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Outlook For Financial Markets And Investment Strategy
Chen ZhaoChief Global StrategistGlobal Investment Strategy
January 2014
2
Global Economies Resynchronize
© BCA Research 2014
70
60
50
40
02 04 06 08 10 12 14
60
40
20
0
-20
-40
U.S. ISM* PURCHASING MANAGERS'COMPOSITE INDEX (LS)TOTAL RETURN:
STOCK-TO-BONDRATIO (RS)
% Ann%Chg
* INSTITUTE FOR SUPPLY MANAGEMENT.
2
0
-2
-4
04 06 08 10 12 14
2
0
-2
-4
EURO AREA REAL GDPMODEL ESTIMATE*
Ann%Chg
Ann%Chg
* BASED ON REAL EFFECTIVE EXCHANGE RATE, CORPORATE BOND YIELDS AND PMI.
© BCA Research 2014
3
Global Economies Resynchronize
© BCA Research 2014
10
5
0
-5
-10
70 75 80 85 90 95 2000 05 10 15
10
5
0
-5
-10
GLOBAL INDUSTRIAL PRODUCTION* MODEL ESTIMATE**
Ann%Chg
Ann%Chg
* GDP-WEIGHTED AVERAGE OF 40 COUNTRIES.
** BASED ON THE BCA GLOBAL ECONOMIC LEADING INDICATOR, THE PRICE OF BRENT OIL AND BAA SPREADS.
4
Price Inflation In Developed World
© BCA Research 2014© BCA Research 2014
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3
2
1
0
-1
2000 02 04 06 08 10 12 14
70
60
50
40
30
20
10
EURO AREHEADLINE INFLATION (LS)INFLATION DIFFUSION INDEX* (RS)
Ann%Chg
%
* PERCENTAGE OF CPI COMPONENTS WHICH ARE RISING. SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.
5
4
3
2
1
0
-1
2000 02 04 06 08 10 12 14
70
60
50
40
30
20
U.K.HEADLINEINFLATION (LS)
INFLATION DIFFUSIONINDEX* (RS)
Ann%Chg
%
* PERCENTAGE OF CPI COMPONENTS WHICH ARE RISING. SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.
5
Price Inflation In Developed World
6 4
2
0
-2
-4
04 06 08 10 12 14
6 4
2
0
-2
-4
4
2
0
-2
4
2
0
-2
SERVICES GOODS
Ann%Chg
Ann%Chg
U.S. CONSUMER PRICE INFLATIONHEADLINE
Ann%Chg
Ann%Chg
© BCA Research 2014
6
Profits, Yield Curve And Equity Multiples
© BCA Research 2014© BCA Research 2014
80
40
0
-40
2000 02 04 06 08 10 12 14
80
40
0
-40
U.S. S&P 500 OPERATING EARNINGS PER SHAREYEAR-OVER-YEAR GROWTHMODEL ESTIMATE*
Ann%Chg
Ann%Chg
* BASED ON THE CHANGE IN QUALITY SPREADS, NEW ORDERS AND THE GAP BETWEEN PRODUCTIVITY GROWTH AND PERSONAL INCOME GROWTH-PER-CAPITA.
11
12
13
14
15
2010 2012
400
350
300
250
200
U.S. S&P 500 FORWARD P/E RATIO* (LS) YIELD CURVE** (RS)
Bp
* SOURCE: THOMSON REUTERS / IBES.** 30-YEAR MINUS 2-YEAR GOVERNMENT BOND YIELD.NOTE: BOTH SERIES SHOWN SMOOTHED.
7
Changing Correlations
© BCA Research 2014© BCA Research 2014
.8
.4
0
-.4
02 04 06 08 10 12 14
.8
.4
0
-.4
1800
1600
1400
1200
1000
800
7
6
5
4
3
2
4-YEAR WEEKLY ROLLING CORRELATION:
U.S. S&P 500 VS. 10-YEAR GOVERNMENT BOND YIELD
%
U.S.S&P 500 (LS)10-YEAR GOVERNMENT BONDYIELD (RS)
%
.8 .6 .4
.2 0
-.2
-.4
08 10 12
.8 .6
.4
.2 0
-.2
-.4
1800
1600
1400
1200
1000
800
700
600
500
400
26-WEEK ROLLING CORRELATION**:
U.S. S&P 500 VS. CONTINUOUSCOMMODITY INDEX*
U.S. S&P 500 (LS)CONTINUOUS COMMODITY INDEX* (RS)
* SOURCE: THOMSON REUTERS.** SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.
8
Are We In A Bubble?
© BCA Research 2014 © BCA Research 2014
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14
13
12
11
10
08 10 12
15
14
13
12
11
10
250
200
150
100
250
200
150
100
12-MONTH FORWARD P/E RATIO**
U.S.S&P 500*OPERATING EPS*
* SHOWN REBASED TO 100 AT THEIR BOTTOMS.** SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT. SOURCE: THOMSON REUTERS / IBES.
Phase IPhase II
9
Are We In A Bubble?
© BCA Research 2014 © BCA Research 2014
3
2
1
0
-1
-2
60 65 70 75 80 85 90 952000 05 10 15
3
2
1
0
-1
-2
EXTREMELY OVERVALUED
OVERVALUED
EXTREMELY UNDERVALED
UNDERVALUED
BCA U.S. EQUITY VALUATION INDEX*
* SHOWN STANDARDIZED.
100
80
60
40
20
0
-20
-40
80 85 90 95 2000 05 10 15
100
80
60
40
20
0
-20
-40
U.S. S&P 500DEVIATION FROM FAIRVALUE BASED ONCOMPETING ASSETS*
% %
* BASED ON 10-YEAR GOVERNMENT BONDS, HOUSE PRICES AND BAA CORPORATE BONDS. ESTIMATED SINCE 1955.
10
Japan: Nominal Or Real Problem?
© BCA Research 2014© BCA Research 2014
100
80
60
40
20
90 95 2000 05 10
100
80
60
40
20
JAPANESE RELATIVE TO GLOBAL EQUITIES IN COMMON-CURRENCY TERMS*
PHASE I ADJUSTMENT:
DEBT MINIMIZATION
* SHOWN REBASED TO JAN. 1989 = 100.
4
2
0
-2
90 94 98 02 06 10 14
60
80
100
120
JAPANESECONSUMER PRICE INFLATION (LS)TRADE-WEIGHTED YEN* (INVERTED, RS)
Ann%Chg
* SOURCE: J.P. MORGAN CHASE & CO.
Benchmark
performance
Severe bear
market
PHASE II ADJUSTMENT:
PROFIT MAXIMIZATION
11
Chinese Stocks: Cyclical Trend Versus Structural Story
© BCA Research 2014© BCA Research 2014
.52
.48
.44
.40
.36
2012 2013
.52
.48
.44
.40
.36
CHINESE SMALL CAP* RELATIVE TO A SHARES**
* SOURCE: MSCI INC. ** SHOWN IN LOCAL-CURRENCY TERMS.
14
12
10
8
6
2000 02 04 06 08 10 12 14
14
12
10
8
6
CHINESE REAL GDP:ANNUALIZED GROWTH RATE
QUARTER-OVER-QUARTER
YEAR-OVER-YEAR
Ann%Chg
Ann%Chg
12
Commodity Plays Versus Commodity Prices
© BCA Research 2014
1.05
1.00
.95
.90
.85
.80
08 10 12
650
550
450
350
1.1
1.0
.9
.8
.7
700
600
500
400
CAD / USD EXCHANGE RATE (LS)CONTINUOUS COMMODITY INDEX* (RS)
CAD/USD
AUD / USD EXCHANGE RATE (LS)CONTINUOUS COMMODITY INDEX* (RS)
AUD/USD
* SOURCE: THOMSON REUTERS.
13
Commodity Plays Versus Commodity Prices
© BCA Research 2014 © BCA Research 2014
140
130
120
110
100
90
80
70
60
50
02 04 06 08 10 12 14
1.2
1.0
.8
.6
EMERGING ASIAN RELATIVE TOLATIN AMERICAN EQUITIES* (LS)
GLOBAL MANUFACTURED GOODS RELATIVE TO RAW MATERIALS PRICES** (RS)
* SHOWN IN U.S. DOLLAR TERMS AND REBASED TO JAN. 2002 = 100.SOURCE: MSCI INC.
** SOURCE: NETHERLANDS BUREAU FOR ECONOMIC POLICY ANALYSIS.
120
100
80
60
40
20
98 2000 02 04 06 08 10 12 14
120
100
80
60
40
20
U.S. S&P 500 RELATIVETO PRICE OF OIL*
* BRENT CRUDE OIL.
A mega switch?
14
Bear Market In Gold Has Further To Go
© BCA Research 2014
1600
900
500
300
70 75 80 85 90 95 2000 05 10 15
1600
900
500
300
1600
900
500
300
1600
900
500
300
REAL* PRICE OF GOLD (IN 2013 US$)
REAL* S&P 500(IN 2013 US$)
* DEFLATED USING HEADLINE CPI.
Breakout
Breakdown
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