Our research team does extensive individual stock analysis to build and construct strategies to outperform the market. Although the bulk of the work we do is finding the right companies to own, we do extensive research to help frame ways to think about macro effects on securities. We would like to share some of the more relevant insights with our readers to help arm them for their internal investment team discussions as well as client facing interactions.
The first set of topics we will explore are:
- China v. US trade war round one, who is winning?
- Global banking, what happened to the European Banks
- The Housing market flare up and flare out
The Chinese Trade War
China’s equity markets are bearing the brunt of market adjustments in the ongoing trade war with the United States. With a large external debt denominated in USD, China is constrained in devaluing the Renminbi.
Stress in the Chinese credit markets is evidenced in the continuing increase in dollar denominated high yield bonds, now yielding in excess of 10%, for the first time since 2013. Notably, this is nearly double the year end levels of just 6 months ago.
However, quality Chinese bonds, usually highly correlated with US rates, have not followed the US higher, signaling growth momentum and bargaining leverage for America.
The relative strength of the US equity market, in comparison to the weakening Chinese markets, confirms the observation of the stronger US negotiating position.
European banks have been decimated in recent years, not only failing to keep up with the market, but even failing to provide a positive return of any kind. The 10 year carnage:
Banco Santander -38%
Credit Suisse -56%
Deutsche Bank -86%
Those anticipating a rebound have been continually disappointed, as European banks continue their woeful performance in 2018. While European banks are still clearly the worst performers, both Japanese and Asia/Pacific banks have also shown negative returns in 2018.
The US Housing Market
After a stunning 47% rally this year, US lumber prices have retreated, reflecting an anticipated slowdown in new homes built. This market forecast proving prescient, on Wednesday the US government reported both housing starts and building permits fell to the slowest rate in 9 months.
As some of the price increase was attributed to transportation bottlenecks and Canadian tariffs, the reaction in homebuilder stocks has been more muted.