Summary

Michael focused his conference call on the state of global liquidity, highlighting the fact that bonds remain high-risk and equities are well-supported. In addition, he discussed inflation risks in late-2021, capital flows into USD and the PBOC’s latest but misunderstood easing phase. He began by focusing on 7 key questions. Are we seeing a V-shaped rebound in markets and economies? … Yes. Has the long-term GDP trend slowed or quickened? …. On balance, quickened. Will high street inflation re-start? … Moderate rise because of fiscal spending / retail money. Is the US dollar peaking? …. Likely because of capital flows. Euro main beneficiary. Is this ‘risk on’? … Q1 should be…Q2 and Q3 look likely to be the most vulnerable periods. Are equities in a bubble? … No evidence based on liquidity. Are bonds still ‘safe assets’? … No, no, no! The correlation between liquidity and both exchange rates and the yield curve was examined, with more liquidity effectively driving the yield curve steeper, further examining the relationship between private sector supply and activity by the central banks for the exchange rate. The Global Liquidity Cycle: Risk On vs. Risk Off was looked at, with downward inflections a risk warning of a funding crisis and upswings usually signalling 'risk on'. Global liquidity sources were compared between 2020 vs. 2021. In 2020, China used ‘directed lending’ and in general provided about a fifth of the increase in liquidity in 2020, worldwide. Comparisons between monetary responses after 2008/09 and 2020 showed at least 5x more US liquidity growth in 2020, predominantly heading towards retail spending markets. In terms of momentum of liquidity, China and Japan are both on a significant rise compared to EM and Europe. Michael went on to discuss China in more depth, a planned economy where state-owned enterprises, banks and PBoC largely pull the strings. State Banks lend at a constant rate of 12-13% p.a. China’s latest evidence of easing is shown since August 2020, PBoC has re-started liquidity injections, and there has been some acceleration in broad liquidity growth. China will have to make choice between economic or financial stability and, unlike Western economies, is probably unable to have both at the same time. Focus turned towards inflation, which is said to be of critical importance with economies picking up. Rapid liquidity growth has historically been associated with faster inflation. This suggests that inflation will pick up, however by how much? The conclusion is that whilst significant, it will not be overwhelming, i.e circa 4%. Bond yields are being driven by higher supply and a lack of demand, the surge in supply of US ‘safe’ assets by Treasury and Fed push term premia higher. US dollar outlook showed contrasting capital flows between major regions, during three major waves. Asian currencies are the most stable, in contrast the ‘real’ Euro is 20% too cheap. Michael gave his views on prospects for the equity market, with levels of risk exposure for investors now well-below the long run average - but off their lows. Investors’ risk appetite was examined in the major markets, BRIC markets and other major emerging markets. Risk appetite is approaching a peak in many BRIC economies, whereas major markets are seeing low to normal readings and other major emerging markets continue to see ‘normal’ levels. Conclusion: Buy commodities and China ‘A’ share.

Topics