The Investor Positioning and Flow report is worth reading. It notes “With the S&P 500 up almost 10% since early June, investors are assessing the sustainability of the risk rally. Our measures show that equity positioning has been fairly flat since mid-June: mutual fund managers have remained neutral while macro hedge and long-short equity funds have stayed underweight. The equity rally has largely been driven by real money inflows: equity inflows of $16bn since early June, compared to $4bn during last year’s post-LTRO rally (Nov-Feb). As we have discussed (“After the Rally”, March 26, 2012), equities should continue to get inflows absent new negative shocks; when the VIX has been below 24, equities have almost always seen inflows…Macro hedge fund beta has moved up only modestly and is still very short; Long-short equity funds have remained 4-7pp underweight since June; Mutual funds have maintained positioning close to neutral; Hybrid funds have cut back exposure over the last 2 weeks toward neutral; Energy is the large, consensus underweight for MFs and HFs; Discretionary and Materials the consensus overweights; Positioning shifts in regional and global funds have been larger than those in US funds and may have been a bigger driver of price movements… Fund managers could chase returns and raise exposures to “catch up” as they have in the last 2 years; mutual funds trail the S&P 500 by 1pp on avg YTD while returns for macro funds (flat) and L-S equity funds (2%) are weak.
Asian stocks fell, with the regional benchmark index headed for a third day of losses, after theEuropean Central Bank failed to reassure investors on immediate action to support growth and a surge in Spanish bond yields added to concern about the region’s debt crisis.
Sharp Corp. (6753), Japan’s largest maker of liquid-crystal displays, plunged 24 percent after widening its loss forecast and announcing job cuts. BHP Billiton Ltd. (BHP), Australia’s biggest mining company and oil producer, slipped 1.8 percent as crude prices fell after the ECB’s announcement. Sony Corp. (6758), Japan’s No. 1 exporter of consumer electronics, dropped 7 percent after cutting its profit forecast.
The MSCI Asia Pacific Index fell 1 percent to 116.88 as of 9:24 a.m. in Tokyo before markets in Hong Kong and China opened. About 12 stocks dropped for each that fell. The measure has gained 0.8 percent this week.
“If Spanish bond yields keep rising like this, it will only increase the chance Spain will apply for assistance,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “What was delivered was a commitment to action, but not immediately. It is a disappointment and it’s a bit of a setback.”
UBS: Don’t Hold Your Breath for another Stimulus in China
Indeed some market participants seem to be eagerly anticipating or hoping for another stimulus in China, and each day that has passed without a big policy announcement seems to have depressed the market further. While the Chinese government has been very concerned about the economic slowdown and has taken policies to support growth, we would not be holding our breath for another big stimulus. The previous stimulus in 2008-09 did lift growth much higher than otherwise would have been, but the excessive credit expansion also worsened the imbalance in the economy and left serious negative consequences which are still been dealt with today. Chinese government has clearly recognized this and is keen to avoid making a similar mistake this time. Of course, the slowdown in export and in the overall economy is also much milder compared with 2008-09. Importantly, the lack of labour market distress so far has made it less urgent to come up with any big stimulus.
This is not to say that the government has done little or will do little to support growth. Indeed macro policies have changed to supportive of growth since early this year and this has intensified since mid-May. The policies taken so far include fiscal (tax cuts for small businesses, subsidies for some appliances, pension increase, and more spending on social housing), monetary (increase of base money supply through RRR cuts and reverse repos, increase of banks’ lending quota, and 2 interest rate cuts), and credit and quasi-fiscal (easing of lending to the property sector, local government platforms and some sectors, approval and launch of more government investment projects). Among all these, we continue to believe that the measures to increase public investment, to be financed largely by bank credit, will be the most important ones in the near term.
The government has also been trying to encourage private investment in energy, utility, transport and service sectors including by promising easier entry and access to credit, but we think it may take some time before such investment can take off. Most recently, the State Council announced on July 30 that the government will support industrial upgrading including by providing interest subsidies for enterprises to invest in new technology and techniques, more advanced equipment, energy saving process and materials, and advanced information and automation systems. Banks are also encouraged to increase lending to such investment projects.
What about the many “regional stimuli”, including in Changsha and Guizhou? Should we tally up the regional investment plans and count these as stimulus? Not really. While the central government is clearly trying to support growth and investment in the inland regions, we think the many regional stimuli are largely wishful thinking of local governments. The realization of such ambitious investment plans depends crucially on sufficient financing, but banks have been more cautious this time and the overall credit policy is still closely managed by the central government. In addition, the central government’s insistence on not relaxing the property policies wholesale has put limited local governments’ ability to use land/property to finance ambitious investment projects.
Nevertheless, with the continued implementation of the existing pro-growth measures we think GDP growth can still be close to 8% in 2012. In the coming months, we should see bank lending to expand at a steady pace, with the share of medium and long term loans rising gradually, which should help support a modest and investment-led recovery in Q3 and Q4 2012. Industrial profits are down and may continue to be depressed for 1-2 quarters with the ongoing decline in some prices and inventory adjustments, and some companies may not survive this cycle, but we do not foresee major macro risks because of this. Some adjustment and industry consolidation in an economic downturn may not be bad, and many listed companies may emerge from this cycle stronger and more efficient. The ride, of course, may not be pretty.
The economic environment seems to be stuck in a rather unpleasant perpetual loop. Greece is always about to default; the latest bailout is always about to save the day and yet never seems to; China is always about to collapse but instead teases us by inching down; and I swear the Financial Times is beginning to recycle its reports! In the U.S., the fiscal cliff looms along with debt limits and the usual election uncertainties. The dysfunctional U.S. Congress continues for the time being in its intractable ways. The stock market rises and falls and rises and falls again. It is getting difficult to find anything new to say at client meetings. I, for one, wish that the world would get on with whatever is coming next.
One slight change, though, is that fantastic (almost unbelievable) profit margin and earnings gains have finally weakened a little. They, together with Bernanke’s super low rates, have been the twin pillars of the market and not bad ones at all: here we are up 8% for the year in a thoroughly unsettling financial and economic world. With margins weakening, one of the twin pillars is looking shaky and price declines look more likely than before.