by Callum Thomas
As interesting and sometimes amusing as it is to look back, as investors we get paid for looking forward, and there’s a few existing trends and themes that will remain front of mind and be key to keep on the radar in 2020. Following is a selection of the key charts and indicators I will be watching in the new year.
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1. A turning point in the global economic cycle: 2019 basically saw a global manufacturing and export recession. Yes Recession. I have a growing list of leading indicators pointing to a recovery in 2020, and the below is one of them. The diffusion index of OECD leading indicators has made a clear turnaround after reaching a decade low. I will be watching for a turn up in the main global indicator (and for the diffusion index to continue to edge higher/stay higher).
2. A big part of the 2020 recovery thesis is the global monetary policy pivot. Not many have noticed, but EM have been particularly aggressive in easing policy (and they have the most traditional policy ammunition). Given some of the cycle indicators have already begun to stabilize for EM I have a stronger degree of confidence that we will see a cyclical upturn across emerging economies in the coming months and quarters.
3. Growth Assets vs Defensive Assets: says it all in terms of where investors have been positioned, and it tells you that defensive assets may not necessarily be “safe” given such expensive valuations. Indeed, a global economic rebound could well make defensive assets a source of risk, rather than a hedge of risk.
4. TIPS breakevens look cheap, and should rebound if we get better growth. This will also tend to put upward pressure on bond yields (i.e. nominal yield = real yield + inflation expectations).
5. The downside of higher yields is that all else equal it will squeeze the ERP, which in contrast to absolute valuations, still looks cheap/attractive.
6. As for Global Equities, it looks like we’re in a new cyclical bull market (based on a fairly familiar and reliable global equity market breadth signal).
7. Commodities (at an asset class level) have also seen a familiar market breadth pattern emerge, which points to a cyclical bull market (lines up with relatively light positioning, cheap valuations, and a prospective better macro backdrop).
8. One key piece of the puzzle for commodities is the US dollar, and while I continue to maintain a bearish bias there, one thing I am very mindful of is the crunch in FX volatility. Typically crunches in volatility like this tend to be resolved in a violent fashion: that is, it could be a harbinger of a large/rapid move (agnostic of direction). So, will 2020 bring a return of volatility for the US dollar?
9. Value vs Growth: the investment strategy graveyard is littered with failed calls for a turnaround in the performance of value vs growth stocks. But I think we could be close to the much awaited and much forecast turning point. Relative value between the two cohorts is at the lowest point in 20 years, and in terms of macro catalysts, higher bond yields, better growth, and higher commodity prices will help the sectors that are slightly over-represented in value vs growth.
10. Last but not least, this chart shows Chinese property price growth vs China A-shares. It’s a useful chart for China watchers and global investors in general, but it’s of particular interest now because property price growth is rolling over, and that could be good news for China A-shares. Because the marginal speculative investment dollar in China is basically trapped in the country, you tend to see this succession of chasing one hot asset after another. Thus, we could start to see a rotation effect between property and stocks in China, and that (along with cheap valuations, easier monetary policy, better global growth, and a trade deal/truce) could drive a potentially explosive new bull market in China A-shares.
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This article is one section of a free PDF report that can be downloded from Topdown Charts. Callum writes:
This edition looks at some of my favorite charts of the year from the weekly report, including the charts that worked (and those that didn’t work!), charts to watch in 2020, the “people’s choice” charts, some honorable mentions, and an overview of new asset class coverage”
Click Here to Download the Report
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