The Wall Street “consensus” is something that certain hedge fund players identify so as they can look for opportunity against the grain. There are certain signals that can point to an overwhelming mainstream thought being the trigger for a mean reversion trade. Many institutional investors, however, find safety in the consensus and flock to trades and investment ideas coveted by the crowd. While it is popular to speak out against the “consensus,” it is often a more difficult strategy to execute in practice.
Credit Suisse, out with a Global Equity Strategy report Thursday titled “Where is the consensus now?” points to the perils. In speaking with clients, the bank has “never had so many client meetings starting with statements such as ‘we are totally lost’.” This “lost” feeling comes in a world of significant hedge fund underperformance, negative interest rates and helicopter money being used while unemployment is generally low and the economy is nonetheless generally positive, and could be a contrarian buy signal.
Stocks, disruptive technology viewed as risk
The consensus on stocks first points to risk that isn’t being rewarded. Bears say US corporate earnings have peaked and stocks, judging from the trailing P/E ratio of the S&P 500 being 28% above its 50-year average, find little reason for a rally given mixed readings on growth.
One assumed threat to growth was disruptive technology, with investments being placed on the disruptors but the other side of the equation is not being considered. Credit Suisse clients see disruptive technology as the key risk – and the bank agrees. Key drivers include smartphone penetration rate of 56% globally, 3D printing, battery storage technology. Computer power by some estimates will come close to replicating the human brain by 2018. “Clients are buying the disrupters (Google, Facebook, Amazon, Tencent, most commonly), but are not paying enough attention to the disrupted.”
While their clients find equity valuations too high relative to macro, political, earnings and business model risks, Credit Suisse disagrees, categorizing their clients as “too pessimistic.”
Andrew Garthwaite and his Swiss-based equity team think equity risk premium is “marginally cheap” while it is bonds, credit and real estate that “look abnormally expensive.”
Europe remains a concern as interest rates could remain low “forever” and emerging markets now safe haven
There remains significant concern regarding Europe, particularly in the US.
The report said “most US clients” are modeling another European political/economic crisis. “The Brexit vote reminded investors of the fundamental shortcoming of the euro: a monetary union without a fiscal, political union or proper banking union (only 0.8% of deposits will be commonly insured by 2024).” Investor’s eyes will be sharply focused on upcoming elections and the rise of the nativist vote in an Italian constitutional referendum and a presidential election in France.
A cause for concern has been interest rates, and here investors are beginning to take what was once considered a radical idea – that interest rates can never go up – and institutionalize it. The attitude is that in the developed world rates will not be “lower for longer” but are now being viewed from the standpoint of “lower forever.”
While institutional clients appear bearish on equities, they are getting more comfortable with emerging markets – despite the radical turn in Turkey recently. The Credit Suisse report notes the thesis that punctuates a yield starved world. The emerging markets have high bond yields and relatively low currency valuations.
Specifically, in a note sent to clients this morning Credit Suisse stated:
Sentiment is extraordinarily pessimistic on equities; Clients are close to being as bearish on equities as we can remember
Common views expressed by our clients; Corp earnings appear to have peaked, equities not cheap in absolute terms, mixed readings on US growth, ongoing RMB weakness, lack of rebalancing in China, lack of policy weapons left, abnormally high political risk, significant business model risk
We think that clients are too pessimistic. The ERP is marginally cheap (on our model) while bonds, credit and real estate look abnormally expensive. Liquidity and positioning are also supportive of equities.
Perhaps the largest emerging market, China, is that is being ignored, Credit Suisse says. China is “largely off the radar screen,” Garthwaite and his team observed, calling this “unwise” and noting the economy is still growing. “We found deep value and hedge funds warming up to luxury.”
Oil is partly a China story, as economic demand (or lack thereof) has been credited with driving prices both higher and lower. From this standpoint, clients whom Credit Swiss has spoken see the risks of a price spike coming into play, potentially moving into the $60 to $70 region. Credit Suisse differs from its clients in this regard, thinking oil will gravitate near $50 per barrel.