“… mainly due to the trade conflicts.”
-BASF revised 2019 outlook, July 8th, 2019 

That’s how yesterday’s profit warning statement out of BASF characterized the slowdown in global economic growth, specifically with respect to industrial production. The statement even gave the BASF management team additional scope to continue scapegoating at a later date: 

“To date, the conflicts between the United States and its trading partners, particularly China, have not eased - contrary to what was assumed in the BASF Report 2018. In fact, the G20 summit at the end of June has shown that a rapid détente is not to be expected in the second half of 2019. Overall, uncertainty remains high.” 

Of course, that was the paragraph right before the statement goes on to read: “preliminary figures for the second quarter of 2019 are significantly below current analyst estimates and BASF's expectations at the beginning of the year”. All told, the company revised its guidance on 2Q19 and full-year 2019 EBIT before special items to down -47% YoY and down -30% YoY, respectively. The latter figure compares to a previous forecast of up 1-10%. 

Back to the Global Macro Grind… 

Between this and the profit warning issued by Broadcom that we discussed a few weeks ago, I’m starting to get annoyed at management teams blaming their inability to execute solely on the various trade disputes President Trump has engineered throughout the global economy.

Sure, the proliferation of tariffs, blacklisting, and general uncertainty are all explicitly negative catalysts for global trade and, ultimately, global growth. We’d be remiss to deny that. 

But what both the BASF and AVGO management teams are missing—alongside US investor consensus—is the simple fact that the ongoing global economic downturn started well before any of the trade issues developed. We know – we authored the bearish outlook on global growth back in January 2018 when BASFY stock peaked amid a deafening chorus of “Globally Synchronized Recovery” chants from our competitors: 

  1. #GlobalDivergences: In contrast relying on financial media soundbites, idea dinners or surveys, our views on the global economy are instructed by sophisticated predictive tracking algorithms – which we run for every investable economy in the world. While investor consensus remains committed to the “globally synchronized recovery” narrative heading into 2018, our models are signaling quite the opposite and that outcome should perpetuate a number of meaningful pivots in asset allocation terms throughout the investment management landscape. In the presentation we detail why we expect domestic equity and credit assets to outperform their international counterparts with respect to the intermediate term.
  2. #UnderweightEM: 2017 was an epic year in terms of risk-adjusted returns and portfolio flows across the EM investment landscape for a variety of fundamental reasons – not the least of which was six consecutive quarters in #Quad1 at the aggregate GIP level. The first half of 2018 will likely see a pickup in volatility and credit spreads as said fundamental tailwinds are eroded, at the margins. In the presentation we detail why we believe global investors would do well to rotate out of EM and into DM, as we expect the former to underperform over the intermediate term. We also make the case for why EM-dedicated investors would do well to high-grade their portfolios by rotating into minimum volatility securities, consumer staples and IG credit in lieu of reflation-oriented cyclicals and HY credit. 

CLICK HERE to download and review that presentation. 

Since then, according to our proprietary Global Macro Risk Monitor, nothing has changed with respect to those views on global growth: 

  • Global Economy (~50 countries): FIVE consecutive quarters of #Quad3 or #Quad4 in aggregate starting in 2Q18
  • Emerging Market Economies (23 countries): SIX consecutive quarters of #Quad3 or #Quad4 in aggregate starting in 2Q18
  • G20 Economies: SEVEN consecutive quarters of #Quad3 or #Quad4 in aggregate starting in 4Q17
  • China: NINE consecutive quarters of #Quad3 or #Quad4 in aggregate starting in 2Q17
  • Germany: 5 of the last 6 quarters of #Quad3 or #Quad4 in aggregate starting in 1Q18; the lone acceleration was a +10bps nudge in Real GDP growth up to 0.7% YoY in 1Q19… our nowcast model for the German economy is currently tracking at 0.06% YoY for 2Q19E 

In our 7/2 Early Look note titled, “What If China Keeps Slowing?”, we detailed each of the risk factors that would instigate a failing of the Chinese economy to recover against easing comparative base effects – an outcome that would result in #Quad4 on the mainland here in 3Q19E. 

Germany faces many of those same risks – e.g. comparative base effects for Real GDP growth that are easing, but decidedly not easy, as well as a confluence of geopolitical and economic headwinds to its manufacturing and export-oriented economic model. 

Regarding the former, the 2yr comp for German Real GDP growth decelerates -15bps to 1.95% here in 3Q19E, which, in part, causes our GIP Model to anticipate an inflection into #Quad1 for the German economy. After all, the probability of mean reversion using our proprietary comparative base effects methodology is 72% for German growth specifically

That said, however, the sheer rancidness of the latest batch of economic data out of Deutschland is enough for any investor to question the efficacy of a back-end-loaded-recovery after six quarters of mostly uninterrupted slowing: 

  • MAY Retail Sales -60bps to 4.0% YoY;
  • MAY Factory Orders -330bps to -8.6% YoY (slowest pace since SEP ’09);
  • MAY Industrial Production -140bps to -3.7% YoY (slowest pace since NOV ’18); and
  • MAY Exports -50bps to -0.7% YoY (slowest pace since AUG ’16). 

The -2.43pt decline in the Eurozone Sentix Investor Confidence Index to a new cycle-low of -5.77 in JUL (lowest reading since NOV ’14) doesn’t exactly scream “the recovery is nigh” either. Neither does this morning’s Japan’s Machine Tool Orders data, which slowed -1070bps to a new cycle-low of -38.0% YoY in JUN (slowest pace since OCT ’09). Recall that the latter figure is among the best – if not the best – leading indicators for global growth out there. 

All told, much like its Chinese counterpart, the German economy has a couple of key structural headwinds – namely poor demographics and an advanced #CreditCycle that got extended due to a confluence of QE at home and stimulus abroad (e.g. Shanghai Accord; US Tax Reform) – that could continue to hold back growth against easing comps

As such, we remain in “wait-and-see” mode on a 2H19E German economic recovery – an outcome the DAX is clearly well out in front of, much like China’s Shanghai Composite was in mid-April. We need to be “shown the money” there too. 

Our immediate-term Global Macro Risk Ranges are now: 

UST 10yr Yield 1.95-2.07% (bearish)
SPX 2 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 200 (bearish)
DAX 129 (bullish)
USD 95.05-97.27 (neutral)
Oil (WTI) 55.09-60.13 (bearish)
Copper 2.64-2.74 (bearish) 

Keep your head on a swivel, 


Darius Dale
Managing Director

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