In this presentation we extend our 2018 Q4 Outlook with our views on the global economy and equity markets. We are negative on US equities and see opportunities in Chinese equities.
Interimreport1 January–31 March2024 Elo Mutual Pension Insurance Company
Saxo Bank Equity Outlook
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Financial markets stand at a crossroad
Equity Outlook
Wednesday, 24 October 2018
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What we have been saying this year…
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Q1 Outlook
…equities can push higher very short-term but that in the second half of Q1 macro data will
begin to disappoint against expectations causing an equity correction above 7 %, something we
have not seen since Brexit
Q2 Outlook
With a recession likely coming with the next two years the outlook does not support an
aggressive stance and overweight position in equities. Portfolios should be more balanced and
tilted towards defensive industries in the portfolio’s equity exposure.
Q3 Outlook
Our view is that equity markets in the second half will begin to negatively discount
2019 … Escalating trade tensions driven by a misguided US government will only add
to the trouble facing financial markets.
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What are we saying now…?
US equities are unattractive, China is a buy, growth stocks to hurt on rising rates
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As the most important discount rate is lifted it changes the dynamics making growth
stocks vulnerable and maybe setting the stage for a comeback to value stocks. Tactically
emerging market equities are a buy with Chinese equities in a bear market territory but
the overall equity bull market is coming to an end.
The Four Horsemen
1. Price of money: RISING
2. Price of energy: RISING
3. Quantity of money: FALLING
4. Productivity: FALLING
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Why 2019 is potentially explosive
Maximum Fed tightening and US fiscal deficit late cycle blowout
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US equities are no longer attractive
Expected 10-year annualised real return is 1.9%
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-5
0
5
10
15
20
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
Z-score (nine valuation metrics)
S&P 500
10-year annualised real return in % given valuation starting point (1990-2008)
Source: Bloomberg and Saxo BankSource: Bloomberg and Saxo Bank
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US aggregate bond market is extremely expensive
Expected 10-year annualised return in 1.7%
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0
2
4
6
8
10
12
-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Z-score (yield-to-worst)
US Aggregate Bond Market
10-year annualised real return in % given valuation starting point (1976-2008)
Source: Bloomberg, Saxo Bank
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So what can the average investor expect?
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The classic 60/40 portfolio is
expected to deliver real return
~1.8% annualised over the next 10
years
Challenging asset class
environment
Stock picking environment?
First real headwind for passive?
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Chinese equities have not been cheaper the past 10 years
Long-term investors should overweight China
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-40
-20
0
20
40
60
80
100
120
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Chinese equities valuation premium
CSI 300 / S&P 500 in % on 12-month trailing EV/EBITDA
Source: Bloomberg and Saxo Bank
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Previous Chinese stimulus has worked
When will the current stimulus feed through to the real economy?
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Massive comeback to value stocks the next 10 years?
Normalised interest rates to drive change
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-4
-3
-2
-1
0
1
2
3
4
5
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1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Value vs Growth
Difference in 10-year annualised return in %-points
Source: Bloomberg and Saxo Bank
* MSCI World Value Net Total Return USD is used for value and MSCI World Growth Net Total Return USD is used for growth
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Growth stocks have present value coming from the future
Higher rates mean higher WACC, and more tariffs mean lower g
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Wild randomness
Environment in which a single observation can impact in a disproportionate way
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0.1
0.2
0.3
0.4
0.5
-4 -3 -2 -1 0 1 2 3 4
Normal vs Cauchy distribution
Normal Cauchy
Source: Saxo Bank
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Wild randomness means that anything can happen
Strategies build on existing data will likely fail
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-5
0
5
10
15
20
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3/29/2004 3/29/2006 3/29/2008 3/29/2010 3/29/2012 3/29/2014 3/29/2016 3/29/2018
VIX Futures (active contract rolled)
1-day measured on z-score
Source: Bloomberg and Saxo Bank
Lehman Brothers
bankruptcy (+0.77!)
China's biggest
selloff in 10 years
China grows slower
than estimated
Brexit
US-North Korea
tensions
Sell volatility
implosion
Global growth concerns
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If markets fit wild randomness what should investors do?
Nassim Taleb has proposed the Barbell Strategy
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”Divide your wealth in two components. One that
maximizes certainty and one that maximizes uncertainty.”
”85% in risk-free assets (government bonds and inflation-
linked bonds) will act as hard stop-loss
15% in very risk investments (long out-of-the-money
options, VC, small/micro cap stocks, biotech, real estate”
”Portfolio will be uncorrelated to everything and likely gain
when everyone else fails”
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Example of a maximize uncertainty bet
This is not an investment recommendation
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Buy S&P 500 put options
with expiry 2019-12-20
Strike at 2,200 (19.7%
below today’s price)
Assume S&P 500 trades
1,800 on expiry
Profit is (2,200 – 58.60 –
1,800) / 56.80 = 500%
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Is the market efficient?
No, that requires P=NP; alpha is more abundant than ever
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Simple strategies are being arbitraged away.
99.5% of all retail investors should buy passive
index trackers or use Barbell Strategy
Read the full analysis here:
https://bit.ly/2OTNYd7
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Worrying signs of out industrials
Caterpillar shares in free fall
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Electrification of cars and tariffs are hurting carmakers
Tesla 3 is changing the car industry forever – Windows 95 moment
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Automobile index down 17.6% relative to global equities
We remain negative on car industry; Daimler’s latest profit warning confirms this
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Maybe globalisation is an extreme condition…
Massively higher tariffs are not unreasonable to imagine
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Is US-China conflict turning into a new Cold War
The Thucydides Trap replay?
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China does not have that much to offer the US…
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Semiconductors are overextended
Vulnerable in an escalation between US and China; underweight this industry
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0
5
10
15
20
25
30
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
MSCI World Semiconductor Industry Group
12-month trailing EBITDA per share
Source: Bloomberg and Saxo Bank
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Tighter US rates policy creates headwinds for EM
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Italy is a time bomb waiting to explode
Government has full support behind hard line against EU
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We live in a time of paradoxes
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Technology should have boosted productivity: but it’s fallen
Globalisation should have aligned values: it’s created nationalism and corrupted our morals
Central banks should be able to create inflation: they can’t without fiscal
Social media should have made us get close to each other: loneliness on the rise
Wealth effect should have boosted growth: hard to observe
Democrazy should have been stronger: biggest headwinds since WWII
Internet should have increased competition: more industry concentration
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Housing market shows dangerous signs again
Denmark is a good example
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0
50
100
150
200
250
300
350
400
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Denmark housing market
Price Index for Sales Residential Property One Family
Personal Disposable Income Index
Source: Bloomberg and Saxo Bank
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Housing market valuation back to late 2005 levels
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0
20
40
60
80
100
120
140
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
OECD House Price to Rent
Source: Bloomberg and Saxo Bank
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Europe’s earnings season is a disaster
Growth has not been consistent for eight years!
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-15
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-5
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15
20
25
Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018
STOXX 600
12-month trailing EBITDA y/y growth in %
Source: Bloomberg and Saxo Bank
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Danish stocks flat for 3.5 years…
…and they are still expensive!
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So what should investors do?
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Reduce equity exposure
Within equities tilt towards value / defensive
Stay away from industrials, carmakers, semiconductors
Bond exposure should have short duration
Potentially add a bit of gold
Consider Barbell Strategy
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