Understanding the difference between the time to market & the time to invest is a key investment lesson; one I thankfully learned early in my career, states Jay Pelosky of TPW Advisory.
The empty IPO calendar, a closed HY issuance market, the SPAC implosion & demise of the YOLO and diamond hands mentality suggests its clearly not time to market. Could it be the time to invest?
Sentiment, positioning, valuation deratings, non US equity outperformance, the huge valuation gap between public and private innovation/thematics all suggest its time to consider the question. Private markets lag well behind public market valuation reset > supports public market thematics.
Inflation is priced in, recession is today’s fear. Equity bear markets w/o recession are akin to what has already occurred. Bond market leads inflation repricing, equities follow as excessive Fed tightening is the recession catalyst.
Amidst the carnage the market is telling us what is working; If one wants to sell, what’s working should be kept. If one wants to buy, what’s working = buy list. Non US equity is OPing; innovation/thematics trying to bottom.
Taking out Fed risk presents both tactical & strategic opportunity: tactical as Fed risk is repriced (May’s 10 yr. breakevens decline is largest since March 2020); strategic as it opens the path to the new, new world of high nominal growth we expect in 2023-2025. Don’t despair, pay attention.
CLIMATE
The EV revolution is in full swing; for 1st time ever a majority of global car buyers want to buy EVs. US Q1 new EV registrations rose 60% y/y to almost 5% of total while overall registrations fell 18%. Tesla dominates.
Under pressure Govts are cutting consumer energy taxes and charging energy producers with windfall taxes; politically expedient but backwards policy wise. Look to the corporate sector for leadership; to wit, the new Coalition for American Battery Independence (CABI).
ECONOMICS
US inflation fears are ebbing as expectations & breakevens rollover, followed by rates. Shift from goods inflation to service inflation underway as supply chains unsnarl. Housing rolling over; mortgage apps down 25% in past few months. Market pricing out 100 bp tightening in June & July.
PMIs suggest DM economies continue to grow from Europe to Japan and on to the US. China is an outlier as it fights Covid. Elsewhere Covid’s ebb and the reopening trade stimulates service demand and offsets manufacturing softness.
Imminent inflation peak shrinks recession window as Fed contemplates a Fall pause; we favor the middle path & don’t expect a US or DM recession in coming 12 months. It’s not the new normal; it’s the new, new world > a higher nominal growth path stimulated by the need to invest in the 3Cs: Covid, Climate & Conflict.
POLITICS
Shift from globalization to regionalization continues apace as the Tri Polar World manifests. Pres. Putin & Xi remain wedded to Ukraine invasion & Zero Covid even as costs mount including rare open criticism of Xi’s decision making.
Europe continues to deepen its integration across energy, defense and economic decision making while the Carnegie Endowment states the US is the most polarized democracy in modern history.
US efforts to pivot to Asia struggle with the “all pain, no gain” Indo- Pacific Economic Framework (IPEF) while the Summit of the Americas’ guest list remains incomplete.
Integration in the Americas remains in distant 3rd place behind Asia and Europe.
POLICY
Political infighting may be limiting the aggressiveness of the Chinese policy response to the negative economic impact of Zero Covid, even as Shanghai reopens.
Europe’s policy response seems top of class with continued fiscal support via Next Gen and an extension of the Fiscal Stability & Growth Pact, while the ECB outlines its process to move off the zero bound, supporting the Euro without slamming risk assets.
Tighter US fiscal and monetary policy means threading the needle to the middle path, helped by a strong consumer even as consumer confidence is in the dumps – watch what they do, not what they say.
MARKETS
1st up week in 8 for the S&P 500 (SPX) is a welcome sight and perhaps represents the beginning of a basing process. The distinction between cyclical bears w/o recession and recessionary bear markets is clear and consistent. Technical levels provide support and the innovation/thematic space, 1st into the bear, appears to be leading the basing process.
Remain OW non US DM, especially Europe and Japan, both selling at several decade valuation lows, with very cheap FX, a better policy mix & have shown relative strength vs the US amidst record setting outflows. The long awaited global equity leadership change seems underway. Brazil provides cheap EM physical asset exposure with a well advanced tightening cycle.
We have added to US credit risk while remaining deeply UW FI believing that our new, new world of high nominal growth means higher long rates over the coming year. Maintain EM HY where rates provide compensation for risk.
Commodities remain a heavy OW across the space as that high nominal growth world supports demand while supply remains a function of time and price.
The USD has wrongfooted us among others with its 15% gain over the past year. We believe it has peaked & expect flows that have been very USD supportive to revert as things stabilize in Europe & China.
Our faith in Crypto has been deeply shaken. The collapse of Terra and the growing realization that it is a get in first game suggests it might be a better private market rather than public market play.
