It’s bullishness, but not as we know it.
Here’s the Nomura take on investing in a world beset by a slowing US recovery:
Since the beginning of the year we have been making a distinction between growth prospects and market risk aversion. In the past week risk aversion has taken control of the market once again. The continued data disappointments from the US have fed the sell-off as markets have continued to focus on the US economy for guidance for global growth. The mantra of the past few decades that “if the US sneezes the world gets a cold” is an oversimplification in our view, leading to missed opportunities in markets…
Bold set-up for an investment strategy, that.
It starts innocuously enough. Nomura have more faith in ‘actual activity data’ than price data at the moment. Port activity rather than commodity prices, for example, plus this:
Similarly the market seems to be focusing on the decline in forward-looking activity surveys; Nomura’s global composite PMI has fallen from 57.6 to 55.2 in the past four months. However, we would stand back from this negative change and consider the current level of PMIs. In July Nomura’s global composite PMI stabilised at 55.2 after reading 55.3 in June. Prior to the inventory-led bounce in global activity in 2010, this level had not been exceeded since 2004. During this period real global GDP growth averaged 4.5%, which is hardly a picture of economic recession.
As a consequence, Nomura appear to have ended up with some sort of long China, bull-flatten everything else strategy. As they note:
In the past two years, the size of the swings in risk-appetite and the high cross-asset correlations that have accompanied them have been unprecedented. Prior to the crisis in peripheral Europe, correlations had begun to fall as markets increasingly focused on the fundamental details and less on a single risk factor governing all markets. This phenomenon has regained prominence since the EU bailout…
Growth is diverging in ways not seen in many years (Figure 5) [see above], an event yet to be fully and fairly reflected in market pricing.
Central banks’ exits from extraordinary monetary policy are already proving not to be uniform and should continue as such, in our view. We do not expect G4 central banks to adjust policy until the end of 2010 and possibly even later. This, combined with strong fundamentals and regulatory and asset-allocation-driven demand for fixed income, will likely keep G4 government yields low and range-bound, G4 rates vol down and provide carry opportunities.
Economic and monetary activity is likely to come from Asia. The post-crisis economy has seen a widening gap between those economies and markets tied to China’s growth and those where linkages are smaller. The commodity story has been well flagged and well traded; hence, the countries benefiting from export growth to China offer greater opportunity. We see this C-bloc phenomenon as a growing theme for markets.
So, then — bull flatteners run amok in a China bloc. Catchy.
Or perhaps, well, not that catchy, considering the linchpin is continued Chinese growth — despite recent signs of a slowdown. And let’s not talk about a certain property bubble.
Perhaps not incidentally, FT Alphaville noted both Morgan Stanley and Goldman Sachs publishing wishful thinking calls for Chinese policy easing in the near term.
Here’s Morgan Stanley:
We believe the policy cycle has troughed and will likely turn growth-supportive by 4Q10. In view of these potential developments, we reiterate our policy calls: 1) no rate hike through 2H10; 2) visible softening in policy tone in 3Q10; 3) new loan target will be revised up and investment project approvals eased by early 4Q10; and 4) sustained RMB appreciation against the USD…
And Goldman:
While the Chinese administration has many policy tools from which it can choose we expect that infrastructure spending and a relaxation of credit controls will be deployed to stimulate activity. While there is speculation in various quarters that the recent swathe of infrastructure spending produced a few ‘white elephants’, we would tend to disagree. We judge the majority of last years spending to have been worthwhile and it is likely to provide a boost to potential growth given the shortfall of infrastructure spending prior to the crisis… Turning to credit growth, while there is a target for new loans of CNY7.5trn for this year, this target is rarely set in stone and a relaxation can also help to boost growth.
Related links:
Chinese economy eclipses Japan’s - FT
Saying ‘mine’s bigger than yours’ in Chinese – FTAlphaville
The end of Chimerica, the shortening of the cycles – FT Alphaville
Cracks in the Chinese bubble? – FT Alphaville