Can Global Cyclicals vs. Defensives Green Shoots Turn into a Full Blossom?

There is growing evidence that China and the emerging markets (EM) are turning. This has implications for our global defensive over cyclical portfolio tilt, and we are putting the global defensive preference versus cyclicals on downgrade alert, acknowledging that EM and China are at least stabilizing.

The Keqiang Index (KI) bottomed late last year and is on a trajectory to expand in the coming months. Historically, Chinese excavator sales momentum and the KI have been positively correlated, and the current message is to expect a further firming in the KI. A recent anecdote is corroborating that China has stabilized. According to Bloomberg: “Komatsu Ltd., the world’s second-biggest maker of construction and mining equipment, said its sales of excavators in China almost doubled last month, signaling an acceleration in the recovery from a five-year slump”.

EM industrial production has ticked up (see chart), further diverging from still muted G7 IP growth that is flirting with the zero line. Higher frequency data also corroborate that the EMs are improving. Relative GDP growth expectations are diverging in favor of EMs. The IMF’s October World Economic Outlook GDP growth update upgraded EM expectations and downgraded advanced economies.

Finally, both the EM currency index and the trade-weighted Australian dollar are likely sniffing out a cyclical recovery in the EMs. All of this suggests that EM green shoots have the potential to blossom.

Bottom line: We are compelled to put our global defensives over cyclicals portfolio tilt on downgrade alert.

For additional details, please access the report titled “Gibson’s Paradox And The Post-1930s Parallel” at


Can The S&P 500 Continue Rising Alongside The U.S. Dollar?

Conventional wisdom dictates that the stock market needs a depreciating currency in order to advance, especially given the foreign exposure of S&P 500 constituents.

Empirical evidence, however, clearly shows that all U.S. dollar bull markets (including the current one that started in 2011) have been positively correlated with equities (please see Chart).

Deciphering this positive stock/currency correlation during dollar bull markets is instructive. A virtuous cycle develops when the dollar and stocks feed off of each other as foreign flows bid the U.S. dollar higher and consequently U.S. dollar denominated assets (including equities) also benefit from these flows.

The primary reason for the attraction of foreign flows onto U.S. shores is diverging interest rates. Historically, the U.S. dollar firms when U.S. interest rates reside in the upper half of the G10 interest rate distribution.

For additional details, please access the report titled “Can The S&P 500 Continue Rising Alongside The U.S. Dollar?” at

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