Global Investment Strategy

GIS September 12 (The Weakest Link)

Date: 2016-09-11 - Prepared by: The GISI

It is a big mistake to ignore the G-20 communiqué issued last week. Many market commentators and researchers don’t read anything longer than a few pages. Instead they briefly look at summaries provided by journalists and rush to conclusions. 

For the first time in many years, the G-20 statement made powerful and concrete commitments to more fiscal stimulus: “monetary policy alone cannot lead to balanced growth….we are making tax policy and public expenditure more growth friendly….commitment to promote investment with focus on infrastructure….”

Last year’s G-20 statement was very different. 

Mario Draghi last week, during the ECB press conference, referred to the G-20 statement. It was clear that future central bank policies will take it into account.

This G-20 statement has huge market consequences. Let me mention some of them:

First, it is an official commitment made by ministers of finance (not central banks) from 20 countries:“once we agree, we will deliver.” Although not legally binding, it is a question of status and prestige to do as agreed.

Second, intentions of more investment and lower-taxes will soon spill into intentions of more corporate investments (CapEx). The market will sniff it out and real bond yields will rise before these investments materialise, because real yields are driven by ex-ante investments and ex-ante savings. More on this in this week’s GIS.

Third, get out of 2/10 flatteners. This doesn’t mean curves will continue to steepen, but the risk-reward of flattening trades no longer makes sense.

Fourth, gold will struggle because higher real yields are bad news for gold. We have reduced our allocation to gold in our asset allocation table on page 4.

Fifth, oil will most likely outperform gold because more CapEx and infrastructure will require more energy, at a time when producers are trying to better coordinate supply.

Sixth, central banks now know that considerable fiscal stimulus is underway. Most central banks’ econometric models do not consider potential fiscal stimuli, which means that they are underestimating GDP growth in 2017 and 2018 and central bankers know this.

For example...

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