BCA, Independent Investment Research Since 1949

Investment Outlook and BCA’s Top Investment Ideas. Find out more at BCA’s Annual Investment Conference in New York

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All of the sessions and the speakers list for BCA’s 36th Annual Investment Conference at the Grand Hyatt New York have now been finalized.

This exclusive conference will feature an outstanding group of leading experts who will explore a wide range of topics.

The following is a snapshot of some of the speakers and topics:

  • Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University will deliver a keynote speech on key economic and policy challenges.
  • Greg Valliere, Chief Political Strategist, Horizon Investment will deliver a keynote speech on the assessment of the U.S. political outlook, whether investors should be concerned, and whether policies in 2017 & beyond will be investor friendly or unfriendly.
  • General Michael Hayden, former head of the CIA and NSA, who will share his perspectives on Terrorism and Cybersecurity Risks at a special conference dinner.
  • BCA’s Top Investment Ideas for the Coming Year panel featuring BCA Strategists will focus on specific ideas for generating superior returns over the next year, covering all major asset classes and regions.
  • Johannes Zhou, Former Chief Strategic Officer, China Investment Corporation, will join two of BCA’s Chief Strategists on the China: Debating the Issues China’s growing reliance on debt looks increasingly dangerous – how much control does the government have over the outlook?
  • Peter Berezin, Chief Global Investment Strategist, BCA Research will discuss his Top-Down Approach To Bottom-Up Stock Picking, and how investors could generate alpha by exploiting market anomalies.
  • Alex Tedder, Head of Global Equities, Schroders, will join Gina Martin Adams, Equity Strategist, Wells Fargo Securities on our Equity Market Outlook Key questions to be addressed include: how much life is left in the bull market and which markets and sectors will outperform?

Other notable guest speakers who will share valuable insights and answer the important questions and key issues affecting the economic and investment outlook include: Paul Volcker, Kevin Warsh, Joaquim Levy, Albert Edwards, Martin Fridson and Devie Mohan.

The full conference agenda can be viewed here.

Register today for a valuable and informative two days you can’t afford to miss.

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Staying Power Of The U.S. Equity Rally

U.S. equities have soared higher, and are increasingly expensive: the underlying reward/risk tradeoff remains poor. That said, several of our indicators suggest that the high-risk rally is not over.

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There are several reasons why the equity prices could continue to rally for a time:

For one, the Fed is sensitive to dollar strength. Officials have acknowledged that monetary ease in the rest of the world will impact U.S. interest rate decisions because a strong dollar would tighten U.S. monetary conditions. This increases the likelihood that European and Japanese monetary ease will benefit both U.S. equities and bonds.

Second, deflation tail risks in remission: Continued compression of emerging market sovereign and U.S. corporate bond spreads suggest easing abroad is keeping the tail risks that plagued equities in late 2015/early 2016 in remission.

Third, the Fed has room to “wait and see”: Subdued inflation pressures across the board are letting both Fed hawks and doves mark down their terminal rate, or resting spot for the Federal funds rate.

Finally, early-warning indicators not flashing warning signs: Investment bank share prices are rising, both in absolute terms and relative to the S&P 500. Market breadth is improving, judging from the ratio of the equal-weighted Value Line Index to the market cap-weighted S&P 500. Junk bond yields continue to decline in absolute terms and vis-à-vis Treasury yields. In previous cycles, junk bonds have tended to lead equity prices.

The next Insight looks at some potential catalysts for an equity selloff.

Implications Of Declining Returns On Capital In EM

Our EM strategists maintain their bearish view on EM risk assets based on poor credit and economic fundamentals. Persistent foreign capital flows are the biggest threat to their view.

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Capital should flow to areas where the return on capital is (RoC) is high and rising. EM RoC has plunged in recent years and has not yet recovered. Importantly, the drop in RoC has not only been due to commodity prices.

The decline in RoC can be attributed to both cyclical and structural factors. The cyclical ones include: a slowdown in top line growth, strong wage/employee compensation growth, poor cost discipline (swelling costs during the boom years), as well as companies raising excessive capital and allocating capital inefficiently (the projects of the past several years have produced low/negative returns on investment). Meanwhile, structural factors include slower productivity growth and a general lack of structural regulatory reforms.

Overall, we do not detect many changes in EM cyclical and structural dynamics, except insofar as the rally in commodities prices over the past six months justifies a turnaround in commodities-producing EM economies. Please see the next Insight.

The Search For Yield And Emerging Markets

The global search for yield – not an improvement in EM fundamentals – is what has been driving the EM rally this year.

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Having turned dovish in February, the Fed has enticed investors to sell U.S. dollars and pile into commodities and risk assets. This phenomenon escalated following the late June Brexit vote. The uncertainties over Brexit and global deflationary pressures led investors to conclude that the Fed would be unlikely to tighten policy meaningfully anytime soon. As a result, the search for yield has gone exponential and flows into EM have skyrocketed.

There is a limit to how far financial demand can propel commodities prices and EM risk assets in the absence of stronger final demand and corporate profits. If final demand disappoints, commodity prices will roll over and drive EM risk assets lower. The chart above demonstrates that there is still a very high correlation between EM share prices and industrial metals prices.

Bottom Line: The global search for yield has driven EM risk assets higher amid lingering poor fundamentals. Our EM strategists believe investors will eventually re-focus on EM macro fundamentals and corporate profits. Once this happens, it will produce a major reversal in EM risk assets: share prices, currencies and high-risk bonds.

Trump And U.S. Treasury Yields

Given recent improvements in global growth and breakouts in global bourses post-Brexit, the low bond yields represent a conundrum. Could Trump really be an answer to the puzzle?

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The 10-year nominal rate is inversely correlated with the probability of Donald Trump winning the U.S. election. So why buy Treasurys as a hedge against a Trump presidency? Generally speaking, Trump is a reason to own safe-haven assets for two reasons:

Trade: Trump could start a trade war with China in 2017. The consequences of a mercantilist America would be profound, potenitally throwing the world economy into a 1930s-like “beggar-thy-neighbor” spiral at a time when global trade is already weak.

Geopolitics: Trump is right when he says that the world is a mess because America is weak. The rest of the world has become a lot more powerful in the last two decades of relative peace and prosperity. The end result is global multipolarity, where numerous countries can pursue their interests independent of one another. We know from political science theory, formal modeling, empirical analysis, as well as the last five years of conflagrations that such a distribution of power is the most likely to create the sort of “messy world” that Trump claims he will “fix”.

Our U.S. bond strategists are not too surprised by the above relationship. They have pointed out that economic factors alone cannot explain the most recent downleg in bond yields. Rising “policy uncertainty”, which includes U.S. politics, has also been depressing bond yields.