Introducing Our Global Sector Earnings Models And Positioning

Currently, Global Alpha Sector Strategy’s global equity sector earnings models are consistent with maintaining a defensive portfolio structure, which will provide protection should the liquidity-driven overshoot run into trouble in the coming months.

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A Special Report published on March 6 introduced the Global Alpha Sector Strategy earnings models for the ten global equity sectors. We have identified key earnings drivers for each global sector and incorporated them into individual sector models. The objective is to forecast the direction of earnings growth. The purpose of the Special Report is to compare and contrast the readings of our global sector models with sell-side analysts’ profit growth expectations and help clients position for a volatile 2015 in the global equity market. As such, we are also initiating coverage of the ten global equity sectors. The earnings models carry the most weight in determining our sector positioning, with our macro overlay and our valuation and technical indicators rounding out our methodology.

For additional information and detailed analysis on all the ten global equity sector earnings models you can access the Global Alpha Sector Strategy Special Report: “Introducing Our Global Sector Earnings Models And Positioning”, dated March 6, 2015, available at gss.bcaresearch.com.

ECB: A QE Update

Apart from setting a date (March 9th) for the beginning of its asset purchase program, the ECB filled in some other details around its policies.

In the press conference introductory statement, President Draghi announced upward revisions to growth over the next year, but revisions to inflation forecasts were down (to 0% for 2015). But it was in the Q&A that more light was shined on QE policy. The major point gleaned from the Q&A is that the central bank is not prepared to buy bonds yielding less than the deposit rate.

That stipulation then begs the question: What happens if there is not enough liquidity for the ECB to buy €60 billion per month if the central bank will not buy any asset with a yield below the deposit rate? One answer is that the ECB could lower the deposit rate. We believe that given the choice between a lower deposit rate or not attaining the €60 billion in monthly purchases, the ECB would likely do the former. The ECB will be disposed to finishing the 19 months of quantitative purchases in order to protect its credibility, unless of course the economy is strong enough to warrant stopping early.

So far, the ECB is not showing concern that there will not be enough sellers of high-quality bonds for the ECB to buy. Draghi more or less dismissed the question during the Q &A and also alluded that he thought there were plenty of foreign sellers.

We have pointed out in Daily Insights that, in fact, the shortage of government paper is acute, especially in Germany, where there will be very little net new issuance. The government last week issued a 5-year Bund for the first time sporting a negative nominal yield (-8 basis points). Almost 30% of the continental European bond market is currently trading in negative territory, and the ECB hasn’t even started buying yet.

Negative yields are helping keep the euro weak, which, much like QE elsewhere in the world, is giving a definitive boost to local growth, and for the time being, equity markets. We maintain overweight positions in euro area stocks relative to the U.S. and global benchmarks.