Equity Strategy: Stalling USD and China reopening tactically support EM trade - we are still long Miners

Speaker: Mislav Matejka, Head of Global Equity Strategy.

 

Our key call at the start of Q4 was to look for the likely peaking out in bond yields, as we believed the disinflation phase has already begun. The potential turn in yields and in inflation has implications for equity P/E multiples, which could find the floor, and for the Growth/Tech part of the market to show a better trading performance. USD typically had an inverse correlation with equities, and any stabilization there would be a support. A peaking in Fed hawkishness would go a long way in taking the upside away from the USD. EM have this year lagged the DM, with the China drag the most notable. Even ex China, EM have underperformed the DM. The potential shift in USD fortunes would in particular be relevant for EM equities, as these historically had a strong inverse correlation to the USD. In addition, while the longer-term picture for China looks challenging given the structural growth downtrend, corporate decoupling and geopolitical uncertainty, the reopening is likely to be an important trade. This is especially the case given the extremely easy comps, such as near record low property starts. Policy responses are ramping up in order to set floors for real estate and credit, and sentiment is rock bottom. How to play this? China and Taiwan equities are down 30% ytd in USD terms, with Chinese P/E relatives at lows. Indirectly, European markets are the beneficiaries of any improvement in China prospects – FTSE100 remains our top country pick. We started this year OW on commodity sectors, and China reopening supporting the turn higher in activity indicators is welcome. Energy (OW) continues to have attractive valuations, even as our commodity team doesn’t see upside to Brent from here. We remain OW Miners in particular, looking for further outperformance on top of 25%+ so far ytd. Key metal inventories are rather low, the sector is a clear play on China reopening, weaker USD, and it still looks attractively priced, with very good balance sheets and a prospect of extraordinary capital return. Overall, we believe the EM risk-reward is tactically more positive given the above, but the longer-term outlook remains challenging, and our China economist is looking for a relatively soft 2023 growth outcome.

 

This podcast was recorded on 21November 2022.

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