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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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) (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.
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.
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.
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.
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.
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.
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.
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.
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..
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.
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
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
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
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
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
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
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.
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%.
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%
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
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%
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.
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
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
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.
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
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.
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.
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)
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
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
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
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
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
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
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
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.
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.
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.
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.
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
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.
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
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. (LSR Daily Note 30th September 2004)
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.
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. (LSR Daily Note 30th September 2004)
Outcome: China becomes crucial to global growth, commodities, and asset prices. No short-term banking crisis.
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. (LSR Daily Note 30th September 2004)
Outcome: Nikkei has increased 50% since the lows of 2003.
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. (LSR Daily Note 30th September 2004)
Outcome: In the next decade China becomes the most important country as % of global GDP growth
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 (LSR Daily Note 30th September 2004)
Outcome: Commodity prices continued their ascent
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. (LSR Daily Note 30th September 2004)
Outcome: German economic shrank H2 2001 and the budget deficit exceeded 1.5% target
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. (LSR Daily Note 30th September 2004)
Outcome: US in recession from March, markets fall 22% in year to Q3 2001.
1999: UK economy
Consensus said: UK recession in 1999.
We said: 1.5% GDP growth in 1999 (the highest forecast out of 43). (LSR Daily Note 30th September 2004)
Outcome: 2.1% GDP growth.
1999: US inflation
Consensus said: 2.2% US inflation in one year's time.
We said: 3% and rising. (LSR Daily Note 30th September 2004)
Outcome: 3% and rising.
Consensus said: Fiscal policy can save Japan from recession.
We said: Japanese fiscal policy has run its course. (LSR Daily Note 30th September 2004)
Outcome: Deepening recession.
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. (LSR Daily Note 30th September 2004)
Outcome: Asia crisis begins in Thailand in July 1997
1995: US economy
Consensus said: US economy will slow.
We said: The strong economy and bull market will continue. (LSR Daily Note 30th September 2004)
Outcome: Strong US growth.
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%. (LSR Daily Note 30th September 2004)
Outcome: Base rates rose to 6.5% in 1995, then fell in 1996. Many Lombard Street Research clients made 250 ticks on short sterling.
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. (LSR Daily Note 30th September 2004)
Outcome: EMU structure was flawed and made no allowance for differing growth rates. ECB rates too low for some, too high for others.
1993: German economy
Consensus said: Germany will be the European locomotive.
We said: German GDP will contract. (LSR Daily Note 30th September 2004)
Outcome: German GDP contracted.
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 (LSR View 6th September 1992) (LSR Daily Note 30th September 2004)
Outcome: UK is forced to leave ERM on Black Wednesday
1992: UK inflation
Consensus said: Rising inflation (to 4.2%).
We said: Falling inflation (3.5%) and strong growth. (LSR Daily Note 30th September 2004)
Outcome: The five years from Q2 1992 saw above-trend growth, and inflation was lower in1997 than in late 1992.
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.
1990: UK economy
Consensus said: UK economy would experience growth.
We said: Recession. (LSR View 10th December 1991)
Outcome: GDP was 1.7% lower in Q4 1990.
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.
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.
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.
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.
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.
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.
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.
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%.
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.
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.
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.
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.
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%.
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.
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.
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.
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.
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.
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.
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.
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
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
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%
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
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%
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.
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
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
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.
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. (Asset Allocation: Americas 3rd January 2012)
Outcome: 2.6% returned between 29 Aug 2012 and 25 Sept 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. (Asset Allocation: Americas 3rd January 2012)
Outcome: 4.1% returned between 22 March 2012 and 13 June 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. (Asset Allocation: Americas 3rd January 2012)
Outcome: 5.9% returned between 12 Jan 2012 and 21 Feb 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. (Asset Allocation: Americas 3rd January 2012)
Outcome: 4.7% returned between 26 Sept 2012 and 5 Nov 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. (Asset Allocation: Americas 3rd January 2012)
Outcome: 9% returned between 12 Oct 2012 and 28 Jan 2013.
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. (Asset Allocation: Americas 3rd January 2012)
Outcome: 3.5% returned between 21 May 2012 and 29 Aug 2012.
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.
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
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
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
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
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
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.
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
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
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
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. (Asset Allocation publications 1st August 2008, 1st October 2008, 5th November 2008) (LSR Daily Note 23rd September 2009)
Outcome: S&P500 rose by 13% over period November 2008-October 2009
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
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 (LSR Daily Note 9th May 2008)
Outcome: Fed funds rate stayed at 5.25% until October 2007
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 (LSR Daily Note 9th May 2008)
Outcome: Sensex up 56% to all-time peak by December 2006
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. (LSR Daily Note 31st October 2005) (LSR Daily Note 9th May 2008)
Outcome: 10-year Treasury yields backed up over 40bps
2004: US debt markets
Consensus said: US long rates moving higher
We said: US bonds set to rally. (LSR Daily Note 9th May 2008)
Outcome: The ten year US treasury rallied over 75 basis points
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.(LSR View 16th April 2003) (LSR Daily Note 9th May 2008)
Outcome: Japanese stocks recover from spring 2003 through to global financial crisis
2003: UK shares recovery
Consensus said: Markets extremely nervous and pessimistic.
We said: Valuations are now fair, even cheap - expect a bounce-back. (LSR Daily Note 9th May 2008)
Outcome: FTAS rose 11% in 12 months.
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. (LSR Daily Note 9th May 2008)
Outcome: US Treasuries outperform corporate bonds, which outperform stocks
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.(LSR View December 2001) (LSR Daily Note 9th May 2008)
Outcome: Bonds deliver superior returns
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. (LSR Daily Note 9th May 2008)
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.
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. (LSR Daily Note 9th May 2008)
Outcome: Bonds outperformed stocks in 2002.
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. (LSR Daily Note 11th May 2000) (LSR Daily Note 9th May 2008)
Outcome: Bubble bursts.
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. (LSR Daily Note 9th May 2008)
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.
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.