Show Transcript
Equity markets have rallied since some of the biggest potential downside policy risks have subsided. But are the conditions there to sustain a buoyant equity market? Kim Parlee speaks to Rachel Ziemba, Founder of Ziemba Insights.
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My guest tonight says the two big potential downside policy risks-- over-aggressive rate hikes and escalation of the US-China trade war-- have subsided. Hence, we have had a strong market rally this quarter. But are the conditions there to sustain a buoyant equity market going forward? Joining me is Rachel Ziemba. She's founder of Ziemba Insights-- also adjunct lecturer at New York University. Nice to have you here in person.
It's wonderful to be here.
I know.
Thank you so much, Kim.
So we've had a pretty strong rally in the past little while, little dips--
Yeah.
--and concerns about yield inversion we'll get into. But do you think the growth prospects are there for companies to grow earnings?
I'm still worried about the growth and earnings outlook, particularly when I look outside of the United States, where I'm based. I think in a number of emerging markets, there's some growth challenges still-- and not only in places like Turkey that have come under pressure in the last few days. And in China, there is still sort of a question mark of how much the stimulus is going to come into effect. Now, we've had earnings expectations adjust downwards, but I still think that we're in an environment where bonds might outperform. And some of the currency dynamics might outperform. And I think, there's limitations of how long this equity market rally can run.
Let me ask you-- what I'd like to do, if I could, is just run through some of the big factors, tell us how you think, and then we'll kind of in the second part talk a bit about what that means for the markets. China, you've got the slowdown stimulus you talked about and a lack of deal. So how concerning is all that for you?
Yeah, so I'm more worried about the domestic dynamics in China, the local policy moves than necessarily the lack of deal. Now, that's because my baseline is that the US and China are making enough progress to keep talking. And that avoids an escalation of tit-for-tat tariff war. Now, the baseline is, they keep talking. There's some kind of thin deal maybe that comes to pass. It will involve some managed trade, big purchases of commodities. It might not be so great for countries like Canada that are also suppliers of both countries. But let's park that aside. But that it's not going to deal with some of the underlying structural issues.
Now, domestically in China, their growth levels are slowing down on a multi-year basis. There's a bit of stimulus coming through. The PBOC is supportive. Fiscal policy is supportive at the local level. But I just worry that they'll be a bit of a couple quarter bounce. But this is still a story of a different driver of growth. And the Chinese authorities know they can't just do a sugar rush.
Yeah.
And we're still dealing with a lot of trade tensions beyond the US and China--
Yep.
--and real technological competition frictions from sanctions, a variety of things. I think these are challenging for assessing risk.
That's the biggie. I say that's the big one in the room. And then, there's a list of other--
Sure.
--also large, but I-- Brexit. I've just lost track. It's a soap opera in terms of how it's coming out. But what does this mean for the markets in terms of, will this get settled in a way that the markets-- or business, I should say, can move forward with some certainty of knowing what the heck is going to happen?
On Brexit?
Yeah.
On Brexit, I think, what we've seen just as we went onto air was the MPs basically voting No on anything. There's not a majority about any of the options, and desire for extension coming down to the wire-- which I had expected the Brits would come down to the wire. But that wire and can-kicking keeps going on. I do not think we're going to have certainty anytime soon. We might see further extensions, but we're still not in this case where the rules of the game that companies in Europe, operating with Britain, even border issues, are not clear.
And it even infects issues like ongoing trade negotiations, and issues like coordination on sanctions, whether it's related to Iran or Russia. So it infects a number of areas. And so I think it's going to be several months, and maybe years, until it's clear. And at the same time, we are coming up towards European elections and a new European Commission. And we're seeing European countries really trying to engage with what role they want China to play in their economy. So I think there is a lot of risks there for inward investment and just question marks that probably will restrain the growth outlook.
I'm going to try hit two more fast. And these are all huge-- each one of these is like a half-hour conversation. US-- divided government, but what I would say is that, that Mueller is put to bed--
Yeah.
--in a sense. We're getting actually ready for our 2020 elections soon.
Yes.
So how is this all going to play out for the US?
Yeah, so I think we see signs of a slowdown in the US economy. The Fed has definitely signaled that. I think, the markets are probably a little overly optimistic perhaps in pricing and cuts. But we'll see how that plays out. I think if the Fed came close to signaling that, that would mean the macro story was even weaker than they and I am anticipating.
Right.
But I think we're not going to see a lot out of Congress. We might see some battles over health care, a variety of things. And that is not great for what might happen with the USMCA. That's settling up to be a sizable battle. On my baseline, still, it eventually gets done. But it could be many months. But this is not necessarily US. And I'm not seeing signs of recession, but just slower growth, and a market that has to absorb a lot of US treasuries being issued. And so that's going to play out and complicate some of the other bonds.
Let me ask you. I've only got a minute here before we go to the markets. But how about Canada? I feel like Canada is getting hammered into so many different directions. USMCA still is to get settled. Issues with China, we're seeing about the canola problem. I feel the West is getting hammered too. What's your outlook for Canada? Energy? That type of thing.
Yeah, so I think Canada is between a rock and a bit of a hard place. You've had interest rates sort of climbing. And that's hit affordability. And then, Canada's been caught a bit in the crossfire of some of the trade conflicts. And one of the saving graces has been both this sort of curtailment of production temporarily in Alberta, but also a bit of increase in demand for heavy oil. The big issue, though, is it's still hard for Canada's oil output to get to the end user.
Yep.
And that's a multi-year process. And we know there's a lot of politics there-- so an OK outlook, but not a particularly good one. And we've seen with the election coming up, and the government's not finding a lot of policy space to use. I think, there's probably a little more fiscal space they could use. But it's clear this is not an environment where a lot more can happen.
Well, let's talk a bit about the markets and what all those things-- by the way, the list was all pretty dreary quite frankly.
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It was not a lot of good stuff there.
We better find some. We better find some good things.
We did see the market. It's been toying with inverted yield curves, slightly not severely. But when you looked at markets and opportunities for investors [INAUDIBLE] or things maybe to avoid. What do you see? Let's start with the energy sector.
So the energy sector, this has actually been pretty bullish time for energy starting from the end of last year. It's benefited from the rally and stabilization, but also from the tug of war and geopolitical risks, particularly in Venezuela-- but also US policy towards Iran. And as we get closer to the May deadlines on the Iran waivers, I think we'll see some support to the energy market.
Now that being said, it's probably US producers that can benefit the most. And so in this environment, I think we'll start to see US shale production, again, surprise estimates. So that might be better thing if one's holding some of those independents. But it's not so great for those who are trying to sell into the US market including--
It's so frustrating for our Canadian producers.
It is. And we've even seen that in emerging market currencies and bonds. We've seen oil producers-- places like Russia, for example, outperform other emerging market currencies. Now, the Russia story is very tied into sanctions and what policy the US takes in that way. I think, given the political dynamics with the Mueller Report and other dynamics-- I think, it's going to take some time before consensus on further pressure on Russia. So that trend could continue.
But I think we're going to continue to see a differentiation of those emerging markets and those developed economies that are very reliant on foreign finance. And those are going to underperform versus some of the Asian currencies and others that have better financing outlook.
What do you see for currencies? And again, a couple of minutes here, but Loonie, US dollar-- what do you see happening over the next little while?
Yeah, I think despite the dovish Fed, a number of other central banks are equally or more dovish. So I think, there's still points towards moderate dollar--
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Yeah.
--sort of US dollar strength, maybe a few emerging markets strengthening against it. A Chinese Renminbi, that's relatively flat-- where the Loonie is concerned, the story I see somewhat further downside. On the euro side, even though the ECB is very dovish, I think it's hard for the euro to weaken too much. So in a sense, this is a tough environment, and we continue to see if anything with the Bank of Japan, with the ECB still buying up, still holding such large shares-- I find it's both hard to see the macro story from the yield curve inversion because the central banks are manipulating it. But also, it's the environment where the outlook is not particularly great for corporate bonds and the like.
I have got 30 seconds.
OK.
I do want to ask you, though, stocks at this point-- how do you feel about them being valued? Fairly valued? Lots of optimism.
Yeah, well, I think there's still some room, particularly in US markets, emerging markets, many of them including China, seem cheap for a reason after a strong rally. So I'd be cautious.
All right, Rachel, we're going to leave it there. Always a pleasure. Thanks so much for coming in.
Thank you for having me.
Come back in person again, OK?
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