“All the world’s a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”
-William Shakespeare
Last week, we touched on the 2016 Presidential election. So far, it’s been a campaign characterized by two distinct outsiders in the socialist Vermont Senator Bernie Sanders and real estate (and bankruptcy) mogul Donald Trump. Both have taken a lot of mind share. In the course of the last week, they have only taken more.
Trump is now consistently registering over 30+ points in the Republican polls, which features a broad field. Another outsider, surgeon Ben Carson has now solidly surpassed second place mainstay Jeb Bush. Collectively, the two outsiders, Carson and Trump, are polling at almost 50% of the Republican nomination voter on a combined basis.
Meanwhile, on the Democratic side, the venerable Hillary Clinton seems a lot less venerable these days within the Democratic Party. For the first time in over a year, she is consistently polling below 50%. In part, this is driven by the emergence of Vice President Biden as a likely candidate. In addition, the self-avowed socialist Sanders is maintaining his relative strength. In fact, in the most recent New Hampshire poll Sanders was actually up on Clinton by +22 points!
So, how much can change between now and Election Day? The short answer is a lot.
In 2011, right around this time, Governor Rick Perry of Texas was polling around 32% for the Republican nomination versus 20% for Mitt Romney. In 2007, at roughly this time, Hillary Clinton was polling at about 40% versus now President Barack Obama at 22%. Interestingly, on the Republican side in 2007, the eventual nominee Senator John McCain was already up by about +10 points on the field.
Now, while we do have a crystal ball in our possession in the @HedgeyeTV studio, we are reluctant to use it to predict the outcome of the race. We are comfortable predicting (if you want to call it that) that on the Democratic side Clinton, Biden, or Sanders will get the nod. On the Republican side, we see Trump, Bush, or Carson likely to prevail.
As investors, our job over the next year will be to prepare for the various potential outcomes and implications on policy, taxes and the markets. Focusing on and understanding the dynamics in Washington, DC is going to become as important as ever over the next year. Start doing your homework now.
Back to the Global Macro Grind...
In terms of global macro moves in the last 24 hours, Chinese equities are leading again on the volatility front as the Shanghai Composite is down about -3.5%. Coincidentally, we released a thorough update (more than 80 slides) on China last night. (You can email to access the deck if you are an institutional subscriber or talk to our Asian analyst Darius Dale.)
The key takeaways from our report on China are as follows:
- China’s secular growth outlook is likely more dour than the average “China bear” is willing to admit, which implies the recent margin-fueled melt-up in Chinese equities was little more than a bubble that is likely to continue popping amid reduced state-backed intervention.
- Conversely, the secular outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. These conflicting forces have been anything but a "fair fight" given how much could be left of the “Beijing Put” which has proven to be impotent of late.
- Our analysis continues to pick up on a positive inflection in the Chinese property market. To the extent this nascent recovery is sustained, we expect two things to occur: 1) mainland Chinese investors are likely to continue to flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to show stabilization for at least 1-2 quarters. The former is an obvious headwind to the Chinese equity market(s) and the latter is key risk in terms of reduced expectations for fiscal and monetary stimulus.
- Ahead of next year’s [likely] rebalancing, Chinese policymakers have lobbied strongly in favor of the yuan to be included in the IMF’s Special Drawing Rights (SDR) basket. Regardless of any success with this initiative, we believe Chinese policymakers are serious regarding their pledge(s) to accelerate capital account reform.
- We believe an incrementally deregulated Chinese capital account has the potential to be a lasting positive influence upon both the Chinese and global economy – IF spillover risks are curtailed via effective safeguards. The extent to which Chinese authorities are willing to defend the CNY from bearish speculators remains to be seen.
If you were to summarize our key thoughts on China, it is that their secular growth outlook is likely to be lower than expected, though in the short term we expect to see some economic stabilization. Longer term, if the Chinese are able to implement the appropriate changes in terms of a deregulated capital account and capital market, it may have very positive and lasting influence on global markets and Chinese equities.
So, what does that mean for Chinese equities?
Well, if you want to be a true contrarian (especially with the Shanghai Composite down -3.5% this morning) it may suggest a re-rating. As highlighted in the Chart of the Day below, China is currently trading at 9.3x next-twelve-months earnings versus 16.1x for the MSCI World Index. A re-rating to the World multiple implies 70%+ upside . . . .
We certainly aren’t suggesting you go run out and buy Chinese equities this morning. But eventually, the time will come again to believe in The Dragon. After all, with Donald Trump emerging as a legitimate candidate for President, we should all be well-practiced at suspending disbelief.
Our immediate-term Global Macro Risk Ranges (with our intermediate-term TREND call in brackets)
SPX 1911-1980 (bearish)
VIX 21.49-31.57 (bullish)
USD 94.68-95.99 (neutral)
Oil (WTI) 43.03-47.15 (bearish)
Gold 1095-1141 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
