Global macro state of play
State of play
It is very interesting to note that even with the passage of the US ~$2tn US fiscal stimulus, the US 10 year treasury bond rate still couldn’t meaningfully climb above 1.50%, for any appreciable length of time.
To us it suggests just how strong the desire to hold money, and near-money like things (which treasuries are) is. That said, we continue to expect yields to grind upwards, having noted in prior updates the maths required to get to a 3% treasury handle seems achievable given the $1.6trn in pent up household savings, and the above $2tn package, will start to wash into the economy over the remainder of 2021 and across 2022.
We’ve been underweight fixed income, and intend to use the opportunity of gradually rising yields to narrow the underweight, eventually moving back to a more normal long duration overweight, predominantly allocated to sovereigns, given our views around secular stagnation and “lower[ish] for longer”.
The recent underperformance of the China A-share market is not unexpected. We view the recent roll over in the flow of credit / GDP (referred to as the “credit impulse”) as a sign of the PBOC commitment towards sustainable (i.e. not debt fuelled) growth. However this credit “prudence” is occurring alongside what appears to be a material weakening in the macro aggregates, which suggests either downside risks to asset prices in China, or an abandonment of the strategy, which should put downside pressure on the Yuan (and, in our view, merely delays the downside pressure to asset prices more broadly).
The Ibovespa performance reflects the deterioration of the political, economic and social environment in Brazil. COVID runs unfettered, key industries (e.g iron ore, oil and gas) are underperforming, and the prospect of military intervention doesn’t augur well for a turnaround. Mind you, our prospects for investing directly in that part of the market are limited, so it is more “for noting” as part of the global economic backdrop.
Rather, our options in equities tend to filter down to a choice (trade-off) between local (Australia) and international developed (the US, Europe, Japan and the UK). This makes life a little easier as an allocator.
To this end we note that the majority of our international allocation (~27% of the Balanced portfolio, with ~60% allocated to the US) is modestly outperforming the Australian benchmark YTD (~20% of the Balanced portfolio).
The emerging markets have performed better than either, which is linked to the Value trade (EM has been in the “Value” category for most of the past half decade), but much more so linked to the weaker US dollar.
With the expected ongoing grind upwards in US yields, we anticipate a firmer dollar (or at least not a weaker one), and the impact of higher yields typically results in outflows from the EM into the now-better carry on offer in safer assets.
But, I think, the better point is that the “EM” region, at least via the readily implementable iShares options, is really a bet on just China and India. And, as we noted above, we are bearish on China, which due to the sizeable constituent share of the ETF in turn means we are not constructive on EM performance from here.
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