Latest from BCA Research
Monetary policy is about to become a powerful tailwind to the already bullish brew that includes Trump’s repeated step-downs from a global trade war, irrelevant geopolitical risks in the Middle East, and a fiscal policy that is no longer as alarming to the bond markets as the raft of campaign promises appears to be. Investors should hesitate to get overly bearish either bonds or stocks. However, we remain uber USD bears.
There is a thin line between geopolitical risk and Enlightenment, just ask Europe in the seventeenth century. The Middle East is exhibiting both. Investors are over-indexing on the negative – which has not impacted the investible universe – and ignoring the positives.
The US economy is not in recession, but is suffering from a post-pandemic stimulus hangover. The cure: lower interest rates. We expect the Fed to start lowering rates, which will benefit both equities and bonds. We upgrade stocks to neutral and downgrade cash to underweight. We also upgrade duration to overweight. The US dollar will continue to weaken, so favour Europe and China within equities.
MacroQuant’s US equity z-score is dangerously close to the -1 threshold. Moves below that threshold have reliably coincided with equity bear markets in the past. As such, MacroQuant recommends an underweight on stocks, offset by an overweight on bonds and cash.
The Life and Health Insurance industry offers downside protection and portfolio diversification in the event of a market correction, surging inflation, or stubbornly high interest rates.
This week our three screeners explore: UK stocks that are cheap and offer a geopolitical hedge; French stocks that are sensitive to China; and US Value and dividend paying stocks.
Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.
