Thursday, November 16, 2023

Quotes of the Day

Premium research provider Numera Analytics, like us, sees late cycle dynamics at play, and is, thus, cautious on equities right here... They, also, per their just-released Global Asset Allocation Report, nevertheless see opportunity in certain emerging markets:

"The clearest opportunity lies with EM equities, another typical late cycle winner. While stalling DM growth would dent the profitability of EM exporters, investments stand to gain from more aggressive rate cuts, favourable terms of trade, greater stimulus by Beijing, and a wider EM growth ‘premium’. At the country level, we generally favour EMs trading at low valuations like Brazil or China, as this greatly improves expected gains when paired with policy support."

Now, per today's morning message, while we're long-term bullish many parts of the emerging world, we do think some restraint is warranted right here.


"...resource-rich economies, both from a valuation standpoint and given our view on the dollar during the next cycle, are one of those opportunities... Whether or not now's the time to take on full positions, well, that remains to be seen.

With regard to Brazil, their aggressive early response to inflation, along with very cheap equity valuations, inspired to us to take a position in anticipation of outright policy easing earlier than the rest of the world... That position is presently up 20% year-to-date..."

"Now, taking a step back from boasting about our returns on these particular positions, we hold no delusions that they're not subject to our present base case scenario, which is recession in 2024... Per Tuesday's note:

"If we indeed happen to escape the woods without recession, and inflation settles back in at the Fed's 2% target, all's good in the land of equities, and we'll introduce, and add to, positions/asset classes that our long-term thesis says will shine over the years to come... Presently, however, odds that we'll be able to capture them at more attractive (cheaper) levels over the coming months are simply too high to ignore."
Hence, we've just carefully scaled in to this point."

So, clients, the point I keep pounding home is that, despite the recent rally, the overall setup presently screams that this is not the time to back up the truck, Numera also pointed that out this morning:
"Late in the game – DM stocks are up 7% during the first two weeks of November, reversing much of their Q3 losses. Although higher stock prices may signal renewed optimism over next year’s growth prospects, the factors behind recent gains are fully consistent with the ‘late cycle’ thesis..."
"The relative appeal of stocks worsens at longer holding periods, reflecting a high probability of negative growth ’surprises’, and faster and more aggressive rate cuts than priced in by markets (improving expected gains on bonds)."

All the while, and for certain, opportunities will abound when the next cycle gets underway... We just have to let the current play itself out before we take on full positions. 

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