BCA, Independent Investment Research Since 1949

BCA Research adds the Energy Sector Strategy to its sector-focused research offerings

BCA Research took the next step in its mission to provide global investors the most comprehensive equity research, analysis and investment recommendations with the launch of its Energy Sector Strategy (NRG). NRG overlays the macro theme and trend analysis BCA Research is known for with sector-specific expertise and fundamental company analysis to connect the dots from analysis to actionable conclusions.

“The demand for fully integrated, objective, high-quality analysis and investment insights continues to rise.  A recent survey showed that more than three quarters of investment managers want more actionable sector research to support investment strategies and we have listened and are responding,” said Bashar AL-Rehany, CEO of BCA Research. “Our Sector Strategy services combine BCA’s thematic top-down macro research with bottom-up, sector and industry-specific analysis and investment recommendations. We are initially focusing on the most widely traded sectors technology, energy, healthcare and financials and also have a number of exciting new products in the pipeline.”

The launch of the Energy Sector Strategy is the first in a series of additions planned over the next six months, to support BCA’s expansion from macro to mid (sector) and micro (bottom-up) research, all delivered through BCA’s digital platform, Edge, to ensure convenient and quick integration into decision-making.

You can read the full announcement here.

To learn more about this new service, click here or please contact Chris Cook, BCAs Equity Product Specialist.

U.S. Equities: Few Signs Of A Sales Or Profit Rebound

Policy uncertainty will remain elevated, putting upward pressure on risk premiums. The upside of uncertainty is that monetary and perhaps even fiscal policy will be looser than otherwise would be the case. That is a plus for stocks, but may cushion downside risks more so than propel capital appreciation in the absence of stronger global growth.

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Deficient global aggregate final demand remains the defining characteristic of the global economy, given high debt loads and ongoing private sector deleveraging in the developed world. The developing world may need to undergo a similar fate. Policy is already extremely easy, but has been unable to spur much growth. Global trade remains very weak.

U.S. companies are already having difficulty generating sales growth. Inflation expectations have plunged, and are an excellent leading indicator for actual corporate sector pricing power.

Any additional U.S. dollar strength would amount to a tightening in global financial conditions, importing deflationary pressures into the U.S. and dampening top-line prospects.

In turn, that would prolong the retrenchment period required to right-size the cost structure of many businesses, especially in the face of the recent increase in labor costs. It is no wonder our profit model cannot gain any traction.

As a result, the Brexit vote does not alter our portfolio strategy, if anything, it reinforces it. Defensive sectors had been outperforming prior to the referendum in response to an increasingly shaky global economic outlook.

Policy Uncertainty And Global Equities

Rising global policy uncertainty should lead to lower equity multiples.

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There is no doubt that policy uncertainty in Europe has risen since last week’s U.K. referendum. The Global Policy Uncertainty Index, created by Baker, Bloom and Davis, is almost certainly much higher today than its last datapoint in May 2016 shown in the chart above.

The uncertainty originating from the U.K.’s “leave” vote will only reinforce weaker global growth and likely trigger a de-rating in global equities. Over the past 12 months the U.S. equity market has repeatedly failed to break above its May 2015 highs. Such market action could be a sign of major top. Meanwhile, global ex-U.S. share prices have been in a bear market for about a year and seem to be breaking down anew.

Bottom Line: Risks to global share prices are building. Investors should stay defensive.

Timely Reminders Of Sterling’s Bearish Fundamentals

The surprise Brexit vote last week dealt a severe blow to sterling. Beyond the vote, the fundamentals remain negative for the British pound. Timely reminders came today from the BoE governor and the Q1 current account release.

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Even before the Brexit outcome, the risks to the U.K. economy were tilted to the downside. Heavy fiscal drag was in the pipeline and the housing market, particularly in London, was cooling. The OECD’s LEI for the U.K. has been heading down since mid-2014, well before the referendum was called. The referendum outcome will only exacerbate the economic slowdown. As U.K. businesses face significant uncertainty ahead, investment spending and hiring will surely suffer. The Bank of England will be forced to ease monetary policy, pushing interest rates closer to zero and/or restarting QE. Earlier today, BoE Governor Carney signaled that more accommodation could be coming this summer.

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Aside from economic weakness and the potential for monetary easing, there is another key negative for sterling: the huge current account deficit. Today’s data showed that the external deficit hit a new modern day record of nearly 6% of GDP in the year to 2016 Q1. This is larger than the deficits seen prior to the 1992 ERM crisis and ahead of the 2008 global financial crisis. The increased political and economic uncertainty following the Brexit vote will make it much more difficult for the U.K. to finance such a large current account deficit smoothly.

Bottom Line: On a short-term basis, sterling is oversold and some technical consolidation/retracement is possible. However, the medium-term fundamental outlook remains bearish. Sterling is likely to make new cyclical lows versus the dollar, euro and yen over the next 3-6 months.

Weak Global Vital Signs

According to our U.S. equity strategists, to forecast that a weaker U.S. dollar will revitalize rather than simply stabilize profits on a broad-basis, it is critical for the rest of the world to demonstrate an internal demand impulse. That would signal that other countries can cope with currency strength, otherwise U.S. dollar depreciation would simply redistribute a shrinking global profit pie back to the U.S.

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Profit redistribution may be enough to avert a serious crunch in stocks, but it is hardly fodder for a sustained breakout when P/E multiple compression is already underway.

The contraction in global exports, particularly in Asia, underscores that global final demand is still sub-par. Our global leading economic indicator, excluding the U.S., is still below the boom/bust line. The global ex-U.S. PMI has also sunk below the key expansion/contraction line. These subdued readings suggest that growth outside the U.S. is not yet on the cusp of a reacceleration.

That is consistent with the message from the bond and equity markets. Global stocks outside the U.S. are barely off their lows, suggesting that foreign profits remain weak. Treasury yields and inflation expectations remain historically low, and yield curves continue to flatten.

We remain wary of global deep cyclicals, but selling pressure in the domestic and interest rate-sensitive S&P consumer discretionary sector may have run its course, particularly if the long end of the U.S. yield curve continues to rally. Our U.S. equity strategist recommend lifting this sector to neutral from underweight.