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[Markets] "The 6Ps Of 2020" And Where The Market Goes Next "The 6Ps Of 2020" And Where The Market Goes Next Tyler Durden Fri, 10/16/2020 - 13:50

The recent rebound in markets has had a stimulative impact on investor psychology, with risk assets continuing to record inflows for another week. As BofA's Ioannis Angelakis and Barnaby Martin write, after three weeks of outflows, IG, HY and equities are now back in positive territory for a second week as "tighter spreads and higher valuations have supported risk taking across credit, government bond, equities and EM debt space."

Some more details on fund flows over the past week, courtesy of BofA's Michael Hartnett:

  • $17.6BN inflows to bonds, of which $12.2BN to IG/HY bonds, the 3rd largest MBS inflow ever ($1.8BN), 1st bank loan inflow in 10 weeks ($2MM), with local EM bonds the only fixed income sector without inflows.

  • $8.6BN inflows to stocks, a second consecutive week of sizable inflows, with $12.5BN in ETF inflows offset by another $4.0BN in mutual fund outflows. Over the past 3 weeks there has been a "chunky" $24BN in stock inflows.
    • Geographically: $6.0BN inflows to US (the largest in 4 weeks); on the other hand Europe and Japan both experienced outflows ($1.0BN and $0.5BN, respectively), with Europe suffering outflows 4 of the past 5 weeks; EM inflows for 4 consecutive weeks.
    • By style: Inflows into US growth ($5.4BN), US Large cap ($5.4BN), US small cap ($0.5BN), with only US Value having outflows ($1.7BN).
  • Money Market Funds continued to be drained, down $237BN in the past 10 weeks to a still-high $4.4 trillion.

Flows aside, in his latest Flows Show report, BofA's Chief Investment strategist lays out the 6 Ps of 2020 - Price, Positioning, Policy, Profits, Pandemic, & Politics - and before providing more details, summarizes the current state of the market as follows: after a historic price rally, positioning is currently neutral, policy stimulus peaking, profits are a bullish surprise, while pandemic & politics remains potential risk factors for rates & EPS.

Some more details:

On price: the history of great market rallies from crash lows predicts S&P500 3300-3600 top between election & inauguration; Q3 EPS = $140 + SPX ® 3600 + PE of 25x, rather "tasty" by historic standards:

On positioning: the BofA Bull & Bear Indicator up to 3.9 from 3.8 (Chart 1); neutral, no longer extreme bearish; BofA Bull & Bear Indicator tethered by modest underperformance of MBS and junk bonds vs Treasuries & defensive FMS sector positions; note BofA private client AUM at record high $2.7tn and allocation to stocks 60.2% in stocks (all-time high was 62.5% in Mar 2015).

On policy: massive collapse in spreads & vol & yields is largely behind us; MOVE, HY, IG, VIX have retraced 70-100% of surge in Feb/March (Table 1); inability of spreads, volatility, yields to breakdown to new lows mean tough for stocks to keep making new highs, hints at "peak policy' stimulus; 10 countries in the "100 Club" (fiscal debt/GDP >100%- Table 2)...countries likely to revert to FX wars in 2021 if desire for fiscal stimulus constrained by markets (Chart 7), which is positive for volatility.

On profits: BofA global EPS growth model (driven by Asian exports, Global PMIs, Chinese financial conditions, US yield curve) has inflected, predicts flat EPS vs -12.5% consensus next 12 months (Chart 8); global inventory-shipment ratios say big inventory restocking cycle underway; investors front-running higher PMI's and EPS via consensus longs in QQQE, SOX, XHB, TRAN...keys macro conviction "tells" of final demand; laggard cyclicals will catch-up post-election on vaccine; but global EPS revisions ratio up from 026 to 0.90; US HY spreads down from 1087 to 489bps (Chart 9) says big easing of financial conditions a la 2003, 2009,2017 likely fades in 2021.

On pandemic: IMF says COVID-19 'scarring' could reduce global output by cumulative $28tn over the next 5 years relative to their Jan '20 forecast (global GDP now expected to grow from $84tn to $114tn in 2025);tsunami of new cases in EU but 2nd wave of deaths more likely driver of cuts in global EPS 84 GDP.

On politics: recent blue wave bullish consensus reflects liquidity addiction, new "buy-the-rip" not "buy-the-dip" mentality, rather than future policy; and Sept unemployment rate in top 8 US election swing states 7.5% vs 7.9% national, in top 25 swing counties 8.2% vs 8.4% national, which means the blue wave won't be driven by macro

As Hartnett summarizes, the 6Ps say that "S&P500 3300-3600 tops between election & inauguration, buy laggard cyclicals (small cap, banks, energy, EM & HY bonds), hedge inflation, own volatility."

Finally, here are Hartnett's election outcome trades: blue wave = sell US$, Trump win = buy Treasuries, contested election = buy tech (Fed will ease), gridlock = buy cyclicals (bipartisan fiscal stimulus). See more here.

Published:10/16/2020 1:04:24 PM
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