BofA’s Ajay Kapur was asking the right questions headed into 2019.
Or, actually, he wasn’t so much asking as he was imploring.
In the final days of 2018, one of the worst years for many global assets since the crisis, Kapur penned an urgent message asking central banks to “please reflate”.
“Financial markets and CFOs think the world economy is in real trouble. Policymakers are oblivious to this scenario”, Kapur said, last December. “One of them is going to be wrong. History suggests, the policymakers”.
Those policymakers didn’t wait around to find out if history was going to “rhyme”.
Starting with Jerome Powell’s January 4 comments in Atlanta, central banks the world over embarked on a coordinated dovish pivot designed to head off a downturn, help offset the drag from ongoing trade frictions and rescue markets – not necessarily in that order.
Since then, we’ve seen cuts from the Fed, the ECB, RBNZ, the RBA, the RBI, and on and on. QE has been restarted across the pond, policymakers have enhanced forward guidance and the Fed has begun to grow its balance sheet anew. In fact, as noted here on Wednesday, the net easing impulse (the difference between rate cuts and rate hikes) betrays the most dovish policy lean in years.
On Thursday, Kapur is out with his year-ahead outlook and he wants to make sure everyone is asking the “right” questions because, as he reminds readers, nobody was last year.
“Asking the right questions, a relative rarity in our narrative-driven world, is important”, he says, adding that this time last year “the two most asked questions were also the most misleading, from the point of making money”.
What were those two questions? Well, they were:
- “How many times do you think the Fed will RAISE rates in 2019?”, and
- “What are your views on the US-China trade war?”
The Fed cut rates three times and the trade war didn’t matter for the benchmarks, as the dovish pivot from policymakers managed to engineer rallies in both US and Chinese equities. In other words, those were the wrong question to be asking.
Given that “asking the right questions is paramount”, as Kapur puts it, he’s keen on discerning what those questions are headed into the new year. Here are the four he thinks are crucial, along with his (in some cases abridged) answers:
Q1: What do you think the magnitude of the G-4 central bank balance sheet expansion will be in 2020, if indeed we do see an expansion? Answer, around USD100bn a month in the first half, helping asset prices.
Q2: Where do you think China’s monetary and credit cycle will go next year, to what extent, and what will you be watching to decipher this cycle? We think that the sum of real GDP growth and PPI is a good proxy for China’s nominal growth. When this drops to around zero like in 1998, 2008 and 2016, we get a robust monetary/credit response from the PBoC and Asia/EMs, cyclicals all rally hard. We see the PBoC becoming less restrictive in 2020 as nominal growth slips, but we don’t see any boisterous monetary reflation.
Q3: Where will EPS growth go next year? We think, between 5%, compared with analyst projections of 14% for Asia ex-Japan, but better than the 1% EPS growth estimated for 2019.
Q4: Where is the US dollar going? Our economists believe that the USD will depreciate to 103 vs the yen, 1.2 vs the Euro, and 1.4 vs the pound, based on a recovering global economy and assuming an initial US-China trade deal. If this forecast pans out, based on past relationships, Asia and EM equities should benefit.