At TS Lombard, we provide deep and early insight in order to help our investment management clients better assess macro economic and political drivers of the global economy and major asset classes. Unlike many other independent research firms, we look at both the economic and political landscape before giving you our recommendations based on the bigger picture – in a concise, clear and complete fashion.
We said: “RMB bias to appreciate: China’s growth prospects remain on track, while the renminbi has held up well this year compared with most other currencies. At the same time, the PBoC has turned to more cautious easing, while the government uses fiscal policy to boost activity and fight deflation. Domestic fundamentals therefore remain supportive for the currency.” Outcome: See Chart - RMB Exchange Rates
We Said: The inflation lessons of the expansion and demands to be responsive to minority employment mean the Fed’s new framework is employment first, and foremost. In the coming cycle, they will simply let employment run until inflation starts to rise. They give themselves the right to do this because the 2% ceiling is now a long-term average, and there have been many years with inflation under 2%. In the meantime, the essential promise of this policy is that the Fed is going to stay out of the way once the growth cycle takes hold. (US Watch, July 30). Outcome: The above policy was officially announced by Powell at Jackson Hole a month later.
We said: (EM Watch, 15 June) The positive impact of a weak dollar on EM currencies and assets is likely to moderate, but rising liquidity and easing of lockdown restrictions will nonetheless provide a boost for markets, even as lack of preparedness for a second wave remains a significant risk. Outcome: Equity markets in China and EM ex-China continued to rally in June and July before starting to trade sideways in August.
We said: China was first-in the Covid-19 crisis and would be first out. Korea and Taiwan also stood out for the management of the pandemic, their close linkages to China, and the weight of Tech in their stock market indices. In our AA model portfolio we’ve been o/w China Equities since March, and Korea and Taiwan since May. Outcome: China equities are up 48% (in USD terms) since March; Korea and Taiwan by 34% and 31% since May, respectively – outperforming the MSCI-ex US, which rose 36% and 18% over these periods. (Performance as of 23-Oct-2020.)
We said: In April, we forecasted the economic outperformance of Korea and Taiwan based on; covid containment, electronic component-heavy exports and proximity to China and its recovery. We doubled down on our projections for East Asian economic strength in July. Ahead of the US election, we added a further structural driver to Korean and Taiwanese growth – the tech war – which promises to boost demand for Asian high end electronic components. Outcome: We went overweight Korean and Taiwanese equities in May 2020 and have been long the KRW in Macro Strategy since June. MSCI TW is the top performing index globally with MSCI KR just behind. As of 18/11/20 Our KRW trade is up 7.42%.
We said: A large negative output gap, huge labour income losses, and a sharp rise in uncertainty and precautionary savings will keep inflationary pressures subdued in the euro area for longer. Surging money and credit growth – usually considered precursors to rapid economic growth – mask fragile underlying credit trends. Outcome: Inflation has missed consensus forecasts since the pandemic. Inflation expectations for this year (according to a Bloomberg Survey) have been revised lower from 1% to 0.3%.
We said: Saudi Arabia cannot afford it, and the collapsing demand environment is completely unfit for a volume vs price strategy. The war will be over by June – i.e. replaced by renewed supply-side restraint, supporting an oil price recovery. Outcome: We were right, only too conservative on the timing: the Saudis folded five weeks later with the new OPEC+ agreement on 12 April slashing production by 25%.
We said: The Covid-19 pandemic will damage domestic demand, especially services. Countries in the EA periphery are the most exposed. Limiting the transmission of negative spill overs to firms’ cash flows and to employment is crucial to avoid more serious medium-term damage from contagion. Fiscal policy will need to be stepped up significantly. Don’t write off ECB easing: serious discussions about changing the ECB’s self-imposed limits on ECB QE should be on the cards by now. Outcome: Domestic demand collapsed, led by services, especially in tourist-dependent EA periphery. EA consensus growth forecasts for this year were revised down from 1% to -8%. EA governments strengthened or introduced income/employment support programmes and provided liquidity to firms via guaranteed loans and equity injections causing national budget deficits to widen dramatically. Few days later, the ECB launched new liquidity measures including a €750bn asset purchase programme – the PEPP – to which the traditional asset purchase constraints did not apply.
We said: In a note on the 25 March 2020, we highlighted that India could not afford the nationwide lockdown that it had implemented that day, and that there would be devastating effects for the economy. Outcome: India's GDP shrank by the largest amount among G20 countries in the April-June quarter, and continued to contract sharply in the July-September quarter. Meanwhile, the number of daily virus cases jumped to the highest in the world, and India has become the 2nd most infected country after the US.
We said: Banks would not lend into repo markets as Fed planned during periods of bank stress (US Watch, Feb 9). Outcome: Banks did not lend, precipitating huge expansion of the Fed into repo markets beginning late March.
We said: We put up a red flag going up for MENA sovereign debt. Said clients should get out of higher yield bonds, particularly Oman, flee to “blue chip” MENA sovereign credit. Why? Post-2011 political order much more insecure than it appears, so much so that new revenue raising will be impossible and costs will continue to rise. Outcome: Lebanon defaulted in March 2020, Oman was the worst performer in the region in 2020. Peripheral MENA sovereigns have generally performed poorly relative to blue-chip sovereigns.