This week my Citywire column will be looking at reasons to be cheerful. Yes there are some, even for those of us with a bearish disposition! I run through the list of reasons and I think I find the simple adage of following liquidity and money flows to be the most powerful, helped along by the growing dominance of mega large caps who will clean up in the recovery. That said I’m still not budging from my bearish position but hey, maybe I’m completely wrong!
So, a well-timed note this morning comes from analysts at Deutsche Bank in the US who track fund flows. It’s a concise summary of what I think is the best argument for bullishness. Follow the money. Lurking behind this is the inescapable point that a huge amount of cash is still sitting on the side lines and currently outside of equities (and I suppose) TINA: there is no alternative. Crucially the Deutsche analysts point out that equity positioning is actually still very, very low. Thus the chart below.
Anyway, here’s the excellent Deutsche summary in full – hard to argue with any of this:
“Equity positioning has risen from rock bottom but is still extremely low. Equity positioning in our estimate has risen from a record low in March to the bottom of its prior range (8th percentile)….five of the indicators are still in single digit percentiles, and another five are significantly below average.
How can equities be up so much and positioning still so low? …the rally has been a tale of two equity markets, in pricing as well as positioning. For the mega-cap growth stocks, positioning has indeed risen sharply and is already stretched in our view. However, outside of the MCG, large swathes of the equity market in the US as well as globally, are only one week into a break out of a 7 week range, and for this group, positioning is still extremely low. There is also plenty of evidence that new retail investors raised exposure through the selloff and the rally, unexpectedly so, and institutional money across the systematic as well as discretionary spaces is now chasing.
Cyclicality works in both directions: will buybacks ramp up as earnings rise? We estimate based on a bottom-up tally that buybacks within the S&P 500 are likely to fall from $175bn in Q4 2019 to $70bn in Q2, in line with levels implied by the sharp decline in Q2 earnings. However, the cyclicality of buybacks works both ways and, as earnings rise in Q3, we expect buybacks to bounce back as well, although the extent is likely to be tempered in an election year to the benefit of M&A.
The cash mountain in money market funds remains enormous. After $1.2 trillion went in since March and almost none moving out so far, money market assets ($5 trillion, 25% of GDP) are still at financial crisis highs and any re-allocation away should be beneficial across risk assets.
Will fund flows rotate from the haves (IG, HY and Growth stocks) to the have-nots (everything else)? The pace of flows into the haves is running +3sd to +4sd above average, arguing for at least a slowing if not a reversal.”
I’ve mentioned before on this blog that I think there is a new a power grid paradigm slowly taking shape, which will help knock the traditionally energy sector for six – a topic I touched on just last week, on Friday.
The point for me is that power generation is already past the tipping point and traditional hydro carbons are now facing a slow death. But it’s a different story over in transport where oil demand is likely to remain high, if only from emerging markets when they recover from Covid.
But in the developed world I think we can begin to see a slow change in attitudes. Take my own situation. I have a wonderful old beast of a 4WD, a Hyundai Sante Fe. It’s been a fantastic vehicle – highly recommended – but is fast approaching its tenth birthday. So thoughts turn to what comes next ? For those of us living in rural areas, 4WD are still essential, so I would suggest that those Greens suggesting we all drive around in one person cars are deluding themselves. But many of us rural types are thinking about the heavy costs of running big old machines and I have more than once found myself thinking through whether an electric 4WD might be an alternative in the next few years. Sadly the range of choices isn’t great at this exact moment but I sense the tide is turning. By 2021 and certainly 202 there will be probably a dozen or so viable choices. The high initial upfront cost, the patchy infrastructure of charging points and the distances travelled on one charge, still combine to make me cautious but I think my thinking is inching towards an electric car.
And I know from talking to neighbours, that others are thinking the same. Maybe not this year or next but imminently. Feed through to system wide change – where urban consumers are much more likely to make the break for electric – and then mix in regulatory and policy changes post Covid, and we have a fast approaching tipping point.
But do my observations ring true in consumer surveys?
Morgan Stanley sustainability analyst Jessica Alresford has just brought out a note called Consumers in Favour of sustainable mobility which uses an AlphaWise survey to check on attitudes – the report conducted 10,000 online interviews across the US, UK, Germany, China and India.
MS European autos analysts reckon that by 2025, 11.5% of car sales will be EVs. My hunch would be that this is too low. Alresford’s survey tends to suggest this is the case.
Here’s the reports main summary conclusions with a cracking infographic summing up the main trends at the end.
“Almost a third of future car sales could be electric: Although current ownership of EVs is low, consumers are seeking to buy EVs & hybrids. Looking at current vs potential EV owners we see the biggest delta in Germany and the UK.
Price and lack of infrastructure are the key consumer issues: both are changing rapidly. Amongst respondents who didn’t choose an EV as their next vehicle, high price (cited by 51% of respondents) and lack of charging infrastructure (47%) were seen as the key hindrances to buying one (although 72% said they would pay more for an EV). Rising charging infrastructure investments and an increase in affordable models should address this. The European Green Recovery proposals may provide potential subsidies and grants for green car sales.
More affordable models are also increasingly available. 19 of the 47 EV models available in Europe this year are under £30k; of these 13are 2020 launches. Some delays to EV adoption, but no change in direction from COVID-19. In Europe, the penetration of BEVs and hybrids nearly doubled yoy in Q120 and BEVs are now at 3.5% of sales. In China, near-term volume risk is skewed to the downside, but market conviction in China’s 2025 NEV penetration target of 25% is intact given several policy levers that the Chinese government can pull. EV sales globally have also been resilient in the downturn with a 6.7% decline in sales yoy through March vs. overall light vehicle sales which are down 23% Y/Y. “
Stocks? The Morgan Stanley analysts reckon there are 48 stocks that offer a way to play the EV adoption theme, highlighting Valeo, Aptiv, Hota, CATL,LG Chem and Panasonic which are also rated Overweight by their stock analysts. Looking at different verticals, the analysts suggest looking into:
- Within autos and autoparts: Tesla, VW, S&T Motiv and Hota.
- On the battery side: CATL,LG Chem, Panasonic and Samsung
- On Semiconductors side: Maxim, NXP, Rohm, STMicro and Analog Devices.
- On Tech and hardware side:Foxconn, Delta, Chroma, Sunwoda and Bizlink