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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Oil’s Demise “Greatly Exaggerated”
Equity Research
Wells Fargo Securities
Sept. 25: It is hard to overstate how cruel 2020 has been to oil-and-gas equities. Beyond the short- to medium-term headwinds of coronavirus, longer-term questions continue to pop up. It seems nearly every week (and sometimes multiple times per week) there is a new headline about a city, state/province, or country planning to mandate low or zero tailpipe emission vehicles within the next 10 to 20 years. Multiple high-profile companies have made promises to cut their net emissions as soon as 2030. “Net Zero” by 2050 has become so common that it hardly rates a headline. [But] it is worth considering the amount of material and energy that will be required to build and sustain this new green world. Good luck hauling all of those windmills blades and mining, processing, and creating all of the metals and carbon fibers without the oil-and-gas sector. Taking electric vehicles from 2% of new cars sold to 20% or beyond is going to put a lot of strain and stress on that supply/manufacturing chain system. Expect more negative headlines about those costs (visible and hidden) in coming years. It may be a while before oil enjoys a “boom” but its “demise has been greatly exaggerated,” to borrow a phrase, in our view.
—Roger D. Read, Lauren Hendrix
World Trade on the Upswing
Economic and Financial Analysis
ING
www.ing.com
Sept. 25: Imports and exports have been increasing in most countries and regions since hitting a low point in May, when world trade volumes were down 18% from a year earlier. The recovery promises to have been sustained in the rest of the third quarter by increases in manufacturing and export orders, and improving consumer confidence.
The outlook for trade in goods depends on the extent of new restrictions aimed at preventing the spread of the virus, especially those affecting manufacturing and supply chains. Some capacity constraints remain in ocean freight, relating to container and equipment shortages. Air freight has seen large reductions in cargo capacity with the restrictions on passenger travel. Travel-related services fell 26% in the first quarter and are likely to have remained low, while other traded services, including manufacturing services such as processing and assembly, and commercial services, are likely to be tracking the recovery in goods trade.
—Joanna Konings
U.S. Bond-Fund Redemptions
EPFR Global Navigator
Informa Group Limited
Sept. 25: EPFR-tracked bond funds extended their current inflow streak to 24 straight weeks going into the final days of the third quarter. But, for the second week running, the net total was the smallest since the streak began early in the second quarter. Behind the headline number, U.S. and high-yield bond funds experienced their heaviest redemptions since March, and European bond funds recorded consecutive weekly outflows for the first time in over five months.
Inflation-protected and municipal bond funds posted inflows for the 15th and 20th week in a row, respectively, and mortgage-backed bond funds absorbed fresh money for the 13th time in the past 15 weeks, while redemptions from convertible bond funds hit a 25-week high and bank-loan funds chalked up an outflow for the seventh straight week and 14th time in the past 15.
While flows to high-yield bond funds stalled during the week ended Sept. 23, emerging-markets bond funds continued to see flows recover from the lows of March. The latest inflows were the 12th in a row for EM bond funds. As was the case the previous week, the positive numbers were largely due to the robust flows into China bond funds, which took in over $1 billion for the first time. That trend may hit a wall in October, according to Tim Cheung and Riki Zhang from EPFR sister company Informa Global Markets. In a recent note, they observed that China’s central bank is showing a general reluctance to boost market liquidity. That, they believe, “is reinforcing the market perception that the monetary easing cycle is already largely over and borrowing costs will start creeping upward…there is a good chance we will see a significant selloff [of Chinese bonds] in October.”
—Cameron Brandt
The Attraction of Preferreds
Global Strategy Quadrant
Citi Private Bank
Sept. 24: Ranked above equity (without voting rights) and mainly issued by financials, preferred stocks have been a fantastic source of high current yield. Due to the lack of new issuance and the demand for higher yields, preferred stock valuations have risen over the years. However, with U.S. preferred yields averaging 4% and European yields, 5%, value still exists. In many instances, valuations of preferred shares are comparable with similarly rated high-yield bonds…
We continue to feel comfortable moving down in capital structure for higher yields in preferreds. In our view, large banks have entered the current economic slowdown from a position of fundamental strength. Dodd-Frank and Basel III regulations have required banks to increase their capital base substantially. While common dividend cuts remain an area of concern for a few banks, we don’t believe preferred dividends are at risk.
—Steven Wieting and team
Betting on a Weaker Dollar
Weekly Update
The Aden Forecast
Sept. 24: The U.S. dollar index bounced up this week. This isn’t unusual following the dollar’s steep decline, and it could rebound further in the weeks ahead. But the dollar is still bearish below 97.50 and it’ll stay very weak below 95. That is, once this rebound rise is over, the dollar remains poised to fall much further, and the currencies will head higher. Other assets will also get a boost from a weaker dollar. Continue to hold the currencies we’ve been recommending: the Australian dollar, Canadian dollar, euro, Swiss franc, and UDN [Invesco DB US Dollar Index Bearish], the bearish dollar exchange-traded fund. Even though they’ve been under pressure, they’re still bullish, and we’ll buy more on further weakness.
—Mary Anne and Pamela Aden
Trump v. Biden on Taxes
Election Watch
UBS
Sept. 23: The disparity in the two [presidential] candidates’ fiscal policy platforms is rather straightforward. Absent any details to the contrary, we are obliged to conclude that President Trump would rely on deficit financing to reduce tax rates while simultaneously increasing federal investment in the nation’s physical infrastructure. Biden proposes to reverse the tax cuts enacted in 2017 and redirect the resulting proceeds toward combatting climate change and expanding health-care coverage.
However, the size and scope of fiscal stimulus planned by a Biden administration are also much larger than the ones contemplated by the president. The net result is to neutralize some of the adverse effects of tax increases on the rate of economic growth. In either instance, whether the president is reelected or voters choose the former vice president, the size of the federal deficit is destined to remain large.
—Solita Marcelli and team
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