Markets Research

Overview

Our investment strategists absorb our teams’ political and economic views and forecasts. Then, using a market lens, they provide our clients with advice on asset allocation, investment positioning and portfolio risk management.

At TS Lombard, we are in the advantageous position of having a wealth of global economic and political analysis at our disposal. Through the judicious interpretation of this knowledge, and rigorous market analysis, we provide clients with high-conviction advice on the best course of action to take in order to capitalise on opportunities and avoid risks.

We provide actionable asset allocation advice (3-6 month horizon) expressed in absolute terms and relative tems in model portfolios. We also provide tactical trade ideas (6-8 week horizon).

Our Markets Research Methodology

Timing is key, and our focus is to determine the optimal moment to increase or reduce exposure to a specific asset class or make a tactical trade. We take pride in presenting our clients with resolute ideas based on their specific needs, giving them an opportunity to make adjustments to their portfolios with greater confidence. In many cases, we act as a ‘sounding board’ or a ‘second opinion’ to help you see how interdependencies and interconnections will have an impact on your decision-making.

 

Our proprietary strategy models can help you identify where the value is in the market with a greater degree of certainty. And our agnostic approach to asset classes allows us to give you the best value recommendations – whether that’s cross-asset, multi-asset or within asset classes.

Using detailed economic and political risk analysis as the building blocks of our forecasting, our team of expert strategists assess market positioning and technical signals and then formulate asset and investment recommendations based on the most likely outcomes.

Services

Asset Allocation

Combines global macroeconomic views and market strategy to give investment recommendations within and across the main asset classes – with a 3 to 6 month investment time horizon. Views expressed as both absolute calls and relative allocations in our model portfolio. Contains proprietary ValuQEST equity model.  (Monthly)

Macro Strategy

Global tactical trade ideas to play key macro themes or exploit relative value opportunities – with a 6 – 9 week investment horizon. (Weekly on Wednesday)

Strategy Chartbook

Highlights important market drivers and summarises our key investment conclusions across all the major asset classes. (Monthly)

EM Strategy Monthly

Flagship overview essay of EMs, relative asset allocation views for each asset class; our high-conviction total return views, heat map presentations of our FX and fixed income market views, as well as an accessible one-page summary for each of the 10 EM countries we cover. (First week of each month)

Quant Strategies

We have developed 10 quantitative signals that provide reliable short-term market calls for investors. Each strategy uses and places heavy weighting on data sets and other technical inputs selected by our macro economic team. These have been overlaid with other quant data and market timing data. The out of sample performance over 5 years has consistently generated alpha. The strategies rebalance once per week or month as appropriate. 

They are:

  • US Equity Sectors
  • Europe Equity Sectors
  • DM Country Selection
  • EM Equity Sectors
  • Government Bond Futures
  • VIX Arbitrage
  • VIX Directional
  • Commodity Selection
  • FX Selection
  • Dynamic Futures Asset Allocation

Research Partners

At TS Lombard Research Partners we partner with experienced market-facing analysts to bring our clients a wider range of independent research services in a highly innovative way.

The changes to the industry’s research business model prompted by the adoption of the MiFID II directive have meant that many well-established analysts are questioning the future direction of their careers.  At the same time, investment managers are just as hungry for sources of alpha generation, and are starting to look at non-traditional sources of insight.

We have therefore created a distribution and compliance platform for experienced, independently-minded analysts.  TS Lombard was ranked in the top three independent research firms globally in our field in the most recent Extel Survey.

Asia Property

Our Asia Property service analyses developments in the sector, with an emphasis on the largest most liquid stocks and provides actionable single stock recommendations and calls on the value of specific REITS and property companies.

Coverage is by Andrew Lawrence from our Hong Kong office.  Andrew joined us as a Research Partner in 2017 and combines 21 years’ experience in Asian real estate at banks such as Kleinwort Benson, Deutsche Bank and Barclays with direct investment experience, investing across the capital structure of both public and private real estate companies for hedge funds, as well as consulting experience in the real estate business.

His research has been top rated in industry surveys and consistently valued by many international investment institutions. Prior to moving to Asia 21 years ago, Andrew was head of property strategy for a major UK PLC and spent seven years in real estate advisory. He founded Oculus Research Asia in 2015 as an independent research service committed to providing original and insightful research focused on the Asian real estate sector.

We believe his partnership with us will generate fresh investment ideas and create outperformance.

All research from our partners will offer the same high standards that underpin our macroeconomic and strategy work.  Research partners interact with our in house team to exchange ideas. Through this macro analysis and micro sector expertise come together.  

We initiated our Research Partners service in 2016/17 with New Energy and Asian Property – two sectors that link directly to our existing expertise in the macroeconomic and policy arenas.  Kingsmill Bond and Andrew Lawrence are well-established analysts with extensive experience in their sectors and strong relationships with investment managers globally.

As other high-quality, experienced analysts leave major sell-side institutions, we will expand the sectors under coverage and will be actively engaged with clients about meeting their needs for high-quality, insightful research.

New Energy

The New Energy revolution has dramatic implications across energy, emerging markets and indeed all asset classes.  Our New Energy service provides a detailed focus on the investment consequences of this transformative revolution, which is driven increasingly by China and India.

Kingsmill Bond joined TS Lombard as our first Research Partner in 2016. He was ranked number one for strategy in European emerging markets and then in Russia by Extel and Institutional Investor for a number of years, most recently in 2015.  Across the New Energy sectors, he specializes in solar, wind, batteries, electric vehicles and energy efficiency. He also analyses the implications of the revolution for old sectors such as oil, gas and coal, as well as for transition sectors such as electricity, automotive, infrastructure and machinery.

Kingsmill is an experienced emerging market analyst, with a particular focus on Russia and energy. He has worked across a wide range of markets in EMEA, Asia and Latin America for Deutsche Bank, Citi and Troika and in a variety of sectors including strategy, technology and consumer. He studied history at Cambridge University, trained as an accountant and is a CFA charter holder.

Markets Research

Markets
05 Mar 2019

Strategy Chartbook: March 2019 Chartbook

  • Macro Drivers. Negative trade growth and inventory overhang spells further growth slowdown
  • Multi Asset. Low volatility may not last too long, especially in rates, credit and EM equities
  • Fixed Income. Foreigners sold $90bn of US govt bonds in Q4, the highest pace of sales since 2016
  • Currencies. USD is rich and the market is long, but it is more likely to drift lower than collapse
  • Equities. The VIX below 15 hints at new highs for US equities, but a consolidation phase is still likely
  • Commodities. Tailwinds for crude – demand dominance, financial markets recovery – are fading

 

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Markets
01 Mar 2019

EM Strategy Monthly: China is driving aggregate EM indices: investors beware!

  • Risk: We maintain our neutral call on EM risk: easing by the Fed and PBoC is positive but we sense global growth is slowing and deflation risks are rising.
  • Brazil: We cut our call on equities to negative as we expect markets to be stuck in limbo until progress is made on pension reform.
  • China: We maintain our negative call as we expect markets to correct in the next two-three months.
  • Russia: We maintain our positive call on equities as we believe local markets are relatively immune from new sanctions.
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Markets
27 Feb 2019

Macro Strategy: Running the bulls

  • Capital flows stabilise CNY and, by extension, risky FX
  • Weakest data sequence in US since ‘11 supports the “Powell put” and the “end of deleveraging” supports China QE: good news for risk short term
  • We add carry through short EUR/TRY; take some profit on GBP/USD, close BRL/CNY and close USD/KRW
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Markets
15 Feb 2019

Asset Allocation: Adrenaline shot

  • Synchronised central bank easing gives adrenaline shot to ailing cycle
  • QT taper will struggle to steepen US curve, a rate cut may be needed
  • Market rally fragile, as not supported by flows, with vol still high
  • China ‘QE’ sparks some credit growth but the stimulus will disappoint
  • DMs stocks face risks but earnings not collapsing – we stay 3% o/w
  • EM long trade starting to look tired, we cut 5% between stocks and bonds
  • Another TLTRO round should support BTPs and BONOs
  • We stay u/w bonds, o/w cash as we prefer short duration in fixed income
  • USD longs large but narrow, 2019 performance will depend on crosses
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Track Record

Markets
13 Jul 2018

2018: TRY to fall further and faster

We said:

Turkey approaching a hard landing. Turkish inflation is currently running above 15%, a 15-year high, and the effective bank rate is 20.75%. Despite this positive real rate of more than 5 percentage points, the currency continues to weaken and the current account deficit continues to widen. Fundamentally, since the GFC Turkish corporates have become too reliant on overseas funding, which was a lot cheaper than borrowing at home. The overhang of FX debt means there is a persistent domestic bid for USD to cover debt-servicing costs.

Erdogan has appointed his son-in-law as the new economy minister and has effectively ended the central bank’s independence by scrapping the minimum term for its governor and claiming the exclusive power to appoint central bank policymakers. As such, Erdogan, who is on record as saying high interest rates are the cause of high inflation, is likely to exercise more influence on monetary policy. His election victory is unlikely to lead to a more orthodox economic policy in Turkey.

Hard currency debt means further TRY weakness. From a valuation and carry perspective, TRY looks attractive. It is one of the cheapest currencies in the world and offers carry gains of 18% a year. Bouts of currency weakness may be interspersed with periods of consolidation as speculative investors attempt to pick up a few percentage points of carry. But the lira’s weakness is now being driven by domestic corporates. Bloomberg puts the foreign asset/liability mismatch at $221bn at the end of April; non-financial FX debt is more than twice Turkey’s FX reserves. We downgrade TRY from 0 to -1.

Outcome:

Our Asset Allocation calls have a 3-6 month time horizon. TRY/USD was at 0.21 when we published this piece and fell 29% to a low of 0.15 on 3 September 2018. A huge rate hike of 625bps to 2400bps on 13 September 2018 has so far only stabilised the TRY/USD at 0.17. 

Markets
04 Jul 2018

2018: Short DAX vs CAC

We said:

We are not bearish on the euro area economy overall. Growth is slowing, but from well above trend to slightly above trend. We see US tariffs and Brexit as rising risks to the auto sector, and we judge the German stock market to be the most exposed in such circumstances. The French stock market has a similar sectoral composition to Germany, but its consumer discretionary sector is not dominated by autos. In addition, it has a beta to the DAX around 1. By selling the DAX and buying the CAC we attempt to isolate the risk of tariffs without taking a negative view on the broader economy. 

Outcome:

Trade closed on 15 August 2018 for a quick profit of 1%. Since the Trump-Juncker meeting in July 2018 the threat of US tariffs on European autos had diminished. 

Markets
09 May 2018

2018: Go long US consumer, we buy ETF XLY

We said:

There is no soft patch in the US. The OECD indicator is slowing, but this masks divergence on a country-by-country basis. The US indicator has just made a two-year high and is firmly in the 'expansion' quadrant. It matches our US economist Steve Blitz's view of the US expansion. The 'soft patch' is temporary and not global. Logically, therefore we should regard the current retreat in risk as a buying opportunity. Employment is improving, particularly in higher-wage industries. Wage growth also looks set to continue rising. Tax cuts and fiscal stimulus are doing their job. We reckon easing fiscal policy at this stage of the cycle is imprudent, but it is what it is. The experiment of running the US economy hot is beginning to show results. It looks like the next stage of the US expansion will be driven by personal and business capex. Households are feeling more confident. 

Consumer discretionary (CD) stocks should perform well in this environment. We buy the XLY ETF, which tracks the consumer discretionary sector, at $104.10 with a stop at $99.50 and target of $115. The sector includes Amazon, whose p/e ratio of 68x forward earnings distorts the sector’s overall valuation. But given Amazon’s global reach, rising market share and policy of investing profits in capex, one can justify a sky-high price: the p/e ratio is not an appropriate measure of value for the stock. Valuations in the rest of the sector are a reasonable 16x forward p/e (compared to 20x for the S&P500 index), and buybacks – running at $22bn/quarter in this sector and $60bn/quarter in the S&P500 as a whole – should continue to support prices.

Outcome:

By 23 May 2018 the trade had made 0.8%. We raised the stop-loss to $102.90 to add some protection. 
By 6 June 2018 the trade had made 4%. We raised the stop-loss to $104.75 to lock in some of the profit. 
By 13 June 2018 the trade had made 6.3%. We raised the stop-loss to $106.5, locking in 2.5% profit to date. 
By 20 June 2018 the trade had made 7.4%. We raised the stop-loss to $109 to lock in more profit. 
On 27 June 2018 we closed the trade for a total gain of 4.7%. Over the same period a long SPX position would have delivered zero return. 

Markets
17 Oct 2018

2018: Buy BRL/MXN on Bolsonaro bounce

We said:

BRL has been beaten down by political risk. We expect a Bolsonaro relief rally to support Brazilian but the FX market continues to hedge against a big fall in the real. The 25 delta risk-reversal/at the money ratio is two standard deviations above its long-term average, a sign that investors remain long USD/BRL. Instead, we reckon there is time and space for the ratio to fall and the currency to rally. 

In the LSR View “The bull case for Bolsonaro”, we lay out the three main pillars of a bullish outlook: the outsourcing of economic policy to his economic advisers; the formation of a supportive coalition to enable passage of legislation; and the appointment of experienced political operators to push reforms through Congress. It is still early days – the second round vote still needs to be won – but optimism over the outlook for Brazil should spur a rally for the next few months.

Seasonally, BRL tends to weaken in November, particularly against USD. While we reckon there is room for USD/BRL to fall, we prefer to buy BRL/MXN at 5.06 with a stop at 4.93 and target of 5.30. BRL/MXN is less subject to weak BRL seasonality in November.

Outcome:

Trade gained almost 4% in one week as BRL rocketed. Ahead of the second round election we chose to be prudent and cashed-out at 5.25 for a profit of 3.6%. 

Markets
29 Aug 2018

2017: 6 reasons for USD to rally into year-end

Consensus said:

Market pricing was extremely short USD against 6 major currencies. 

We said:

Since hitting a 14-year-high back in January the dollar has traded on the back foot. Most of its depreciation has been against DM currencies, primarily the EUR which has gained 14% so far this year. Because of geopolitical risks the dollar looks set to decline in August for the sixth consecutive month. But we think there are at least six reasons why the risk for the dollar is skewed to the upside heading into Q4.

1 Policy rate expectations. Market expectations for policy rate hikes over the next two years discount more increases from Canada and Australia than from the US. But we think the probability of a 25bp Fed rate rise in December is 80%, not less than 25% as the market currently discounts. That would leave traders anticipating less than one more hike in the subsequent 15 months, which we judge to be far too dovish considering inflation is effectively on target and the market is forecasting GDP growth above 2%.

2 FX valuation. Thanks to prior Fed policy tightening the dollar has been rich for the last few years; thanks to ECB policy easing the euro has been cheap. This is changing. Valuation can provide only a moderate headwind or tailwind at the best of times, but now the tailwind for the euro is fast turning into a headwind. On a different valuation assessment – the IMF’s FEER methodology – the euro is now 3.5% above fair value. Euro appreciation (and therefore dollar index depreciation) is no longer a foregone conclusion. 

3 Balance of payments dynamics. As the euro strengthens so the euro area’s current account surplus declines. By contrast, the US’s balance of payments is driven by fundamental change and is less sensitive to currency strength. After running an energy trade deficit for most of this century, the US has an energy trade balance close to zero. Despite the dollar’s strength in the last few years net exports have halved from -6% of GDP in 2005 to -3% of GDP now. The US will continue to exploit its strong energy export position while a more traditional currency/trade dynamic is likely to stay the euro’s hand, once again supporting the dollar.

4 Data divergence. In our view global growth is pulled along by three locomotives – the US, China and Germany. The lead changes amongst the three. In the last few months Germany has been ahead, as strong survey data and last week’s GDP report confirmed. But market pricing compares outcomes to expectations. In that regard the US has begun picking up again. Economic data have, on average, beaten expectations in the last couple of months after a soft patch in H1. Meanwhile the Li Keqiang (LKQ) indicator for China peaked in February and suggests a pause in growth, in line with our post-Congress view. This divergence should lead to a repricing of monpol expectations and support for the dollar. 

5 FX positioning. Total short-dollar CFTC IMM positioning is close to a record high. Although stretched positioning is not necessarily a sufficient condition for a reversal, it is a necessary one. Investors are particularly short dollars against the euro, the Swiss franc, Mexican peso, New Zealand dollar and Canadian dollar.

6 Seasonality. Seasonal strength in Q4 has seen the dollar rally by 2% on average over the last 10 years. Although the hit rate is only 50% (in half the years it has fallen into year-end), the skew is positive with rallies twice as big as sell-offs. The balance of risk on seasonality is towards a dollar rally.

 

Outcome:

DXY index rises from 92.81 at time of publication to peak at 94.39 on 29 October. We also expressed this view through a USD/CAD call spread. 

Markets
01 Aug 2018

2018: Liquidity getting tighter, short EM stocks vs. DM stocks

We said:

USD liquidity pressures have eased over the last few months. Financial conditions have stopped tightening, providing some respite for stocks. But somebody forgot to tell EMs: countries with low resilience scores (i.e. large current account deficits and low FX reserves) continue to see outflows. But now liquidity pressures are set to rise again, and financial conditions are at risk of tightening.

EM assets remain vulnerable. In recent weeks, the threat of trade wars has hogged the headlines. But liquidity strains are likely to come to the fore again. Externally vulnerable EM countries (see our recent Global Financial Trends and Daily Note on EM FX reserves) are likely to suffer further losses due to both liquidity and trade risks. We retain our strongly negative stance on EM risk in EM Strategy Monthly, as trade frictions remain intense and Chinese growth is still slowing. This week we add a relative value short MSCI EM / long MSCI DM position to the model portfolio.
 

Outcome:

By 10 October 2018 the trade had made 8% as markets woke up to the reality and effects of trade war and tighter liquidity conditions. We  believed the theme had further to run but introduced a stop-loss to lock in 4% profit. Trade closed off on 21 November 2018 for a profit of 4%. 

Our Team

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ECONOMICS

Through our analysis of the forces that drive economics at the global, regional and country level, we have a joined-up picture of the world economy and a deeper understanding of the countries that investors care about. This gives us a unique perspective that allows us to present courageous, fresh, long-term thinking and forecasting with high conviction.

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POLITICS

With political drivers and government policy playing an increasingly significant role in determining economic and market outcomes, our world-wide team of political analysts are able to provide critical, timely insights into political shocks and policy developments that will influence investment performance – both regionally and globally.

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