Let’s start today with two investment themes that are in the doghouse at the moment. Energy stocks in the US and value stocks in Asia. Starting with the former (US unconventional), the conventional narrative of the optimists is that US shale output will plummet as bankruptcies accelerate and the market will find a new balance. The first chart below plays nicely to this narrative of energy-based sector carnage.
I have always been slightly suspicious of that narrative and a comment from the energy team at Guinness Asset Management – who have an energy equities fund – caught my eye. In their monthly report they project that…
“Having peaked at the end of 2019, we believe that production is likely to fall to a plateau in 2021, around 1m b/day lower (this is a ‘smoothed’ picture and ignores the short-term shut-ins that are currently occurring). Production growth would then resume, reaching the prior peak in late 2022, then growing again to 2025 at an average annual rate 2023-25 of around 0.5m b/day.”
This projection suggests that after an initial plunge, US energy production will increase again, which will concern our Saudi friends. In simple terms, job not done – US unconventional is still armed and dangerous. That suggests continuing pressure on the oil price.
Next up we have Asian value stocks. Like many value strategies in the West, Asian value managers have had a rough first six months. Greg Fisher at Samarang (managers of the Asian Prosperity Fund) has certainly had a torrid time and the three charts below nicely sum up the pain. The first chart below shows the relative performance of growth and value indices in Asia over the last 5 years. Greg reckons that “this is not sustainable, such an abandonment of valuation”, but who the heck knows these days.
The next chart shows the difference in return of large versus small Asian stocks, and that below it, the relative performance of China and Japan, year to date. What’s patently clear is that if you are worried about concentration issues, the US is not the only place to be worried about. China is also pulling ahead aggressively, with growth oriented large caps dominating the leader-board.
Last but by no means least, given these cross-cutting trends – weak oil prices, China building strength, value struggling in the face of concentrated growth – which currencies still offer safe haven status? It’s a question asked this week by analysts at Morgan Stanley. The report won’t surprise many of us as it concludes that the “USD is likely to become the favored safe haven as the fall in US rates this year makes it an attractive funding currency for borrowing and carry trades”. And JPY ? “Recent correlation and flows analysis suggests that USD/JPY could even rally in times of risk-off, counter to market perception. We find that Japanese investors have actually bought foreign assets in times of risk uncertainty and didn’t repatriate.” And the Swiss Franc ? 2CHF should remain a safe-haven currency, but its appreciation potential is limited by Swiss National Bank FX intervention.”
If we had to narrow it down to one trade in a risk off, safe haven scramble, the MS analysts argue for buying USD versus AUD screens as the strongest risk-off hedge in the G10.