If you’re wondering what the mood is among investors and asset managers in South Korea, the answer is that it’s the same as the mood everywhere else in the world – or at least that’s the impression SocGen’s Head of Global Asset Allocation and Equity Strategy, Alain Bokobza, got during his trip to Seoul, the first stop on 10-day jaunt through Asia.
“It’s all about FOCMO, or to spell it out Fear of Continuing to Miss Out”, he writes, in a “postcard” dated Monday.
“After a breathtakingly good first quarter, many investors de-risked their portfolios in the final quarter of 2018, mainly cutting exposure to equities”, he continues, adding that in addition to FOCMO (an amusing tweak to a tired acronym that doubles as an almost cringe-worthy cliché), “like everywhere else on the planet, it’s also all about the search for yield, especially as the Bank of Korea has very recently signaled it would stop tightening.”
Of course “FOCMO” and a reinvigorated hunt for yield are phenomena that can (and do) reinforce one another. As investors are chased out the risk curve and down the quality ladder, that scramble for yield pushes prices higher, exacerbating underperformance for anyone who isn’t engaged. The further out ahead markets run, the more acute the FOMO feeling, necessitating the addition of the “C” to the acronym.
If you’re lucky enough to have been “in on it” (so to speak) during Q1, FOCMO manifests itself in a reluctance to ring the proverbial register in an environment where the bar for a return to hawkish policymaking seems impossibly high.
“FOCMO is mainly fueled by the assumption that inflation will print soft despite higher oil prices, allowing central banks to continue to fuel liquidity-driven markets”, Bokobza continues, observing that “many of the investors we met with are not yet ready to take profits.”
And yet this is a market that still lacks the ingredients of a full-on “melt-up”. Equity fund flows have not “validated” the rally and many investor cohorts remain underexposed.
You can blame whatever you like for that – the ubiquitous list of familiar macro risk factors, where the “top five” never seem to change, but are merely reshuffled in monthly surveys in accordance with the latest balderdash from the Trump administration.
Or you might simply point to earnings. Obviously, expectations have been tempered, and it’s now widely accepted that EPS growth in the US will turn negative for the first time since 2016 in Q1. The only question now is how things evolve given the challenging macro backdrop.
BofAML, for instance, slashed their target for 2019 earlier this month and introduced a 2020 outlook that’s well below consensus. “Our house forecasts for several key macroeconomic variables have been revised lower since 4Q18, leading us to lower our 2019 EPS by 1.2% to $168 (+4% YoY) from $170”, the bank wrote a week back, adding that their newly-introduced 2020 EPS forecast is $180, which would represent +7% YoY growth. That is sharply below current consensus which sees 2020 EPS coming in at $187.66 up 12% YoY. That, BofAML warns, “is overly optimistic.” Think about buybacks, for example. The bank notes that consensus EPS for 2020 incorporates a roughly 2.5ppt benefit from net buybacks. But what if that’s not accurate? To wit, from BofA:
We highlight that S&P companies were net issuers of stocks prior to the financial crisis and given the strong buyback trend we have seen since the crisis, we expect muted corporate buybacks in 2020, particularly as the economy heads further into a late-cycle phase and some companies may be forced to focus on their balance sheets. Today, investors no longer want companies to buy back stocks, but instead prefer balance sheet repair, and leverage ratios/rates/spreads are at a point where paying down debt seems more likely than buying back stocks.
Panning back out to a 30,000-foot perspective, one wonders whether it’s just a matter of time before trade concerns shift to Europe and, perhaps, Japan, which will try its hand at negotiating with the Trump administration starting this week.
“Ahead of the next G20 meeting here in Seoul on 28-29 June, we wonder if the next chapter will see market fears switch to Japan and Europe (Airbus?) and more specifically Germany (autos) and maybe France (agro)”, SocGen’s Bokobza muses on Monday.
Meanwhile, Mexico is trying its best to separate the US president’s most recent threats regarding auto tariffs (or, “the big ball game“, as he calls them) from “new” NAFTA. Consider the following bits from The New York Times:
“This administration’s approach to trade is bully, bully, bully,” said Mary Lovely, a senior fellow at the Peterson Institute for International Economics. “What will be the ramifications in the future? We really don’t know. We need cooperation on so many things.”
Jesús Seade Kuri, the under secretary for North America at the Mexican foreign ministry, was in Washington last week to meet with legislators and lobby for passage of the Nafta replacement. He told reporters at a news conference that Mexico did not intend to mix discussions of trade with migration and avoided comment on the auto tariff threat.
But in an interview with a Mexican radio station on Friday, Mr. Seade laughed off the threat of auto tariffs. “That is being talked about,” he said, chuckling. “The art of the threat.”
And speaking of the “The art of the threat”, Trump’s weekend attacks on the Fed muddy the waters even further. If he’s “successful” in influencing monetary policy, then that dovishness-by-dictatorial-decree would be ostensibly bullish for risk assets, thereby offsetting some of the assumed drag from ongoing uncertainty tied to trade bullying. But then again, markets reacted violently to the idea that Trump might actually fire Powell (and/or Steve Mnuchin) late last year.
“One hot topic where there is broad consensus concerns central bank independence, partially because the efforts to influence the Fed have been so ham-fisted”, Bloomberg’s Richard Breslow wrote on Monday morning, adding the following:
It’s an important issue, nonetheless. But only the threat it’s being portrayed as if the legislature and the FOMC allow themselves to be seen, let alone act, as enablers. Politicians trying to influence policy is certainly nothing new. Undue efforts, however, are unacceptable. And they don’t, in all cases, warrant extreme politeness in response.