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Recovery, Upcycle, Emerging Markets… Commodities next?

Raphael Fiorentino
26th June 2020 - 2 min read

According to the global macro nowcasting part of Butterwire’s engine, we’ve moved to an economic upcycle phase on June 23, just over 3 weeks after moving into a recovery phase. Market-implied equity returns have shot up past 16% with a strong tilt toward Emerging Markets.

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The backdrop is one of fast accelerating global growth expectations, still accommodative monetary policy expectations, and benign price (inflation/deflation) expectations.

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From an equity return profile and global growth expectations standpoint, this makes 2020 almost looks like a picnic compared to 2008.

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In turn, the stock alpha forecasting part of Butterwire’s engine has started to surface the kind of “interesting” long candidates we perhaps didn’t expect to see pop up so soon, notably among “Production” stocks from the energy, materials and industrials sectors.

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One big difference with 2008 of course, besides an enforced shutdown in the West for a virus that has so far resulted in excess mortality rates (in Europe) akin to that of the 2015 seasonal flu, is the scale of the US response, with the Fed growing its balance sheet by $4tn. In other words, the US has invested the equivalent of nearly 50 Marshall Plans (in real $US) in a matter of days for probably not even close to one Marshall Plan’s worth of productive investments.

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With Eastern economies having carried on largely unaffected, Western ones talking of industry re-localisations, and the world awash in $US, it may be that commodity equities (other than gold) could make their comeback after 9 years in the doldrums. To be sure, the price disconnect between equity and commodity markets has never been greater. And if the 2008-09 looking trajectory of ZAR (commodity currency) relative to JPY (defensive currency) is anything to go by, commodity prices might just double within the next 6-12 months. It will all depend on whether the 1st of our 3 global macro dials (global growth) keeps well in the green together with the 2nd dial (i.e. no tapering off by the Fed), while the 3rd dial gradually drifts to the left (reflationary signal).

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