In this morning’s Early Look – which is an absolute must-read for anyone interested in successfully navigating the reflation vs. deflation debate – Keith posited whether or not it’s appropriate to chase reflation-oriented factor exposures higher from here:
“I’ve been much more vocal on the Long Utilities (XLU) vs. Short Financials (XLF) view than I have been on being long Reflation and that’s basically because it was an easier call to make that growth would slow than it was that being right on #GrowthSlowing would get people to chase Reflation Charts that have been blowing investors up for 3 years. I don’t think of this as a mistake yet (this “bull” only started in MAR/APR). I’m actually thinking of it as an opportunity. While I haven’t been short Energy this year (we were last year with our #StrongDollar Deflation call), I haven’t been long it either.
Do I buy something that I’ve initially missed (that’s already had a huge move) that doesn’t have global demand behind it? Maybe. I have no problem buying or selling anything, don’t forget. If Energy stocks (XLE, XOP, OIH, etc.) are about to put on a 6-12 month move (higher) from here, it’s my job not to miss that inasmuch as it’s my job not to get sucked into the allure of its momentum.”
For now we remain squarely in the “no position” camp. While that may not be especially useful for anyone who’s under pressure to put capital to work today, we do think as the authors of the global deflation trade going back to the late-summer/early-fall of 2014, we’ve afforded ourselves some time to wait and watch after having [fortuitously] closed out our bearish biases on energy and industrials in early January on our Q1 Macro Themes Call.
One thing that is not up for debate is the rate of change in global demand – the growth of which continues to decelerate on a trending basis.
Looking at Markit PMI data (something that is admittedly easy to track because the consistent nature of index construction makes it cross-country comparable on an apples-to-apples basis), we see that global growth slowed sequentially in MAY. Moreover, said weakness was perpetuated by sequential slowdowns in both advanced and emerging economies.
Looking at the data more granularly, we see that only 35% of country and regional PMI figures across manufacturing, services and composite readings are both expanding (i.e. > 50) and accelerating sequentially as of last month. The rest are either expanding but decelerating or in outright contraction (i.e. < 50). Furthermore, the latest monthly and 3MMA values (51.1 and 51.4, respectively) for the global composite PMI are only in the 3rd and 5th percentiles, respectively, on a trailing 3Y basis.
We’ve been hearing that “global PMIs are bottoming” every month since OCT, so we’re not exactly sensitive to that view. That said, however, if you feel you’re aware of a near-term catalyst to get the aforementioned indicators to inflect sustainably (other than eventual mean reversion as all diffusion indices eventually do), we’re all ears. Feel free to email us and we can discuss further.
Best of luck out there navigating the ongoing slowdown in global growth.