10 Charts To Watch In 2020 (Q1 Update)

"Emerging Markets: a big part of the 2020 recovery thesis is the global monetary policy pivot. Not many have noticed, but EM central banks have been particularly aggressive in easing policy (and by the way, they have the most traditional policy ammunition available). Given some of the cycle indicators have already begun to stabilize for EM I have a strong degree of confidence that we will see a cyclical upturn across emerging economies in the coming months and quarters."

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3. Growth Assets vs Defensive Assets: in the wake of the corona crash, defensive assets have become more expensive (as investors crowd into safe havens), and growth assets have fallen to really very cheap levels (but more so for global ex-US equities and commodities).  I would definitely be doubling down on this one: over the longer run, valuations speak for themselves, particularly at extremes, and now is about as extreme as it gets.

"Growth Assets vs Defensive Assets: this chart 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."

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4. TIPS breakevens: much like commodities and global ex-US equities, TIPS went from cheap to really cheap. So again, double down on this.  But in terms of catalysts, clearly TIPS are tied in with the whole EM equities/commodities/EMFX etc complex... which are all showing up as cheap (thus attractive from a valuation standpoint), but obviously there will be some water to go under the bridge as EM and commodities face very real near term headwinds.  Sentiment towards these assets has already been resolutely cleaned out, which is a good start, and stimulus measures will help - but stimulus will have to speak louder than the near and pressing shock and awe headlines.  We'll definitely get there eventually, as a tipping point is reached.

"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).  This is closely tied in with the commodities picture [chart 7]."

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5. US Equity Valuations: this chart saw quite the change from the start of the year.  Back at the start of the year it was a case of absolute valuations look expensive, but relative valuations look cheap.  Now it's a case of absolute valuations don't look that expensive anymore, but relative valuations look the cheapest in years.  Essentially a reset or winding back of the market clock. In hindsight, it shows the risk of going in/staying in when absolute valuations are lofty.

"US Equity Valuations: the downside of likely higher bond yields is that all else equal it will squeeze the ERP (equity risk premium), which in contrast to absolute valuations, still looks cheap/attractive.  Indeed, you can argue it's quite rational to be bullish equities even as absolute valuations are historically high if the equity risk premium provides enough of a cushion."

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6. Global Equities: the nascent cyclical bull market in global equities that began last year basically got stricken down by the virus. Obviously we're no longer in a bull market, but would you call it a bear market?  Bear markets can happen over the course of years in some cases, and weeks/months in others (like now).  Similar to the comment on the previous chart, it's a full reset or winding back of the clock.  The market breadth signals now look like they do in the deep dark depths of a bear market or crisis - i.e. like what you see at the start of a secular bull. Of course, the situation is still evolving, so I will leave it at that for now - but will flag the note from last week on the global equities outlook.

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