Daily BriefsMacro

Macro: Golden Week/ US-China/ Global Views/ Solar and more

In today’s briefing:

  • Golden Week/ US-China/ Global Views/ Solar
  • TMI Snapshots: China Property Sentiment Indicators Recover Post “Three Red Lines” & Evergrande Drama
  • A Valuation Puzzle: Rising Stocks and Recessions

Golden Week/ US-China/ Global Views/ Solar

By Diana Choyleva

China News That Matters

  • Glass three-quarters full for Golden Week 
  • US: Commies not welcome 
  • World sours on China  
  • China switches on world’s second largest solar power station 

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

TMI Snapshots: China Property Sentiment Indicators Recover Post “Three Red Lines” & Evergrande Drama

By Elan Gore

  • After 3 months of consistent decline, our China Property Sentiment Indicator is showing notable signs of recovery
  • News attribution suggests this is primarily driven by decreasing negative coverage as the Evergrande liquidity crisis was averted limiting broader contagion; continued momentum on developer spin-offs of property management subsidiaries; and strong Golden Week consumption metrics related to home furnishings & building products (a secondary parameter in our indicator)
  • Our text mining already incorporates recent negative news on shrinking land premiums, as well as coverage on (expectedly) heavy discounting during Golden Week sales; but the overall tone of coverage remains “less negative” in the month-to-date
  • The TMI China Property Sentiment Indicator has been 58% correlated with Chinese real estate equities (via CHIR ETF), 40%-54% with Chinese HY (via KCCB ETF), and 65% with copper prices (on a T24M basis)

TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade & traditional media. Our proprietary software text-mines the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income & individual equities. 

A Valuation Puzzle: Rising Stocks and Recessions

By Cam Hui

One of the investment puzzles of 2020 is the stock market’s behaviour. In the face of the worst global economic downturn since the Great Depression, why haven’t stock prices fallen further? Investors saw a brief panic in February and March, and the S&P 500 has recovered and even made an all-time high in early September. As a consequence, valuations have become more elevated.

One common explanation is the unprecedented level of support from central banks around the world. Interest rates have fallen, and all major central banks have engaged in some form of quantitative easing. Let’s revisit the equity valuation question and determine the future outlook for equity prices.

The S&P 500 is trading at a forward P/E ratio of 21.9, which is well ahead of its 5- and 10-year averages. In light of the BIS analysis, the forward P/E ratio of about 13 reached during the March low represents a reasonable level of bottom-of-cycle valuation in light of the lower interest rate regime.

Investors who missed buying the March low may find a second chance in the near future. From a technical perspective, past recession-related equity bear markets have seen an initial low, followed by one or more re-tests of the first low. In some cases, the re-test was unsuccessful and the S&P 500 fell to a lower low before launching into a fresh bull. The time between the first and final low can be as long as over a year.

No matter how the fundamental develop, the S&P 500 and U.S. growth stocks have low upside potential compared to value stocks and other developed market equities.

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