BETAPRO SP500 VIX ST FTRS 2X DLY BULL T.HVU

Global secular stagnation is unlikely to unwind for years

[shakerman640]

According to Macquarie Research:

https://tinyurl.com/nnawrak

Emerging Markets vs Developed Markets Equities

What would the average opinion say?

Secular stagnation = no support for EMs…

- As Keynes highlighted, the secret of successful investment is anticipating what the average opinion of an average opinion would be. He also observed that it is better to fail conventionally than to succeed unconventionally. Thus there is always a strong desire to follow what appears to be a prevailing consensus. In the case of Emerging Markets (EMs) vs Developed Markets (DMs) equities, the view is forming that EMs are in secular decline and DMs should outperform. Investors are guessing that average opinion of an average opinion would concur. Do we agree?

- We have maintained for a number of years that EM as an asset class no longer exists, as all of EMs’ key engines (deregulation in DM labour markets; opening of product markets and massive rise in global shadow banking and associated leverage) are shutting down. Therefore we maintain that divergence would be the dominant trend and only those EMs that embark on domestic structural reforms would be able to grow (stealing growth in a stagnant environment), whilst those avoiding structural change would regress.

…this has become consensus, but is it right?

- We believe that over the LT, the consensus is right and global secular stagnation (due to overleveraging, overcapacity and structural shifts such as replacement of humans and shortening of supply chains) causes strong deflation, retards growth and is unlikely to unwind for years to come.

- Indeed, in the last six months, EM equities have already underperformed DMs by ~13% (US$) and investors witnessed significant increase in EM currency volatilities. In an environment of strengthening deflation and rising US$, EM headwinds could easily strengthen further, even though a number of EM markets and currencies are touching multi-year lows.

Long-term, yes, but ST depends on policy errors

- However, over a shorter-term horizon (six to nine months), the answer is not as straightforward. We maintain that as supply of global US$ remains tight (in the absence of QE4) and neither ECB, BoJ nor PBoC significantly increase monetary accommodation or provide meaningful stimulus (at least not in the near term), deflationary pressures should get stronger. As discussed here and here, after short-lived rebound, deflationary pressures are again rising.

- However, this assumes a persistent policy failure. Despite rising deflationary pressures, EM dislocation and signs of FX and debt pressures, Central Banks would procrastinate and avoid another dose of stimulus or perhaps Central Banks concluded that global economy is already in a liquidity trap and thus monetary policy is impotent. It is not clear which answer is scarier. Our view remains that apart from Japan and Euro, evidence is not conclusive whether other key economies have already descended into a purgatory, and hence we think monetary policies still matter. As deflationary winds strengthen, it is likely that Central Banks would panic. We maintain that possibility of QE4 into ’16 is real and we also expect a more robust stance by ECB, BoJ and PBoC. This implies that at some stage, investors are likely to experience a sharp (though short-lived) rebound in commodities, EM currencies and equities. The question is whether this snap-back is imminent and our answer is not yet. We need to see much greater pain before an average opinion concludes that snap-back is inevitable.