Staying the course in our macro strategy

China has just relaxed its law around speculative investment from 1500 contracts to 5000.

macro strategy
Source: Bloomberg

This shows the Chinese are not concerned about the possibility of risk building in the markets. The fact the Hang Seng added 7.9% last week and saw two consecutive days of southbound limits shows investment appetite is only going to increase from mainland China over the coming months.

The price to earnings (P/E) differential between the China A50 and the H-shares indices has been closing in recent weeks. However, the gap is still rather large and has further room to run. This, coupled with the fact the A50 has had seen a 100% appreciation over the past year makes the H-share all the more attractive as it plays catch up to its mainland counterpart. The Hang Seng looks to be along for the ride but both remain points of interest.

This week is also the true beginning of US earnings season – currently analysts believe this could be the first time since 2009 that US firms will see two quarters of negative EPS growth. I would point out that, on average, US firms normally beat consensus expectations on the EPS line 70% of the time but that doesn’t mean they will not log two quarters of negative EPS growth.

So does this mean we need to alter our global strategy? On a momentum basis, I’d say no.

The US, Europe and Asia all saw very solid appreciation last week. Bloomberg estimates that the market capitalisation of global equities hit US$70 trillion – another clear statistic showing where the results of global monetary policy has ended up in the past six years.

The Nikkei caught stage fright when it briefly crossed 20,000 points for the first time since 2000 but still looks to be extremely well bid on macro differentials. Demand from Asian neighbours and the FX tailwinds to earnings mean it looks to be blue sky if its crosses and holds 20,000.

Bank of Japan Governor Kuroda speaks on Wednesday. He has remained fairly level about the state of play in monetary policy but there is a growing belief he may have to do more this year.

Our European favourite index, the DAX, made another record all-time high to close the week. However, if you are looking for the best index in Europe so far this year, it is the MIB. It also has the highest level of risk in continental Europe.

Mario Draghi and Co. meet in Frankfurt on Wednesday night. Expectations are for further explanations of European QE. More printing. More equity risk investment. And, based on the macro data coming out of Europe and the fact the ECB has given the markets a two-year timeframe, this is unlikely to change anytime soon.

We continue to believe the correct strategy involves following the macro thematics and the direction of the fund flows created from these macro thematics. Those markets that either have reactionary central banks (ie. the ASX) or central banks which are now moving towards tightening (ie. the S&P 500) will underperform those that look to be expanding further – Europe and Japan.

We haven’t altered our strategy all year and we are still comfortable with where our strategy sits. We are well and truly ready for a change of tack when the macro situation breaks down. However, with the Europeans and the Japanese still pumping funds into their domestic economies, coupled with the fact the data suggests they are unlikely to exit this mass accommodation phase in 2015, we remain comfortable with this setting.

We are calling the ASX 200 up 15 points to 5983.

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