Recap: Equity markets continued to rally, but
retraced nearly a month of positive performance during the
past week, as Momentum and Technology market segments
led a correction (Figure 1). Last month we maintained a
pro-risk stance, with OWs in credit, equities and
commodities funded by an UW in government bonds and
cash. Our long-only portfolio was up slightly and
performed in-line with its benchmark over the past month,
as equity performance moderated following the recent sell-
off (though remains up small m/m) and was largely offset
by a modest decline in credit.
Figure 1: Performance across asset classes
Asset class return (%), ranked by YTD return through Sep 9th
Gol
d Nasdaq
Copper
US
linkers
US Treasuries
US HG
GBI
Global
S&P
500
CEMBI
German Bunds
EMBIGD
MSCI World
Euro
HG GBI 3m
cash
US
HY
JGB
s
Euro
HY
MSCI
EM
EM FX
EM local debt
Topi
x Russell
2000 Euro
Stoxx FTSE
100
GSCI
Brent
Figure 2: The recovery has been uneven
Returns by asset class from their respective 1Q20 peaks, through Sep 9th
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
Source: . Morgan, Bloomberg.
Economic Outlook: Global growth remained strong in July
and August, even in the face of rising COVID-19 case
counts and a pullback of fiscal supports in the US. We saw
a broadening in the sources of global demand, from a surge
in consumer goods spending initially, to a stockbuilding
cycle as factory shutdowns depressed inventories, a strong
rebound in global capex, and more recently improvements
in the US service sector. This has prompted our economists
to revise their 3Q20 global growth forecast sharply higher
in recent weeks to % ar (Figure 3). However, they look
for growth to moderate after that and global GDP is still
projected to fall short of a complete recovery, with GDP
below its pre-pandemic level until the middle of next year
(Global Data Watch, Sep 4).
Figure 3: . Morgan global GDP forecast
% change saar, both scales
-40 -30 -20 -10 0 10 20 30
Source: . Morgan, Bloomberg.
Past month (%)
YTD (%)
B
re
n
t G
SC
I
FT
SE
10
0
Eu
ro
St
ox
x R
T
Y T
op
i
x
EM
lc
l d
eb
t
M
SC
I
EM
E
M
FX
Eu
ro
H
Y
U
S
H
Y
M
SC
I
W
rld
Eu
ro
H
G
S&
P
50
0
U
S
H
G
C
op
pe
r N
as
da
q
Source: . Morgan.
The Fed published the conclusion of its
monetary policy framework review last month,
adopting average inflation targeting and
formalizing a more accommodative reaction
function (discussed by our Economists here
and here).
There were two important changes made to the Fed’s
Statement on Longer-Run Goals and Monetary Policy
Strategy: First, the FOMC now “seeks to achieve inflation
that averages 2 percent over time.” This indicates the Fed
will need to “make up” for periods of below-target inflation
with periods of above 2% inflation. Second, the FOMC now
aims to eliminate “shortfalls” from maximum employment,
rather than “deviations” from maximum employment.
Asset Allocation: We retain a pro-risk allocation in our
model portfolio, given the strong rebound in global growth,
a tailwind from light investor positioning, the cheap relative
valuation of equities, and policy support. The
Tech- and Momentum-led correction over the past week
removed some froth from overextended segments of equity
markets, and reset already light macro and systematic
positioning even lower.
The sources of global demand are broadening, from a surge
in consumer goods spending, to inventory rebuilding, a
rebound in global capex, and improvements in the US
service sector. This prompted our economists to revise their
3Q20 global growth forecast sharply higher in recent weeks
to 35% ar.
The ‘K-shaped’ recovery, which saw technology surge
while cyclical market segments lagged, was driven by the
response to virus and political trends, but is not sustainable
long-term in our view (see Market and Volatility
Commentary, Aug 31). We expect economic and political
convergence of this ‘K-shaped’ recovery or unwind of the
“new normal”, supported by improving virus trends and
narrowing political odds, which began over the past week
in Momentum, Tech and bond proxies. Within
Commodities, we rotate from precious to base metals given
the rich valuation of the former vs. real yields, and tailwind
for the latter from strong China demand.
Equities: a Tech- and Momentum-led correction
removed froth from Equities over the past week, but the
technical and fundamental setup remains positive. We
favor Value and Cyclical segments over Momentum and
Tech.
In the first half of the year, investors debated the shape of
the economic recovery (. will it be a V, W, U or
something else?). We believe this is now settled and that
we are seeing a ‘K-shaped’ recovery, where the technology
sector took off to rally to ~20% above previous all-time
highs, while cyclical market segments significantly lagged,
in large part due to the COVID-19 response (Figure 4).
Populations largely confined to their homes have to
socialize, work, shop and be educated online, causing the
use of devices, cloud and internet services to skyrocket,
while the rest of the economy took a nose dive. This has
created enormous inequality not just in the performance of
economic segments, but in society more broadly. The fork
in the K-shaped recovery was also reflected in politics,
with Republicans largely pushing for quick reopening and
accepting the risk of more infections, while Democratic
governors moved in the direction of longer lockdowns and
re-imagining the economy (Market and Volatility
Commentary, Aug 31).
Figure 4: The K-shaped recovery is likely to converge
COVID
but has further to go. On the virus side, new US cases are
declining and will likely continue to fall since there are no
large states that have yet to see widespread outbreaks to
significantly boost new cases, fatality rates are falling as
treatment improves, and vaccine availability is likely
nearing (despite the Oxford/AZN setback). While the
November US elections are a risk, the implications are
larger for internal rotation than overall direction, and
markets are already pricing in a substantial risk premium
for this event (see Volatility Risk and the . Presidential
Election, Sep 1).
We maintain an OW in pro-cyclical assets given the above-
mentioned drivers, with OWs in Equities, Credit and
Commodities vs. an UW in Government Bonds and Cash.
Lockdowns
Central
Banks and
Fiscal
Source: . Morgan QDS.
Technology, Large Caps,
Wealth/White Collar
“Re-imagining”
vs.
Reopening
Cyclicals, Small
Business, Poor/Blue
Collar
Convergence
Our expectations for convergence of the ‘K-shaped’
recovery leads to our preference for Value/Cyclical
segments and laggards during the pandemic recovery, which
we implement regionally by going UW US vs. rest- of-
world equities, and via an OW in cyclical sectors (.,
Energy, Banks and Industrials) and Value stocks vs. an UW
While the “new normal” of remote work and distancing
benefits some (. large cap tech companies), it is simply
not sustainable long-term. Without direct government
transfers (stimulus and unemployment paychecks),
continued central bank interventions, and massive
borrowing from future generations, this “new normal”
would have already collapsed. We think that political and
economic convergence of the K-shaped ‘recovery’, .
convergence of COVID-19 winners and losers, is ahead of
us (. unwind of the “new normal”). Over the past few
weeks, Trump’s betting odds rapidly increased, which we
attribute largely to: 1) the impact of the degree of violence
in protests on public opinion and voting patterns, 2) a bias
in polls due to Trump voters being more likely to decline or
mislead polls, and 3) a decline in COVID-19 cases. We
believe momentum in favor of Trump will likely continue
given these drivers, while most investors are still positioned
for a Biden win. This could have significant implications for
the performance of factors, sectors, COVID-19
winners/losers, as well as ESG.
Shortly after our above-linked note was published, we saw
a Tech- and Momentum-led market correction that saw the
Nasdaq fall ~11% over 3 trading sessions. This correction
removed some of the froth from these segments, and drove
more general risk off flows. Despite the strong market rally
over the past few months, positioning of macro investors
and systematic strategies was low before the correction, as
much of the rally appears to have been driven by single
stock flows (mainly buying of stocks and stock options on
tech names), and appears even lower afterwards as the
correction prompted de-leveraging from these strategies.
For example, Hedge Funds’ equity beta index is in its ~25-
30th percentile, and Volatility Targeting funds' exposure is
~10th percentile (and they needed to sell moderately on the
pickup in volatility over the past week). Only CTAs
appeared to have meaningfully re-levered over the past few
months, but likely de-levered over the past week on the
market weakness and increase in volatility, and now have
below average exposure levels (~35th percentile) (see US
Futures Rollover Outlook, Sep 7).
We expect continued convergence of the ‘K-shaped’
recovery going forward, and look for continued rotation
into Cyclical and Value segments as the recovery broadens,
election odds tighten, COVID-19 case growth continues to
slow, and we get closer to having a vaccine available. As
such we prefer to position in Cyclical segments and
underperformers during the pandemic – . via sectors
such as Energy, Banks and Industrials, and regionally via an
UW in the US (given its high exposure to mega cap Tech
and strong outperformance – see Figure 2) vs. rest-of-
world equities. We also maintain an UW in the UK as a
hedge for hard-Brexit risks.
Bonds: We maintain a government bond UW in our
long only portfolio to finance our equity, credit and
commodity OWs, and as heavy duration supply points
to a steeper curve and higher long-end yields.
Our Rates Strategists note that with the framework review
complete, it frees the FOMC up to amend its guidance as
soon as next week's meeting. Although recent Fed speak
has made this a close call, they believe the Fed will be
reluctant to lose traction at this early stage by failing to
deliver outcome-based guidance. Given the dovish Fed and
a sharp increase in duration supply over the remainder of
the year, our Rates Strategists think there is room for the
curve to steepen further and maintain 5s/30s steepeners. As
a result of this duration supply and positive cyclical trends
our strategists see 10Y/30Y yields ~10bps/20bps higher by
year-end, respectively (USFIMS, Aug 28). Our Technical
Strategists also see room for long-end yields to rise over the
near-term, and look for a retest of the June highs (Technical
Strategy, Aug 28).
In Europe, our Strategists have a bearish bias on Germany
10Y with an inclination to fade further richening of Bund
yields below -50bps via outright short duration, and hold
2s/5s steepeners. They also recommend scaling up the OW
in intra-EMU exposure by adding longs in 7Y Italy vs.
Germany to existing longs in 10Y Spain vs. France, 7Y
Cyprus vs. Portugal, and 5Y NRW vs. Germany (GFIMS,
Sep 4. In EM, our Strategists maintain an overall OW in
EM rates, with OW in China, Malaysia, Indonesia,
Hungary, Russia and Mexico, and UW Thailand and Chile
bonds (EM Local Markets Recommendations Roundup, Sep
7).
Credit: We remain OW credit to position for further
spread tightening, given its use as a policy tool and
robust technicals.
Credit significantly outperformed equities during the recent
correction, owing to compositional differences (the S&P
500 has much higher weight in Tech and lower weight in
Financials vs. HG credit) and robust technicals/strong
inflows in the HG market as of late. Our Strategists
maintain a year-end target of 150bps for JULI spreads,
implying nearly 20bps of further tightening from current
levels. September tends to be the busiest month of issuance
and may again deliver a surge in supply, but our Strategists
are not convinced this should weigh on spreads (and it
hasn’t over the past 4 years) given clean positioning,
stabilizing foreign demand, and net supply remaining well
below gross (Credit Strategy Daily, Sep 8 and Sep 2).
Similarly, in Europe, with economic activity rebounding,
central bank support, and HG corporates having raised
enormous liquidity cushions, the fundamentals for HG
remain supportive. Further, our European Credit Strategists
believe many corporates could take action to repair balance
sheets in order to maintain investment grade ratings (High
Grade Spotlight, Bailey et al, Sep 3rd). In HY, spreads have
tightened ~60bp since mid-year, and have reached our
460bp year-end target. Our Strategists look for some
consolidation over the coming month as the market awaits
heavy supply, ‘make or break’ UK-EU trade negotiations,
and the US Presidential election, but lowered their YE
spread target to 430bps on improving recovery rates (HY
Talking Points, Sep 8).
Commodities: We retain a commodity OW, with an OW
in Energy, and rotate from precious to base metals, to
position for a continued rebound in activity.
Commodity market flows turned positive last week, but
remains strongly negative YTD. This could continue to
reverse in the face of the continuing recovery, with
broadening sources of global demand from consumer goods
spending, to a surge in global capex and improvements in
the US service sector, which prompted our economists to
revise the 3Q20 global growth forecast sharply higher in
recent weeks (Commodity Market Positioning and Flows,
Sep 7).
During the 2Q20 earnings season it became increasingly
apparent that the US upstream community has been far
more hesitant to push capital back into drilling activity over
the remainder of 2020, even as price has remained above
$40/bbl for a fairly comfortable period of time, leading our
Commodity strategists to revise US production estimates
lower (Oil Markets Tracker, Aug 12). Meanwhile, stalling
global mobility data also caused them to trim demand
assumptions last month, though they still see global
demand rising ~ over 2H and outpacing supply
through the end of the year (Oil Markets Weekly, Aug 5).
likely to exhibit y/y growth in 2020 despite the COVID-19
pandemic. China’s industrial activity has blown away
expectations, fueled by public debt and powered by strong
housing, infrastructure and auto demand (Base Metals
Quarterly, Aug 18). Meanwhile, our Strategists exited their
-year bull call on gold and turned neutral around a
month ago. Based on their valuation framework, for gold to
breach $2,000/oz on a sustained basis, the 10-year US real
yield needs to reset at least another ~65bp lower to -165bp,
a scenario that looks unlikely given our macroeconomic
forecasts. Therefore, they believe that gold will more
sustainably move lower into year-end, averaging $1,880/oz
in 4Q20 (Gold Update, Aug 12 and Precious Metals
Quarterly, July 27). As such, we rotate from gold to base
metals, cutting the former to UW and adding an OW in base
metals within our long only model portfolio.
The agri commodity complex is in a demand-led recovery
after the historic collapse of 2Q20. After a long period of
historically short ags positioning, speculators rapidly
moved long and are now running their largest net long
position in September since 2012. Our Commodity
strategists believe that declining grain & oilseed inventory
expectations and a recovery in global growth will likely
drive an extension in accumulated length and recovery in
prices (Agricultural Markets Weekly, Sep 4 and Quarterly,
Aug 20). However, concerns surrounding China ag
purchases in the US under the Phase One deal continue to
hang over the space, and with positioning providing less of
a tailwind, we remain UW ags in our model portfolio.
Our Commodity Strategists expect Industrial Metals to rise
further, driven by strong China demand, which appears
Long-Only Asset Allocation
GAA Long-only portfolio allocation
Major Asset Classes Active
Weights
Prior
Month
Δ UW |
OW
Equities 6% 6%
Govt. Bonds -10% -10%
Corp. Bonds 5% 5%
Commodities 4% 4%
Cash -5% -5%
Major Sectors within each Asset Class Active
Weights
Prior
Month
Δ UW |
OW
vs. US Benchmark
Equities Countries US % % Note Tracking Error (%)
%
EMU % %
Japan % %
UK % %
EM % %
Other % % vs. Benchmark
Govt. Bonds Countries US Nominal % % Note Yield (bp)
US TI Ps % % Dur (months)
Europe Core % % Tracking Error (%) %
Europe Periphery % %
Japan % %
UK % %
EM Local % %
Australia % %
Other % % vs. Benchmark
Corp. Bonds HG US % % Note Yield (bp)
Europe % % Duration (months)
UK % % Tracking Error (%) %
HY US % %
Europe % %
US Loans % %
EM Sovereigns % %
Corporates % % vs. Benchmark
Commodities Energy % % Note Tracking Error (%)
%
Industrial metals % %
Agriculture % %
Precious metals % %
Livestock % %
Source: . Morgan.
Long-Only Portfolio Performance
Performance for Aug 2020 GAA Long-only portfolio
In bps.
GAA Long-only portfolio performance
Benchmark (bps) GMOS portfolio Active (bps)
1D WTD MTD 1D WTD MTD 1D WTD MTD
EQ 145 -35 122 123 -52 108 -21 -17 -14
Govt Bonds 1 12 -51 5 17 -27 4 5 24
Corp Bonds 9 12 -113 -5 -3 -80 -13 -14 33
CO 58 -89 6 64 -85 9 6 4 4
FX 0 0 0 0 0 0
`
(1) Portfolio 70 -14 25 69 -31 36 1 -15 13
(2) Cross asset class allocation 81 -20 32 11 -6 7
(3) Within asset class allocation 59 -22 31 -10 -8 6
Note: (1) the leftmost columns are the absolute returns of the benchmark portfolio. The center columns are the absolute returns of the GMOS portfolio. The rightmost columns
are the relativ e performance of the GMOS portfolio v ersus the benchmark. If these are positiv e then the GMOS portfolio outperformed the benchmark. (2) The leftmost
columns are the absolute returns of the benchmark asset classes w ith activ e asset allocation w eights. The rightmost columns are the relativ e performance of the activ e asset
allocation v ersus the benchmark. If these are positiv e then activ e allocation outperformed the passive index . (3) The leftmost columns are the absolute returns of the activ e
asset classes w ith benchmark asset w eights. The rightmost columns are the relativ e performance of this portfolio v ersus the benchmark. If these are positiv e then activ e
asset classes w ith benchmark w eights outperformed the passiv e index .
Source: . Morgan
A
ss
et
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tu
rn
s
Trade Recommendations
Cross Asset Trade Inception Date
Long Global IG corporate bonds vs Global equities and Govt Bonds Apr'20
Equities
Strategies to hedge against potential further unwind of crowded long positions Sep'20
Long Nikkei volatility to hedge political uncertainty and stock concentration Sep'20
Buy HSI/HSCEI up-variance on ADR inclusion and potential retail participation Sep'20
OW China vs UW India Aug'20
Long COVID-19 Recovery International Basket (JPAMCRIB <Index>) vs. SPX Aug'20
Long COVID-19 Recovery Domestic Basket (JPAMCRDB <Index>) vs. SPX Aug'20
Long Staples (SX3P Index vs. SXXP Index) Jul’20
Long China vs EM equities (MXCN Index vs. MXWD Index) Jul’20
Position for further inflows to China A-shares Jul’20
Maintain asymmetric market exposure while monetizing the steep skew via S&P 500 KI risk reversals Jul’20
Position in China tech localization plays as US-China decouple Jun’20
Long S&P 500 dividend futures Jun’20
Long US Value with Relative Strong Balance Sheet Jun’20
Go against the grain in Pan-European SMid May’20
Long Healthcare (SXDP Index vs. SXXP Index) May’20
Extract rich Asian volatility risk premia Apr'20
Long Utilities (SX6P Index vs. SXXP Index) Apr'20
Long in Euro STOXX 50 dividend futures Apr'20
Long “Energy Recovery” vs. SPX Dec'19
Long “Healthcare Laggards” vs. SPX Dec'19
Long “Seasonal Cyclicals” vs. SPX Dec'19
Long US Small-Caps vs. Large-Caps Dec'19
Long “5G Thematic” vs. SPX Dec'19
Short “Expensive Defensives” vs. SPX Dec'19
Short “Disconnected ESG” vs. SPX Dec'19
Long “Asia Top Ideas” vs Asia ex-Japan Nov’19
Long US Value vs. Low Vol Stocks Jul’19
OW Brazil and UW Mexico Equities May’19
Long Mining (SXPP Index vs. SXXP Index) Mar'19
Position for outperformance of China consumption stimulus beneficiaries Mar'19
OW / UW EM Countries and Sectors Feb'19
Long China/Trade Sensitive Basket vs. SPX Feb'19
Fixed Income
Enter EUR 5Yx5Y/15Yx5Y swap curve steepener Sep’20
Long Italy vs Germany in 7y Sep’20
Short 30y EUR Gamma Sep’20
Long in 10y Spain vs. France Jul’20
EM local bond exposure via GBI China, FX-hedged, and GBI Russia Jun'20
5s/30s UST curve steepeners May’20
Long 10y AUD and NOK swaps vs. EUR and NZD swaps May'20
Credit
Long EUR IG vs. HY Jul'20
FX
Short USD/JPY in cash Sep’20
Sell basket of EUR & GBP vs CAD Sep’20
Position for lower EURUSD/higher SX5E via 4-month dual digital options Aug’20
Commodities
Long the CBOT Corn Dec ‘20 370 call Jul’20
Long ICE #11 Sugar Oct ’20 – 16 USc/lb call spread, short the USc/lb put Feb'20
Stay long Agriculture commodity complex Oct’17
Source: . Morgan
Cross-Asset Trading Themes
Long Global IG corporate bonds and
Global equities vs. govt bonds
Economic data continue to point to a marked rebound in
activity in 3Q as lockdowns have been relaxed and credit and
fiscal supports have sparked a consumer-led bounce, with a
strong surge in the manufacturing and goods sector in
particular. Moreover, as we noted two weeks ago (F&L, Aug
25th) we find that investors overall are likely still underweight
equities with global non-bank investors’ allocations still
below their post-financial crisis averages.
This optimistic outlook faces two challenges over the next
two months in the form of the September FOMC meeting and
the US election. For the former, the question is if the Fed will
support its new policy framework with more action or
stimulus, where the failure to follow through with at least
some form of enhanced forward guidance would likely be
seen as a disappointment. And for the latter, the question for
overall market direction is less about the eventual winner, as
both candidates are likely to eventually create an overall
positive impulse for risk markets by delivering new fiscal
stimulus, but rather about the closeness of the result. A very
close result is likely to be contested and could result in
political gridlock and lack of policy action. While these
challenges represent near term risks for risk markets, the
medium-to-long term picture remains supportive given the
low overall equity positioning.
Nikolaos Panigirtzoglou AC
(44-20) 7134-7815
. Morgan Securities plc
Mika Inkinen AC
(44-20) 7742-6565
. Morgan Securities plc
Equities Trading Themes
Strategies to hedge against potential further
unwind of crowded long positions
Buy switch put on {SPX, HSCEI, TWSE}: Based on our
analysis, risk of crowded positioning unwind is highest in
US, China and Taiwan among major Asia and global markets.
Moreover, the three regions share similar drivers of
concentration risks (. low factor dispersion and index
efficiency). In case of a further unwind of crowed long
positions, we think the three markets could fall in tandem. We
recommend investors buying switch put on SPX, HSCEI and
TWSE as a hedge against a more correlated correction. A
switch put is typically trading at a slight premium vs a best-of
put equivalent and a meaningful discount to a basket put
equivalent. Driven by our views for a correlated correction,
as opposed to a February/March 2020 type of collapse, we
think buying switch put offers the highest risk reward as
investors pay for a cost similar to that of a best-of-put in
exchange for a potential payoff likely to be same as that of a
basket put.
Buy TWSE put spreads: With Taiwan being top ranked in
our composite stock market concentration analysis, we
recommend investors put spreads on TWSE to hedge against a
potential unwind of crowded long positions. From an options
pricing standpoint, TWSE put spreads are attractively priced
due to historically elevated put skews. Compared to a list of
Asia and global indices, TWSE also stands out in terms of put
skew richness.
Tony SK Lee AC
(852) 2800-8857
. Morgan Securities (Asia Pacific) Limited
Long Nikkei volatility to hedge political
uncertainty and stock concentration
Rising political uncertainty prompts us to review stock
market concentration in Japan. On a scale from 0 to 1, with 0
representing the highest concentration, our model assigns a
rating of to Japan and to US. While not as extreme
as US, Japan stock concentration appears extreme relative to
its own history. Admittedly, high stock concentration does
not necessarily lead to a rise in volatility. However, history
suggests positioning crowding lays the groundwork for
market swings should unexpected surprise come through. We
think the twin risks of political uncertainty and stock
concentration provide sufficient reasons for investors to
consider going long Nikkei volatility as a hedge. Our favorite
implementation is buying Nikkei Sep21 90% up-variance
which avoids the more expensive part of the volatility
surface.
Tony SK Lee AC
(852) 2800-8857
. Morgan Securities (Asia Pacific) Limited
Buy HSI/HSCEI up-variance on ADR
inclusion and potential retail participation
We expect higher volatility in the Hang Seng and H-shares
index as the inclusion of ADRs’ secondary listing in HK
could increase index volatility from a realized perspective
and rising retail participation via warrants could boost
demand for upside volatility from an implied perspective.
Local retail investors' preference of warrants for upside
participation has historically led to an increase in volatility
amid rallying markets. This dynamic could repeat in the
future should China's new economy stocks gain more
traction. Furthermore, we observed lately that rising US-
China tensions into the US presidential election could have
largely reflected in the price of the HSCEI index. This adds
conviction to our view that higher volatility is likely to
materialize in a rising market. Following the recent
normalization in variance term structure, we change our
recommended implementation from forward starting up-
variance to buying up-variance outright.
Tony SK Lee AC
(852) 2800-8857
. Morgan Securities (Asia Pacific) Limited
OW China vs UW India
OW China: Macro data continue to come in strong as
production activity has normalized with domestic demand
recovery. We expect an ongoing favorable macro policy
environment to support further improvement in domestic
demand, with steady investment growth and broadening of
recovery in the form of consumer spending and service sector
activity. Monetary easing is likely to continue in 2H20 led by
credit expansion. We also expect potential upside revision on
earnings forecast into the results season to support valuations.
UW India: Hedge for potential earnings growth
disappointment: (1) cyclical risk that could be driven by
lapses in economic recovery data and / or COVID-19 second
wave; (2) structural lower growth driven by the need of 2021
fiscal consolidation, driving valuation multiple de-rating on
lower sustainable GDP growth; (3) stretched performance
and valuation metrics.
Pedro Martins Jr., CFA AC
(55-11) 4950-4121
Banco . Morgan .
OW / UW EM Countries and Sectors
We reassess the balance of risks for EM equities down to
neutral. We could be sitting at a transition point—where
positive news continues to come but the slope of
improvement declines. EM EPS and GDP growth for 2021 is
exhibiting divergent trends with a robust EPS expansion
forecast at +22% (bottom up) and +30% (top down). On the
other hand . Morgan forecasts global GDP will fall short
by % at the end of 2021 relative to its pre-pandemic path
owing to private sector caution, impaired balance sheets, and
early removal of fiscal support. Our EM equity portfolio has
parts positioned for stronger economic activity while
managing hedges for US- China disputes, social distancing,
and credit risks: (1) OW Consumer Discretionary,
Communication Services, Healthcare, Materials, and Real
Estate vs. UW Consumer Staples, Financials, Industrials, and
Utilities; and (2) OW China, Brazil, Indonesia, Russia, and
South Korea vs. UW India, Malaysia, Mexico, Saudi Arabia,
South Africa, and Thailand.
Pedro Martins Jr., CFA AC
(55-11) 4950-4121
Banco . Morgan .
Long COVID-19 Recovery International
Basket (JPAMCRIB <Index>) vs. SPX
This basket is designed to benefit as the economy reopens
and there is progress in containment of the virus. Our
screening methodology for COVID-19 Recovery
International stocks is based on S&P 500 companies that
became considerably cheaper during the pandemic compared
to the pre-COVID-19 period (Q2’20 vs Q4’19) based on our
Value composite score (sector-neutral equal weight
combination of price-to-forward-earnings, price-to-book-
value and price-to-sales). The list is then filtered to select
only International candidates based on their Revenue
exposure. The list is reviewed and further revised to
incorporate fundamental Stock Analysts’ feedbacks. See
Conditions Increasingly Favor COVID-19 Recovery
Candidates.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Long COVID-19 Recovery Domestic Basket
(JPAMCRDB <Index>) vs. SPX
This basket is designed to benefit as the economy reopens
and there is progress in containment of the virus. Our
screening methodology for COVID-19 Recovery Domestic
stocks is based on S&P 500 companies that became
considerably cheaper during the pandemic compared to the
pre-COVID-19 period (Q2’20 vs Q4’19) based on our Value
composite score (sector-neutral equal weight combination of
price-to-forward-earnings, price-to-book-value and price-to-
sales). The list is then filtered to select only Domestic
candidates based on their Revenue exposure. The list is
reviewed and further revised to incorporate fundamental
Stock Analysts’ feedbacks. See Conditions Increasingly
Favor COVID-19 Recovery Candidates.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Strategies to take advantage of foreign
flows to China A-shares
Stock Connect Flow Momentum strategy: Our analysis
finds that Stock Connect Northbound Flow Momentum (as
measured by net inflow normalized by turnover) exhibits
strong ‘alpha’. Since launch of the strategy, our NB Flow
Momentum Strategy performed in-line with the broad A-
shares market despite overall foreign selling activity in the
past month. The resilience of the strategy amid foreign
outflows should be appealing to many investors, we continue
to recommend the Northbound Flow Momentum Strategy.
Buy 2823 HK Sep20 appearing call spread or KO call: We
recommended buying 2823 HK appearing call spread and KO
call to position for upside on continued strong foreign inflows
while taking advantage of inverted upside skew. However,
foreign flows reversed to net selling in the past month and
2823 HK were unable to post further upside. At current
pricing, the appearing call spread and KO call would have
lost % and % respectively on a MtM basis mainly
due to option value decay. Since we are close to option
expiry and foreign outflows for A-shares have slowed
recently, we prefer to retain the trades and keep the
optionality until expiry.
Tony SK Lee AC
(852) 2800-8857
. Morgan Securities (Asia Pacific) Limited
Extract Asian volatility risk premia
HSCEI skew lock: We retain the HSCEI Dec20 skew lock
strategy to monetize skew premium. HSCEI skew has risen
again recently amid the recent market correction. At current
entry point, the risk reward remains attractive based on our
back-test analysis. For investors who are concerned about
potential MtM risks in case of another volatility shock, we
recommend purchasing an OTM put as a tail hedge overlay.
We demonstrate by adding the 75% put, maximum MtM loss
for the trade would have been reduced maturely in case of a
major selloff.
NKY var vs vol: We retain the short NKY variance vs long
NKY vol swap trade to monetize Nikkei convexity, which
remains relatively elevated, risk reward analysis continues to
favor selling convexity. We recommend monetizing the
convexity richness via short Nikkei Dec20 variance vs
volatility swap spread. Based on our analysis, a
variance + volatility sizing gives rise to the best risk
and reward under a variety of hypothetical volatility
scenarios.
Tony SK Lee AC
(852) 2800-8857
. Morgan Securities (Asia Pacific) Limited
Keep OW Brazil; UW Mexico Equities
Overweight Brazil: While a lot of the performance continues
to depend on global markets embracing cyclicality, the Brazil
narrative is improving both from a top down and bottom up
point of view. 1) On macro side, the country is to have the
lowest contraction in LatAm, strongly supported by the fiscal
expansion following Covid-19. While JPM is revising down
GDP estimates for most of LatAm, Brazil was recently
revised up from % to %. 2) The death count of the
pandemic is also starting to recede, following several months
of stability. 3) Structural reforms are back in the agenda.
Albeit timing for those is still uncertain, it drives the
discussion back to a constructive outlook rather than the
usual political noise. 4) Interest rates continue to stimulate
rotation away from fixed income and into equities, providing
support for equities, despite the strong offering pipeline. 5)
BRL appears mostly cheap on technical terms. The negative
news lies on the uncertainties surrounding the fiscal accounts
and how to make it all back on track after the strong
expansion of 2020. Slippage on this front is today the main
local risk ahead. Underweight Mexico: The toll from the
pandemic has been brutal, considering that the government
continues to try to maintain a healthy fiscal stance. Still,
fiscal accounts continue to rely on the deep pockets of
extraordinary funds, which will likely be depleted by next
year, at the same time that lower oil prices and the
government stance on energy don’t help on the revenue side.
JPM sees Mexico contracting by % in 2020 with a
negative bias. The one comforting stance remains the peso,
which in the absence of political noise, continues to be well
supported by interest rates.
Pedro Martins Jr., CFA AC
(55-11) 4950-4121
Banco . Morgan .
Stay long Staples (SX3P Index vs. SXXP
Index)
Staples is a bond proxy sector with clearest negative
correlation to bond yields and offers an attractive entry point
with P/Es close to the bottom in almost 10 years. Further,
Staples remain a relative beneficiary of resilient food
purchases when compared to other consumer categories.
Mislav Matejka AC
(44-207) 134-9741
. Morgan Securities plc
Long China vs EM equities (MXCN Index
vs. MXWD Index)
We upgraded China to OW in November last year, after its
poor run over the prior two years. We find the region to be
cheap and to have favourable sector tilts. Further, China
remains attractively priced vs the rest of EM, and vs DM,
despite the strong run. CNY is well behaved, house prices are
rising and corporate sector leverage is smaller than it was
during ‘15-’16 uncertainty.
Mislav Matejka AC
(44-207) 134-9741
. Morgan Securities plc
Stay long Healthcare (SXDP Index vs.
SXXP Index)
We expect Pharma earnings growth to outpace the rest of the
market, with topline supported by a strong pipeline. The
sector should do well in an environment of subdued yields.
Further, Pharma P/Es tend to rerate during recessions.
Mislav Matejka AC
(44-207) 134-9741
. Morgan Securities plc
Stay long Utilities (SX6P Index vs. SXXP
Index)
Continued focus on decarbonisation has been a structural
positive for the sector. Relatively elevated CO2 prices are
also a positive, as companies move towards renewable
alternatives. In addition, bond yields might remain stuck at
subdued levels for longer aiding the investment case of this
“bond proxy sector”.
Mislav Matejka AC
(44-207) 134-9741
. Morgan Securities plc
Stay Long Mining (SXPP Index vs. SXXP
Index)
Bulk of the Miners earnings downgrades are already behind
us. Commodity prices have strengthened in the recent months.
The dollar has weakened over the last few months, which is
usually a support for Miners. The sector could benefit from
potentially more aggressive stimulus measures in China. The
sector is trading cheap and has resilient balance sheets and
offers strong cash flow generation with materially lower
breakeven.
Mislav Matejka AC
(44-207) 134-9741
. Morgan Securities plc
Maintain S&P 500 asymmetric delta
exposure while monetizing the volatility
skew via KI risk reversals
We recommend maintaining asymmetric market exposure
while monetizing the elevated long-dated skew via long SPX
calls funded by selling knock in puts. Our trade delivered
positive P/L of ~2% over the past month (+6% since
inception) as the market continued to rally, though declined
on the market pullback that started late last week.
Bram Kaplan AC
(1-212) 272-1215
. Morgan Securities LLC
Stay long S&P 500 dividend futures
Dividend fundamentals continue to hold up well, as discussed
in our S&P 500 Dividend Weekly: dividend cuts have been
relatively benign during the pandemic (~86% of S&P 500
dividend payers have maintained or raised their payouts since
March), we're starting to see some companies resume
dividend payments that were suspended in Q2, and bottom-up
estimates have been stable in recent weeks. Meanwhile, S&P
500 dividend futures continue to trade at significant discounts
to bottom-up estimates. The 2020/21 S&P 500 dividend
futures are up over the past month and have rallied 7%/11%
(respectively) since we initiated the trade, and we recommend
staying long to position for a continued recovery of these
contracts.
Bram Kaplan AC
(1-212) 272-1215
. Morgan Securities LLC
Maintain long position in Euro STOXX 50
2022 dividend futures
At the start of April, we recommended adding long positions
to Euro STOXX 50 2022 dividend futures, which were
trading at severely distressed levels. Since then, Euro
STOXX 50 2022 dividend futures have rallied by ~33%.
Most of this performance was delivered in April and May,
when the worst case-scenario for dividend cancellations did
not materialize. Euro STOXX 50 2022 dividend futures are
slightly up (%) since the last GAA publication and
maintain an attractive upside (%) to IBES bottom-up
estimate. We recommend holding Euro STOXX 50 2022
dividend futures, which should continue benefitting from
equity derivatives risk premia normalization.
Davide Silvestrini AC
(44-207) 134-5916
. Morgan Securities plc
Long US Value vs. Low Vol Stocks
Even prior to the COVID-19-driven sell-off, Value has
persistently underperformed Momentum (for structural
reasons see Value Conundrum). Since our note on Value
Squeeze, there were numerous episodes of short-lived Value
squeezes (Momentum vs Value). Value stocks still remain
substantially oversold, we expect this rotation to Value from
Momentum to continue in the short term. The forward P/E
dispersion is highest since GFC, and that typically is a
precursor to Value outperformance. Momentum-Value
correlation is still extremely negative. We find this to be
historically an effective indicator for a Value short squeeze.
A possible implementation can be Long JPRPULVA Index
and Short JPRPULBE Index or see Stock screens in Outlook
2020.
Alternatively, investors can position for this expected
convergence between Value and Low Vol/the market via
limited-loss option structures. See Volatility Review, Jul 20
for details.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Bram Kaplan AC
(1-212) 272-1215
. Morgan Securities LLC
Long US Value with Relative Strong
Balance Sheet
It is increasingly important to differentiate good Value from
poor Value (., Value traps), with degree of balance sheet
leverage (., net debt to EV, interest coverage, liquidity
runway) likely to remain a crucial differentiator. While Value
companies may survive this crisis, many will likely be left
with structurally higher debt loads. Value plays with stronger
relative balance sheet (JPAMVSBS <Index>) can be a
suitable way to approach the Value trade. See Style
Positioning note, Apr 3 for more details.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay Long Energy Recovery (JPAMEVAL
<Index>) vs. SPX
Energy is our highest risk/reward OW for this year given
record crowded short positioning and extremely depressed
valuation. SMid E&Ps, in particular, are among the most
hated names in the sector, trading at a fraction of book value.
However, we hold a more constructive outlook for the sector
and expect fundamentals to improve in the coming quarters.
The Energy Recovery Basket identifies the top 30 Energy
stocks that would benefit from a recovery in the business
cycle and oil prices. The composite rankings were selected
for the basket and further vetted by Stock Analysts. The
weighted Composite Ranking was based on Value score,
Quality score, Correlation to Oil and Consensus Price Target
Upside.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay Long Healthcare Laggards
(JPAMHVAL <Index>) vs. SPX
We recommend investors favor Healthcare for its defensive
growth. Healthcare was our non-consensus underweight this
past year given its richer relative valuation and political
uncertainties. In our view, some of the political headwinds
have eased with increasing acknowledgment that policies
such as ‘Medicare for All’ will likely prove too difficult to
implement without bipartisan support. While risks still remain
around the Presidential election, COVID-19, drug pricing and
the opioid crisis, we continue to see a rebound on better-than-
feared outcomes. Within the Global Healthcare sector, the US
possesses attractive relative valuations and could benefit from
cross-regional flows. The Healthcare Laggards Basket
identifies the top 30 Healthcare stocks that we believe would
benefit from a recovery in the business cycle with a Value tilt.
The composite rankings were selected for the basket and
further vetted by Stock Analysts. The weighted Composite
Ranking was based on Value score, Quality score, Correlation
with Value factor and Consensus Price Target Upside.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay Long Seasonal Cyclicals (JPAMSECY
<Index>) vs. SPX
The Seasonal Cyclicals basket includes stocks best positioned
to benefit from a recovery in the business cycle. The 100
companies in the basket ranked the highest across the
following criteria: (1) Beta to the market based on 12 months
of daily returns (prefer high positive beta); (2) Beta to
composite PMI based on 5 years of monthly returns (prefer
high positive beta); (3) Seasonal outperformance in 1st
quarter of the year. Companies were further filtered for
Liquidity, Market Cap and Cyclical Sectors: Materials,
Industrials, Discretionary, and Technology.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay Long 5G Thematic (JPAMFIVG
<Index>) vs. SPX
The 5G Thematic basket is composed of stocks that are most
closely tied to the ongoing 5G rollout. Using textual analysis
of corporate earnings, conferences and other call transcripts,
we identified the top 30 names in the S&P 1500 that most
strongly associated with the 5G theme based on level and
type of discussion. JPM analyst feedback was also
incorporated to further refine the list of stocks.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay long US Small-Caps vs. Large-Caps
While Russell 2000 total return has lagged S&P 500 since
2017, we maintain a positive view on small-caps post intra-
cycle slowdown. Also, the US pro-growth policies remain
most favorable for small-caps with deregulation and
infrastructure spending disproportionately benefiting domestic
companies. Smaller companies could become M&A targets as
large-caps look to consolidate smaller industry peers and/or
seek higher growth opportunities.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay long China/Trade Sensitive Basket vs. SPX
The China/Trade Sensitive basket (JPAMCNEX <Index>) is
up % since launch (Dec 7, 2018) compared with %
total return for the S&P 500. The basket comprises the top 50
stocks from the S&P 500 (excluding hard-to-borrow and
M&A candidates) ranked on high revenue exposure to China
(50%) and high mentions per million of trade/tariff concerns
based on textual analysis of earnings transcripts (50%). The
basket is expected to deliver stronger growth, and we expect
it to outperform as we progress toward trade resolution.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay Short Expensive Defensives
(JPAMXDEF <Index>) vs. SPX
The Expensive Defensives basket consists of expensive, low-
vol stocks with high interest rate risk. We exclude any
oversold secular growth names from S&P 500 (excl. hard-to-
borrow & M&A candidates) and then rank the stocks on the
following: (1) Low Vol stocks based on sector neutral
realized volatility; (2) Expensive stocks based on sector
neutral for composite score for P/E, P/B and P/Sales;
(3) Inversely correlated to US 10yr treasury rate.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Stay Short Disconnected ESG (JPAMRESG
<Index>) vs. SPX
The Disconnected ESG basket consists of ESG stocks with
strong outperformance but weaker fundamentals vs Sector
peers. We start with a universe of Russell 3000 companies
and then further refine down for: (1) Stocks with high overall
ESG score; (2) Stocks with Environmental and Social
Ranking higher than Governance ranking; (3) Stocks that
outperform their sector index by >5%; (4) Stocks with
weaker fundamentals (ROE, sales growth, earnings growth).
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Pan-European SMid Trade: This recession will
be shorter lived than what the market thinks…
go against the grain (buy what the market has
sold out of and sell what it has held on to)
Having gone into 2020 with a cautious stance, we adopted a
contrarian constructive view on Mar 17th, arguing that the
market trough was not far and one had to start building
positions among those stocks that had been most sold off
during the correction. As we mentioned in our note, some of
these underperformers had sold off huge, and offered
"tremendous opportunities" within a market correction that, in
our opinion, differed from past such recession-linked sell-
offs in 3 key ways: a) it was far more temporary (dealing
with COVID-19 will be a matter of months, not years), b) far
less fundamental (., equities were being driven by passive
trend-following AUM more than ever before), and c) with a
far more certain outlook as the world knew this time around
what the end result would be (., once COVID-19 is behind
us, we will be back to a world we all have had a decade to
understand… a world of low growth, low inflation, low
interest rates, low returns). This view has delivered
tremendous alpha, with SMid indices up >35% since our Mar
upgrade, and with the sold-off stocks we favoured vastly
outperforming the rest (the worst decile of performing SMid
Caps during the downturn has delivered an average gain of
50% since the Mar market low, while the best decile of
performers during the downturn is up just 4%). As a result,
we stick to our pair trade, going long the worst decile of
performers among Pan-European SMid-Caps from the Feb
19th market peak to its Mar 18th low, while shorting the best-
performing decile during that downturn. This pair trade has
delivered a return of 963 bps since we launched it on Apr 7th,
2020.
Eduardo Lecubarri AC
(44-20) 7134-5916
. Morgan Securities plc
Position in China tech localization plays as US-
China decouple
In our 2020 Outlook, we highlighted that together with
broader de-globalization/regionalization, we believe China’s
efforts to reduce dependency, especially in technology, will
boost localization of demand and supply within the region.
This is likely to remain in focus while US-China frictions
worsen further, due to increasing bi-partisan support against
China and the upcoming presidential election. Current stocks
picks include Wingtech, Xiaomi and HKEx.
Mixo Das AC
(852) 280-00511
. Morgan Securities (Asia Pacific) Limited/. Morgan
Broking (Hong Kong) Limited
Long Asia Top Ideas vs Asia ex-Japan
Asia Top Ideas is our highest conviction positioning ideas for
near-term outperformance in Asia. This combines our top-
down macro, market timing, style and country allocation
views together with bottom-up aggregation of catalysts and
conviction from . Morgan's equity research analysts. As
the business cycle continues to improve, we reinstate cyclical
exposure, keep Value exposure and add to Insurance as a
sector that appears to be disconnected from fundamentals.
Current stocks include Hon Hai, Samsung, Vanke, AIA, and
Shanghai Airport.
Mixo Das AC
(852) 280-00511
. Morgan Securities (Asia Pacific) Limited/. Morgan
Broking (Hong Kong) Limited
Position for outperformance of China
consumption stimulus beneficiaries
In our 2019 outlook, we highlighted China consumption
stimulus beneficiaries as a segment that benefits from a
combination of structural growth via consumption/service
upgrades, premiumization, and a new retail ecosystem as well
as pro-growth policy measures including tax cuts. A robust
domestic consumption economy remains critical to China’s
long-term strategic geopolitical goals. Amidst a global
demand slowdown due to Covid-19 and a nascent recovery in
China, we expect domestic consumption to be more resilient.
Investors can gain diversified exposure to the theme via our
basket of China consumption stimulus beneficiaries
(JPHCHCSB) vs. the MSCI Asia ex-Japan index. The basket
has outperformed the regional benchmark (MXASJ Index) by
+% YTD.
Mixo Das AC
(852) 280-00511
. Morgan Securities (Asia Pacific) Limited/. Morgan
Broking (Hong Kong) Limited
Take profit on long Russell 2000 vs. short
S&P 500 conditional variance
Russell 2000 realized volatility underperformed over the past
month due to the Momentum/Tech-led correction, realizing
~3 points under the S&P 500, due to the S&P 500’s higher
exposure to these segments (the S&P 500 has ~39% of its
weight in Tech and Communication Services). However, our
long Russell 2000 vs. short S&P 500 conditional variance
trade performed very well as Russell 2000 realized volatility
is points over the S&P 500 since Oct’19 inception (well
above the implied spread of points at entry) and the
implied volatility spread remains wider (Dec’21 variance is 4
points higher on RTY). Given the potential for continued
rotation out of Tech/Momentum names, we see near-term risk
for carry on this trade and advise taking profits.
Bram Kaplan AC
(1-212) 272-1215
. Morgan Securities LLC
Closing our Long High/Resilient FCF
Yielders vs Cyclical SMid-Caps at Peak
Margins (+684 bps since launched)
We opened this trade on Jan 16th, 2020, looking to profit from
our belief that it was late in the cycle, with limited upside
from then on; a scenario that, in our opinion, didn’t warrant
taking on beta risk. Our analysis showed that upside per year
for the reminder of the cycle was limited to single digits
under best-case scenario assumptions. The reason for this was
simple: the output gap was all but gone and revenue growth
could only come at the expense of margin contraction from
then on. This had already happened in 2019, with earnings
growth being <5% for SMid-Caps across DMs that
year. Empirical evidence also showed that FCF was the
metric most consistently related to SMid-Cap performance
during not just recessions but also during structural low
growth environments. With all of this in mind, we went long
our “Surf & Turf” basket, which offered consistency and
yield (stocks with EBITDA positive operations through the
cycle and a >25% discount to the market on FCF Yield at the
time), while being short our “Roller Coaster” basket made up
of those stocks with net margins in the top quintile of their
cycle range, which happened to underperform the broader
market in the 2007-2009 equity market downturn. This
strategy has returned a net 684 bps since we launched it on
Jan 16th, 2020.
But this trade has, in our opinion, played out, with many of
these cyclical plays still down big while the broader SMid
mkt is only single digit down YTD. For this reason, we are
taking profits and closing the trade today, while remaining
focused on our other proposed trade which invests in those
stocks that still have plenty of recovery upside.
Eduardo Lecubarri AC
(44-20) 7134-5916
. Morgan Securities plc
Close Long COVID-19 Outperformers vs.
COVID-19 Underperformers
We expect convergence of the broad disparities that opened
up during COVID-19 crisis, and unwind of the "new normal."
As such, we close our previous trade that went long stocks
that are key beneficiaries in the event of further outbreak vs.
short stocks at risk in a further outbreak.
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Close Long/Short Democratic Outperformers
vs Underperformers (JPAMDEMO Index vs
JPAMDEMU Index)
We close our long/short basket trade that was intended to
capture the policy direction of the Democratic Party, given
tightening election odds and momentum in favor of Trump
(see Market and Volatility Commentary for discussion).
Dubravko Lakos-Bujas AC
(1-212) 622-3601
. Morgan Securities LLC
Close US long vs. DM
Our expectations for convergence of the ‘K-shaped’ recovery
lead to our preference for Value/Cyclical segments and
laggards during the pandemic recovery, which we implement
regionally by underweighting the US vs. Europe and EM
equities.
Bram Kaplan AC
(1-212) 272-1215
. Morgan Securities LLC
Close UW South Africa vs. EM
We close our UW South Africa versus EM. MSCI South
Africa has underperformed EM by more than 20% YTD and
our index of domestic SA stocks underperforming EM by
more than 40%. MSCI SA is down more than 40% (USD
terms) from its 1Q18 highs when optimism over the then
brand-new President Ramaphosa peaked. Index composition
has change in the last six months with the internet (Naspers)
now >30% of MSCI SA and precious metals (gold and
platinum) c 20% of the index – both are key OW’s in our
CEEMEA allocation. Our bearish outlook for the domestic
economy has not changed. We think the 3Q growth rebound
will be weaker than consensus on the back of load-shedding
as well as ongoing COVID risks. However, the recent push
back against corruption from the Presidency could boost
long-depressed investor sentiment toward the long-term
structural issues.
Pedro Martins Jr., CFA AC
(55-11) 4950-4121
Banco . Morgan .
Closing HSCEI call contingent on SPX
trading range-bound
The trade terminated early, PnL is limited to premium paid at
the start (%).
Tony SK Lee AC
(852) 2800-8857
. Morgan Securities (Asia Pacific) Limited
Credit Trading Themes
Long EUR IG vs. HY
With economic activity rebounding and HG corporates having
raised enormous liquidity cushions, the fundamentals for HG
remain supportive. Our credit strategists believe many
corporates could take action to repair balance sheets in order
to maintain investment grade ratings (High Grade Spotlight,
Bailey et al, Sep 3rd). Moreover, HG credit will continue to
benefit directly from central bank support until at least mid-
2021. HY by contrast remains more vulnerable to the shape of
the recovery and with supply set to increase in coming weeks.
In addition to technical support and valuations favouring IG,
the trade also provides some downside protection in a risk-on
portfolio.
Mika Inkinen AC
(44-20) 7742-6565
. Morgan Securities plc
Fixed Income Trading Themes
Enter EUR 5Yx5Y/15Yx5Y swap curve
steepener
We have a medium term bearish duration bias in Euro rates
but acknowledge that yields over the near-term could remain
range bound. As a result, we favour positively carrying
bearish duration proxies. To this effect, we prefer forward
curve steepeners which have retraced around 50-70% from its
YTD lows (seen around March/April when non-inversion note
related hedging flows had pushed these curves significantly
flatter) but where we still see some upside.
Given the range-bound outlook for yields in the near term we
acknowledge that steepeners may have limited upside in the
next few months, which is why the positive carry of forward
curve steepeners is important. For instance, the
5Yx5Y/15Yx5Y swap curve would have accumulated around
of carry since June. As a result, we recommend
entering 5Yx5Y/15Yx5Y swap curve steepeners. See Euro
Long-End View, Bassi et al, Sep 10th for further detail.
Khagendra Gupta AC
(44-20) 7134-0486
. Morgan Securities plc
Mika Inkinen AC
(44-207) 742-6565
. Morgan Securities plc
Re-enter longs in Italy vs. Germany in 7y,
keep longs in 10y Spain vs. France
The economic data flow continues to track a significant
pickup in growth in 3Q. And despite a rise in COVID-19
infections in a number of European countries in recent weeks,
especially in France and Spain, mobility data have been
steady suggesting a resilience in activity. There are signs that
the resurgence in cases has been different compared to the
spring (Europe’s second COVID-19 wave very different to
the first, Mackie, Sep 3rd), suggesting that policy makers can
be more focused in their interventions and avoid large-scale
lockdowns. We continue to see narrowing pressure on intra-
EMU spreads against a backdrop of favourable net supply
dynamics after ECB purchases and strong safety nets created
by a combination of the PEPP, liquidity operations and the
EU recovery fund. We scaled back our exposure last month,
as we saw a risk of liquidity conditions amplifying market
moves, and re-enter longs in Italy vs. Germany on improved
liquidity conditions, lighter positioning and limited near-term
political risk.
P&L: +1bp since inception in Jul20 GAA for 10y Spain vs.
France.
Mika Inkinen AC
(44-207) 742-6565
. Morgan Securities plc
Enter short 30y EUR gamma; take profit on
short 10Yx10Y EUR vega vs. GBP vega
We favour a bearish bias on gamma in the long/ultra-long
sector on 1) favourable seasonal dynamics as risk-on
dynamics tend to increase after illiquid summer months on
increasing market depth and lower vol; and 2) attractive
valuations. 3Mx30Y implied vol is elevated relative to its
range in the past few years, and delivered vol is running well
below implied. Given the large degree of mean reversion in
yields, however, we also favour infrequent delta-hedging
given the large degree of mean reversion in yields. For
further detail, see European Derivatives, GFIMS, Sep 4th.
We also take profit on short 10Yx10Y EUR vs. GBP gamma
trade as the relative cheapness of GBP to EUR implieds no
longer looks so extreme.
P&L: +30bp of notional since inception in Jun20 GAA.
Khagendra Gupta AC
(44-20) 7134-0486
. Morgan Securities plc
Mika Inkinen AC
(44-207) 742-6565
. Morgan Securities plc
Keep EM local bond exposure via GBI
China, FX-hedged, and GBI Russia
Growth indicators continue to signal an improvement
globally, and overall COVID-19 cases have been falling
driven by drops in the US and some EM countries even as
other regions have seen some increases. In addition, US real
yields are close to all-time lows of -100bp, with an overall
supportive global liquidity environment for EM assets. This
supportive environment can continue for local currency
bonds.
We retain modest, selective long exposure to EM local
duration via China and Russia. In China, the economic data
continue to point to a V-shaped recovery, though this may
present a near term headwind for yields as a result of the
fiscal support that looks set to increase supply. This pressure
should abate after 3Q, however, and with 10y CGB yields at
around % valuations are attractive particularly compared
to DM bond markets. And in Russia, the economic data flow
has on balance been stronger than expected suggesting the
recovery maintained momentum in August, and we still some
scope for rate cuts.
P&L: % for GBI China and % for GBI Russia since
Jul GAA; % and % since inception in Jun GAA.
Mika Inkinen AC
(44-207) 742-6565
. Morgan Securities plc
Keep 5s/30s UST curve steepeners
Recent US data has seen some improvement in tone, and the
US COVID-19 tracking data continues to show improving
trends with most of the hotspot states having seen a
significant improvement in hospitalisation data (US COVID-
19 Chartbook, Hunter et al, Sep 8th). With the Fed’s
framework review now complete and its shift to targeting
average inflation over time indicating that it will tolerate
periods of above target inflation after periods of below target
inflation, it now frees the FOMC to amend its guidance.
Reinforced guidance would likely help anchor the front-end
of the curve. And with markets having embraced an expected
shift in its guidance, evident in the decoupling of TIPS
breakevens from nominal yields recently, a failure to deliver
some outcome-based guidance could erode some of the
goodwill that has been created in recent months. By contrast,
at the longer end of the curve increased duration supply
should continue to put upward pressure as the Treasury seeks
to extend the weighted average maturity of its outstanding
debt.
While the current risk-off sentiment in risky assets presents
some near term downside risk to yields, we continue to see
steepening pressure on the curve over the medium term and
keep 5s/30s steepeners.
P&L: +17bpbp since Aug GAA, +20bp since inception in
May20 GAA.
Jay Barry AC
(1-212) 834-4951
. Morgan Securities LLC
Mika Inkinen AC
(44-207) 742-6565
. Morgan Securities plc
Cross-market rule-based signals: long 10y
AUD and NOK swaps vs. EUR and NZD swaps
We update our regular suite of rule-based signals for outright
and cross-market fixed income trading in the Appendix.
Bond markets sold off in August, in part as markets reacted
to the conclusion of the Fed’s framework review and shift to
average inflation targeting. Given the relatively broad-based
nature of the sell-off, however, changes in the relative
rankings were modest. The main change this month is that
relative underperformance of 10y NOK swaps have seen them
overtake AUD and CAD swaps as the steepest curve for the
carry and carry-to-risk signals.
As a result of the BoJ’s explicit 10y yield target, we continue
to exercise discretion by excluding JPY swaps. This month,
that means replacing JPY swaps with EUR and GBP swaps as
third-lowest ranking markets in the carry, carry-to-risk and
change in slope signals. There has been a somewhat greater
overlap between the carry-based signals and the real yield and
change in slope signals in recent months, and we look to
combine the signals after eliminating offsetting positions.
This month, it leaves our signals long AUD and NOK swaps
vs. shorts in EUR and NZD swaps.
P&L since Aug20 GAA: %; cumulative return since Feb
18: +% at an annualized information ratio of .
Mika Inkinen AC
(44-207) 742-6565
. Morgan Securities plc
FX Trading Themes
August was challenging for our portfolio. A positive
reflationary backdrop, mixed with proactive policy surprises
(Jackson Hole) and summer trading conditions ultimately
converged to drive the dollar back below pre-COVID levels.
By some measures, the broad dollar and EM both appeared
cheap to global cyclicals to end the summer, implying a
substantially higher degree of cyclical optimism in G10. We
had been advocating narrow USD shorts throughout the latter
half of the summer, primarily versus the Euro-bloc and via
proxies, and had otherwise recommended selling structurally-
impaired currencies like GBP and NZD. The latter were
foiled in late-summer market momentum, but are now re-
coupling more obviously with fundamentals as risk markets
and dollar directionality have flipped in dramatic fashion to
start September. As the dollar consolidates from possibly-
oversold August levels, we expect relative value trades to
provide some windows of opportunity. Negative Brexit news
out of the UK reinforcing GBP weakness to start the month is
perhaps the most obvious example of fundamental strategic
drivers coming back to the fore, while the ECB, COVID and
positioning present tactical risks for EUR.
Stay short USD/JPY in cash
Our USD/JPY short has traded largely sideways despite
strong dollar directionality elsewhere to end the summer but
has tactical downside risk in the current market environment.
While JPY is less sensitive to risk markets than previously
stemming from structural capital outflows, holding JPY
upside amid current equity turbulence is prudent. Elsewhere,
while PM Abe’s resignation had an immediate market impact
and prompted USD/JPY lower, that announcement effect has
since faded as a consensus emerges around Yoshihide Suga
as Abe’s successor. That being said, there’s still reason to
continue holding USD/JPY shorts to capture what we believe
will be a slow-burning move lower beyond the equities
outlook. As we’ve highlighted previously, USD/JPY remains
the most sensitive pair to real yields and compared to its
historical relationship, the pair remains noticeably well-
supported despite the dramatic compression in global interest
rates this year. Moreover, the potential changing of the guard
from PM Abe to Suga also provides some longer-term lower
USD/JPY justification. While we generally expect that
neither monetary nor fiscal policy would be meaningfully
disrupted under his leadership, there is the chance for some
deterioration in US-Japanese relations. A worsening trade or
geopolitical backdrop could ultimately warrant a pullback in
the level of capital outflows from the country that has
presented a persistent headwind to JPY strength in recent
years.
Sell USD/JPY at . Stop at . Marked at
%.
Paul Meggyesi AC
(44-207) 134-2714
. Morgan Securities plc
Meera Chandan AC
(44-207) 134-2924
. Morgan Securities plc
Patrick Locke AC
(212) 834-4254
. Morgan Securities plc
Sell basket of EUR & GBP vs CAD
With dollar consolidation in focus, we look to . to exploit a
combination of tactical and structural opportunities. We start
by selling a combination of EUR & GBP. The former has
already shown some signs of moderation in recent days, yet
remains quite long according to our positioning proxies.
Concerns around EUR stemming from the September ECB
meeting (., more vocalization around EUR and the
inference that it will further challenge the central bank in
achieving its inflation targets) or another leg higher in
regional COVID infections are material risks, given the one-
sidedness of market positioning. GBP’s rally through the
latter half of the summer seemed excessive, and seemingly
ignored the lingering risk from a short Brexit timeframe.
GBP has been among the underperformers thus far in
September, as a negative risk backdrop and some concerning
rhetoric surrounding Brexit has walked back some of the
surprising gains made at the end of the summer. The UK is
also staring down the prospects of a fiscal cliff with the
expiration of its furlough program, which at the least will
provide some headwind to the UK's already-belated recovery.
We pair against CAD, which screens as a buy according to
our growth framework model, and which juxtaposes EUR net
length with a much less crowded CAD position.
Sell equal weighted basket of EUR & GBP vs CAD
at an average rate of . Market at +.09%.
Paul Meggyesi AC
(44-207) 134-2714
. Morgan Securities plc
Meera Chandan AC
(44-207) 134-2924
. Morgan Securities plc
Patrick Locke AC
(212) 834-4254
. Morgan Securities plc
Stopped out of short GBP vs CHF
We were ultimately stopped out of our GBP/CHF short as
sterling continued its remarkable outperformance through
most of August (the TWI peaked at over +4% since end-June,
and GBP/CHF breached earlier this week). As has been
the case in previous weeks, the late-summer rally continued
despite any tangible, fundamentally-constructive news coming
out of the UK, and instead arguably reflects a sustained boost
from the pro-cyclical backdrop, moderate positioning and
late-summer trading conditions. Indeed, GBP stands out as
having overshot its estimated levels based on its historical
relationship with other G10 pairs over the last two months,
including a % excess appreciation in cable relative to the
change in EUR/USD. If this was in fact indicative of some
market momentum (and the current USD consolidation we’ve
seen thus far in September persists), it is reasonable to believe
that GBP’s fundamentally-negative headwinds should reassert
themselves more obviously in September, particularly at these
elevated FX levels, and indeed that seems to be the case very
recently. First and foremost, it remains that only negligible
progress in Brexit negotiations has seemingly been made,
meaning the market focus on each of the remaining meetings
will likely be highly scrutinized. The fact remains that even a
bare-bones trade deal could prove significant and damaging to
the economy in early 2021, which should warrant a currency
adjustment. The UK’s fiscal cliff also looms, with the
expiration of the furlough scheme due around when Brexit
talks will be down to the wire. Accordingly, rather than wind
down our GBP exposure entirely, we instead rotate into a
short against CAD in a basket trade, which should capture
some of the increased attention around the UK's lingering
structural issues, while partially offsetting the beta to ongoing
cyclical strength and limiting the positioning mismatch.
Sold GBP/CHF from . Stopped out at a loss of
%.
Paul Meggyesi AC
(44-207) 134-2714
. Morgan Securities plc
Meera Chandan AC
(44-207) 134-2924
. Morgan Securities plc
Patrick Locke AC
(212) 834-4254
. Morgan Securities plc
Stopped out on NZD/CHF and NZD/JPY
shorts
We have been advocating NZD shorts since the end of July in
anticipation of significantly more aggressive monetary easing
from the RBNZ. This ultimately performed well leading into,
and in the immediate aftermath of, the August MPR meeting.
And while foreign asset purchases were ultimately relegated,
communication from Governor Orr this week was fairly
explicit regarding moving towards negative rates and is
generally advocating a “least regrets” approach to
policymaking. Accordingly, we now expect a cut at either the
November or February meetings, and 1y1y swaps have
accordingly moved negative. Of course, this did not preclude
our shorts from being stopped out given that the reflationary
momentum through the month of August was substantial, and
the move higher in longer-end yields likely helped catalyzed
some NZD capital inflows, as is historically the case. Yet
should the pro-growth and reflationary mood temper in
coming weeks, we would expect NZD to underperform as
markets once again shift their focus back to the RBNZ’s
aggressive policy and the attendant complications for negative
rates in a current external deficit economy. See also B
Jarman, The Antipodean Strategist, 3 Sept.
Sold NZD vs CHF. Stopped out at a loss of %.
Sold NZD vs JPY. Stopped out at a loss of %.
Paul Meggyesi AC
(44-207) 134-2714
. Morgan Securities plc
Meera Chandan AC
(44-207) 134-2924
. Morgan Securities plc
Patrick Locke AC
(212) 834-4254
. Morgan Securities plc
Continue to hold [ lower EURUSD & higher
SX5E ] 4-month dual digital option
Back in Aug we recommended positioning for EUR
vulnerability via FX-equity dual digitals structured as a low
cost high leverage EUR downside play in the EUR-SX5E
decorrelation direction. While equity markets have started
experiencing some turbulence last week we think that the
trade remains supported by weakening of the EUR drivers
and an extreme length of the EUR positioning. Consequently,
we continue to hold our aged Dec 18th expiry [EUR/USD <
(3% OTMS) | SX5E > 3495 (7% OTMS) ] that is
MTM at % vs the Aug 5 10% entry level.
Ladislav Jankovic AC
(1-212) 834-9618
. Morgan Securities LLC
Arindam Sandilya AC
(65) 6882-7759
JPMorgan Chase Bank, ., Singapore Branch
Lorenzo Ravagli AC
(44-20) 7742-7947
. Morgan Securities plc
Commodities Trading Themes
Stay long the CBOT Corn Dec ‘20 370 call
We remain bullish CBOT Corn amid improving domestic US
and export demand, while supply side risks are heavily
discounted in our view. The US summer of 2020 is forecast
to be the fourth warmest since 1950, and the market is
currently pricing perfection, and record high yields. While in
Brazil, safrinha corn yields have been disparate and with
already historically tight stocks, exports will likely be
constrained. International corn prices are on the rise, while
US futures have de-coupled lower. Investor positioning is still
historically short, even despite significant short covering over
the last month.
Went long the CBOT Corn Dec ’20 370 USc/bu call for a
cost of USc/bu or % of the underlying on 30 June,
trade marked at 0 USc/bu on 9 September.
Tracey Allen AC
(44-207) 134-6732
. Morgan Securities plc
Stay long the ICE #11 Sugar October ’20
– 16 USc/lb call spread, short the
USc/lb put
ICE #11 Sugar, like all biofuel feedstocks was hit with the
double whammy of the COVID-19 recession and historic
collapse in gasoline demand. However, oil and sugar prices
are recovering off historic April lows, as demand resurfaces,
and the aggressive global growth recovery projected through
2H20 is compelling, with quarterly projections of +31%
QOQ SAAR in 3Q20 and +7% QOQ SAAR in 4Q20 (see
The way you made it, that’s the way it will be, Kasman et al,
31 Jul). While gasoline demand will take some time to return
to pre-COVID levels, ethanol prices in Brazil are close to
record seasonal highs in local terms – mitigating downside
risks to ICE #11 Sugar prices. Import demand has also
surfaced from Indonesia and China earlier in the season than
expected, which should alleviate the pressure rising Brazilian
raw sugar stocks around the expiry of the October contract.
From a fundamental point of view, the 2020/21 world sugar
balance remains in a modest surplus, around million
tonnes (see Agricultural Markets Quarterly: Demand is in the
driver’s seat as weather risks loom, Allen & Aggarwal, 20
August). However, ENSO appears to be transitioning from
neutral to La Nina, which typically brings dry conditions to
southern Brazil into year end and above-average rainfall
across much of South East Asia during the early stages of the
cane harvest. This should be monitored closely and may
constrain expected production through the remainder of 2020,
potentially reducing the extent of the surplus balance.
Went long ICE #11 Sugar October ’20 – 16 USc/lb
call spread, short the USc/lb put, on 24 January for
a cost of USc/lb or % of the underlying (
USc/lb). Trade is marked at a loss of USc/lb or -
% of the underlying on 9 September.
Tracey Allen AC
(44-207) 134-6732
. Morgan Securities plc
Stay long the agri commodity complex
(First published in Trade Ideas for Long Term Investors,
Panigirtzoglou et al, 18 October 2017).
The agri commodity complex has been roiled by oil price
weakness and demand destruction during the COVID-19
epidemic, and associated slump in biofuel demand. However,
it has become clear that the fall in global economic growth
through Q3, while still immense, was not as massive as our
economists first thought. Accordingly, our 1H global oil
balance has tightened, as actuals show demand was firmer
than expected over the last few months (see Oil Markets
Tracker: 1H balance tightens further, Kaneva et al, 1 July).
The . Morgan Agriculture Ex-Front Excess Return Index
has jumped near 8% over the month and now surpasses 2019
levels on surging demand from China, and weather related
production risks in the US and Latam. Agricultural market
inflows have been steadily rising over recent weeks and we
look for more to come, as biofuel and commercial food
demand continues to recover. The rapid and aggressive
recovery projected for global growth in 2H20 is compelling
for a rebound in agri demand, with quarterly global growth
projections of +% QOQ SAAR in 3Q20 and +% QOQ
SAAR in 4Q20 (see Global Data Watch, Kasman et al, 4
September). Agri commodity markets have embedded
significant discounts relative to underlying fundamentals,
which continue to show tightening grain and oilseed
balances. Meanwhile, China is showing clear signs of a V-
shaped economic recovery and the prospect of higher
purchases of US agricultural commodities under the Phase
One US-China Trade Deal, should not be discounted. (See
China: 2Q GDP beat expectations, growing %oya;
economic recovery pace to normalize in 2H, Zhu et al, 16
July).
We look for agri commodity prices to recover through the
second half and stay long the agri commodities complex via
an index (such as the BCOM Ag Index or . Morgan
JPMCCI Ex-Front Month Agriculture Excess Return Index)
which provides exposure to the broad agricultural commodity
complex and offers diversification to the idiosyncratic moves
within underlying agricultural markets. Investors with a
short-to-medium time horizon may prefer an index with
prompt exposure such as the BCOM Ag Index or . Morgan
JPMCCI Agriculture Price Index.
Went long the agri commodity complex via a proxy index,
. Morgan JPMCCI Ex-Front Excess Return Index at
points on 18 October 2017. Trade is marked to
market at a loss of – points or -18% on 9 September
Figure 9: The JPMCCI Ex-Front Month Agriculture Excess
Return Index has have surged 8% over the month, and now
exceeds 2019 levels. We see a continuation of the recovery
ahead as China’s demand is surging and weather risks loom
. Morgan JPMCCI Ex-Front Month Agriculture Excess Return Index
Source: Bloomberg, . Morgan Commodities Research
Tracey Allen AC
(44-207) 134-6732
. Morgan Securities plc
APPENDIX:
Forecasts & Strategy
Rates Current Sep-20 Dec-20 Mar-21 Jun-21 Credit Current Dec-20
US (Fed funds)
US High Grade (bp over JPM JULI 168 150UST)
10-year yields Euro High Grade (bp over iBoxx HG 125 120Bunds)
Euro area (Refi) US High Yield (bp vs. JPM HY 584 600UST)
10-year yields US Lev Loans (bp vs. 3Y JPM Lev Loans 557 600Index)Italy - Germany 10Y
(bp) 147 150 130 120 120 Euro High Yield (bp over iBoxx HY 453 430Bunds)Spain - Germany 10Y 79 70 60 60 60(bp) EM Sovereigns (bp vs. JPM EMBIGD 416 450UST)United Kingdom
(repo)
10-year yields
Japan (overnight call rate)
EM Corporates (bp vs. JPM CEMBI 327 325
UST)
Equities Current Dec-20
S&P 500 3,399 3,400
10-year yields MSCI Europe 1,503 1,370
MSCI Eurozone 210 185EM Local (GBI-EM
yield)
FTSE 100 5,975 5,920
Currencies Current Sep-20 Dec-20 Mar-21 Jun-21
TOPIX 1,625 1,650
JPM USD Index 123 124 124 124 125 MSCI EM ($) 1,086 1,000
EUR/USD MSCI China 96 92
USD/JPY 106 105 104 103 102 MSCI Korea 734 750
MSCI Taiwan 500 415GBP/USD
MSCI India 1,325 1,460
AUD/USD
Brazil (Ibovespa) 101,292 104,000
USD/CNY Mexico (MEXBOL) 36,158 41,000
USD/KRW 1185 1185 1180 1180 1180 MSCI South Africa 1,296 1,510
USD/MXN
USD/BRL Equity sector recommendations & year-to-date returns
USD/TRY US Europe Japan EM
Energy -42% OW -42% N -26% OW - N
23%
Materials 7% OW -1% N -4% OW -1% OW
USD/ZAR
Commodities Current Sep-20 Dec-20 Mar-21 Jun-21
Brent ($/bbl, qtr avg.) 40 41 41 43 45 Industrials -2% OW -6% N -6% OW - UW
11%
WTI ($/bbl, qtr avg.) 38 39 40 41 43
Discretionary 32% N -11% UW -6% N 22% OW
Gold ($/oz, qtr avg.) 1,947 1,933 1,880 1,815 1,790
Staples 5% UW -4% OW -7% UW -4% UW
Copper ($/ton, qtr 6,752 6,425 6,400 6,5007,000 avg.) Healthcare 6% OW 1% OW 8% UW 29% OW
Aluminum ($/ton, qtr 1,748 1,715 1,770 1,8001,850 avg.) Financials -18% N -25% N -17% N
- UW
23%
Iron ore (US$/dt, qtr 125 112 106 110 103
avg.) Technology 29% N 6% OW -2% N 16% N
Wheat ($/bu, qtr
avg.)
Comm 12% OW -18% UW 9% UW 15% OW
Services
Soybeans ($/bu, qtr .)
Utilities -6% UW 3% OW -13% N - UW
18%
Source: . Morgan flagship weekly/monthly strategy publications.
Source: Bloomberg, Datastream, J. P. Morgan
Real Estate -6% UW -19% UW -21% N
- OW
21%
Overall % % % %
Global Economic Outlook Summary
Real GDP
% over a year ago
Real GDP
% over previo us perio d, saar
Consumer prices
% over a year ago
2019 2020 2021 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 4Q19 2Q20 4Q20 2Q21
Canada
Argentina
Brazil
Chile
Ecuador
Mex ico
Peru
Venezuela … … … … … … .. .. ..
EM Asia
Hong Kong
Indonesia
Korea
Malay sia
Philippines
Singapore
Taiw an
Thailand
Western Europe
Euro area
Germany
France
Italy
Spain
United Kingdom
EMEA EM
Czech Republic
Hungary
Israel
Poland
Romania
Russia
South Africa
Turkey
Global
Dev eloped markets
Emerging markets
Source: . Morgan
Asia/Pacifi
c
Japan
-
New
Zealand
-
India
Ex
China/India
China
Norw
ay Sw
eden
Colombia
Latin America
United States
Central Bank Policy Rate Watch
Official
Curre
nt
4-qrtr change
(bp)
Last
change
Next
meeting
Forecas
t
Forecast (%pa)
rate rate (%pa) Last Nex t next change Sep 20 Dec 20 Mar 21 Jun 21 Sep 21
Global -127 -10
ex cluding US -87 -13
Dev eloped -119 0
Emerging -148 -24
Latin America -342 -33
EMEA EM -366 -11
EM Asia -68 -26
The Americas -218 -5
United States Fed funds -200 0 15 Mar 20 (-
100bp)
16 Sep 20 On hold
Canada O/N rate -150 0 27 Mar 20 (-50bp) 9 Sep 20 On hold
Brazil SELIC O/N -400 0 5 Aug 20 (-25bp) 16 Sep 20 On hold
Mex ico Repo rate -354 -100 13 Aug 20 (-50bp) 24 Sep 20 Sep 20 (-50bp)
Chile Disc rate -150 0 31 Mar 20 (-50bp) 15 Oct 20 On hold
Colombia Repo rate -225 -25 31 Aug 20 (-25bp) 25 Sep 20 25 Sep 20 (-
25bp)
Peru Reference -225 0 9 Apr 20 (-100bp) 10 Sep 20 On hold
Europe/Africa -106 -2
Euro area Depo rate -10 0 12 Sep 19 (-10bp) 10 Sep 20 On hold
United
Kingdom
Bank rate -65 0 19 Mar 20 (-15bp) 17 Sep 20 On hold
Norw ay Dep rate -125 0 7 May 20 (-25bp) 24 Sep 20 On hold
Sw eden Repo rate 25 0 19 Dec 19 (+25bp) 22 Sep 20 On hold
Czech
Republic
2-w k repo -175 -20 7 May 20 (-75bp) 23 Sep 20 4 Feb 21 (-20bp)
Hungary 3-m dep -30 -10 21 Jul 20 (-15bp) 22 Sep 20 15 Dec 20 (-
10bp)
Israel Base rate -15 0 6 Apr 20 (-15bp) 22 Oct 20 On hold
Poland 7-day interv -140 0 28 May 20 (-40bp) 9 Sep 20 On hold
Romania Base rate -100 -50 5 Aug 20 (-25bp) - 5 Oct 20 (-25bp)
Russia Repo rate -275 -75 24 Jul 20 (-25bp) 18 Sep 20 Sep 20 (-25bp)
South Africa Repo rate -300 0 23 Jul 20 (-25bp) 17 Sep 20 Nov 21 (+25bp)
Turkey 1-w k repo -1150 125 21 May 20 (-50bp) 24 Sep 20 Jan 21 (+50bp)
Asia/Pacific -57 -20
Australia Cash rate -75 0 19 Mar 20 (-25bp) 6 Oct 20 On hold
New Zealand Cash rate -75 -25 15 Mar 20 (-75bp) 23 Sep 20 Nov 20 (-25bp)
Japan O/N call rat -5 0 28 Jan 16 (-20bp) 16 Sep 20 On hold
Hong Kong Disc. w ndw -200 0 3 Mar 20 (-50bp) - On hold
China 1-y r MLF -35 -30 15 Apr 20 (-20bp) - 4Q 20 (-10bp)
Korea Base rate -100 -25 28 May 20 (-25bp) 14 Oct 20 1Q 21 (-25bp)
Indonesia BI RRR -150 -25 16 Jul 20 (-25bp) 17 Sep 20 17 Sep 20 (-
25bp)
India Repo rate -140 -25 22 May 20 (-40bp) 1 Oct 20 Dec 20 (-25bp)
Malay sia O/N rate -125 0 7 Jul 20 (-25bp) 10 Sep 20 On hold
Philippines Rev repo -200 0 25 Jun 20 (-50bp) 1 Oct 20 On hold
Thailand 1-day repo -100 0 20 May 20 (-25bp) 23 Sep 20 On hold
Taiw an Official
disc.
-25 0 19 Mar 20 (-25bp) 17 Sep 20 On hold
Source: . Morgan. 1BoJ targets ¥80tn/year expansion in monetary base and sets the IOER (O/N) as policy
guidance. Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting
during upcoming week.
Aggregates are GDP-weighted averages. 2The BI rate for Indonesia reflects announced recalibration effective August 19, 2016.
3 The Philippines introduced a recalibrated reverse repo rate effective June 3 at a level of %.
Rather than the refi rate, we now display the 1-wk dep rate, which better represents CBR policy stance and is closer to interbank market rates.
Global Rates Forecast
09-Sep* Sep-20 Dec-20 Mar-21 Jun-21 YTD chg. (bp) 09-Sep* Sep-20 Dec-20 Mar-21 Jun-
21 YTD chg. (bp) US Fed funds -150
3M Libor -166
2Y bmk yield -142
5Y bmk yield -140 5Y bmk yield -65
10Y bmk yield -121
30Y bmk yield -93
2s/10s bmk curve 56 60 60 65 70 21
10s/30s bmk curve 75 80 80 85 85 28
2s/30s bmk curve 131 140 140 150 155 49
2Y swap spread 9 10 10 -------------------------------------3
5Y swap spread 6 5 5 - - 3
Euro area Refi rate -
Depo rate -
3M Euribor -11
* Lev els as of 5pm London time.
Source: . Morgan
UK Base rate -65
3M Libor -73
2Y bmk yield -60
10Y bmk yield -58
30Y bmk yield -53
2s/10s bmk curve 31 30 35 35 35 2
10s/30s bmk curve 56 45 45 40 35 4
2s/30s bmk curve 87 75 80 75 70 7
2Y swap spread 0 27 30 35 35 -26
5Y swap spread 0 30 30 25 25 -26
10Y swap spread 0 22 25 22 20 -19
30Y swap spread 0 -18 -20 -20 -25 23
Japan Policy rate -
10Y yield target -
2Y bmk yield -2
5Y bmk yield 0
10Y bmk yield 4
20Y bmk yield 11
30Y bmk yield 12
2s/10s bmk curve 16 15 15 20 20 5
10s/30s bmk curve 53 60 60 60 60 9
2s/30s bmk curve 69 75 75 80 80 14
Australia Cash rate -50
3Y bmk yield -61
10Y bmk yield -32
New
Zealand
Cash rate -75
2Y bmk yield -107
10Y bmk yield -111
Sweden Repo rate -
2-year govt -4
10-year govt -23
Norway Depo rate -75
2-year govt -109
10-year govt -89
2Y bmk yield -9
5Y bmk yield -20
10Y bmk yield -28
30Y bmk yield -36
2s/10s bmk curve 24 25 35 40 50 -19
10s/30s bmk
curve
45 50 50 50 45 -8
2s/30s bmk curve 69 75 85 90 95 -27
2Y swap spread 23 34 34 32 32 -11
5Y swap spread 27 30 30 28 28 -9
10Y swap spread 27 24 22 20 20 -11
30Y swap spread 7 4 4 2 2 -22
10Y spread Austria 19 25 20 20 20 -4
to
Germany
Belgium 27 30 25 25 25 -1
(curve
adj.)
Finland 18 25 20 20 20 -5
France 29 30 25 25 25 0
Greece 167 160 140 130 130 -2
Ireland 36 40 40 35 35 3
Italy 158 150 130 120 120 -1
Netherlands 12 15 10 10 10 -2
Portugal 85 75 65 65 65 21
Spain 81 70 60 60 60 17
Wtd. peri. spread 128 117 102 95 95 5
FX Forecasts vs. Forwards & Consensus
Current JPM forecast gain/loss vs June 21* Actual change in local FX vs USD
Majors 8-Sep Sep 20 Dec 20 Mar 21 Jun 21 Spot Forwards Consensus** Past 1mo Past 3mo YTD Past
12mos
EUR % % % % % % %
JPY 106 105 104 103 102 % % % % % % %
GBP % % % % % % %
AUD % % % % % % %
CAD % % % % % % %
NZD % % % % % % %
JPM
USD
inde
x
% % % % % % %
DXY % % % % % % %
Europe, Middle East & Africa
CHF % % % % % % %
ILS % % % % % % %
SEK % % % % % % %
NOK % % % % % % %
CZK 22.
