HSBC and its institutional clientèle are confused. After an unprecedented level of fear was generated surrounding the Brexit vote, how is it that the stock market is so positive? But that’s not the only concern HSBC’s institutional clients are pondering. What are the limits, if any, of “unconventional monetary policy?” Will the once laughed prospect of “helicopter money” become a reality in Japan? The US looks like the “safest haven,” but is it oversold?
Clients are exhausted about Brexit but want to talk about UK real estate
There is apparent “exhaustion” regarding conversations about the macro implications of Brexit among institutional investors, noted the HSBC Global Equity Strategy report titled “What’s giving investors sleepless nights?” What investors did want to discuss was the impact of the political uncertainty on the UK real estate market and concerns that a sliding British pound could rekindle a currency war.
HSBC, like many of the global banks, just can’t seem to get over the market reaction to voters rejecting the European Union. The negative consistency of opinion among bank research, which some independent institutional investors view as a contrary indicator of its own, was virtually unanimous. The major bank research on the topic was all in agreement it would be the UK that would be punished for leaving the European Union.
There are clearly problems that have yet to be addressed, of course. Negotiations have just begun and the EU could make it very difficult for the UK. Unintended consequences of the Brexit are a risk to market forecasts. HSBC, for its part, is currently neutral-weighted UK equities “in a global context” and overweight Europe. This “buy Europe sell UK” establishment mantra is exactly opposite of what some independent analysts have recommended.
Who is correct? At this point, comparing stocks in a “global context,” the globally focused FTSE 100 was up 4.39% in June. The Euro Stoxx 50, by contrast, was down -7.58% in June.
It’s not only the herd of sheep-like predictions all the major bank researchers made regarding Brexit that was generally wrong were it matters. Like much of the Brexit analysis, what is most interesting about some regional bank research is what is currently being ignored. The HSBC report has failed to address the implications of a potential 150 billion euro bank bailout. Those are not UK banks that are being bailed out, but those in the EU – including the heart of the EU. Separate analysis wonders how it is that bank research considering the health of the EU fails to mention the health of the key pillars in the region? The Italian and Deutsche Bank bank bailout on the horizon, publicly discussed in the media, is oddly missing from bank research.
US is “safer haven,” but will political uncertainty pierce the markets at some point?
When considering equity investments, the US gets mentioned as a “safer haven,” HSBC’s Global Equity Strategist Ben Laidler noted. He along with Equity Strategists Daniel Grosvenor and Yevgeniy Shelkovskiy write that US markets are looking “well-owned.” This polite term for an overbought market.
When looking at the US, they note a common problem found in the UK: Brexit-like populism. Risk could manifest itself in the form of Donald Trump and earnings that just might have hit a ceiling.
“Concerns focused on the potential peak of the earnings cycle and margins coming under incremental pressure from higher wages,” the report said of discussions with investors. “There were widespread questions on what a Trump presidency could mean for US equities. We expect to see an increase in economic policy uncertainty from current relatively low levels – typical during an election season, and potentially greater this time around given the unconventional nature of the Trump candidacy and high levels of global policy uncertainty.”
But despite these concerns, HSBC recommends a tactical overweight US equities. The thesis is based on “shorter-term benefits of a robust share buyback story, relatively closed equity market, and high domestic consumer index weight,” all of which combine to make it a “safer haven.” This comes in the case of headwinds from global uncertainty as well as “medium-term concerns on peak US earnings and margins, high valuations, and high levels of investor ownership.”
Japan’s unconventional monetary policy a concern
It is often interesting to monitor bank research for consistent themes. An emerging rallying cry – one expected to grow louder if the economy falters – is concern over “unconventional monetary policy.”
The leader in such monetary gymnastics has been Japan, and it is here HSBC is most cautious.
“We continue to see disproportionate interest in Japan, driven by its leading position in unconventional monetary policy and the belief that more is to come – from ever more negative rates, to risk-asset (equity) purchases, and eventual ‘helicopter money,’” the report noted. Helicopter money, citizens unearned direct financial subsidy that could be implemented through fiscal stimulus, once considered a joke in some quarters, is now being considered among the academic elite.
Here HSBC is concerned, as expressed in their underweight Japanese stocks and “cautious” stance over Bank of Japan efforts to weaken the yen. “We therefore see Japan’s all-time high earnings and margins as vulnerable given the strong historic correlation,” they wrote.