Track Record

We have a 29 year track record of successful calls. Many of these calls combined economic, political and market analysis.

Economics

12 Jun 2018

2018: RMB appreciation to be halted by authorities

We said:

The real effective exchange rate of the RMB has appreciated by 10% on the producer price measure since 2016. While the divergence in profits growth suggests domestic consumption has remained solid, we believe policymakers will be less tolerant of a further rise in the trade weighted RMB as growth pressures mount in H2. The focus on curbing debt in the financial sector and on reining in unauthorised government financing is set to weigh on growth in the coming quarters. However, China is unlikely to engineer a significant depreciation of the RMB. In the current global political climate, a sharp decline in the exchange rate could be interpreted as Beijing firing the first shot of a currency war. We expect the RMB's trade-weighted appreciation to come to a halt. 

Outcome:

RMB index peaked at 97.85 on 22 June 2018 and fell back to 93 as trade war fears were priced in. Far from depreciating the currency the authortieis intervened to prevent a more rapid fall than markets would have priced in. 

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14 May 2018

2018: Oil sweet spot is maturing fast

We said:

The oil market is in a sweetspot and, so long as demand stays solid, crude prices could see further upside. That said, the sweetspot is maturing, paving the way for a pick-up in volatility going into 2019. Three factors underlie this prospect.

First, while it is too soon to call time on the cyclical world economic upswing, oil is no longer as cheap relative to global growth momentum as it was, say, six months ago. Some demand destruction can be expected gradually to set in. What is more, as inflation expectations respond to rising crude prices, sharp bond yield increases could pose challenges for growth and, therefore, oil consumption.

Second, a smooth transition to the next stage of OPEC+ strategy is by no means guaranteed.  With the approach of next month’s review, the different perspectives of the two pillars of OPEC+ – Saudi Arabia and Russia – look set to become more apparent. Riyadh has been signalling since last year that it favours postponing any reversal of the production restraint agreed in November 2016 and has meanwhile found it expedient to over-deliver on its output cuts. The Saudi preference for keeping the oil price higher for longer is unmistakeable.

By contrast, Russia would be comfortable with a price range of US$50-60/bbl; and while taking care to avoid giving any impression of serious disagreement with the Saudis, Moscow would prefer to stick to the global inventories criterion that underlay the 2016 agreement. This would point to a decision to increase output.

Third and finally, by mid-2019 new pipeline infrastructure should be up and running in the Permian, ready to accommodate higher US shale production.

We have long held the view that OPEC+ action was a defensive supply taper in the hope of stronger demand. This hope has materialised, but OPEC’s initiative can no longer be described as defensive. The pendulum is now swinging in the other direction, stoking a price overshoot that will raise the stakes for all parties involved: producers, consumers and investors

Outcome:

WTI prices continued to rise to $74pb in July before range trading. In early October volatillity was back in large style. WTI fell from $76bp to $60bp in one month. 

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17 Apr 2018

2018: AUD to fall heavily vs. USD

We said:

We downgrade AUD from 0 to -1 vs USD on domestic risks and monetary policy divergence. AUD is particularly exposed to two of the major factors roiling markets: FOMC policy tightening and trade war risk.

Following the FOMC’s rate hike last month, the RBA cash target rate is lower than fed funds for the first time in almost 20 years. The last time this happened, in the late 1990s, AUD lost one-third of its value against USD. In the 1990s the gap reached 50bp in favour of fed funds; based on market expectations of monetary policy this year the gap could widen to at least 75bp this time. The 2y yield spread is already at -50bp, and could yet test the 1990s level of -100 bp. In our Macro Strategy portfolio we own AUD/USD downside through a calendar put spread, betting that AUD will react to this erosion of yield support by the end of the year.

External demand for Australian commodities at risk. We expect Chinese GDP growth to slow moderately this year, to 6.5%, due mainly to a cooling housing market. This implies reduced demand for Australian iron ore. Sure enough, prices have already dropped 20% since the end of February. 

Online retail market share rising. Amazon Australia started trading in December. According to the latest figures, online retail turnover in Australia has increased by 40% since February 2017, In Germany, the UK and the US, where online retail sales are around 14% of the total, the Amazon effect has produced high street price disinflation and weakened the Phillips curve. The prospect of something similar happening in Australia is likely to stay the RBA’s hand, lending further support to our AUD downgrade from 0 to -1. 

 

 

 

Outcome:

AUD/USD spot was 0.78 at the time we made the call. Our Asset Allocation recommendations have a 3 to 6 month time horizon. Over 3 months AUD had fallen 5% vs. USD and this deepened to 9% over 6 months. 

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16 Feb 2018

2018: Four Fed hikes in 2018

We said:

In the US, Fed policy has had the funds rate inching towards zero in real terms, in line with the growing bias of firms to add capital rather than labour to boost output. Inflation, however, is starting to pick up and the FOMC decision-making process now has to consider a markedly easier fiscal policy that is mostly targeting capital-intensive industries, through tax reforms and increased defence spending. Fed Chair Powell is, in our view, more sensitive to market mischief than to price indexes. As such, he may very well be compelled to act more aggressively than the market expects if he thinks greed is getting out of hand. We believe the base case is four 25bp rate hikes in 2018 with the impact of fiscal policy still on the policy horizon.

Outcome:

At time of writing, 26 October 2018, the Fed has hiked three times in 2018. Markets have repriced their expectations through the year and a fourth hike at the December meeting is fully priced in. 

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12 Feb 2018

2018: Oil - brace for a more volatile year

We said:

Froth coming off the market, but stars still aligned for oil prices. Volatility to pick up over 2018 as the sweet spot matures. 

Some froth is now coming off oil prices – a healthy development. But not much has changed in terms of the underlying fundamentals. Higher real interest rates mirror solid global macro momentum and have some way to go before they restrict activity. Demand for crude remains strong and the global inventory glut is shrinking – a supportive combination for prices. In addition, we expect the dollar to remain soft and view output disruptions in Venezuela and geopolitical tension in the Middle East as posing upside risks for prices.

We stick to the scenario laid out in our recent LSR View: 2018 looks to be a sweet spot year for both OPEC and US producers. But with OPEC+ output guidance approaching a crossroads and US supply gathering pace, the sweet spot is maturing. OPEC’s strategy was always to be viewed as a supply taper in the hope of stronger demand. With the global economy on the mend since mid-2016, this hope has materialised. Sustained oil consumption growth is now required for prices to maintain current levels. For the time being, the market looks well supported. But as supply dynamics become more challenging and Goldilocks investing loses its shine, oil market volatility is set to rise.

Outcome:

WTI rose from $59pb at time of publication to $74pb in July, then range traded. The volatiltiy we predicted arrived in early October and prices slid from $76pb to $60pb in a month. 

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11 Jan 2018

2018: China debt crisis not on the cards

Consensus said:

Most analysts agree that the rate of China's debt build up is cause for alarm. Some predict an imminent blow up in the form of a major financial crisis. Others predict a Japan-style series  of 'lost decades' as the debt burden drags down economic growth. 

We said:

Market forces do not operate in the usual way in China. Opting for a slow adjustment process does not mean that Beijing is simply sitting on the fence. This, in short, is deleveraging by stealth. The nature of China's debt rules out the likelihood of a systemic crisis, and the crux of the issue lies in the overall balance sheet. We make a debt distribution adjustment by combining the debt of the govenment, SOEs and local government funding vehicles to estimate the overall debt of the state. These adjustments do not change the total amount of debt, but the mix alters dramatically: corporate debt looks far less frightening from a default perspective. The implication is the central government still has room to absorb the current level of debt onto its balance sheet without triggering a crisis. 

We identify four main reasons why the government's position is stronger than is assumed by those who are predicting a crash landing: 1) the state can make all the difference; 2) the overall balance sheet is healthy; 3) the level of external debt is low and that of domestic savings high; 4) and real estate, which is widely used as a form of collateral, has not yet collapsed. 

Unlike many China sceptics, we believe policymakers are proactively seeking to contain financial risks by means of the following measures: 1) pooling the risks among different sectors, 2) stealth restructuring and controlled defaults, 3) increasing SOE efficiency without privatization and de-monopolization, 4) forcing financial deleveraging and strengthening regulatory coordination, 5) narrowing the credit gap with nominal GDP. 

Outcome:

There has been no financial crisis or debt blow-up. Defaults have been allowed to rise in certain specific cases as healthy part of a more macro-prudential policy. Deleveraging by stealth continues. 

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18 Dec 2017

2018: Oil sweet spot in H1 2018

We said:

2018 will be a sweet spot year for both OPEC and US shale. 

Vienna’s output cut deal between OPEC and Russia (‘OPEC+’) marked an inflection point for global oversupply. It has been running for almost a year now. Against the backdrop of benign global growth, it has broadly succeeded in putting a floor under prices, despite US shale oil production levels continuing to rise in 2017. We regard the current apparent ‘truce’ between OPEC+ and US shale as an unstable equilibrium. US operators are currently in a sweet spot, but they running on borrowed time, not least as Russia’s incentive to continue cooperating fully is likely to dwindle going into H2 2018. 

The paring of speculative shorts over the summer has gradually given way to a build-up of long positions, as a tighter market has tipped the forward curve into backwardation, propelling WTI prices towards the upper end of the $50-60/bbl range.This represents a sweet spot for OPEC. 

Let’s say that things stay roughly as they are in the foreseeable future, with Riyadh managing to keep the alliance intact; US shale producers sticking with a more balanced approach; global demand continuing to grow at a healthy rate; and the inventory glut receding. At the current pace of drawdowns, ‘price stability’ could be achieved around the end of H2 2018, precluding the need for further extensions.

 

 

Outcome:

WTI oil price rose by 29% from $57.22pb when we published to $74pb in the firdt week of July2018. The sweet spot had matured and oil range traded around $70-75bp to September. 

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17 Nov 2017

2017: Four Fed hikes in next 12 months

Consensus said:

Markets pricing a 45bps rise in Fed funds rate during 2018. 

We said:

Fed still likely to deliver three more hikes by H1 2018 (in December, March and June), and an additional one before the end of next year as the tax reform boosts growth. 

The fed funds rate remains below inflation, compared with a long-run real average of 1.9%. Even the three hikes we expect by June may take the rate barely above core inflation, as inflation itself is turning up slightly, as are wage settlements. Beyond the rise we are forecasting in fed funds to 2%, further increases will depend on how strong growth is and what form tax cuts take. But with monetary effects anyhow subject to long and variable lags, a shift to minimally positive real short-term rates next spring is unlikely to check the economy’s momentum before the end of 2018.

Outcome:

Markets had to reprice their expectations. Fed hiked 4 times as we expected in Dec 2017, March 2018, June 2018 and Sept 2018. 

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15 Nov 2017

2017: Bank of Japan will become more flexible

We said:

Inflation pick-up could soon open the door to BoJ policy fine-tuning. Yield Curve Control ‘face-lift’ possible in 2018 as the macro mix improves. With the 10yr breakeven inflation rate recently climbing above the downtrend in place since mid-2014, the market may be sniffing a sea change.

To be sure, there is still a long way to go until the 2% target is in sight and the Bank can declare success in dispelling the private sector’s deflationary mindset. So the current policy framework can be expected to remain in force as far as the eye can see. But this does not preclude some policy fine-tuning to match the evolving domestic macro backdrop. Over the coming quarters, the BoJ may be in a position to upgrade its assessment of the risks to its inflation outlook from ‘skewed to the downside’ to ‘balanced’, paving the way for a reconfiguration of monetary settings. 

Looking ahead, tweaking the parameters of Yield Curve Control (YCC) – for example, by raising the 10yr target and/or widening the band around it – in response to sustained improvement in the growth/inflation mix could make sense.

Outcome:

BoJ announced a widening of the band around their 10y target rate on 31 July 2018. Following this policy adjustment 10y JGB yields rose from 0.05 to 0.15 in October 2018. 

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24 Jan 2017

2017: OPEC cuts not enough to pull oil price higher

Consensus said:

Goldman Sachs expected WTI to rise to $57.50pb in H1 with OPEC cuts factored into the forecast.

We said:

In the near term, the balance of risks for oil prices looks skewed to the downside. Positioning is stretched. Speculative WTI longs are hovering at record highs and producer hedging has increased markedly over the last two months. Oil price volatility remains depressed, but is bound to creep higher as the global inventory overhang recedes, OPEC compliance is already in the price and the market begins to shift its focus to demand. (LSR Daily Note 24th January 2017)

Outcome:

WTI rose modestly from $53.18pb at time of publication to peak at $53.99pb on 24th February. By 9th March the price had fallen back to $50.28pb.

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29 Feb 2016

2016: Yes! The US will grow! No dollar spike.

Consensus said:

Oil price collapse will hit US growth through falling capex in shale, oil and other sectors. Some commentators suggested that job creation in shale fracking had been the only driver of employment. Fear growing that a rise in the USD would hit S&P earnings and capex hard.

We said:

The timing effects of the oil and commodity price collapse - pain first, gain later - have taken longer than in 1986...but the consumer-led growth will come through. The dollar will be protected from undue appreciation as the real Chinese exchange rate falls, by buoyuancy of the euro (also the yen) as real incomes support European consumer growth: the euro's past depreciation, with an already huge trade surplus, boosts current and real-asset capital flows. (LSR View 29th February 2016)

Outcome:

US growth stable at 2-2.5% through 2016 following a weather related soft patch in Q1. USD index (DXY) ranged around 95 from March to October and only jumped to 100 in November following Trump election victory and re-pricing of inflation expectations.

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01 Feb 2016

2016: Oil to decline short-term then rebound to $40p/b

We said:

An oil price rally is further away than at any time since 2014. $40p/b should hold in the medium-term level as oversupply is reduced. Further declines are the main risk in the short-term but any move lower would trigger production cuts and so would be brief. (LSR View 3rd November 2015)

Outcome:

WTI (NYMEX) fell from $45p/b in Nov 2015, bottoming out at $29p/b in Jan 2016 and range trading between $40p/b and $50p/b for the rest of the year.

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29 Jan 2016

2016: BoJ negative rates are a dangerous mistake

We said:

Negative interest rates are a mistake in Japan. Today's announcement could prove critical in the currency war. China's announcement that they will target a basket of currencies is for real this time and the yen is roughly 15% of that basket. The euro is a further 21% and BoJ aggression will heap pressure on the ECB to act in March. With all the other major central banks looking to devalue, the risk of ever greater USD strength means it will now be difficult for the Fed to send a strong message on the health of the economy by hiking rates in March. (LSR Daily Note 29th January 2016)

Outcome:

ECB cut rates and expanded QE programme on 10th March, Fed did not hike.

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31 Dec 2015

2016: Don't panic yet - no global recession

Consensus said:

Some commentators were forecasting a recession amid concern that China's slowdown would drag the world down with it and citing falling commodity prices as a re-pricing of growth expectations. Early January saw the yuan fall and risk assets drop on fears of rising global deflation.

We said:

China to keep growing around 3-5% in 2016. This is good news for the global economy. Resulting lower commodity prices boost consumer incomes and can unleash capex in the West. 2016 should see US growth of 2.5-3% and a stronger dollar while the euro area grows at an above-trend 1.5%. We expect further painful rebalancing, financial market volatility and EM pain, but not a global recession. (LSR View 3rd December 2015)

Outcome:

Global growth became more stable and secure in the US, UK and euro area with consumers and businesses regaining confidence. Chinese growth stabilized around 4% on LSR numbers and PPI turned positive. Deflationary pressure eased through the year and markets re-focussed on the return of inflation risk and rates.

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27 Oct 2015

2015: Big bull - tired, but far from dead yet

Consensus said:

Investors becoming more concerned about US earnings and frothy valuations

We said:

Q3 S&P earnings, seasonally adjusted, could be up handsomely despite a significant rise in the dollar as EM currencies weaken. The profit recovery in the US and Western Europe has further to go. (LSR Daily Note 27th October 2015)

Outcome:

S&P 500 rose from 2080 at time of writing to 2141 12 months on and continued to set record highs through December 2016.

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06 Oct 2015

2015: Japan steers toward the financial rocks

We said:

Japanese corporate cash flow is protected by the cocoon of keiretsu. Excess private saving now largely offset by budget deficits. Net govt debt now 130% of GDP and rising. Abenomics' inflation target poses major dilemma in 2016. 'Perma-QE' likely - financial crisis probably in three years. (LSR View 6th October 2015)

Outcome:

Bank of Japan finds itself in a policy trap and begins to run out of JGBs to buy-up. Inflation falls back to zero and BoJ is forced to move from QE to targeting 10y yields at cost to their credibility.

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16 Feb 2015

2015: Euro area to growth to surprise at 1.5% in 2015

We said:

The euro area could provide a positive growth surprise in 2015. Lower oil prices, ECB QE and the weaker euro should help. Assuming of the gains in real income are spent and only a negligible recovery in business investment, we think the euro area could achieve 1.5% GDP growth in 2015. That might not sound like a lot but Mario Draghi and his colleagues at the ECB would gladly take it given where they seemed to be heading a few months ago. And it's another reason why we recently upgraded our outlook for European equities. (LSR Daily Note 16th February 2015)

Outcome:

Euro area growth 1.5% in 2015.

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16 Feb 2015

2015: Chinese yuan over-valued and Beijing will devalue

We said:

Yuan on the edge of a cliff. RMB over-valued by between 10-15%. A weaker currency needed to boost exports and keep growth and employment on track. (LSR Daily Note 16th February 2015)

Outcome:

Yuan began the year at 6.25 to the USD and finished the year at 6.70. The step devaluation in August 2015 shocked markets leading stocks to sell-off and raised questions about global growth and currency wars. 

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11 Dec 2014

2015: Chinese growth 4-5%, no chance of recession

Consensus said:

Having been ahead of the pack in calling the halving of Chinese growth we found ourselves on the optimistic side of the debate. Consensus was the China's debt overhang would severely limit growth, or even trigger a recession.

We said:

Growth has slowed sharply in 2014, but the economy's painful rebalancing has only just begun. The adjustment after year's of over-investment and an alarming build-up of debt since the crisis was never going to be easy. Activity will probably remain weak at 4-5% in 2015, but a recession is unlikely. (LSR View 11th December 2014)

Outcome:

Growth stabilised at around 4% on LSR numbers. Global investors became less fearful of a debt blow-up in the short-term.

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09 Dec 2014

2014: No 1998-style EM crisis but a slow motion EM adjustment

Consensus said:

End of Fed QE, rising interest rates and indebtedness may lead to 1998-style Emerging Market crisis

We said:

EMs don’t face a 1990-style crisis. They will go through a slow burn adjustment process. Emerging markets, in particular current account deficit EMs, will see their currencies depreciate and real rates increase while growth weakens. (LSR View 11th March 2014)

Outcome:

Real GDP growth has slowed and currencies have weakened in most EMs over the last 18 months, but growth and FX are a lot resilient in comparison to the collapse during the 1990s crises.

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26 Nov 2014

2014: Europe at stall speed

We said:

As a region, the euro area has no serious sectoral imbalances. But debt is above pre-crisis levels, especially in the periphery...pushing the euro area to the brink of debt deflation. A lower euro will help - but only slightly with a lag. Ever larger trade surpluses are not a permanent solution. Looser fiscal and monetary policy needed to aid deleveraging. (LSR View 26th November 2014)

Outcome:

Euro area growth begins to pick up but inflation expectations continue to fall prompting ECB to launch an expanded QE programme in Jan 2015.

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18 Nov 2014

2014: Chinese growth to weaken further

We said:

Chinese debt has surged, but not to levels that could touch off a crisis wiping out the economy's catch-up potential. Even so, feeble growth and heightened financial distress are likely as Beijing deals with past excesses. China needs a weaker yuan to rebalance, but this could trigger financial turbulence as foreign currency debt is an issue. (LSR View 18th November 2014)

Outcome:

Chinese growth continues to slow. Authorities devalued the yuan in August 2015. This shocked markets and led to a global sell-off of risk assets.

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30 Oct 2014

2014: The bill from Brazil

We said:

Brazil is one of our least preferred emerging markets. The economy faces severe cyclical and structural headwinds. With the least reformist candidate, Ms. Rousseff, elected for a second term, a growth revival remains elusive. (LSR View 30th October 2014)

Outcome:

BOVESPA falls 16% in 12 months from 54629 at time of writing to 45869 on 30th October 2015.

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08 Sep 2014

2014: Fed to announce beginning of the end of QE through a taper of asset purchases

Consensus said:

Markets price-in announcement of taper of QE purchases at September FOMC meeting

We said:

Weak money creation outside of QE together with our expectation of below-trend output growth explains why we expect the Fed to delay the start if its asset purchases tapering to the winter of this year. (LSR Global Leading Indicators 8th September 2014)

Outcome:

Fed does not announce taper on 18th September. Huge market moves as investors reposition. Taper not announced until 18th December.

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11 Jun 2014

2014: Abenomic's the wrong policy mix for Japan and more is to come

We said:

Japan's dismal export performance for 20 years has undermined its recovery potential. Abenomics has produced only a temporary growth spurt and has worsened already-weak household incomes. Without further major devaluation, inflation will relapse to zero or turn into deflation. Abenomics will have failed. Only with major fiscal measures to extract excessive cash directly from corporations can this 'lose-lose' choice be avoided. (LSR View 11th June 2014)

Outcome:

Investors lose faith in Abenomics. Inflation falls through 2014 and 2015 and reverts to deflation in 2016 as Yen rises.

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11 Apr 2014

2014: US stocks, bonds and USD to outperform, US growth to quicken to 3%+ annualized

Consensus said:

Investors positive on the US growth story and stocks. Bond markets expect yields to rise as growth picks up and Fed ends QE programme.

We said:

US has rebalanced household debt, dollar and budget deficits. Growth to be driven by pent-up housing & car demand, shale energy, and capex induced by low US costs. Sluggish rest-of-world to provide capital inflows, holding down bond yields, boosting stocks, real estate and, especially, the dollar. (LSR View 11th April 2014)

Outcome:

US stocks strongly up in 2014 to date, long bond yields do not rise in line with market expectations, USD takes off.

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27 Mar 2014

2014: Europe drifting into Japanisation - ECB inaction risks losing control of inflation/deflation expectations

Consensus said:

ECB continues to predict a growth pick-up across the euro area

We said:

Euro-wide deflation isn’t inevitable, but it is a material risk. The smaller periphery countries are already in deflation and without a sustained economic recovery, some of the larger countries (notably Spain) could follow. The ECB is hoping for an economic recovery in 2014 that will alleviate these pressures. But if the forecasts prove too optimistic and the economy stagnates – our own baseline – the ECB must be prepared to look at more radical policy options. There is a clear risk it waits too long. (LSR Macro Picture 27th March 2014)

Outcome:

Euro area growth stabilises but at very low levels, inflation expectations and measures continue to fall. Speculation grows that QE is the only policy response that will control market expectations.

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05 Feb 2014

2014: BoJ and Abenomics a high-risk strategy with little chance of success

Consensus said:

Two clear camps on the risks and likely outcomes of Abenomics

We said:

The only way enduring 2% inflation is achievable is if QE is continued or reinforced, and the yen takes another step down. Mr Kuroda has committed himself to the first of these, and the second is likely to follow. Only continued devaluation and export-led overheating – barely tolerable to the rest of the world – might do the trick. So the short-term yen-decline/Topix-bull story remains in place. But those wishing to get on for the ride had better be watching closely for the moment to get off. (LSR Daily Note 5th February 2014)

Outcome:

BoJ continues to debase currency announcing an intensification of QE purchases on 31st October. Consensus shifts dramatically as risks become clear to investors. Stocks up 11.5% year to date.

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21 Jan 2014

2014: China slowdown to continue, no major stimulus to boost growth

Consensus said:

Growth to slow to 7-8%

We said:

Official data underestimate China’s growth downturn over the past two years. LSR estimates show real GDP growth has more than halved, down to 6.1% in the year to Q4. Continued yuan overvaluation, decimated profits, weak external demand and financial sector reform suggest growth in 2014 is likely to be below 5%. (LSR Daily Note 21st January 2014)

Outcome:

Chinese govt. and market expectations lowered. GDP slowdown continues without major policy response Q3 annualized GDP is 5% on LSR calculations.

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11 Dec 2013

2013: Pick 'EM carefully

Consensus said:

Economies running current account deficits to underperform those with current account surpluses

We said:

A more nuanced approach to EMs is imperative. Those with better ability to generate productivity and domestic demand will outperform. Commodity exporters will suffer more than the rest. India and Mexico will outperform. Brazil, South Africa, Russia to underperform. China will remain a laggard. (LSR Special Report 11th December 2013)

Outcome:

Real GDP consensus forecast for 2014 and 2015 revised up for India and down for Brazil, China, South Africa and Russia. Indian equities outperform EM equities while Brazilian equities lose out. The same holds for FX as well..

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20 Dec 2012

2012: Rate cut, not QE, to be ECB's next move

Consensus said:

Policy makers predict Euro Area returning to growth in H2

We said:

View changed to interest rates down from easier. We expect the ECB to cut interest rates before opting for QE. (Global Political Drivers 20th December 2012)

Outcome:

Rates cut to 0.5% on 2nd May 2013

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11 Oct 2012

2012: Brazilian easing cycle over, tightening to surprise in 2013

Consensus said:

End-2013 expectations for 7.25% persist until January 2013

We said:

The central bank is trying its hand at Fed-style 'low for long' rhetoric talking of stable rates for a 'sufficiently long period' in the post-meeting statement. This may turn out to be wishful thinking. Committing to keep the Selic rate at current levels for a prolonged period of time is not credible and interest rate hikes still look likely in 2013. (LSR Daily Note 11th October 2012)

Outcome:

Rate up from 7.25% to 8.5% by 10th July COPOM meeting

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02 Oct 2012

2012: Austerity ensures Spain will miss deficit targets

Consensus said:

Austerity measures imposed to protect creditors interests

We said:

Rapid fiscal retrenchment is not simply hammering the economy, and with it market hopes that private sector solvency can be resolved by solid output growth. It is also having little apparent impact on the government's fiscal position. Additional spending cuts and the recently enhanced VAT hike should lower the deficit somewhat in H2, but not enough to get close to the 7.4%, let alone mandated target. (LSR Daily Note 2nd October 2012)

Outcome:

2012 deficit expands to 10%, Q1 GDP falls 0.5%, speculation of downgrade to junk

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16 Jul 2012

2012: Philippines the best bet in ASEAN

Consensus said:

EMs weak and growth in Philippines 'surprisingly strong'

We said:

We remain structurally positive on the Philippines given its relatively low exposure to external headwinds - either via trade, commodities trade, or funding channels. Additionally, improved macro fundamentals have led to a wider policy bandwidth and potentially a virtuous growth cycle. (LSR Daily Note 16th July 2012)

Outcome:

PSEi up 20% in 12 months, up 10% in 2013 to date

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28 Feb 2012

2012: China's banks a disaster waiting to happen

Consensus said:

China’s adjustment to lower growth rate to be smoothly managed

We said:

Worsening bank liquidity and mounting bad loans are set to undermine China's financial house of cards, leading to economic and financial turbulence over the next couple of years. Bank liquidity stress could turn out to be a key trigger in destabilising China's economy. (LSR View 28th February 2012)

Outcome:

Liquidity crunch shocks markets June 2013, Hang Seng down 8.78%, Shanghai Comp down 11.30%, GDP growth slows dramatically

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25 Jan 2012

2012: Chinese hard landing in Year of the Dragon

Consensus said:

China to ‘soft land’ with GDP growth of 8-9% in 2012

We said:

China’s miraculous growth era is over. China’s growth downswing is set to intensify. Quarterly annualised real GDP growth could well slow to 5% by the middle of the year, though it is unlikely that the official data will show such a slowdown. (LSR Special Report 25th January 2012)

Outcome:

Growth down to 6% annualised by April, Bank of China cuts rates 50bps 7th June

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09 May 2011

2011: Over-tightening, not overheating threatens Brazil

Consensus said:

Markets priced in 80bps tightening May 2011 – Jan 2012

We said:

Brazil’s bias towards ultra-tight monetary policy could prove highly damaging. Calls for higher rates, capital controls and a weaker currency are misplaced. (LSR Daily Note 9th May 2011)

Outcome:

Interest rates up 50bps then rapidly ‘surprise’ cut back by 50bps

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01 Apr 2011

2011: US growth to accelerate H2 due to cap-ex spending

Consensus said:

Consensus forecasts for end-2011 GDP slide away: Q1 3.2%, Q2 2.5%, Q3 1.6%, Q4 1.7%.

We said:

100% first-year depreciation…creates an unprecedented incentive to bring business capital spending forward from 2012 into 2011. This intensifies hugely the likely upswing in GDP at end-2011. (Asset Allocation: Americas 1st April 2011)

Outcome:

2011Q1 GDP 0.4%, 2011Q2 GDP 1.3%, 2011Q3 GDP 1.8% , 2011Q4 GDP 2.8%

READ ME
04 Feb 2011

2011: UK house prices to stagnate

Consensus said:

Views range from -10% upwards with average -5%

We said:

UK house prices are to be little changed this year. Our model forecasts house price inflation of -0.8%. (LSR UK Outlook 4th February 2011)

Outcome:

UK house prices fell -0.9%

READ ME
26 Jan 2011

2011: € crisis to rapidly deteriorate

Consensus said:

Greece an isolated case - € to ‘muddle through’

We said:

Severe deflation in Club Med, probably accompanied by effective default in Greece, and more likely than not, Ireland, Portugal and Spain, will mean prolonged and major subsidy and credit support for those economies. (LSR View 26th January 2011)

Outcome:

10 Year govt spreads in € nations all widen vs. bund in 2011. France widens +0.94, Greece +22.50, Ireland +0.45, Italy +3.33, Portugal +7.87, Spain +0.76.

READ ME
26 Jan 2011

2011: Chinese inflation out of control, domestic demand to be hammered

Consensus said:

Chinese economy to soft-land (growth 9-10%)

We said:

China’s overheated economy risks a slump. Chinese policy makers have to slam on the brakes if they want to prevent accelerating inflation. (LSR View 26th January 2011)

Outcome:

GDP growth slows through 2011. Q42011 GDP slowest for 2.5 years, Q12012 GDP slowest for 3 years. Shanghai Composite Index down 20%.

READ ME
16 Nov 2010

2010: Chinese growth rate to halve to 5% in 2010's, GFC has killed their export-led growth model

Consensus said:

Goldman Sachs and others see no meaningful slowdown in Chinese growth, GDP predicted at 8-9% medium-term

We said:

China has reached the end of the road for its export-led growth. Its miraculous growth machine has produced outstanding results, but they were only made possible by good fortune abroad. The financial crisis has ushered in a period of low global growth. The rest of the world will no longer tolerate China’s continual grabbing of market share when the global trade pie is hardly growing. The external demand shock has undermined the sustainability of China’s exorbitant investment rate, which is set to fall to 35% of GDFP by the end of the decade from 48% in 2009. Chinese potential growth rate could well halve to 5% this decade. (LSR View 16th November 2010)

Outcome:

GDP slows year or year through the decade, reaching annualized rate of 5% by mid-2014. Consensus turns bearish, commodity prices fall.

READ ME
19 Jul 2010

2010: Chinese growth set for a sharp correction

Consensus said:

China set for a ‘soft landing’

We said:

At some point over the next four quarters China’s expansion is highly likely to be cut short, restrained by its cyclical barriers amid a sizable relapse of global growth. The longer the economy continues to boom and inflation is left unchecked, the worse the necessary growth correction is set to be. (LSR View 19th July 2010)

Outcome:

Chinese domestic demand slowed sharply in H1 2011 under the impact of monetary tightening and administrative policy measures from late 2010 onwards

READ ME
04 Mar 2010

2010: RBI behind the curve, food inflation will force rates up

We said:

The spill over effects of higher food prices are already starting to be felt a core inflation has started rising rapidly. Unless the Reserve Bank of India becomes more proactive, it risks keeping a check on inflation. The RBI will come under increasing pressure to act as inflation rises even further in the next two to three months. The government’s 8% GDP growth projection for FY11 is plausible only at the cost of high inflation well beyond the central bank’s stated tolerance level of 5% - which in turn spells more aggressive back-loaded tightening in H2/FY11. Therefore, we expect slower growth in FY12.(India note 4th March 2010).

Outcome:

RBI forced to begin hiking cycle at emergency meeting on 19th March 2010. Rate up from 4.75% in March 2010 to 8.5% by October 2011. GDP slowed from 8.4% in 2010 to 6.5% in 2011 and 5% in 2012. 

READ ME
05 Jan 2010

2010: € crisis continues to worsen - divergence to be extreme

Consensus said:

Rating agencies complacent, spreads did not reflect crisis until April 2010

We said:

2010 will bring no let-up for divergent EMU bond ratings. The monetary union was propagated in the late 1990s as a weapon to solidify peace in Europe. As we said at the time, it is more likely to ensure at least unnecessary grief and discord quite possibly something a good deal worse. The first place to look for the financial effects of all this will be in the government bond markets - but it could well become increasingly visible on the streets as well. (LSR Daily Note 5th January 2010)

Outcome:

€ area continues to suffer economic turmoil, periphery vs core spreads widen dramatically

READ ME
19 Mar 2009

2009: UK plc to recover quicker than expected

Consensus said:

Fall of 3% real GDP in 2009, 0.5% expansion in 2010

We said:

Current consensus forecasts imply a contraction of 3% in real GDP this year, followed by a 0.5% expansion next. By contrast, our own projections remain less pessimistic than this. Not only has the UK business sector adjusted swiftly to the changing economic landscape but there is a very significant degree of monetary easing working its way through the economy. (Europe Watch 19th March 2009)

Outcome:

UK stock market bottomed in March 2009, but the economy did not move out of recession until the last quarter, as LSR predicted.

READ ME
12 Jan 2009

2009: QE is the right solution to the GFC, stocks will rally

Consensus said:

Investor pessimism at historic lows. Many forecast a 1930’s-style depression.

We said:

Monetary authorities around the world are starting to understand the necessity of quantitative easing. With a market improvement in sentiment…a strong rally in global equities is possible. (GLI: Americas 12th January 2009)

Outcome:

QE puts a floor under market fears , boosting equity and bond prices. US stocks lead a multi-year global rally from Q1.

READ ME
08 Dec 2008

2008: Double digit inflation to hit India

Consensus said:

Goldman Sachs - "Inflation is on a downward trajectory and we expect it to continue to fall sharply going into next year. (December 2008)

We said:

With grossly loose monetary policy and grotesquely loose fiscal policy, India now risks a repeat of the UK’s experience in the 1970s. India has an inflation problem”. (LSR Daily Note 8th December 2008)

Outcome:

Indian CPI hit 10% in February 2009 and continued to rise to 16% by year end

READ ME
08 Dec 2008

2008: US house prices set for long-term falls

Consensus said:

Rate of decline to slow, lower interest rates to support house prices by mid-2009

We said:

Before the US economy can recover, household debt must return to manageable levels. Once there, US households are unlikely to go on another borrowing and spending spree.…it will take much more than a decade for prices to regain their former peak. (LSR View 8th December 2008)

Outcome:

Housing market still in doldrums by mid-2011, prices at best flat and down 20-30% from their peak (depending on the measure)

READ ME
10 Nov 2008

2008: 1930's depression comparisons are overdone, markets oversold

Consensus said:

Lehman Brothers collapse generates excessive fear of a US (and global) depression

We said:

The chances of a rerun of the 1930s are miniscule…Extreme volatility in financial markets will continue far longer than necessary. (LSR Daily Note 10th November 2008)

Outcome:

US stocks bottom-out in March 2009 before multi-year bull run.

READ ME
28 May 2008

2008: US monetary policy counterproductive - will raise inflation and slow growth

Consensus said:

Fed needs to boost private sector credit growth to support the economy

We said:

Private sector debt capacity is nil. Fed policy will reduce growth as inflation will eat into real incomes, and confidence worsening the economic downswing and missing the Fed’s growth goal. (LSR View 28th May 2008)

Outcome:

Inflation is elevated; credit growth has been weak over past years

READ ME
05 Jun 2007

2007: Sub-prime mortgage fiasco - the start of something big

Consensus said:

Complacency on the sustainability of house price growth, confidence and US consumption

We said:

In this review Brian Reading opens with a short essay on how the Eurasian savings glut – of its nature deflationary – has nonetheless provoked a global boom through its spectacular stimulus to liquidity. The epicentre of this borrowing spree has of course been the US housing market. Leigh Skene details the dismal narrative itself and why the housing market woes are to knock on into a broader US domestic demand crunch. (LSR View 5th June 2007)

Outcome:

Sub-prime blow-up sparks Lehman Brothers collapse and Global Financial Crisis

READ ME
29 Mar 2007

2007: Banking crisis imminent

Consensus said:

Nothing. Wall Street entirely silent re: subprime, CDS and liquidity issues

We said:

Losses from the subprime mortgage markets will initiate the rebalancing of the Eurasian savings glut, at least for a while. Further losses due to the resulting global slowdown will turn risk seeking into risk avoidance. Both will drain the liquidity central banks inject and end the recent series of asset booms. (LSR View 29th March 2007)

Outcome:

Subprime mortgages and their derivatives trigger financial chaos

READ ME
24 Jan 2007

2007: The bubble is about to burst

Consensus said:

IMF and others see stable growth or ‘soft landing’

We said:

The May to June 2006 market crunch was a dress rehearsal for liquidity implosion. Make no mistake; the world is on the cusp. This looks and feels like a bubble. In the past, bubbles have always burst. (LSR View 19th January 2007)

Outcome:

The Global Financial Crisis

READ ME
31 Aug 2006

2006: Spain & Italy diverge from core EMU

Consensus said:

Euro structure will encourage economic convergence

We said:

The problem is that it is hard to see any Italian solution within the euro context: and the best Spanish policy would be a devaluation and tight monetary policy, both of which are precluded. (LSR View 31st August 2006)

Outcome:

Euro area divergence results in the 2010 euro area crisis

READ ME
04 Aug 2006

2006: Bank of England will not cut rates and will hike next

Consensus said:

August 2005 rate cut began an easing cycle.

We said:

Growth and inflation will be higher than the MPC expects, next rate move up. (Europe Watch 17th January 2006)

Outcome:

Rates flat at 4.5% until upward move in August 2006

READ ME
20 Apr 2006

2006: UK house prices to continue steady growth

Consensus said:

Prices overvalued and minimal growth at best in prospect

We said:

House prices will grow steadily to reach 10% in 2006. (Europe Watch 17th January 2006)

Outcome:

Halifax price index rose 9.9% in the year

READ ME
17 Jan 2006

2005: Germany to recover strongly

Consensus said:

Germany remains uncompetitive post re-unification

We said:

Germany is at the turning point towards the global mainstream. (Europe Watch 17th January 2006)

Outcome:

Corporate restructuring restores Germany competitiveness. German the only DM to grow its export market share in the next 10 years.

READ ME
23 Nov 2005

2005: Central Bankers will fall from grace

Consensus said:

Masters Of The Universe can do no wrong

We said:

The challenge for a 21st Century central banker will be how to deal with asset price bubbles, This [low inflation] kind of world is more prone to asset-price booms, which threaten to turn into bubbles and eventually burst. (Europe Watch 17th January 2006)

Outcome:

Low yields allow build of excess debt and record equity prices which burst in 2008.

READ ME
02 Feb 2005

2005: UK house prices

Consensus said:

House prices overvalued by up to 30%-40%.

We said:

Interest rates of 4¾% will not lead to a house price crash: expect a stable market. "A crash in the housing market remains a distant prospect, with conditions simply not in place for a drastic fall in house prices". (LSR UK Outlook 2nd March 2005)

Outcome:

House price inflation slowed to 3% and started to accelerate.

READ ME
30 Sep 2004

2004: Eurasian savings glut to drive US economy into hard landing

Consensus said:

US debt capacity on housing unconstrained

We said:

Persistent Eurasian surpluses are crucial in the trashing of US business balance sheets with too much capacity and debt in 1998-2000; and trashing household balance sheets with excessive debt now - with a hard landing for the economy likely to result in 2005-2006. (LSR Daily Note 30th September 2004)

Outcome:

US slowdown in 2006 leads to sub-prime mortgage crisis

READ ME
01 Sep 2004

2005: Korea

Consensus said:

Korean household spending to recover strongly in 2004

We said:

Korean growth remains dependent on exports performance. Domestic demand, in particular household spending growth will not recover until 2005 and is unlikely to drive growth before 2006. (LSR Daily Note 1st September 2004)

Outcome:

Household spending average quarterly growth in 2004: 0.1% vs 2.3% for exports

READ ME
12 Aug 2004

2005: Euroland

Consensus said:

Euroland growth remains weak, the ECB should cut interest rates

We said:

Euroland growth will be above-trend in 2004, slowing to trend in 2005. There will be no interest rate cuts. (LSR Daily Note 12th August 2004)

Outcome:

Euroland growth was 1.7% in 2004 (trend = 1.5%), but slowed in Q2 2005. Interest rates remain unchanged in the year to date.

READ ME
05 May 2004

2005: Asian Tigers

Consensus said:

Strong growth for Asian tigers in 2004 and 2005

We said:

Once export growth cools in H2 2004 and following quarters, output growth will slow down abruptly. Indonesia performance will remain countercyclical to the rest of Asia. (LSR Daily Note 5th May 2004)

Outcome:

Q1 GDP growth yoy halved in Singapore, Taiwan and Korea and slowed in Thailand. Indonesian growth accelerated from late 2004.

READ ME
10 Jan 2004

2004: UK housing market

Consensus said:

A slowdown from the current inflation rate of 15%.

We said:

Current reading suggests that house price inflation could rise back up towards 20% again by the summer. 

Outcome:

House price inflation rose to 19% in May.The momentum in the housing market has taken many, including the Bank of England, by surprise.

READ ME
21 Jul 2003

2003: China: the coming ascendancy

Consensus said:

China not yet integral to global investors thinking.

We said:

China has grown in importance in the global economy...This article outlines the successful economic progress China has made since the late 1970s after 30 years of decline under Mao Zedong. It looks at what has underpinned its robust expansion and argues that favourable economic fundamentals should support continued strong growth in the long run. The main medium term risk is a collapse in the banking system, but this threat is often exaggerated. There has been some pressure for China to revalue its currency. Although such a move, coupled with stimulating domestic demand, will be beneficial for both China and the rest of the world, it is unlikely to happen very soon. 

Outcome:

China becomes crucial to global growth, commodities, and asset prices. No short-term banking crisis.

READ ME
16 Apr 2003

2003: Japan turnaround

Consensus said:

Japan will continue to be crippled by deflation.The bad bank loan situation means Japanese stocks are not worth touching.

We said:

Japan is turning. Buy Japanese equities. 

Outcome:

Nikkei has increased 50% since the lows of 2003.

READ ME
26 Nov 2002

2002: China to become a global economic engine

Consensus said:

China unlikely to take the global economy forward

We said:

Medium-term growth prospects for China very good. Emerging Eurasia to dominate world by 2025. 

Outcome:

In the next decade China becomes the most important country as % of global GDP growth

READ ME
19 Sep 2002

2002: Commodity Prices

Consensus said:

Rising commodity prices unlikely to continue

We said:

At least in the medium term China will fuel domestic demand growth, attempting to counter the global economic cycle. This will invariably have an upward effect on commodity prices.

Outcome:

Commodity prices continued their ascent

READ ME
03 May 2001

2001: Germany at risk of recession

Consensus said:

German GDP to total 2% in 2001

We said:

A recession this year cannot be excluded. The budget deficit will almost certainly over shoot the 1.5% target. Beware a German recession.

Outcome:

German economic shrank H2 2001 and the budget deficit exceeded 1.5% target

READ ME
20 Jul 2000

2000: US economy

Consensus said:

US to have a 'soft landing'. Corporate profits to rise gently.

We said:

Hard landing for US economy, sharp fall in corporate profits 2001-2002, shares to plummet. 

Outcome:

US in recession from March, markets fall 22% in year to Q3 2001.

READ ME
01 Apr 1999

1999: US inflation

Consensus said:

2.2% US inflation in one year's time.

We said:

3% and rising. 

Outcome:

3% and rising.

READ ME
06 Jan 1999

1999: UK economy

Consensus said:

UK recession in 1999.

We said:

1.5% GDP growth in 1999 (the highest forecast out of 43). 

Outcome:

2.1% GDP growth.

READ ME
01 Sep 1997

1997: Japan

Consensus said:

Fiscal policy can save Japan from recession.

We said:

Japanese fiscal policy has run its course.

Outcome:

Deepening recession.

READ ME
28 Apr 1996

1996: Uphill capital flows to Asia will lead to currency crisis

Consensus said:

FX markets appropriately pricing EM currency risk.

We said:

Capital flows uphill when it goes from countries that don’t have it to countries that don’t need it. Private capital floods out of America, where savings are low and into Asian Tiger economies where they are high. These flows do not in any way reflect macro-economic savings surpluses or shortfalls, money simply moves where returns are likely to be highest – which is in well run Asian economies. When it gets there it is bound to cause trouble, particularly for countries like Thailand that have resisted nominal exchange rate increases. Excessive foreign currency reserve growth, which cannot effectively be sterilised, leads to overheating and inflation. Real exchange rates appreciate and current accounts dive deeply into deficit. Crises and recessions follow when investors finally lose confidence.

Outcome:

Asia crisis begins in Thailand in July 1997

READ ME
06 Jun 1995

1995: US economy

Consensus said:

US economy will slow.

We said:

The strong economy and bull market will continue.

Outcome:

Strong US growth.

READ ME
10 Feb 1994

1994: UK base rates

Consensus said:

UK base rates will rise from 6% to 8%.

We said:

Base rates will rise only slightly, to 6.5%. 

Outcome:

Base rates rose to 6.5% in 1995, then fell in 1996. Many Lombard Street Research clients made 250 ticks on short sterling.

READ ME
05 Aug 1993

1993: Maastricht: a house built on sand

Consensus said:

Policymakers believed that the European monetary union would lead to economic convergence

We said:

Maastricht was fatally flawed. Its convergence criteria were designed to make the single European currency as sound as Europe’s soundest, by imposing fiscal and monetary discipline on all. But Europe’s problem is endemic unemployment, not inflation. The political will to make Maastricht succeed remains strong in France, Germany and some smaller European countries. If they go ahead with a two speed Europe, they will move into the slow lane. The single market will die. 

Outcome:

EMU structure was flawed and made no allowance for differing growth rates. ECB rates too low for some, too high for others.

READ ME
10 Mar 1993

1993: German economy

Consensus said:

Germany will be the European locomotive.

We said:

German GDP will contract.

Outcome:

German GDP contracted.

READ ME
31 Jul 1992

1992: The ERM: is it doomed?

Consensus said:

FX markets volatile but not pricing in UK exit from ERM

We said:

Germany’s stringent monetary policy, to damp the inflationary pressures from unification, is incompatible with its role as leader of a fixed rate system whose other members are suffering recessions. Devaluations do not raise prices when the world is in recession. They force price cuts on exporters The British economy is headed for depression unless Germany revalues significantly. Only policy changes can save it, and that means a political crisis in which the Prime Minister and Chancellor lose their jobs. (LSR View 31st July 1992) The pound is doomed to devalue or float. 

Outcome:

UK is forced to leave ERM on Black Wednesday

READ ME
06 Feb 1992

1992: UK inflation

Consensus said:

Rising inflation (to 4.2%).

We said:

Falling inflation (3.5%) and strong growth. 

Outcome:

The five years from Q2 1992 saw above-trend growth, and inflation was lower in1997 than in late 1992.

READ ME
10 Dec 1991

1991: Japan

Consensus said:

A model economy.

We said:

The Japanese stock market crash and property price collapse has left a legacy of bankruptcies, loan losses and delinquencies. A credit implosion is possible, leading to severe recession. (LSR View 10th December 1991)

Outcome:

Japan experienced a decade of economic collapse.

READ ME
03 Jan 1990

1990: UK economy

Consensus said:

UK economy would experience growth.

We said:

Recession. 

Outcome:

GDP was 1.7% lower in Q4 1990.

READ ME

Politics

16 Aug 2018

2018: Russian financial deepening a shock-absorber

Consensus said:

Russian geopolitical risk premium to hamper asset prices. 

We said:

Financial deepening is an important long-term driver of improved risk adjusted investment returns in EM. In Russia the short-term benefits are becoming clear. 

Monetary policy underpins the recent advances and brightening prospects of financial deepening in Russia, but fiscal policy is also contributing to the strengthening local bid that speeds recovery from periodic market turbulence. The aftermath of the latest sanctions scare this month will show this live benefit of financial deepening in action once again. An imminent and decisive breakthrough is the launch of a new pension investment system - reducing fixed income risk premium and particularly benefitting the equity market. 

Financial deepening is also creating opportunities in the here and now. Our first 'Exhibit' in this note highlighted the importance of the structurally stonger local bid for the OZF recovery from last April's sanctions shock. At the time of writing, only a week has passed since the latest bout of sanctions-related Russian market turmoil. Signs of stabilization are already apparent, and, once again, a prompt recovery is to be expected. These live episodes show financial deepening in action. 

Outcome:

Russian stocks rose from 2,261 on publication date to peak at 2,493 on 3 October 2018. Russian assets did not suffer as much as other EMs during risk-off episodes in autumn 2018. We attribute some of the relative resilience to financial deepening. 

READ ME
05 Jul 2018

2018: Brexit noise a buying opportunity

Consensus said:

Risk of a no-deal crash out is too big to be ignored and is reflected in sterling weakness. 

We said:

Brexit-related noise in UK politics is rising to a new pitch, prompting a review of our existing call that the risk of a 'no-deal-crash-out is negligible. Noise means market volatility with sterling as ever in the front line. Noise is not only inevitable in a political process as fraught as Brexit but also an instrinsic feature of that process. The reason for this is brinkmanship. It is in the nature of such negotiations to go down to the wire. Moreover, the UK government has an interest in brinkmanship to improve its chances of persuading various potential rebel camps that they must choose between the Brexit solution on offer, however distasteful it may be to them, or the worse alternatives of Brexit never happening and/or a government collapse and the risk of Jeremy Corbyn's Labour coming to power. 

Periods of heightened volatility for sterling - and UK financial assets - are to be expected between now and next March. This volatility will reflect fears of a crash-out Brexit. Based on the political realities, such episodes should be viewed as opportunities to buy on weakness. 

 

Outcome:

Since publication there have been many moments of political deadlock, drama and fear. There have been 5 sharp sell-offs in sterling vs EUR and on each occasion sterling has bounced and the losses have been quickly recovered. Buying the dips proved to be a profitable strategy. 

READ ME
25 Jun 2018

2018: Mexico - AMLO will win presidency and Congress

Consensus said:

Morena’s party alliance is unlikely to reach absolute majority in Congress

We said:

AMLO’s expected victory possibly represents the largest change in the political regime of the country in modern times. Moreover, his victory could lead to significant gains in congressional seats too, as Mexicans have historically voted for the same party in both the presidential and congressional ballots

Outcome:

Morena’s party alliance obtained a landslide win for the presidency and achieved an absolute majority in Congress in 1 July’s election

READ ME
29 May 2018

2018: NAFTA deal is not imminent despite what some say

Consensus said:

A NAFTA deal is possible in May

We said:

The possibility of closing negotiations with a ‘skinny’ deal is a good sign for the ongoing trade talks, but the proposal is not credible

Outcome:

A NAFTA deal was not reached in May and the negotiation process paused for 2 months

READ ME
17 May 2018

2018: Russia geopol risk premium overdone

Consensus said:

Geopolitical risk premium for Russia is soaring, with no end in sight. 

We said:

Despite the appearance of stalemate fraught with uncertainty, careful analysis of the causes of the latest sanctions escalation suggests a more positive conclusion that sanctions risk will now subside. Other things being equal, the US government will likely hold its fire on Russia for now. The Russian policies regarded by the US as 'malign' stem from what Russia perceives as vital interests. Those policies would only be changed or abandoned if the US retaliation against that 'malignancy' completely undermined Russia's economy and present political leadership. For the US, however, pursuing the goal of regime change in Russia comes at a price in terms of collateral economic damage that it does not seem ready to pay. Peak sanctions may be behind us. 

This more constructive turn of events is now more likely than the opposite scenario of yet more sanctions escalation. Since the threat of further indiscriminate US sanctions will continue to hang over Russia, the political risk premium will remain elevated. If, however, our prediction proves correct, that premium will look increasingly attractive. 

 

Outcome:

Russia's stock market rose from 2,324 at time of publication to an all-time peak of 2,493 on 3 October 2018. Russian assets and currency out-performed other EMs during risk-off episodes.  

READ ME
03 May 2018

2018: Long, ugly trade clash looms

Consensus said:

Hopes were high that a US-China trade deal would be done quickly because: 1) it makes economic sense for both parties and 2) President Trump is a 'deal maker'. 

We said:

Contrary to the expectations of the media and many analysts, we believe the starting point for serious negotiations between US and China is some way off and that considerable time may be needed to get there. This week's US-China talks are likely to highlight the gulf between the two sides. 

As a result, the risk of tit-for-tat trade actions is heightened because it is unlikely that formal negotiations will start ahead of the original deadline set for the US to make a decision on imposing tariffs.

In the face of open-ended and ill-defined demands, China is unwilling to consider any compromises to the "Made in China 2025" programme. Moreover, it will remember its experience with Commerce Secretary Wilbur Ross, who apparently reached several agreements with Chinese negotiators last year only to have Trump throw them out when he returned to Washington. The Chinese side will want to know who speaks with authority for the US on trade and economic issues so as not to repeat the Ross experience. 

Detailed trade and economic negotiations are unlikely to get under way soon. We believe the most likely scenario for reaching serious negotiations will involve multiple deadlines and subsequent postponements, similar to what appears to be happening with the US-EU steel and aluminium talks, which have been postponed for another month. 

When negotiations finally come, they are likely to be long and ugly. 

Outcome:

No quick trade deal is done. Tit-for-tat tariffs are introduced and rounds of negotiations are delayed and cancelled. Investors gradually realise that trade war is real and increase risk premia priced into in stocks as a result. RMB falls by 9% vs USD between June and October despite Chinese authorities efforts to cushion the fall. 

READ ME
26 Apr 2018

2018: Brexit In Name Only a done deaI

Consensus said:

Risk of a no deal crash-out is to big to be ignored. 

We said:

Intense domestic UK political battles over Brexit are getting underway but the appearance of high stakes is an illusion. The outcome os the formal Brexit process is already in the bag: on leaving the EU in March 2019, the UK will move into a ‘standstill transition’ lasting (initially) for 21 months. The risk of a no-deal ‘crash out’ is negligible, as is the prospect of the Brexit project collapsing altogether. The questions now being fought over are outside the scope of Withdrawal Treaty which is the legal basis of the formal March 2019 exit. 

The sound and fury that is getting going may well create the impression of a beleaguered government and the possibility of Conservative leadership challenges. Any such political tremors could cause passing sterling weakness (and even hesitations in the MPC about rate hikes). As far as any related sterling weakness goes, this would – on our fundamental view of the matter – be “buying opportunity” territory.

 

Outcome:

Since publication there have been many polticial scares about a crash-out Brexit, potential challenges to Teresa May's leadership, internal conflict among Conservative MPs, and seemingly chaotic Brexit negotiations. There have been five large falls in sterling vs. euro and in each case they were quickly undone. A 'buy the weakness' strategy proved to be profitable. 

READ ME
19 Apr 2018

2018: RMB to appreciate short-term despite trade war

We said:

Renminbi appreciation is set to continue in the short term. At the current index level around 97 and amid export growth that remains strong, the RMB may still be some way short of the level at which the authorities will be inclined to manage the currency weaker. Even without the threat of a trade war, however, the exchange rate impact on exports in the current enviroment may be stronger that that in 2015-16, as suggested by the recent appreciation of the real effective exchange rate compared with the CNY index. The moral high ground of an appreciating currency better suits Beijing at this early stage om the trade negotiations. We see potential for the renminbi to appreciate to as much as 98-100 vs the CNY index in the coming months, before the authorities act to rein it in. 

Outcome:

RMN index rose from 96.9 on date of publication to 98 on 20 June 2018. It then collapsed back to 92.4 at the end of July as markets began to price in the effects on US-Sino trade war. 

READ ME
06 Apr 2018

2018: Red lines and trade war tensions

Consensus said:

Trade war between US and China would be quickly resolved because a deal is in the economic interest of both sides. 

We said:

The nature of the Chinese system is that all policy is driven - either immediately or ultimately - by the politics of the ruling group. It dictates how the leadership wil act by drawing its "red lines" in key areas affecting relations with the United States in particular. This is the context in which current trade frictions should be viewed. 'Made In China 2025' is not negotiable. 

Outcome:

Trade war escalates, as we forecast, through spring, summer and fall 2018. Markets being to price in the reality of tariffs, FX moves, and the impact to inflation and growth. US-China relations sour further and trade talks are put on hold. 

READ ME
26 Mar 2018

2018: Trump tariff tantrums will benefit Brazil

We said:

In a tit-for-tat trade war between China and the US, Brazil's farm sector, which has been a driving force of the country's economic recovery, would be a primary beneficiary. Trump's initial bluster and grandstanding on trade both with Mexico and China has created significant uncertainty about the sustainability of US supply chains for agricultural products. Even if the resolution of upcoming negotiations spare US farm exports, countries that import from the US have strong reasons to diversify their souces of supply. As a result, Brazil will likely be in a win-win situation. 

Outcome:

Brazilian exports of soybeans to China rise 15% from 44.1 milliion tonnes in January - August 2017 to 50.9 million tonnes in the same period in 2018. 

READ ME
16 Mar 2018

2018: Mexico will move into deficit

We said:

It is unlikely that the fiscal surpluses observed in 2017 will be sustained throughout 2018. Banxico’s operational profits, which derived from FX gains in 2017, have fallen significantly and thus their transfer to the fiscal accounts in Q1/18 will be smaller or even zero. Moreover, the start of the election season in Q2/18 will likely translate into a further narrowing of the fiscal surplus owing to higher pre-election spending. Thereafter we could see small primary fiscal deficits.

Outcome:

March data showed that Mexico posted their first primary fiscal deficit in more than 15 months

READ ME
08 Mar 2018

2018: Chinese infrastructure to be lowest in a decade

We said:

Macro policy implementation will be crucial to watch this year. We continue to believe that the three leading sources of potential growth disappointments in 2018 are: 1) lower-than-expected infrastructure growth (our base case); 2) a collapse in Chinese export growth and trade surplus (not our base case); and 3) the impact of the debate over the property tax on the confidence of households in buying and holding property, which could lead to a drop in house sales. We believe that, together with expected lower land sales revenues, overall fiscal spending will be contractionary this year compared to 2017. We expect infrastructure investment growth to slip below 12% in 2018 - the lowest growth rate in more than a decade. 

Outcome:

By March 2018 infrastructure investment had been 12.3% annualized in the first two months of the year. It collapsed to trough at -4.7% in July since when a mini-stimulus has been used to provide support. 

READ ME
25 Jan 2018

2018: India - Growth recovery at the expense of macro stability

Consensus said:

Markets have perceived Prime Minister Narendra Modi as a reformer, with investors still optimistic about his policy agenda.

We said:

Widening twin deficits and rising inflation are fast emerging as risks to India’s macroeconomic stability that will threaten the nascent growth revival. Historical precedence shows that spending rises ahead of elections; combined with the Modi government-driven policies such as farm loan waivers and GST rate cuts as well as a probable reduction in excise duties owing to rising oil prices, this points to the high possibility of fiscal slippage in FY19. Increasing oil prices and fiscal pressures will keep inflation above the RBI’s 4% target in FY19; the RBI will not cut policy rates to assist any growth recovery and could even hike interest rates in FY19. The current account deficit is widening owing to stronger oil prices, but non-oil imports are rising sharply too. Given that consumption and government spending are likely to drive economic activity in FY19, any growth spurt will be unsustainable, leading to macroeconomic imbalances over the medium term.

Outcome:

In this overarching macroeconomic piece at the start of the year, we made calls on the twin deficits, inflation, monetary policy and macroeconomic stability, and we have been proved right on almost every count. The only outstanding issue is the excise duty cut on fuel prices, which may still well happen before the 2019 general elections. The risk of a hard landing in 2019 is only growing as the Modi government's inability to generate a rapid growth recovery is making it fall back on populist policies, with damaging consequences for fiscal consolidation and inflation.

READ ME
17 Dec 2017

2018: Turkey will fall into crisis

Consensus said:

Analysts had become accustomed to seeing Turkey as vulnerable, clearly unbalanced and badly governed but did not feel that a crisis was imminent. Almost all agree that the country is capable of bailing itself out just in time through a rate hike. 

We said:

Unbalanced growth is driving a vicious cycle in which lira depreciation drives inflation, forcing a rate hike, motivating fiscal stimulus, driving up core deflation, leading to further depreciation. The government has no intention of fixing imbalances and this means that the underlying problems will get worse and worse. At some point Turkey will run out of time. 

The foreign debt issue is a symptom of the underlying malaise: unbalanced growth. This external vulnerability is heightened by FX dynamics: "hot money" continually floods in and out of the system in search of carry from high interest rates and as a result the whole economy suffers from resultant FX volatility. In short, Turkey has a whole new set of vulnerabilities, only it is no longer an issue of banks relying on the government to be solvent, but of the banks relying on external finance to remain solvent. 

Turkey's relations with the EU and US appear to be stuck in a long-term pattern of decline. This is a bumpy process which has an almost limitless capacity to produce short-term shocks of exactly the kind that can trigger hot money to flood out. 

Fed hikes are coming and benign conditions will not last. Turkey will fall into crisis. The next time intense lira depreciation hits, it will be time for investors to leave the casino.  

Outcome:

The economy continues to deteriorate but the government refuses even to raise rates until June 2018. Turkey and the US fall into a major political crisis. TKY loses 45% of it's value between our publication date and August 2018. Turkish stocks fall 20% in the same period (28% from the January peak) and the government/central bank is forced to raise rates to 25.50% by September 2018. 

READ ME
22 Nov 2017

2018: Brazil: Why Bolsonaro chances should not be underestimated

Consensus said:

At the time of writing polling data showed only 13% intending to vote for Bolsonaro in the first round of the election

We said:

For the first time in three decades, a right-wing movement has resurfaced. As Brazil's political elite implodes, a vacuum is forming galvanising the reurgence of the Right. This new, potent force will shape the 2018 presidential race. Bolsonaro should not be underestimated, the ongoing political crisis has given rise to a once-in-a-lifetime opportunity for the Rio politician. There are 5 main reasons he appeals to voters:
1) A political outsider
2) An anti-corruption mantra
3) Tough talk of public security
4) Opposition to affirmative action and social programmes
5) Evangelical base

Outcome:

Bolsonaro won a resounding first round victory on 8 October 2018, taking 46% of the vote and winning 4 of 5 electoral regions

READ ME
05 Oct 2017

2017: Brazil: Little time left for crucial fiscal reform

Consensus said:

Markets still complacent on fiscal problems and the ability of the Temer administration to pass essential pension fund reform. 

We said:

With a mere 11 weeks left until the yearend leglislative recess - part of which will be focussed on Temer's fight for political survival - even the passage of uncontorversial micro reforms will be challenging. Furthermore, the timeframe for other important legislation to be passed next year is too narrow, too, since key members of Temer's cabinet must resign by early April if they want to run for elected office. Fiscal austerity bills are also on the back burner, putting next year's primary deficit target in jeopardy. Furthermore, even those politicians who recognize the urgency of passing unpopular reforms - such as the overhaul of the pension system - are more likely to opt to postpone the tough reforms until after the election. 

Outcome:

Temer hangs on but no reform is past. The fiscal situation continues to deteriorate rapidly and markets finally wake up to the problem. 10y yields rise from 9.73% at the time of writing to 11.34% 12 months later. 

READ ME
15 Sep 2017

2017: Catalonia will not secede

We said:

Catalonia's planned independence vote will not lead to secession, although the row could be protracted. Spanish and Catalan debt markets have so far been relatively subdued. The reason for this, presumably, is that markets don't expect Catalonia to secede from Spain anytime soon. They're right: Madrid won't allow it. Rather than try to prevent the vote, Rajoy could simply refuse to recognise it; and when it registers a Soviet-style majority for independence on a derisory turnout, congratulate the Catalan government on having conducted a glorified survey of its own supporters. It would then be a declaration of indepence which would seem illegitimate and divisive. A messy dispute might result, but with economic and hard power and international recognition vested in Madrid, the outcome would not be in doubt. 

Outcome:

Independence vote is 92% (of 43% turnout) in favour. Madrid refuses to recognise the result and Catalonia remains part of Spain. 

READ ME
17 Aug 2017

2017: Brazil: Closer to the fiscal precipice, ratings downgrades coming soon

Consensus said:

Investors, and bond investors in particular, complacent about Brazil pension reform and fiscal position

We said:

The weakened Temer government - which had once promised a "bridge to the future" - bowed to the politically inevitable this week when it sharply revised up its 2017-20 primary deficits targets. While this comes as little surprise - indeed we have long forewarned it will happen - the trend is clearly at odds with the Temer administration's long-touted goal of returning Brazil to the path of fiscal sustainability. Although the market reacted well initially we still see a serious risk of a downgrade before yearend. 

Outcome:

S&P cut Brazil's rating to BB- on 11 January 2018. Fitch followed suit and cut to BB- on 23 February 2018. In the 12 month's since publication the real lost 29% vs. USD and 10y bond yields rose from 10.11% to 12.40%

READ ME
06 Jul 2017

2017: Italian populist talk of euro exit is a chimera

We said:

The high risks of leaving the euro make this policy a likely vote loser. A referendum on continued Eurozone membership is the present M5S party line. M5S leaders have claimed that the referendum threat would give Italy leverage over Germany. In reality, the referendum gambit would more likely be regarded in Germany (and elsewhere) as a Greek-style bluff. The Italian bond market would be destabilized by the announcement of such a referendum (which, for legal reasons, would probably have to be non-binding in any case). In what amounts to an implicit aknowledgement of these realities, M5S now seems to be drawn to the parallel currency idea. This "solution" looks like another mirage. We predict that the new Italian government, whatever its political stripe, will instead go down the road of unilateral violation of the Fiscal Compact. 

Outcome:

5 Star Movement and La Liga both soften their tone on the euro and remove euro exit from their policies in January 2018. The first coalition budget expands the scale of the fiscal deficit, enrages the EU, and causes BTP 10y yields to rise to 3.58% in October 2018. 

READ ME
10 Mar 2017

2017: Macron to win French Presidency, Le Pen’s chances overstated

Consensus said:

Markets pricing in chances of Le Pen victory, euro area spreads widening and talk about the future of the euro

We said:

The prospect of a victory for Marine Le Pen has unsettled markets. A case can certainly be made for how she could win. We believe that, for all her impact in moving French politics to the right, this is unwarranted. Despite his lack of backing by an established political party, his age (39) and his thin governmental experience, the centrist candidate, former banker Emmanuel Macron, has a much better chance than Le Pen of entering the Élysée Palace in May. The left has divided; and as Macron acquires ever more high-profile endorsements. At a recent press conference confirming his intention not to run, the centre-right primary candidate and former PM Alain Juppé seemed to be opening the door to eventually giving Macron his blessing. (Europe Watch 10 March 2017)

Outcome:

Macron beats Le Pen by 66% to 34% in the second round to become President. His En Marche! party subsequently wins a huge majority in the French parliament. 

READ ME
08 Mar 2017

2017: India - On the road in Uttar-Pradesh, Modi's BJP will win key election

Consensus said:

Markets were predicting Modi's BJP to fall short of a majority in the largest state election in India, scheduled for the mid-point of Modi's 5-year term and the first poll after the controversial demonetisation drive.

We said:

Our impression following a five-day road trip in eastern Uttar Pradesh, where polling in a month-long election culminates today, was that Prime Minister Narendra Modi’s Bharatiya Janata Party has a clear lead over its regional rivals. Modi’s pro-development image and nationalist, pro-poor rhetoric spun around the demonetization drive seem to have ameliorated the impact of the caste and religious lines on which the state has traditionally voted; he remains very popular, even as the negative effects of the notes ban continue to ripple through the economy.

Outcome:

Modi's BJP won an overwhelming majority in the state providing a big sentiment boost to the markets as the Uttar Pradesh election was viewed as a vote of confidence for Modi and his reform agenda, and it encouraged the government to press ahead with the rollout of the key Goods and Services Tax reform. This report was an example of our on-the-ground analysis where we go to different parts of the country to survey the local circumstances.

READ ME
03 Mar 2017

2017: Xi’s power consolidation allows room for lower growth target than previously promised

We said:

Xi Jinping promised in November 2015, that the economy would grow at 6.5% through to 2020. This was necessary, he said, to fulfill a promise by his predecessor, Hu Jintao, to double the 2010 GDP and per capita income by the end of the decade. However, over the past year, there have been several signs that Xi might be willing to back away from this pledge. After recent conversations in Beijing, we believe the target will be relaxed. We believe policymakers will accept growth below 6.5% from next year. The change responds to a wide-scale recognition that the current rapid pace of debt accumulation is unsustainable and increasingly risky. This bold political move will be enabled by Xi Jinping’s consolidation of power at the 19th Party Congress at the end of 2017. (China 03 March 2017)

Outcome:

Li Keqiang announced a lower growth target of “around 6.5%”, the lowest in 25 years, on 4th March 2017. 

READ ME
26 Apr 2016

2016: Nabiullina is a Russian Volcker – equities and bonds will benefit

We said:

Success in squeezing persistently high inflation out of the system would be an historic achievement for the Central Bank under the leadership of Elvira Nabiullina and would have positive implications for Russian financial asset prices. Nabiullina’s improving chances of success are founded on her most important achievement to date, which is to have secured President Putin’s support for what she calls “moderately tight” monetary policy. The CBR does not enjoy statutory independence in its pursuit of an inflation target. It therefore depends on political support (as, arguably, is the case for its global peers, which are formally independent). President Putin has consistently provided such support since the previous crisis of 2008-09. In our view, his underlying motive came out of the lesson brought home by that crisis – namely, that monetary policy matters for sovereignty and self-reliance (paramount goals for Putin). In the run-up to 2008, Russia became prey to the well-known “impossible trilemma”, whereby a country with a convertible currency and pegged exchange rate must submit to having its domestic interest rate set by the outside world. Quite apart from the intrinsic desirability of regaining monetary sovereignty in Putin’s world view, an inflation-targeting framework makes it easier to weather periodic crises. That political support will continue for two reasons: first, the worst is over for real household income, and monetary policy is now helping rather than hindering this turnaround; second, Nabiullina is avoiding shock therapy, thanks in part to effective coordination with fiscal policy. (Russia 26 April 2016)

 

Outcome:

10y bond yields fall from 9.25 on 26th April to bottom at 7.48 in May 2017. RTS index rises from 951 on 29th April to peak at 1196 in January 2017.

READ ME
11 Apr 2016

2016: No RMB devaluation, Beijing will use a ‘managed float’

Consensus said:

Large speculative positions for a repeat of the August 2015 RMB step devaluation. 

We said:

Although speculators were wrong to anticipate a sudden devaluation, they were not wrong in noticing that the RMB is overvalued. Despite slowing dollar demand from corporates and tight capital controls, net capital flows are still negative. The government has no desire to protect an overvalued currency because such an approach is expensive and hampers its ability to implement monetary policy. But at the same time it is keen to preserve stability. For this reason, we believe the authorities will continue to use a “managed float” approach, gradually guiding the currency down towards the market level but allowing occasional volatility to inflict pain on speculators. (China 11 April 2016)

Outcome:

USD/CNY weakened from 6.46 on date of publication to 6.96 on 3rd January 2017.

READ ME
07 Oct 2015

2015: Xi Jinping takes control of economic policy as ‘core leader’

We said:

Xi’s concept of reform differs from the markets. We believe that Xi recognizes the need for economic modernization now that the 1980s model of cheap labour, cheap capital and strong export markets no longer applies. But he wants to regulate the process in keeping with the stress on control shown by the Communist Party since its foundation 90 years ago. Above all, he does not want to allow economic liberalization to spill over into China’s political structure and weaken the Party’s grip. This means that reform will be applied very cautiously and that political and social factors will play a big role in policy implementation. (China 07 October 2015)

Outcome:

Investors disappointed by reform progress. Shanghai Composite Index move sideways for 2 years. 

READ ME
30 Jan 2015

2015: Levy honeymoon will soon be over for Brazilian assets, recession coming

Consensus said:

Markets up on confidence in new Finance Minister Joaquim Levy. 

We said:

We think his honeymoon with the markets will end soon for the following reasons:

  • President Rousseff has become a lame duck even before her second term has really started.
  • Levy has successfully harvested the low-hanging fruit of fiscal reform – namely, tax hikes that do not require Congressional action; but these actions fall short of what is required to reach his target of 1.2 per cent of GDP 2015 primary surplus.
  • The full impact of the fiscal “bombs” and other creative accounting measures from Dilma’s first term are still not quantified.
  • Extraordinary fiscal assistance will be required this year to prevent a precipitous collapse of infrastructure spending on existing projects and the Rio 2016 Olympics.
  • Although many analysts have downgraded their forecasts and are now calling for a small decline in GDP growth this year, we think the consensus is still too optimistic. We revise down our earlier -1 to 0 per cent GDP forecast to -1 to -2 per cent for 2015. (Brazil 30 January 2015)

Outcome:

BOVESPO rose from 46,908 to 57,479 on 30th April before falling back to 43,200 on 21st Dec 2015 when Levy left office. Equities finally bottomed out at 37,497 by 28th Jan 2016. Worst recession for 25 years in 2016-2017.

READ ME
14 Nov 2014

2014: Petrobras scandal may lead to impeachment of President Rouseff

We said:

The re-election of President Dilma Rousseff has set the stage for what looks likely to be another challenging four years for Brazilian state-run firms. Political risk tends to rise for Petrobras (PETR3:BZ, PBR:US) in election years and fall in non-election years, in tandem with the state imperative to use the firm to control inflation and to increase investments ahead of voting. But this time around, the company and the government now face the ticking time bomb of the widening Petrobras corruption scandal. Although the appointment of new management could help the firm to put the scandal behind it, this crisis shows no signs of abating soon. The scandal could widen to include Brazil’s overall oil & gas sector, the power sector (notably Eletrobras [ELET3:BZ, EBR:US]) and public pension funds. (Brazil 14 November 2014)

Outcome:

Formal impeachment began on 2nd December 2015. Rouseff removed from office on 12th May 2016. 

READ ME
04 Aug 2014

2014: Political imperatives make mini ‘stop-go cycles’ the new norm for China

We said:

The Chinese government has strengthened its “mini-stimulus” measures since May and as a result GDP growth has picked up. Economic indicators show signs of stabilizing, but this is unlikely to continue beyond Q4/14. We do not believe that the economy is back on a firm footing. These mini-cycles seem to be the “new norm”, especially given that the present government has a higher tolerance threshold for lower growth than did its predecessor. (China 04 August 2014)

Outcome:

Mini-cycles persist for the next 3 years with the govenment providiing monetary and fiscal stimulus to keep growth up. 

READ ME
14 May 2014

2014: Markets much too hot on Indian reform.

Consensus said:

Investors excited about Modi's reform agenda. 

We said:

We are sceptical of the view that a Modi-led government would bring about India’s Margaret Thatcher moment. As we have argued elsewhere, the Congress Party model of gradual reform with a generous dose of welfare spending is firmly entrenched in India’s political economy. We think it unlikely that a mass party such as the BJP could change direction without generating political turbulence. (India 14 May 2014)

Outcome:

Sensex jumped from 20,000 to 25,000 as Modi's election became likely. The market peaked at 30,000 in March 2015 before falling back to 23,000 in Feb 2016. 

READ ME
08 May 2014

2014: Modi to win a larger majority than polls suggest. But markets still too hot on reform.

We said:

After travelling 1,500 km across parts of two of India’s poorest states – northwestern Bihar and eastern Uttar Pradesh (UP) – over five days in early May, my own mini-opinion poll indicates that Narendra Modi is well on his way to becoming the country’s next Prime Minister when votes in the six week-long national election are counted on 16 May. Amid slightly waning but still important undercurrents of religion, caste and community, Indians are looking for faster economic development; and they believe that Modi holds the key. (India 08 May 2014)

Outcome:

Modi's BJP won with the largest majority of any government since 1984. 

READ ME
12 Jul 2013

2013: Markets too excited on China reform.

Consensus said:

Investors anticipating major refoms from Xi Jinping and Li Keqiang following a 'lost decade'. 

We said:

  • Our biggest concern is that optimism about the speed of reform and the government’s ability to execute policy is overstated.
  • Although some plans are likely to be unveiled at the November Plenum, we do not expect radical change in the near term.
  • Instead, the immediate priority will be to clarify medium- and long-term objectives, to define the urbanization drive envisaged by Li and to continue to launch easy short-term alterations such as reform of various taxes, changes to the hukou system and factor market deregulation.
  • While reform would have positive longer-term results, it would be likely to compromise short-term growth and increase inflation, with a negative impact on equities.
  • Investors should not be too impressed by policy promises, but will have to be patient in monitoring execution and material structural improvements to produce a positive turn for Chinese equities. (China 12 July 2013)

Outcome:

Progress on reform was slow: two stepes forward, one step back. Shanghai Composite index went sideways for 12 months. 

READ ME
19 Sep 2011

2011: Chinese wealth management products not the negative others perceive

Consensus said:

Some observers believe that the recent rapid expansion of China’s shadow banking sector threatens financial and price stability.

We said:

After close examination of the issue we have reached a very different conclusion. 

  • China’s financial authorities have tolerated the rapid expansion of shadow banking activities because they hope to learn lessons about how to implement future financial sector reforms. 
  • The authorities will sooner or later crack down on activities they find undesirable such as off-balance sheet lending and securitized finance, while tolerating “good shadow banking” such as wealth management products. 
  • On balance, wealth management products help to underpin the stability of the Chinese banking system by improving the efficiency of capital allocation in the domestic economy and promoting de facto interest rate liberalization. (China 19 September 2011)

Outcome:

As of 2017 there have been no major blow ups in wealth management products. 

READ ME
21 Sep 2010

2010: Chinese wages to lead on rebalancing policy.

Consensus said:

Rising wages viewed as result of slower growth in the labour force. 

We said:

The phenomenon of rising wages now seen in China is often viewed simply as a result of the slower growth of the labour force and pressure for pay hikes from workers in coastal regions. We believe investors should instead view the changing labour scene as part of the leadership’s larger effort to rebalance China’s growth drivers in the coming years. This is why we expect the central authorities to continue to support rising wages to boost labour incomes after three decades of tilting the distribution of national income in favour of capital. (China 21 September 2010)

Outcome:

China's average yearly wage nearly doubles by 2016 risiing at an average of 13% per year. 

READ ME
23 Jul 2010

2010: Brazil faces serious problems no matter who wins the election

We said:

Don't believe the hype - serious problems lie ahead no matter who wins. Although the markets are expecting a soft landing next year there are compelling reasons to think it will not be smooth sailing for the Brazilian economy in 2011. Ingredients for a post-election letdown are:


1) Markets are wrong in interpreting recent low rates of inflation and slower growth as being sustainable. Those rates reflect special factors, such as falling food prices and the end of temporary government tax breaks. The economy is actually running close to full capacity with little or no economic slack. Even if global prices are in deflation strong domestic demand will fuel inflation of non-tradables and accelerate the deterioration of the current account.
2) Although an independent central bank is an indispensable asset in the economic outlook, most of the challenges Brazil faces today lie outside the monetary policy area. These include major structural bottlenecks in infrastructure, shortages of skilled labour, an overgrown and inefficient government bureaucracy and excessive government interference in markets.


Perhaps the biggest risk of all is that the next president will believe the market's bullish scenario and defer tackling the countrry's underlying structrual problems. This would frustrate Brazil's move onto a higher growth trajectory in the medium term. (Brazil 23 July 2010)

Outcome:

GDP falls from 7.5% in 2010 to 4% in 2011, 1.9% in 2012, 3% in 2013, 0.5% in 2014, -3.8% in 2015 and -3.6% in 2016 during which year Dilma Rousseff was impeached and removed as President.

READ ME
10 Aug 2008

2008: Beijing will use monetary not fiscal stimulus to boost GDP.

Consensus said:

China's growth model at serious risk following global financial crisis. Fiscal policy will be used to boost growth. 

We said:

Monetary stimulus will take the lead. The storm clouds generated by the spreading global financial crisis have spurred China’s policymakers to put into motion major economic policy changes. Although some analysts anticipate a large new fiscal stimulus programme, we think priority will be given to the loosening of monetary policy via reductions in banks’ required reserves and increases in loan quotas. We expect fiscal initiatives to follow, focused on tax relief and speeding up the pace of spending on existing infrastructure investment programmes. Hopes that the developing crisis might lead to a rebalancing of the government’s growth strategy away from investment and towards consumption are unlikely to be fulfilled. As in the past, the government’s primary goal is to boost economic growth as quickly as possible. Attempts to prevent growth from slipping below 8 per cent will concentrate on loosening monetary restraints on investment, not on measures to increase social spending. 

Outcome:

China's economy suffered as global demand fell but did not collapse. Enormous monetary stimulus of approx. 25% of GDP employed. 

READ ME

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%. 

READ ME
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 stablised the TRY/USD at 0.17. 

READ ME
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. 

READ ME
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 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. 

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08 Mar 2018

2018: China 10y spread over USTs will fall

We said:

A quarterly series of Fed rate hikes does not mean the PBoC will be forced to push up interest rates. We believe the PBoC will aim to keep the deleveraging process on track by not moving in lock-step with the Fed's 25bps quarterly hikes. 

The interest rate differential between 10-year Chinese government bonds and US Treasuries is likely to continue to shrink. We expect the differential, whihc is currently 100bps, to fall to 70-80bps in the coming six months. 

Outcome:

The spread of Chinese 10y bonds over UST 10y bonds fell consistently and rapidly through 2018 to reach a low of 39bps on 19 October. 

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28 Feb 2018

2018: Short AUD vs. USD

We said:

This year so far has been characterised by weak correlation between rates and FX as a consequence of ECB and BoJ QE. A re-rating of Fed hike expectations will temporarily disrupt the broader trend of global rebalancing away from the dollar. AUD/USD is a good example of this breakdown in rates-FX correlation; AUD has risen for two years despite the erosion of its 2y-yield advantage over the US, which has now turned into a discount of -50bp. On a previous occasion when the advantage turned negative, in 1998, the force of gravity eventually pulled AUD lower. The risk of a repeat has increased, and AUD/USD downside remains cheap. 

The implied volatility curve is relatively flat, and AUD/USD puts are relatively cheap. As the effects of the US government's fiscal stimulus become clear later in the year, and as the Powell Fed continues along its policy path, FX volatility should also rise. With Australia's yield advantage eroded, any change in dollar dynamics may have an outsized impact on AUD/USD compared to other G10 currencies. 

We buy an AUD/USD 20th Dec 0.75% put, and fund it by selling a 6-month put of the same strike for net cost of 58bp. 

Outcome:

AUD fell 5% vs USD more rapidly than we had anticipated. We closed the trade on 20 June 2018 for a profit of 27bps. 

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21 Feb 2018

2018: Buy WTI and OIH ETF to play the cycle

We said:

Global economic growth remains strong, but there are signs it may be maturing. Oil performs strongly at this stage of the cycle. Three technical factors will also support oil prices: 

  • OPEC restraint allows US supply to fill the demand gap
  • The IEA predicts an increase in global demand of 1.4mb/d this year
  • Shale supply is maturing and inventories are falling

We buy WTI at $61.50 and OIH US at $24. Oil prices do well at this stage in the cycle, and thanks to dollar depreciation and fiscal stimulus, the cycle has legs. More than that, the significant changes in the structure of global oil supply support rising global demand for US oil and associated activity. We buy WTI at $61.50, watch a stop near the recent low at $57.50 and target $70. We also buy OIH at $24 with a stop at $22.80 and target of $29. This ETF covers the US oil services sector, a sector which stands to benefit from increasing US production. OIH is lagging the recent rise in oil prices, perhaps because of a weak earnings season: earnings have tended to lag the oil price by a couple of quarters. But EPS based in the middle of last year and should soon begin to reflect the improving oil price outlook and improving US activity.

 

Outcome:

On 18 April we raised stop losses on both positions to lock in profit of 5% on WTI and 4% on OIH respectively. 

On 9 May we close the long WTI position for an absolute return of 13.2%. We kept the OIH trade running but raised the stop loss to $25.80 as well as raising our target to $30.

On 23 May we raised the OIH stop loss again to $27.50 as we became more cautious. 

On 30 May the OIH trade hit our the in-the-money stop loss and was closed out for an absolute return of 13.6%. 

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03 Jan 2018

2018: Sell CAD vs. MXN

We said:

We sell CAD/MXN on relative competitiveness. Mexico is cheap, Canada isn't. We continue to expect Canada to be the laggard in any global upswing because of the currency's strength. Recent weakness in the oil price will also dampen trade flows. BoC may raise rates more than 3 times but if it does, it will probably be because the Fed has delivered more than the two hikes the market is currently discounting, rather than because Canada needs the most policy tightening in G10. CAD is likely to underperform as rate-hike pricing adjusts.

MXN FX is cheap. Leftist presidential candidate AMLO has a lead of at least 9% in the polls, but with fully six months until the election it is too soon to price in all the 'bad news'. As NAFTA renegotiations continue there remains a risk that the trade treaty will be scrapped. But that is not our base case, and we reckon the current spot level compensates for that risk. 

We sell CAD/MXN at 15.50 with a stop loss at 15.80 and a take profit target of 14.85. 

Outcome:

CAD/MXN hits our profit taking level on 12 February 2018 for a total profit of 4.2%. 

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29 Nov 2017

2018: QE distortions will fade, we buy 1y10y USD 2.9% swaption

We said:

Distortions caused by central bank policies are suppressing global bond markets. Term premiums are pushed lower, muffling domestic drivers. In the US, for example, the decline in the term premium has obscured an increase in real short-term rate expectations and stability in inflation expectations in the last few years.

The nature of the first factor in fixed income means volatility has also been suppressed. All government bond markets are dancing to the same tune and are limited in the degree to which they can sell off before a central bank-induced bid emerges. But as the pace of QE slows and first factor loading declines, realised volatility will rise.

Fixed income implied volatility is currently at a record low. Compared with FX and global equities, fixed income also stands out as being driven by a single factor, which we expect will diminish in importance next year. Fixed income volatility should therefore rise in 2018. We buy a 1y10y USD 2.9% payer swaption for 86bp (2.36% yield spot ref).  The trade should make money on rising volatility and on the diminution of QE distortions, allowing the term premium (and therefore yields) to rise. We choose the US as the forward curve is flatter than in Europe, minimising the roll-down cost.

Outcome:

US 10y yields rise from 2.36% at trade inception and hit our target of 2.9% on 14 February 2018. 10y then range trades between 2.8-3% until breaking through 3% on the upside in September and 3.2% in October. 

As yields rose sharply on 7 February 2018 we sold a 3m10y USD 3.1% payer swaption to protect some of the gain. We repeated this hedge on 3 May 2018 be selling a 3m10y USD 3.18% payer swaption. 

We closed the trade for a total return of 155bps, including hedging costs, a 3x return on capital.

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06 Oct 2017

2017: Buy WTI / sell Brent

We said:

The Brent-WTI spread has risen in the past few months as supply curbs in OPEC and Russia have been effective, and US production has increased. Hurricane Harvey also reduced demand from US refineries (which cut production), so when the IEA forecast higher global demand, Brent prices were most affected. The spread widened to almost $7, its highest in two years.

US refineries are now getting back up to speed and the spread is now likely to narrow.  US domestic demand should also begin to increase and rising US exports should ease global demand for Brent oil. We expect the spread to return to its 2016-17 range of around $1-$3. 

We sell Brent oil futures and buy WTI oil futures at a spread of $6.50 with a target of $3 and a stop-loss at $8.

Outcome:

The trade hit our $3/bbl target and was closed for a profit of 78bps or 5.2%. 

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02 Aug 2017

2017: Forget sanctions, Russia is a buy

We said:

Apart from enjoying the tailwinds that GEMs in general are experiencing, Russia is benefiting from a number of idiosyncratic factors and is particularly appealing.

In short, we think that even though the US Congress approved fresh sanctions against Russia, new geopolitical risks are unlikely to crystallise. The relatively muted market response to the passage of the sanctions legislation suggests that most of the potential bad news is reflected in today’s cheap valuations. Besides, a broad-based economic recovery is evident in Russia, fuelled by increasing real wages and a rebound in retail sales. Importantly, orthodox monetary and fiscal policies continue to enjoy political support, which should help the rouble recover a little from recent weakness. Oil, a major determinant of the performance of Russian assets, may not be massively supportive given that current levels are close to the top end of what we regard as a reasonable range ($45-50/bbl). At the same time, continued dollar weakness would probably put a floor under crude prices. 

We therefore add a long position in RTSI$ futures as this gives exposure to both Russian equities and the RUB.

Outcome:

On 30 August 2017 we raised the stop loss to 1015 to protect profits. 

On 13 September 2017 we raised the stop loss to 1070, locking in profit of 6% since inception. 

On 11 October 2017 we raised the stop loss to 1100, locking in profit of 8% since inception. 

Profit taking level of 1200 was hit on 4 January 2018 . We closed the trade for a profit of 18.2%. 

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21 Jun 2017

2017: Goldilock's for EM, buy EEM US

We said:

Now that we see the risk of tighter US policy and a rising dollar pushed out to next year, we think it’s time for EM to catch up.

Since Fed policy started to tighten (the low in the Wu-Xia shadow fed funds rate was May 2014), investment in the EEM ETF – a US-listed fund which tracks the MSCI EM Index – has lagged investment in the SPY ETF. The SPY tracks the S&P500 and its size is a proxy for the broad rise in investable assets in the US. In other words, investors are relatively underweight EM.

Valuations also support owning EM rather then DM equities. The forward p/e for MSCI EM is 12.6x compared to 17.3x for MSCI DM. The discrepancy in EPS growth expectations is slightly lower, at 21% for EM vs 24% for DM, but EPS expectations have been rising more rapidly for EM than DM – another positive signal for EM outperformance from here on. Although the EEM ETF includes exposure to China, the slowdown in Chinese growth that we expect should not become a headwind. 

Finally, the decision by MSCI to include 222 China A-Shares in its EM index may not deliver an immediate boost to EM equities. At 0.73% market cap weighting, the potential inflow is around one-quarter of average daily volume in Shanghai and Shenzhen. All else equal, it is likely to mean only reallocation rather than new flows. But it is a net positive for sentiment towards EM assets and may highlight the degree to which some investors remain underweight.

We buy the EEM US equity ETF at 41.10 and set our t/p at 44 (near the previous high) with a stop at 39.50 (below the 100d moving average).

Outcome:

On 13 September we increase our target to 49.00 and raise the stop loss to 43.70, locking in 6.3% of profit since inception. 

On 11 October we raised our stop loss to 44.40, locking in at least 8% profit. 

On 1 November we raised our stop loss to 45.20, locking in a minimum 9.5% profit. 

On 22 November we raised out stop loss to 45.80, locking in over 10% profit. 

On 4 December our target of 49.00 was hit and we closed the trade for a total profit of 11.4%. 

 

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15 May 2017

2017: Buy Turkish local debt

We said:

As of today we add a positive view on Turkish local debt to our list of high-conviction total return calls. The Central Bank has progressively tightened monetary policy since the start of this year. As a result, inflation expectations have at last started to decline and the lira has stabilized. But the currency remains relatively undervalued amd yields are high, both vs the level of risk and vs comparable peers.

Monetary policy under the newly assertive CBRT has improved conditions for local debt and we see potential for yields to fall further over the next 3-6 months. 

Outcome:

Trade closed on 11 September 2017 for a total return of 7.6%

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05 Apr 2017

2017: Long Indonesian equities

We said:

We add a positive view on Indonesian equities to our high-conviction absolute views. 

The favourable US growth outlook will support a shift from fixed income to equities, while a moderately stronger dollar and relatively limited disruption to global trade will benefit EM assets. GDP growth in Indonesia is among the highest in major EM economies and the outlook for structural reform is increasingly positive, although economic nationalism remains a drag on growth.

Bank of Indonesia's cautious monetary policy and focus on currency stability will ensure that inflation remains within the target range and that expectations are well anchored, reducing risks for investors. 

Indonesian equities have underperformed since the US election, offering a relatively attractive entry point. 

Outcome:

Trade makes 5.6% by the time we close it on 20 November 2017. 

READ ME
10 Nov 2016

2016: Long South African local debt

We said:

International investors have reduced their exposure to local debt amid the latest escalation of political turmoil but have not yet returned to the market; this leaves potential for them to rebuild positions if, as we expect, the country enters a period of relative political calm. A stable currency will also ensure that inflation expectations remain well anchore, which will support the case for the SARB to the monetary tightening cycle, and benefit local bond markets. (EM Market Views 10 November 2016)

Outcome:

Trade makes 19bps (9.7%) before we take profit on 3rd February 2017.

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12 Oct 2016

2016: Bottom in sterling post Brexit

Consensus said:

Investors panicked by sterling and gilt sell-offs following Brexit vote and announcement of Article 50 timing.

We said:

EM parallels after joint sell-off in Gilts and sterling look misplaced. Sustainability may look poor on current account but not on net foreign asset position. We recommend playing near-time sterling topside using options and suggest selling a 0.90-0.95 3-month EUR/GBP call spread. (LSR Macro Strategy 12th October 2016)

Outcome:

GBP gained 6% vs. the euro from the top around 0.90.

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31 Aug 2016

2016: Gilts to under-perform

We said:

On the whole the Brexit-induced slowdown may turn out to be shallower than the spread between Gilt yields and US Treasuries is pricing in. This will especially be the case if core inflation picks up in the UK but declines in the US. We recommend a new relative-value trade: long UST 10y/short Gilt 10y entered at or close to current market levels (96bp at the time of writing) with a target of 65bp and a stop loss at 105bp. (LSR Macro Strategy 31st August 2016)

Outcome:

Target move of 31bps achieved.

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15 Apr 2016

2016: Long EM bonds

We said:

Appealing valuations, brightening prospects for global carry strategies, a large yield pick-up core markets and a general fear-fatigue make EM bonds attractive, as the Fed pushes back rate hikes and China stabilises. (LSR Asset Allocation 15th April 2016)

Outcome:

EM bonds outperform driven by the search for yield as investors moved out of negative or zero rate bond markets.

READ ME
07 Apr 2016

2016: Protracted exit for Dilma favors local debt

We said:

Despite the risk of a weaker economy and of heightened volatility in equity markets, the protracted exit for Dilma favours local debt. We expect Banco Central to continue to intervene in response to excessive currency appreciation; but improved investor sentiment thanks to the perceived prospect of a new government should ensure that the Real does not collapse and that inflation continues to decline, opening the way for lower interest rates. We add a positive view of Brazilian local debt to our list of high-conviction absolute market views. (EM Macro Strategy 7th April 2016).

Outcome:

Trade generates 220bps of profit which we take on 7th September 2016.

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30 Mar 2016

2016: Add carry to your portfolio

Consensus said:

Policy divergence dominates as a theme for investors.

We said:

The Fed is helping carry strategies perform. But not all carry is equal. We need the propulsion of a good domestic story. We recommend going long INR vs. GBP and long IDR vs. USD. (LSR Macro Strategy 30th March 2016)

Outcome:

5%+ pure carry performance on the Indian rupee.

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01 Mar 2016

2016: EMs stocks to outperform as the Fed will defer rate hikes

We said:

The Fed will change its current policy by taking further rate hikes off the table later this year. We think the move will, intentionally, create conditions for a reversal in the strengthening trend in the dollar and thereby for the improved perfomance of EM equities. (EM Strategy Monthly 1 March 2016). 

Outcome:

MSCI EM index up by 25% in 12 months outperforming both the MSCI World index (up 18%) and S&P500 (up 19%). 

READ ME
01 Mar 2016

2016: Long duration to remain a profitable theme

Consensus said:

Many were calling the end of the 30 year bull market in bonds and others were saying there was no value in buying bonds at the prevailing elevated levels.

We said:

Long duration and other carry trades will perform will in a zero and negative interest rate environment as the search for yield will continue to drive investors into long duration bonds. Within this theme we recommended tactical long positions in 10y USTs, gilts and Australian bonds. (LSR Macro Strategy 29th July 2015)

Outcome:

All long duration and carry trades added value to our portfolio. Inflation expectations remained extremely low until Nov 2016 and political risks including Brexit pushed bond yields down and prices up.

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17 Feb 2016

2016: Brexit risks: more an FX than a rates story

We said:

Brexit does not pose solvency risks for the UK: Gilt yields won't rise. Sterling is and will remain the main shock-absorbing channel for Brexit risks. Gilts on the other hand are likely to continue to behave as a safe haven and reflect the traditional inflation and growth risk premia. (LSR Macro Strategy 17th February 2016)

Outcome:

10y gilt yields of 1.48% at time of writing fall after Brexit vote to bottom at 0.52% on 12th August 2016. Sterling ($1.43 at time of writing) collapsed following the Brexit vote and hit a low of $1.22 on 14th October 2016 two days after we called the bottom.

READ ME
16 Dec 2015

2016: US HY pricing in Armageddon

We said:

While there are numerous reasons to be cautious on US junk bonds we think spreads price in excessive pessimism and offer compelling long-term value. However, with no peak in sight for default rates and rating trends still negative, a sustained rally is unlikely to begin just yet. (LSR Macro Strategy 16th December 2015)

Outcome:

US High Yield spreads rose from 485bp at time of writing to peak at 591bp in the first week of February 2016 and then fell back to a low of 380bp and range traded thereafter.

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11 Nov 2015

2015: Long agri commodities, short energy

We said:

Commodities have been and remain unloved since Chinese industrial growth began moderating in 2011. While concerns of oversupply relative to global demand underpin much of the commodity-bearish opinion, we find differentiating drivers between energy and metals on the one hand and agri/softs on the other. As a specific trade we recommend a volatility-weighted basket with wheat and soybean meal as long legs and WTI and natural gas as short legs. (LSR Macro Strategy 11th November 2015)

Outcome:

We close the trade on 9th Dec 2015 for a return of 12.8%.

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16 Oct 2015

2015: Long/overweight 10y gilts

We said:

Both manufacturing and services have slowed down which, combined with persistently low inflation, make the case for overweight gilts. Positive correlation with USTs (where we are now overweight) adds to our conviction. (LSR Asset Allocation 16th October 2015)

Outcome:

10y gilt yields fall from 1.93% in Oct 2015 to 1.37% in May 2016 when we downgraded gilts to neutral.

READ ME
16 Oct 2015

2015: Buy 10y USTs

We said:

Persistent deflation continues to argue in favour of Treasuries, but the slowdown in manufacturing as seen in ISM and regional surveys, as well as metrics such as inventory/sales ratios, strengthens the argument further. (LSR Asset Allocation 16th October 2015)

Outcome:

10y UST yields fall from 2.2% in Oct 2015 to 1.7% in Apr 2016 when we downgraded to a neutral recommendation.

READ ME
07 Oct 2015

2015: Lower inflation and policy tightening will flatten the US yield curve

Consensus said:

Yield curve to steepen as Fed hikes near.

We said:

After sharply flattening during H2 2014, the US Treasury yield curve hasn't really trended much. Rate hikes can bring flattening. But the Fed keeps holding fire, maintaining the term premium as the predominant driver of the curve. The polar opposites of Fed rate hikes and deflation both support flattening. Steepening would require a rise in inflation expectations with the Fed on extended hold. Scope for steepening driven by real term-premium widening is limited given structural factors. It's ultimately cyclical inflation that holds the key to future trends in the curve. (LSR Macro Strategy 7th October 2015)

Outcome:

Positioning for a flatter curve delivered 100bps of performance, 60bps one negative carry is deducted.

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26 Aug 2015

2015: Buy the dip on the S&P

We said:

China's decision to devalue the yuan triggered a correction that has now reached extreme levels. Should this be seen by investors as a buying opportunity, or rather as a sign that the global cycle has turned? We think the former, and add to our long US equity position as the market looks as oversold as in 2008. (LSR Macro Strategy 26th August 2015)

Outcome:

Trade makes 5.7% between 26th August 2015 and 18th November 2015 when we close it out.

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20 May 2015

2015: Sell coppper on China slowdown

We said:

China, the marginal consumer of 45% of the world's copper, is slowing rapidly. PBoC easing will at beat prevent a disorderly unwind. Most industrial metals (including copper) have temporarily rebounded from oversold levels, but haven't shed the fundamental basis of their downtrend. We enter a short copper position using the July-CME futures contract. (LSR Macro Strategy 20th May 2015)

Outcome:

Copper fell 30% in the 6 months from trade inception to generate a return of 15%.

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15 May 2015

2015: Increase long/overweight Japanese stocks

We said:

Abenomics was never going to revive the Japanese economy in 2015 and, in fact, made structural problems worse but would boost stocks by channelling income to corporates. We upgraded Japanese stocks to +2 from +1 on improving profit margins, sales growth, cheap valuations and the support of ultra-loose monetary policy. (LSR Asset Allocation 15th May 2015)

Outcome:

Nikkei 400 rises from 14,500 in mid-May to 15,200 in mid-August 2015 when we took profit and downgraded to a smaller overweight recommendation of +1.

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13 May 2015

2015: A $-neutral G10 basket

We said:

With the USD continuing its consolidation, we highlight the value of $-neutral views and provide one in G10 FX. AUD & NZD (our favoured shorts) are rich and leveraged to an ever-slowing China. In contrast, the Scandis and CAD (our preferred longs) will benefit from an acceleration in the euro zone and the US respectively. (LSR Macro Strategy 13th May 2015)

Outcome:

China growth concerns increase and related currencies struggle. Euro area and US growth accelerate. We take a profit of 15% on the NZD/SEK cross on 9th Sept 2015.

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08 Apr 2015

2015: Long USD but only in select currency pairs

Consensus said:

Generalized USD strength predicted through 2015 and into 2016.

We said:

We traded long USD against currencies where valuations were extreme (CHF) and in EM currencies highly leveraged to Chinese growth (SGD, KRW). (LSR Macro Strategy 8th April 2015)

Outcome:

Profit of between 10% and 17% on various USD pairs through 2015.

READ ME
18 Feb 2015

2015: Gilt yields and GBP are capped

We said:

Gilt yields and sterling have backed up sharply in recent days with markets seeing signs of diminishing dovishness in Bank of England's language. We think both markets and the Bank will be surprised by further (core) disinflation. Gilts are still a buy for us, while GBP is a sell after a brief correction. We initiate a long Gilt/short Bund trade. (LSR Macro Strategy 18th February 2015)

Outcome:

Gilt trades added 40bps performance through 2015.

READ ME
13 Feb 2015

2015: Overweight core euro area stocks

We said:

We upgraded Spanish, French and Italian stocks from 0 to +1 in February, upgraded Germany from 0 to +1 in March, and took Spain to +2 (our highest recommendation) in May. We maintained positive calls on core euro area stocks through to June 2016. (LSR Asset Allocation 13th February 2015)

Outcome:

European stocks outperform as ECB action and a burgeoning recovery lead global investors to rotate into European equities.

READ ME
03 Feb 2015

2015: US equity bulls, particular consumer stocks

We said:

The basic story is that US domestic demand will be strong. The plunge in oil prices has shifted the emphasis of our US forecast from capex towards consumer spending. The near-certainty of lower profits from oil in the short-term has inhibited the bull market that prevailed last year, but the diffused likelihood of stronger consumer spending has not yet been priced in. This creates opportunities in consumer sectors. (LSR View 3rd February 2015)

Outcome:

S&P Consumer Discretionary index begins the year at 575 and climbs steadily to a peak of 628 in December 2015.

READ ME
30 Jan 2015

2015: Strong negative on Brazilian stocks

We said:

Based on our view that the bad news on: 1) Dilma's ability to govern, 2) fiscal reform blockages, 3) the need for extraordinary fiscal assistance for the olympics, 4) fiscal bombs as yet undisclosed and 5) tax hikes and higher interest rates has yet to be reflected in market valuations, we reaffirm our strong negative call on Brazilian equities. (Brazil 30 January 2015)

Outcome:

Negative positiion on Brazilian stocks made 42.6% in USD by the time we closed the position on 5th February 2016.

READ ME
27 Jun 2014

2014: Big Bull rampant through 2015

We said:

The global desire to save exceeds profitable investment opportunities, holding down real and nominal interest rates. US has corrected financial defects with '3-Ds; - devaluation, demand deflation, and default - now free to grow at 3%. Flow of funds, improved profitability and strong economies to boost US and UK stocks well into 2015. (LSR View 27th June 2014)

Outcome:

S&P 500 rises from 1961 at time of writing to peak at 2123 in May 2015 and close 2015 on 2044. FTSE rises from 6758 at time of writing to peak at 7090 in April 2015.

READ ME
05 Feb 2014

2014: Yen down, stocks up to remain the Japan trade

We said:

Japan still needs yen down => Topix up. Mr Kuroda needs more QE and yen decline for enduring 2% inflaiton. (LSR Daily Note 5th February 2014)

Outcome:

Yen down 12% vs. USD year to date breaking 120, Topix up 11% ytd, Nikkei up 10%

READ ME
17 Jan 2014

2014: UST 10y yields to be held down by global investment flows

Consensus said:

Bond investors position for rising US rates

We said:

For bond yields, the natural assumption is that above-trend growth will start to raise real interest rates. But against this force are both foreign capital inflows from savings-glut countries like China and Japan and the fact that current Treasury yields discount future inflation of 2.25%, a rate that is not in prospect in reality any time soon. So QE tapering may be accommodated quite easily. (LSR Asset Allocation 17th January 2014)

Outcome:

UST 10y yields at 2.84% on 17th Jan and down to 2.29% on 3rd December

READ ME
17 Jan 2014

2014: US stocks to outperform other DMs again

We said:

The recovery from the financial crisis has been uneven and China, Japan and Germany have not lowered their savings. These continued excessive world saving could erode real returns on capital. Until then, US real assets remain the most attractive game in town as the US is the only major economy to rebalance successfully. (LSR Asset Allocation 17th January 2014)

Outcome:

S&P500 returns 14% ytd

READ ME
17 Jan 2014

2014: Weak growth and deflation risk means buy French, Spanish and Italian government bonds

We said:

Spain could continue to disappoint optimists…Italy by contrast has seen some bounce in Q4, though this could well be some random effect, probably owing to inventory shifts. France seems to be suffering from a deep-seated malaise. (LSR Asset Allocation 17th January 2014)

Outcome:

Euro area bond yields fall through the year as growth disappoints and ECB policy action is pre-empted

READ ME
25 Nov 2013

2013: Yuan down

We said:

Beijing has firmly set off on the route of reform, planning to widen the exchange rate band and liberalise capital flows. But contrary to the expectations of many, this is most likely going to push the yuan down rather than up over the next 12-18 months. (LSR Daily Note 25th November 2013)

Outcome:

Yuan falls against the USD through H1 2014.

READ ME
18 Jan 2013

2013: US stocks to outperform 'cheap' European stocks

Consensus said:

Morgan Stanley overweight Europe, underweight US in best trades for 2013

We said:

Earnings matching or exceeding battened-down expectations could lift US equities a little further in coming weeks. From then on, the brighter spots in the US economy should help the market gain ground (not least against the Eurozone), justifying a richer US p/e relative to Europe ex UK. To reflect these prospects we upgrade the US equity market from -1 to 0. Euro Area stocks at -1. (LSR Asset Allocation 18th January 2013)

Outcome:

S&P500 and Dow Jones return 19%+, Euro Stoxx returns 5.34%

READ ME
18 Jan 2013

2013: Gold to lose its lustre

Consensus said:

Goldman Sachs forecasts 3 month rate rise to $1,850 per ounce on 21st January

We said:

We downgrade gold to 0 from +1, mirroring our one-notch downgrade for US Treasuries. Still-negative real yields and any lingering euro sovereign concerns should support investor demand for gold, but political will to hold the euro together until after the German elections has reduced gold's safe haven appeal. (LSR Asset Allocation 18th January 2013)

Outcome:

Gold price falls 29% from $1,657 on 1st January 2013

READ ME
20 Dec 2012

2012: Yen weakness to extend well into 2013

Consensus said:

Westpac forecast Yen strengthening to 79 vs. $ from December 2012 to December 2013.

We said:

Yen weakness can extend well into 2013 on small changes in Japanese investors' hedge ratios. With currency support from high real yields and the current account surplus already waning, we downgrade JPY:USD from 0 to -1. (Global Political Drivers 20th December 2012)

Outcome:

JPY down 18% vs. USD over next 7 months.

READ ME
20 Dec 2012

2012: US debt markets

Consensus said:

US long rates moving higher 

We said:

US bonds set to rally. (Global Political Drivers 20th December 2012)

Outcome:

The ten year US treasury rallied over 75 basis points

READ ME
12 Oct 2012

2012: Chinese growth and liquidity sweet spot > long stocks short-term

We said:

Improving liquidity and a trough in PMIs leads us to go long Chinese stocks. We recommend a long position in the Singapore-listed FTSE China A50 index futures balanced by a short in a CAC/DAX futures basket. CAC will struggle as concerns rise over French debt, it is nearly certain that they will miss their budget deficit targets. DAX is trading near the top of its range with Industrials and Metals vulnerable to slower Chinese demand. The effect would neutralize the China growth variable while playing improvement in Chinese liquidity conditions. Long FTSE China A50/short DAX & CAC futures.

Outcome:

9% returned between 12 Oct 2012 and 28 Jan 2013.

READ ME
26 Sep 2012

2012: Markets drunk on liquidity: relative value sector call is best bet

We said:

Scope for upside EPS surprise in US Utilities. The consensus expects no gain in Utilities’ EPS over the next twelve months, the weakest among US sectors. So the sector stands to benefit from either excessively low expectations or the bad weather this winter. By contrast Telecoms earnings expectations leave the sector open to disappointment as growth slows and reinforce the expensive feel of the sector. Long US utiities.short US Telecoms.

Outcome:

4.7% returned between 26 Sept 2012 and 5 Nov 2012.

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21 May 2012

2012: Backing a relatively constructive stance on European stocks

We said:

We continue to prefer RV to directional equity trades. Our “macro factors” model suggest that EA markets look “cheaper” than the US in aggregate. At sector level, the models highlight Energy as one area where the European sector is looking good value both in absolute terms and relative to the US. European Energy has a predominantly utility-like character and is preferred to US Energy. Long EA Energy/short US Energy. 

Outcome:

3.5% returned between 21 May 2012 and 29 Aug 2012.

READ ME
12 Jan 2012

2012: European risk decouples from US risk

We said:

Tactical pro-risk opportunity to short EUR vs. PLN. Close to 4.50, EUR/PLN looked somewhat dear given the zloty’s fundamentals (e.g. narrowest November current account deficit in six years). Spot at 4.45 offered decent risk-reward for a tactical short, targeting 4.20 with a stop on a close above 4.59. Sell EUR/PLN. 

Outcome:

5.9% returned between 12 Jan 2012 and 21 Feb 2012.

READ ME
03 Jan 2012

2012: Equity markets to peak early in 2012

Consensus said:

AAII investor sentiment survey : 48% bullish, 33% neutral, 19% bearish

We said:

Wall Street pundits whistling Dixie…Double negative for stocks as spring approaches. Not only will activity be weakening – and profits with it - but the monetary growth that has been buoyed recently by the temporary surge of cap-ex is likely to subside, taking away the flush of liquidity that is a current major factor supporting stock prices. (Asset Allocation: Americas 3rd January 2012)

Outcome:

S&P500 H1 peak is 1,422 on 2nd April, followed by a sell-off. 1,422 recovered 5 months later.

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03 Jan 2012

2012: Short AUD the best way to play China's slowdown

We said:

AUD still overvalued against its terms of trade, these will suffer as markets and companies recognise the Chinese slowdown. Also, no upward pressure on CNY means less intervention to sell CNY, fewer USTs bought and less need to diversify into AUD and other currencies. Mexico is not directly exposed to China’s slowdown and Mexican business will benefit from yuan appreciation in real efficient terms. Sell AUD/MXN. 

Outcome:

2.6% returned between 29 Aug 2012 and 25 Sept 2012.

READ ME
03 Jan 2012

2012: Who is most exposed in the next stage of the euro area crisis

We said:

Collapsing PMIs are bringing forward the next round of market concern about foolhardy austerity and shifting the focus to solvency from liquidity, we recommend buying USD vs. 2 European currencies exposed to the next stage of the crisis: SEK & HUF. While SEK’s vulnerability is to the downturn in EA demand (given Sweden’s export dependency), HUF is vulnerable both to that and a sharper focus on sovereign worthiness. This all assumes that the next round of US QE is likely to be “cash neutral” like Operation Twist and that anything more USD-negative requires better inflation and much worse jobs data. Buy USD vs. a basket of HUF and SEK. 

Outcome:

4.1% returned between 22 March 2012 and 13 June 2012.

READ ME
22 Mar 2011

2011: Oil price to begin secular fall

Consensus said:

JP Morgan upgrades forecast to $109.5/bbl

We said:

Market attention has returned to Libya and the Gulf, pushing oil prices back towards their peaks. High prices incorporate both supply concerns and a Saudi Arabia risk premium. Absent the disruption of Gulf oil supplies, prices should ease back”. (LSR Daily Note 22nd March 2011)

Outcome:

WTI then $104/bbl, fell to $86/bbl in 6 months

READ ME
01 Mar 2011

2011: US equities to peak in the summer

Consensus said:

AAII investor sentiment survey: 46% bullish, 29% neutral, 25% bearish

We said:

“We downgrade US equities from positive to neutral. Equity markets may struggle from the Summer on as liquidity is also squeezed. Stocks may have a little juice left in them, but are likely to top out in the summer”. (Asset Allocation: Europe 1st March 2011)

Outcome:

2011H1 S&P500 range trades 1250-1350. July 22nd – August 8th market falls 17% and ends flat for full calendar year.

READ ME
28 Feb 2011

2011: India must raise rates to battle inflation - stocks will suffer

Consensus said:

Sensex to rise 20% to 23,350 in 2011

We said:

With growth slowing, inflation rising and further monetary tightening almost certain…stocks could fall to 16,000”. (LSR Daily Note 28th February 2011)

Outcome:

Sensex falls 25% in 2011 to finish the year at 15,175

READ ME
03 Dec 2010

2010: US long bond yield to be well down over 12 months

Consensus said:

1y forwards pricing 10 year yield at 3.6% Dec-10-Dec-11

We said:

US growth to stay below trend. The short term is seriously threatened by too much Q3 inventory building. This is highly likely to fall back, making a negative contribution to near-term GDP growth, aggravated by QE2’s higher food and energy prices. (LSR Daily Note 3rd December 2010)

Outcome:

US growth at 1.9% in Q1, likely 1.8% in Q2, 10-year treasury yield down to 2.48 in August 2011

READ ME
04 Oct 2010

2010: Oil prices may remain bubbly while QE2 is on the cards

Consensus said:

Consensus Economics survey shows 2.3% rise from Oct 2010 spot – Sep 2011

We said:

The most direct and visible effect of QE is likely to be on asset prices. At least some will rebalance their portfolios. This portfolio rebalancing could present a substantial upside to commodities. (LSR Daily Note 4th October 2010)

Outcome:

Oil prices then $81.4/bbl (WTI), $99/bbl in August 2011

READ ME
18 May 2010

2010: ECB won't raise rates in 2010

Consensus said:

Markets began the year pricing in 110bps of tightening in 2010, by May markets were pricing 40bps tightening in the next 12 months.

We said:

There is not the slightest possibility of any sustained rise in inflation in the euro area in 2010, nor in 2010. ECB won’t raise rates in 2010. (LSR Daily Note 18th May 2010)

Outcome:

ECB left interest rates unchanged in 2010, hiked in April 2011

READ ME
14 Oct 2009

2009: Indian inflation out of control, RBI behind the curve

Consensus said:

Market expectation was for RBI to raise policy repo rate by 225bps and CRR by 75bps

We said:

India needs Volckers policy – assertive monetary tightening needed to control inflation. (LSR Daily Note 14th October 2009)

Outcome:

Repo rate up 325bps and CRR up 100bps. More is still needed.

READ ME
23 Sep 2009

2009: Government debts to dominate investor behaviour

Consensus said:

Periphery bond spreads normal vs. German bunds

We said:

As government spending continues to provide the needed ‘fix’ for economic recovery, public sector balance sheets are starting to look increasingly exposed…We think a time of greater market discernment is drawing closer – in other words, economies’ fundamentals, especially debt dynamics in bond markets, are likely to become a (if not the) chief driver. (LSR Daily Note 23rd September 2009)

Outcome:

Eurozone government debt sparks euro area crisis

READ ME
04 Aug 2009

2009: Bank of England will need more QE

Consensus said:

Quantitative easing to be put ‘on hold’, policy to be tighter

We said:

Bank of England to expand gilt purchases. M4 data open door for QE expansion. (Europe Watch 4th August 2009)

Outcome:

BoE boosts QE by £50bn on 8th August 2009

READ ME
03 Mar 2009

2009: Huge upside potential in US equity markets

Consensus said:

Merrill Lynch survey of portfolio managers revealed pessimism at “near record highs”

We said:

“Markets unlikely to get much cheaper, upside huge…With short-run interest rates at negligible levels, monetary reflation should drive investors into the stock market quite soon”. (LSR Daily Note 3rd March 2009)

Outcome:

S&P rallies 58% from March to December, developed stock markets all grow strongly

READ ME
01 Aug 2008

2008: Timing the US stock market recovery

Consensus said:

Bearish view dominated private investor sentiment

We said:

Our US equity recommendation was negative in August 2008, turned neutral in September and positive in October 2008.

Outcome:

S&P500 rose by 13% over period November 2008-October 2009

READ ME
09 May 2008

2008: Oil price driven too high by speculation - will peak and fall rapidly

Consensus said:

Goldman Sachs predict oil price of $200pb, talk of "peak oil" dominates

We said:

The demand story favouring high oil prices is - cyclically - just that: a story. If and when the speculators decide the game is up, the game could be fun! (LSR Daily Note 9th May 2008)

Outcome:

WTI peaked at $147pb in July 2008 and fell to $35pb in Q1 2009

READ ME
23 Apr 2007

2007: Fed funds rate staying high

Consensus said:

Rate cuts priced in for early 2007

We said:

Inflationary pressure means Fed will be unable to cut until Q3 2007 earliest.

Outcome:

Fed funds rate stayed at 5.25% until October 2007

READ ME
20 Jun 2006

2006: Indian stock market offering value

Consensus said:

May 2006 bloodbath the beginning of a major correction

We said:

Strong fundamentals to take markets higher after post-May falls. 

Outcome:

Sensex up 56% to all-time peak by December 2006

READ ME
31 Oct 2005

2005: Sell US bonds short-term

Consensus said:

Buy bonds as shorts rushed for cover

We said:

Treasury market is overbought. Bull phase temporarily over.

Outcome:

10-year Treasury yields backed up over 40bps

READ ME
20 May 2004

2004: US debt markets

Consensus said:

US long rates moving higher

We said:

US bonds set to rally.

Outcome:

The ten year US treasury rallied over 75 basis points

READ ME
16 Apr 2003

2003: Japan stocks are undervalued

Consensus said:

Japanese stocks remain unattractive years after the crisis

We said:

This Monthly Review documents our February 27th seminar debate with Andrew Smithers and Stephen Wright. The motion was “Japanese business profits are understated and the Tokyo stock market is good value” A paradigm shift from fast to slow GDP growth and demographic disaster have added to Japan’s post-bubble trauma. But the issue now is “top line” versus “bottom line”. Charles Dumas shows that Japanese companies have highly profitable operations. Diana Choyleva highlights better large than (unquoted) small company post-bubble adjustment.

Outcome:

Japanese stocks recover from spring 2003 through to global financial crisis

READ ME
10 Jan 2003

2003: UK shares recovery

Consensus said:

Markets extremely nervous and pessimistic.

We said:

Valuations are now fair, even cheap - expect a bounce-back.

Outcome:

FTAS rose 11% in 12 months.

READ ME
10 Apr 2002

2002: US Treasuries to outperform US stocks

Consensus said:

US stock market to begin to rebound from two years of falls since 2000

We said:

Stocks to perform badly again. There is a powerful case for US Treasuries. Corporate bonds a better bet than stocks. 

Outcome:

US Treasuries outperform corporate bonds, which outperform stocks

READ ME
18 Dec 2001

2001: US stocks hamstrung after end of dot.com bubble

Consensus said:

Stocks to recover from 2000 falls

We said:

Bonds, which are discounting 6% ongoing from mid-2002, should do well and stocks badly.

Outcome:

Bonds deliver superior returns

READ ME
02 Dec 2001

2001: US bonds preferred

Consensus said:

Stocks to do well after a fall this year.

We said:

Falling prices and a feeble US recovery means bonds will outperform stocks in 2002.

Outcome:

Bonds outperformed stocks in 2002.

READ ME
03 Jul 2001

2001: UK equities

Consensus said:

UK stock market would rebound after the disastrous falls in 2000.

We said:

Equities would perform poorly for the second year in a row. Commercial property and cash represented the safest investment vehicles.

Outcome:

Another dire year for stock markets. FTSE-100 fell a further 16%. Commercial property was the best-performing asset class with cash a second.

READ ME
11 May 2000

2000: Dotcom bubble to burst

Consensus said:

’New paradigm’ believers take NASDAQ and T&T stocks to record highs

We said:

Nasdaq 2000 in 2000?...This looks like a bear market. At some stage, the bulls could tire, and prices lurch downward.

Outcome:

Bubble bursts.

READ ME
09 May 2000

2000: Telco 3G licences

Consensus said:

Telecommunications companies were right to pay enormous fees for 3G licences.

We said:

The Telcos were overvalued, crazy to pay such fees, and that they would run into financing difficulties in the future. 

Outcome:

Continued decline in telecoms share prices in wake of bursting of high-tech bubble; significant problems at the major companies, including placing their enormous bond issues in the market.

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We have a 29 year track record of successful calls. Many of these calls combined economic, political and market analysis.

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