Log in Open account
International
CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. 
Show more
CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX, or any of our other products work and whether you can afford to take the high risk of losing your money.
Show less
Equity Monthly: Light at the end of the tunnel?

Equity Monthly: Light at the end of the tunnel?

Equities 8 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  A dovish Federal Reserve and a stimulus-pushing Beijing are leading equities higher, but the key outstanding thing remains a trade deal between China and the US.

January was a big comeback month for global equities, which rose 7.8% in the wake of Federal Reserve chair Jerome Powell's significant U-turn on January 4, when he acknowledged that the Fed was open to ending quantitative tightening faster than anticipated and stated that the current interest rate trajectory was put on hold.

Immediately thereafter, the Chinese government enacted several key stimulus programmes, from cutting taxes to cutting interest rates and banks’ reserve requirements. While global equities have responded positively to these events, Chinese investors are still holding back. Key levels in the CSI 300 Index (China’s leading stock market index), however, may soon be broken to the upside which could change the dynamics altogether. From our sources in China, sentiment has changed for the positive lately which will likely drive risk-on sentiment in equities but hard economic data will not show the change until as late as Q4 this year.

The crucial thing required if the economy is to avoid slipping into recession is more monetary stimulus (most likely to come) and a comprehensive US-China trade deal. We use the USDCNH exchange rate as the best proxy for estimating the probability of a trade deal, and the signal here is clear: a trade deal is coming. We put the probabilities at 25% (no trade deal) and 75% (trade deal). But what's more important is the nature of the deal. Will it be comprehensive or not? If it is not comprehensive, the market's reaction will likely amount to a short-lived rally and then a fade. If it is comprehensive and China has responded forcefully enough against its economic slowdown then equities could fight back to new all-time-highs.

What we hear from sources in China is that the two parties (US/China) are moving closer to each other but some key bottlenecks remain in place. Ultimately, however, the process is most likely so advanced that the deal will be extended (the current deadline is March 1). Two things stand out: first, the US wants China to close the trade deficit gap much faster than China can accept given the impact on its economy. Second, this trade deal is highly bilateral, circumventing the World Trade Organisation and in this way potentially representing a new chapter in globalisation. It could potentially represent a new chapter in the globalisation process, and one based more on national interest than is the contemporary norm.
iShares MSCI World ETF
Source: Saxo Bank
Where is the business cycle?

Using the OECD’s Composite Leading Indicators, we see that the the data suggest the OECD countries are currently growing below trend and contracting. This is the most difficult phase in the business cycle because this is when policymakers realise that the economy is quickly losing steam and enact measures to remedy the slowdown. The question then becomes whether policymakers responded quickly and severely enough to avoid deviating further from trend growth and slipping into a recession.

This is exactly the situation facing the global economy right now and also the key driver behind why investors and companies are worried about the future.

The OECD’s data cover until November, but December’s figures are just around the corner and the interesting question is whether the contraction has accelerated or decelerated. The print will most likely reveal the worst business cycle dynamics since late 2009. If the Fed’s U-turn came fast enough and China did its par, then the economy might take a 2012-style path where recession is avoided and global growth is resumed.
OECD Composite Leading Indicators (amplitude adjusted)
OECD Composite Leading Indicators (amplitude adjusted, source: Bloomberg)
What does the current business cycle mean for sector exposure?

Based on data going back to 1995, business cycle phases with contracting growth (both above- and below-trend growth) are the most negative ones, and correlate to declines in the equity market. This fits very well with what we have observed as the global economy went from a boom cycle to a downswing in February 2018 and then shifted into a “recessionary” phase in August 2018. This period saw equities down globally and feature great downside volatility, scaring investors.

In the current phase, the preferred sectors are communication services, information technology and healthcare, and the least preferred are financials, energy and materials. When the business cycle turns into the recovery phase, the best sectors to be exposed to are real estate, financials and industrials while the underweight sectors should be communication services, utilities and materials.
 
Sectors
These months are the most important ones for investors since the euro area crisis in 2011/12 and the great financial crisis of 2008-9, so we recommend investors be more active and stay alert to changing conditions. In our next Equity Monthly we will give an updated picture on the business cycle and hopefully more clarity on the US-China trade deal.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article

Disclaimer

 The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International
Products & pricing
Platforms
Accounts & service
General
Other
Legal

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.