Soaring junk bond redemptions; rising investment grade (and high yield) yields pressuring corporate buybacks; record corporate leverage and sliding cash flows; Chinese devaluation back with a vengeance; capital outflows from EM accelerating as dollar strength returns; corporate profits and revenues in recession; CEOs most pessimistic since 2012, oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity. To Wall Street's strategists none of this matters.
As Bloomberg notes, virtually every single sellside "strategist" doubles down on Barron's cover store from this weekend in which "experts" predict another 10% increase in stock prices in 2016 (just ignore their forecast about 2015), and agree that despite the Fed's rate hike, there will be no end to the bull market.
Here, courtesy of Bloomberg, is what most equity strategists expect will happen tomorrow and in the weeks and months after.
BOFA
- Big “flight to cash” ahead of Fed meeting, BofA strategists write in Dec. 10 note
- Money-market funds saw $48b in inflows past 4 weeks; $212b in 2H, “dwarfing” $31b equity inflow, $27b bond outflows
- Europe equities saw $3.5b in inflows in Dec. 9 week, largest in 14 weeks with inflows in 28 of past 30 weeks
- U.S. equities saw $9.2b in outflows, largest in 13 weeks
- EM equities saw $1.7b in outflows, 6th week of outflows
RAYMOND JAMES
- A trading bottom will coincide with the Fed rate decision, Jeffrey Saut, chief investment strategist at Raymond James, writes in Dec. 14 note
- “The equity markets are massively oversold, support levels are at hand, and everyone is bearish”
CREDIT SUISSE
- First Fed rate hike has historically caused decline of ~7% in equities, though it has never marked end of a bull market and 6 months later equities are up 2.2% on average from pre- Fed tightening levels, Credit Suisse equity strategists including Andrew Garthwaite write in Dec. 10 note
- U.S. stocks have always underperformed in the 6 months following the first rate hike
- Purpose of Fed rate hike this time is “more benign than usual”: to insure against financial asset bubbles and to create room for easing into the next recession, not to control inflation by slowing down growth
- Fed rate rise won’t signal equity bear market, until yield curve inverts or U.S. reaches full employment
- In Asian equities, heavily-geared stocks with unhedged U.S. foreign debt, importers, among cos. likely to be the most affected by Fed hike, while Asian banks may benefit from widening of loan spreads, Credit Suisse analysts Manish Nigam and Mujtaba Rana write in Dec. 15 note
CITI
- On average after first Fed rate hike, global equities wobble then recover, U.S. equities underperform and cyclicals beat defensives, EM equities do not consistently respond badly to the first Fed hike, Citi strategists write in Nov. 20 note
- “Given significant differences in this cycle it is difficult to make equity calls in response to this Fed hike. Nevertheless, the previous experience of a market setback followed by a recovery may be repeated”
MORGAN STANLEY
- Morgan Stanley strategists including Graham Secker see a period less favorable to USD strength, and commodity price weakness, following Fed meeting, according to Nov. 30 note
- In start of last six Fed rate hike cycles, energy and materials stocks have been 2 of the most consistent outperformers, with both beating the wider market on 5/6 occasions
JPMORGAN
- JPMorgan equity strategists including Mislav Matejka and Emmanuel Cau think first Fed hike should be interpreted as confirmation of improving sentiment, should be a positive for equity markets, they write in Dec. 7 note
- However, Fed tightening happening very late in the cycle
- “Typically, the first hike takes place within 12 months from the end of last recession. This time around we are close to 7 years”
BLACKROCK
- With a rate hike largely expected, investors will focus on Fed language, Russ Koesterich, BlackRock’s global chief investment strategist writes in Dec. 14 note
- “Our base case is that the Fed will go out of its way to stress that the tightening cycle will be gentle and gradual”
- First hike not a threat; other factors are, such as collapse in oil prices which raises more questions over asset classes ranging from high yield bonds to emerging markets
AXA IM
- In run-up to Fed meeting, investors increasingly concerned about confusion from fact that U.S. credit market much more pessimistic than the stock market, Maxime Alimi, investment strategist at AXA IM, says by phone today
- Overall, equities should react positively to Fed rate hike, “as long as the message on the path for future rate hikes is clear, that would bring visibility”
- Issue for EM stocks mostly about a repricing of new regime of economic growth in EM; Fed rate hike shouldn’t have much impact
BNP PARIBAS
- Emerging markets have enjoyed “free lunch” from zero U.S. rates and access to cheap USD debt, however with with Fed liftoff now imminent, this is drawing to an end, BNP Paribas economist Richard Iley writes in Dec. 15 note
- Macro momentum in much of EM remains dismal, with close to a record number of manufacturing PMIs below the 50 breakeven level
- Downdrafts of more USD strength, slowing Chinese industrial demand and swooning commodity prices “still in force”
HSBC
- Too early to sell equities on the first U.S. rate rise, HSBC equity strategists Peter Sullivan and Robert Parkes write in Dec. 14 note
- Equities may wobble on the news but are usually higher within a year. Monetary policy will remain supportive of growth well after first hike
- Consumer sectors most vulnerable; energy stocks typically outperform and the sector is supported by attractive valuations and signs that the earnings may have bottomed
- High yield equities could fare better: tightening cycle to be gradual; bond yields to fall; evidence that high yield sectors are losers from higher interest rates is “far from convincing”
DEUTSCHE BANK
- Deutsche Bank strategists expect world economy, financial markets to weather the turn in policy “reasonably well”, according to Dec. 8 note
- Expectation that major central banks, Fed in particular, will be “moving far more cautiously than they have in the past” as they withdraw accommodation
- Equities should remain resilient and presenting some upside, as long as the rise in rates is limited and orderly
BARCLAYS
- Fed rate hike could be catalyst for switch away from quality and bond proxy sectors into value and cyclicals, Barclays strategists including Ian Scott write in Dec. 10 note
- “Equity investors do not seem to be pricing in this event from a sector perspective”
- Outperformance of bond-proxy sectors puts them at level of price/book valuation that has only been seen previously during sovereign debt crisis and financial crisis
WELLS FARGO
- Equity strategists including Gina Martin Adams and Peter Chung write in Dec 14 note they believe higher short rates, starting with a Fed rate hike this week, are likely to induce volatility for rate sensitive shares in coming year
- “Despite evident financial market weaknesses, we do not recommend investors rotate into defensive sectors and industries”
- They see momentum and quality styles most likely to drive outperformance in 2016
Thanks to this we know that every single bank is positioned on the same side of the trade; last time we checked with the comparable positioning in the EURUSD ahead of the ECB's announcement, this type of herding tends to have unfortunate consequences.
Source: Bloomberg