Macro Hive Podcast Playlist: Goldmans Likes Equities / UBS Bullish China / Blackrock’s ESG Pivot

Three podcasts to flag this week – all with an optimistic tone to them. Not sure if it’s something to do with Valentine’s day!

First up, Goldman Sachs give positive take on US equities. Not only do they see the US economy outperforming both other DMs and EM on structural metrics, they see upside from cyclical dynamics and the election cycle.

Then we have UBS, they don’t expect the coronavirus to make any permanent dent in China’s long-term strengths. The economy is becoming richer and has an increasingly domestic-focused growth model.

Our final podcast this week features former SNB Governor and current Blackrock Vice Chairman Philippe Hildebrand. He discusses the importance of public-private initiatives in the transition to a low-carbon economy as well as some of his personal views on climate change.

Enjoy!

Bilal

• Probability of a US recession is low at around 20% as the possible triggers – namely aggressive Fed tightening or economic imbalances – are remote. Imbalances are below average levels in the US with both households and banks deleveraging since the crisis.

• Demographics, labour productivity, export competitiveness and EPS growth all moving in favour of the US versus both other developed and emerging markets.

• US election analysis finds the third and fourth years of a presidential first term have attractive equity returns.

• A fairly extensive list of risks to their bullish view includes; geopolitical risk from China, escalating tensions in the Middle East or North Korea, cyberattacks and terrorism.

• Disinflation theme is expected to continue and largely driven by China. In the US they see no evidence of inflation responding to low unemployment rates.

• Goldman look at past pandemics to assess possible risks from the coronavirus. History shows an initial flight to quality but then fundamentals reassert over time.

Why does this matter? Goldman’s bullish view on US equities comes at a time of late-cycle expansion, stretched valuations and mounting risks to global growth from the coronavirus. If the US economy continues to post moderate growth and equities and corporate profits remain resilient this year President Trump will tout his economic management as a central pillar of his re-election campaign. [Bullish US equities]

• Despite the virus, China will continue its structural shift to a more domestic-focused economy.

• Consumerisation, premiumisation and disruptions in tech are themes that will all play out in the next 10-20 years. One lasting impact from the coronavirus he identifies is a possible acceleration towards greater automation.

• Markets will likely ignore bad Q1 numbers and may try to calculate an ex-coronavirus equivalent. But if weakness spills into Q2 then earnings forecasts will be cut more broadly.

Why does this matter? China now accounts for almost one-fifth of the global economy (ppp basis), more than double the share during the SARS outbreak in 2003. Whether or not the economic disruption from the coronavirus is contained to Q1 is therefore crucial for global growth prospects this year. How the authorities handling of the outbreak is perceived is also important for domestic political stability and for China’s global ambitions. [Bullish China]

• They see global warming problem as the most significant challenge facing humanity in the next decades. But policy and private sector behaviour will enable the transformation away from carbon. The result will be changes in global capital allocation and relative prices which will be reflected in investment portfolios.

• Europe is very supportive of the shift to ESG.

• Finance industry can be a catalyst for, or amplifier of, change. It’s an opportunity for the industry to redeem itself from the crisis if they get it right on climate change.

• More generally, Blackrock underestimated the extent to which clients want transparency. They will report on engagements on key votes, including on climate-related issues but this will take time to play out.

• Blackrock’s ESG focus should put enormous pressure on other asset managers to adapt business models. It will be too disadvantageous not to follow ESG.

• Private/Public initiatives are needed as the significant investments to facilitate transition to low carbon economy required private capital. Blackrock announced a climate finance partnership with French and German government to enhance sustainability.

• No global convergence yet on carbon pricing. But Europe will move ahead on this regardless of US position.

• Hardest piece will be in emerging markets. Allocation to Africa in climate finance initiative partnership but not easy to execute. Must rise to challenges.

• A lot needs to be done. There is no taxonomy around language on sustainability / ESG or broadly established analytics or reporting benchmarks. This makes it difficult to assess risk.

• Stress testing of banks is starting. ECB President Christine Lagarde confirmed climate will be part of the strategic review.

Why does this matter? Blackrock’s January sustainability push with their very clear message that climate risk is investment risk has pushed the ESG conversation forward this year. Much remains to be done on establishing industry-wide standards and increasing knowledge, but companies will now face more pressure for climate-related disclosures and asset managers for the ESG rationale within their investment rationale. [Bullish ESG]

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)