1 October 2009 Global Macro StrategyPage 2 Deutsche Bank AG/London
Trading the Recovery: Six Months of Clear Skies
We expect global growth to remain strong until at leastthe middle of 2010 due to a turn in the inventory cycle,easing credit conditions, further fiscal stimulus andsustained low interest rates. We believe the market isunderestimating the quantitative impact of these factorsand the length of time (6 - 9 months) it will take for themto work their way through the global economy. Forinstance, we believe US growth could be twice as highover the coming three quarters (4%) as the consensusforecast (2.3%).
This global “sweet spot” is historically very rare —improving economic data in the context of still extremelyaccommodative fiscal and monetary policies andabundant market liquidity—and provides the perfect mixfor a range of risky assets.
On a 6-month horizon, we expect EM assets, high yieldcredit and gold to outperform on valuation, economicmomentum and liquidity grounds. US equities areconstrained by valuation but could significantly overshootcurrent fair value estimates, as earnings forecasts are notaligned with the likely near term growth overshoot. Welike short fixed income positions on fundamentalgrounds, but in the short term the sell-off in rates isconstrained by abundant liquidity and a structural shiftback into the asset class.
The main risks to our views over the 6-month investmenthorizon stem from (1) a soft patch in the economic data(possibly due to a brief period of further de-stocking andde-leveraging, or the expiration of stimulus schemessuch as car scrap schemes and housing programs), (2)premature tightening of regulatory requirements, or (3)an even sharper economic rebound that fuels inflationfears and a rise in interest rates.
Beyond mid-2010 we are much more cautious about theoutlook. Economic momentum will stall as the inventorycycle runs its course, stimulus is withdrawn, and yieldsstart to rise on inflation expectations and a closing outputgap, and new regulatory requirements start kicking in. Bythen asset valuations will be stretched and pressure oncredit from a refinancing of HY debt will rise. These risksare real and significant but are unlikely to drive assetprices for now.
The “sweet spot”
Since March 09, the economic data have continued toimprove and are now pointing to a recovery over the next3 quarters that, in the US for instance, could be a full 2ppin excess of median consensus expectations. This wouldbe much more in line with the trajectory of historicalrecoveries, with growth averaging some 4% over the nextthree quarters (Figure 1).
Figure 1: US consensus forecasts too low
-4%-2%0%2%4%6%8%09q209q309q410q110q2Full range of forecasts25-75% of forecastsAvg of past recoveries (excl. 'double-dips')Median forecastUS GDP QoQ
Source: Deutsche Bank, BEA, Haver
Economic recovery has been reflected in improvements inPMIs, global IP and export growth, and is now alsoincreasingly apparent in some consumption and housingindicators. In 3m/3m terms, global IP growth has reachedits fastest pace since early 2004 (Figure 2). PMIs and theLeading Economic Indicators index are likewise pointingto growth in excess of 5 % in Q3, while retail sales wouldsuggest a growth number of about 5%.
Figure 2: Global IP grows at fastest pace since 2004
2226303438424650545862200120022003200420052006200720082009-35-30-25-20-15-10-5051015Global PMI outputGlobal IP, 3m/3m saar (rhs)July IP growth estimate based on75% of the sample that havereported thus far
Source: Deutsche Bank, Haver, Markit
The improvements in economic data are not confined tothe US and are taking place at a global level. Market datasurprise indices have now shown nearly continuousimprovements since March, despite continuous upgradesto economic forecasts. Stress in money markets,meanwhile, have thawed to pre-Lehman levels (asevidenced by compression in Libor-OIS spreads) thoughwe have yet to see a decisive improvement in aggregatenet credit provision from banks to households andcorporates in advanced economies. By contrast, in EM