One of Wall Street’s most renowned market strategists who is a notorious bear has laid out a case for buying global stocks in the tumultuous first half of 2016.
Gerard Minack, former head of developed market strategy at Morgan Stanley and now a Sydney-based investment consultant, believes a combination of global forces could combine to produce a stock rally in advanced markets over the coming months.
The view is based on four key points: the El Niño weather event boosting global output; rises in US wages; oil prices finding a floor to stoke inflation, and markets getting more hawkish on US interest rate policy.
Minack’s view that there might be a profitable trade in buying stocks is significant as it runs counter to his widely-known thesis that global stocks are vastly over-valued.
His take is backed by senior money managers who have told Business Insider they are now looking for buying opportunities after one of the worst starts to a year for developed stock markets on record, and deep uncertainty in global markets about the health of the Chinese economy.
Minack’s famous bearishness on stocks stems from a belief that companies are facing long-term stagnation on profit growth, thanks to the availability of cheap credit from central banks. He is sticking by this view over the long-term.
The day before Christmas Eve, however, Minack said in his “Down under Daily” note to clients that he now runs from Minack Advisors that a scenario is building which could see global stocks rally in the first half of 2016.
He says “it may be that cyclical factors dominate for a quarter or two in 2016”. So far, even with the turmoil sparked by China’s devaluation of its currency, these factors are still in play as a potential boost for stocks in the short-term.
Here’s his investment case – charts and comments are from Down under Daily.
1. The weather!
First, El Niño is warming the northern hemisphere, and that often leads to strong macro data. A warm US winter would follow two cold Januarys, so 2016 could start with a macro bang.
2. Wage growth in the world’s largest economy
Several indicators suggest that wages will accelerate in the first half of 2016.
3. Oil finding a price floor
[…if] oil did find a floor, say, through the March 2016 quarter, then the likely turn lower in the dollar would fit with the pattern that the dollar tends to weaken early in Fed tightening cycles.
4. Markets misreading the Fed
If all these were to happen rate markets would likely shift towards the Fed’s view on the likely course for policy, at least for 2016. In short, rate markets could turn more hawkish.
A lot has happened on global markets since this was written. And many things – weather, policy, geopolitics – must conjoin to produce the result.
But the scenario, if it was to come about, would be a horror show for investors who believe stock markets will continue to fall.
Chris Robertson, Investment Director for Colonial First State Global Asset Management’s $24 billion Australian equity business, said his funds are actively looking for opportunities despite the current turmoil.
“I believe market volatility will continue to remain higher as a result of the ongoing global uncertainties surrounding the European economies, commodity prices, Chinese economic outlook, divergent central bank policy and continued unrest in the Middle East,” Robertson said. “There is no evidence to suggest that market volatility will be lower going forward or that investors will be more rational in the future. Markets will continue to misprice stocks as long as they are instructed to do so by herds of ‘irrational’ investors with various predispositions thus continuing to present us with investment opportunities.”
Robertson said that “volatility typically equates to irrational investor behaviours, which can, in turn, present mispriced investment opportunities.”
After years of squeamishness about risk, portfolio managers in Australia now have a lot of cash to deploy. Following bearish calls from some institutions such as RBS – which has told clients to “sell everything” apart from high-grade bonds – there is increased danger everywhere in the market.
Steve Blizard, senior investment adviser at WA-based Roxburgh Securities, said the volatility was shaking out some underperformers in the Australian money management business. “The need to generate reliable income for retirees, from markets that are finally starting to reflect their real level of capital risk, is really sorting the sheep from the goats amongst the fund managers at the moment,” Blizard said. “Some absolute return funds, and some long-short managers, are really coming into their own at the moment.”
Minack is careful to point out that his fundamental views on the long-term outlook for stocks have not changed.
“Secular stagnation remains the dominant economic theme,” he wrote to clients. “However, secular stagnation does not rule out periods of cyclical recovery, and the point here is that a brief cyclical improvement may be the key to markets early in 2016. That prospect is made greater by the fact that the secular stagnation view, or variants of it, has become increasingly embedded in market pricing over the preceding 3-4 years.”