Deutsche Bank’s Torsten Slok gives his outlook for 2020: we could see another US fiscal boost that extends the business cycle. Next we have a podcast outlining the strategy of super-quant Jim Simon and his Renaissance Technology fund – the secret is not to predict stocks. Then Goldman Sachs talks opportunities in sustainable finance.
Our last two podcasts focus on equities. Blackrock argues that long-term strategies make the most sense for stock-picking, while Gavekal Research are bearish on tech stocks…
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Deutsche Bank’s Torsten Slok gives his outlook for 2020: we could see another US fiscal boost that extends the business cycle. Next we have a podcast outlining the strategy of super-quant Jim Simon and his Renaissance Technology fund – the secret is not to predict stocks. Then Goldman Sachs talks opportunities in sustainable finance.
Our last two podcasts focus on equities. Blackrock argues that long-term strategies make the most sense for stock-picking, while Gavekal Research are bearish on tech stocks.
Oh, and check out our awards for the top podcasters of 2020.
Happy listening,
Bilal
Global Economic Update with Torsten Slok, December 2019 (Podzept – with Deutsche Bank Research, 14 min listen) Torsten Slok, Chief Economist at Deutsche Bank Securities, concisely articulates the macro drivers impacting the markets today and the things to watch in 2020.
• Slok opens on the trade war begun in mid-2018. It has led to significant CAPEX slowing down, meaning new business equipment, instruments, software, and computers, etc.
• Secondly, CEOs’ confidence levels are their lowest since the 2008 crisis. Slok thinks this could worsen if the 2020 election uncertainty heightens. Even though business investment spending is a small share of GDP, the underlying behaviour of these factors is a major downside risk to the outlook.
• Slok points out yield hunting made a comeback this year because of three FED rate cuts (75 basis points). As a result, risky assets performed well in 2019.
• He highlights that we are in a late-cycle environment for two reasons. First, profit as % of GDP is falling (led by wage cost rising). Second, the credit quality of both consumer and corporate has marginally deteriorated – interest on auto loans has risen and credit spreads in corporate bonds have increased to 5% (CCC vs AAA). Some delinquencies are seen in the lower spectrum.
• Slok is also monitoring the developments in the repo market, which is now at 4%, however, he predicts no significant macro repercussions.
• For Slok, the economy will see a fiscal boost following the 2020 election (regardless of whether Trump or a Democratic candidate wins). This, in turn, will extend the business cycle.
Why does this matter? The cycle might continue its record longest run of growth experienced over the last 126 months, however, it does seem there are more downside risks than upside tailwinds: the trade war, the US election, consumer credit vulnerability, and liquidity tension in the repo market. These warrant cautious asset allocation for investors.
Billionaire Jim Simons’ Quant Revolution w/ Gregory Zuckerman (We Study Billionaires – The Investor’s Podcast Network, 36 min listen) In an interview for The Investor’s Podcast, bestselling author Gregory Zuckerman looks at the lifetime achievements of the founder of Renaissance Technologies, Jim Simons:
• Before investing, Simons had a hugely successful career in academia as a mathematician. Later on, he built on that to become a highly effective code breaker for the US government.
• By using his scientific abilities to find patterns and structures, Simons brought a completely new approach to the interpretation of market movements and significantly challenged the purely random walk views that were still dominant in the 1980s.
• Even though machine learning is a recent phenomenon, his fund was one of the very first to implement models that taught themselves how to trade.
• His philosophy was to avoid genuine predictions of single stock movements. Instead, he tried to anticipate how stocks move relative to each other or to an industry.
• There are similarities between him and the billionaire investor Ray Dalio, especially when it comes to the rules-based systems they follow. Differences start to appear when analysing how long they were usually holding their positions, with Simons preferring shorter timespans and rarely going more than one or two months without liquidating.
Why does this matter? Systematic algo funds are all the rage and Jim Simons is one of the pioneers of systematic trading. He maintains a highly private lifestyle with little known about his personal life. Insights about his work are also very scarce. As such, this podcast represents a rare and insightful glimpse into the mind of a brilliant investor who has achieved a remarkable 66% annual return since 1988.
Is Sustainable Finance the Next Big Commercial Opportunity? (Exchanges at Goldman Sachs, 37 min listen) John Goldstein, head of Goldman Sachs’ Sustainable Finance Group, shares valuable insights and operational details on how the firm will accomplish its recently announced sustainable finance commitments. Their latest initiative is valued at $750 billion, representing the capital that will be deployed over the next 10 years in climate transition and inclusive growth. The discussion revolves around the following ideas:
• The main climate transition themes will be clean energy, waste management, and ecosystem services, while the main inclusive growth themes will be accessible education, accessible healthcare, and local community support.
• These areas are arguably seen as something outside Goldman Sachs’s current business model, but Goldstein strongly emphasises the opposite. He backs this initiative by citing the firm’s best researchers, who have qualified those themes as the main secular trends driving our economy.
• Goldstein does not link this initiative with specific environmental targets, but rather describes this as a twin commitment contribution towards a holistic change in society.
• Lastly, he shares some operational insights on how Goldman Sachs partners with companies like Enel or Volkswagen in projects directly linked to those commitments. Probably the most pressing challenge right now is designing the right incentives and accountability rules for companies in the area of green financing.
Why does this matter? As mentioned, ESG will be the secular trend driving the economy, so catching an insight into Goldman Sachs’ initiative is an important reveal. Along with those from the government, commitments from Wall Street banks signal the presence of both new opportunities and challenges for firms to access green finance. If the views of Goldman Sachs prove right, strong structural changes are bound to happen and almost all business models will have to adopt an ESG strategy.
A stock picker’s guide to 2020 (The BID, 18 min listen) Tony DeSpirito, Managing Director and Director of Investments at BlackRock discusses his outlook for stocks in 2020.
• DeSpirito claims that equities have an image of being highly risky due to being measured against monthly volatility. In contrast, if volatility is observed from a longer time horizon (i.e 3+ years), they appear less so.
• He highlights that, given the current backdrop, stocks (S&P 500 – 1.9% dividend) generate higher income compared with bonds (1.7% yield on US 10 year). Additionally, if a more income-oriented index is considered like the Russel 100 value index (2.5% dividend yield), the income has a chance to double every 5 years, which is a significant return.
• DeSpitio believes a big data paradigm shift has changed the skills of PM’s from finding information to focusing on important information. He advocates maths as a particularly important skill in analysing large datasets.
• He further argues that the market has become hyper efficient in the short end (i.e., Algo trading) and is driven by short-termism (quick profit). This, in turn, presents an opportunity for long term investor to take advantage of time horizon arbitrage by following fundamentals.
• DeSpirito predicts that in the future a firm’s performance on the ESG metric will determine its cost of capital. A desirable ESG score will mean a lower cost of capital, and vice versa.
• He believes the Bull Run in Equities this year was a mere correction from last year’s policy error where the Fed was too hawkish. But he also admits that currently the economy is in the later stages of its cycle.
• Despite this, DeSpirito is bullish on the health sector (demand stemming from the aging population) and the banking sector (Strong Capital ratio vs 2008 GFC). He is bearish on income proxy stocks, i.e. utility and REITS, as they have been bid up in price (expensive valuation).
• Finally, he thinks the 2020 US election will make the equities market volatile.
Why does this matter? Tony’s advice is this: prudence is important in the later stages of an economic cycle. Invest in quality business models with persistent earning (free cash flows and net profit), cheaper valuation (low P/E, P/B, etc.), a strong balance sheet (not highly levered with strong liquidity), and those that are ESG friendly.
Louis-Vincent Gave : Tech stocks are at the same % of SPX Composition as the 1999 high (Macro Voices, 18 min listen) CEO of Gavekal Research, Louis-Vincent, discusses the S&P 500 Christmas Rally, tech companies’ index composition, the trade war, the return of inflation, and gold’s comeback.
• He notes that if the S&P 500 (in terms of % return) was a stock it would have outperformed 78% of stocks in the world this year. He explains that massive liquidity injection in the shape of both easy monetary and fiscal policy is the main force behind this rally.
• Next, he highlights that tech stocks are at the same % of SPX Composition as the 1999 bubble, however Apple alone in terms of market cap is bigger than the whole energy sector. He attributes this paradox to tech companies operating as monopolies and to the rise of passive investing, disproportionately favouring high index weighted stocks in terms of capital.
• Louis-Vincent believes the US-China trade war has evolved into a technological war. He points out that although there is now greater political alignment between China and the US (easing the resolution of trade disputes), their technological conflict will escalate.
• On the inflation front, he highlights that CPI and labour costs are trending up. In the presence of a higher energy price shock or a weaker dollar going forward, inflation could get triggered.
• Growth uptick in the emerging market, bearish dollar, gold suppliers consolidating (reduction in supply), and central banks becoming net buyers are all reasons to support the bullish gold thesis.
Why does this matter? Commodity prices have been subdued for one reason or another, especially soft commodities which have been 30-40% below their production cost in some cases. Irrespective of a higher dollar or not, a global inflation spike in 2020 could be a major curve ball, complicating the Fed’s and China’s monetary policy and leaving everyone confused. Additionally, the overvalued tech sector is also under risk of antitrust regulation and supply chain disruption from the technological conflict between China and the US.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(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.)