TPW Investment Management

Weekly Musings

Friday Musings

Spend Money to Make Money….Right?

Happy Friday,

We continue to muse over the implications of a “lower for longer global growth path” including how to get there (confirmation of growth bottoms in China, Europe) & investment implications (ACWX vs SPY, yield plays etc).

Data flow is increasingly supportive of the growth bottom thesis in both China (lending, trade) and Europe (wage growth, IP). Rising long rates remain a tell: China 10 yr at 3.3%, highs for the year while the 10 year BUND breaks back above the zero bound. Rising rates = bullish for banks... European Banks anyone?

Any bets as to whether this week’s IMF downgrade to global growth is the last one for this year? I think so.

Thinking through the investment implications of a “lower for longer global growth path” led us to some charts showing ACWX vs SPX (Rest of the World vs US) over multiple times periods: 10, 5, 1 yr, YTD, 1 month. The scope for catch up by ACWX is staggering while it searches for a bottom (see chart). ACWX has room for multiple expansion (key in low growth world) and new owners; SPY is over owned by ROW and arguably has little room for multiple expansion.

ACWX/SPX over the past ~20 years

2019.03.18 Skyview.png

Source: Bloomberg

Lots of talk about US High Yield, but one of the most interesting facts I learned this week was that European HY default rates are well BELOW that of the US which is quite low itself. As EU peripheral yields collapse & growth stabilizes, EU HY yielding almost 4% vs. EU Investment Grade which yields 1% looks interesting (Japanese investment flows in EU HY at 6 yr high).

In US HY it is noteworthy that HY energy names have not followed the oil price higher, suggesting perhaps further room to perform even as HYG hits a 52 week high.

UBER’s IPO is generating all kinds of noise - gotta love the line that it may never make a profit… Silicon Valley has really taken the phrase “you have to spend money to make money” to an extreme. LYFT trading down 15% from IPO price suggests the froth may be in the private, not public, markets. A massive loss maker coming to market just as tech buyers start to digest the idea of US tech EPS down 10% y/y in Q1….hmmm, good luck with that.

Finally, the Tri Polar World’s (TPW) regional integration process both ebbs (Splinternet) and flows (Asian connectivity). The Macro Polo folks had a good read (ARTICLE) on how China is speeding up Asian integration, nice 3rd party confirmation as to why we call Asia the TPW’s Proactive Region.

Have a great weekend and LET’S GO UMASS (NCAA Hockey Finals tomorrow night); LET’S GO ISLANDERS!

Jamie & Jay

James Gardiner