Article / 06 October 2016 at 10:00 GMT

Quarterly Outlook: Marathon bull run

Head of Equity Strategy / Saxo Bank


  • Equities extraordinary run could continue into Q4
  • US presidential campaign could boost equities, whoever wins
  • Pharmaceuticals sector likely to come under some pressure
  • Better data out of China offers Glencore route to the upside
  • Twitter, Facebook, Amazon all set for strong quarter

By Peter Garnry

This bull market spanning 91 months is almost like a parasite – we can’t seem  to get rid of it. No matter what is thrown at it (Brexit, China slowdown, negative rates, banking crisis in Europe, emerging market crisis, weak oil prices, geopolitical conflicts…), it always seems to relentlessly grind to new all-time-highs.

With a hugely interesting US presidential election in November and a likely Fed rate hike around the corner, global equity markets find themselves entering another unknown battleground.
Will the bull market survive again?

Markets would be cheered if she won but equities could eventually get a push from republican
rival Donald Trump's big-spending plans if he were to emerge victorious next month. Photo: iStock

Theories of relativity

Albert Einstein once said that it’s all relative. Although an old quote, it fits well with the current narrative in financial markets. Given the extant prolonged bull market in equities and undoubtedly high valuations – The MSCI World index is valued at 22.6 times trailing earnings – unprecedented accommodative monetary policies seem to have broken down historical relationships in financial markets.


What in isolation seems like a high valuation is nothing compared to the immense bubble present in government bond markets, with the average G7 10-year yield sitting around 53 basis points.

Viewed in that light, global equities (yielding 2.6%) seem like a bargain. Our asset allocation models are still long most equity markets and in our view, equities –together with real estate – seem to offer the best risk-reward ratio on a global basis. The biggest risk definitely lies in bond markets.

Ready for higher

Every action has its reaction. The bubble in government bonds produced by central banks does not exist in isolation. As governments have increased their leverage to offset weak private sector demand, the corporate and household sectors have engaged in a multi-year long deleveraging process which has ended in the US but continues in Europe.

As the below chart on net-debt-to-EBITDA among MSCI World companies shows, the deleveraging wrapped up in the global corporate sector around the end of 2014. Today, leverage ratios among companies are lower than the 1995-2011 period that saw the pinnacle of corporate leverage reached.


The probability of a Fed rate hike in December stands at 59% as of September 23, 2016. Despite the fact that the Fed wants more evidence before hiking rates, the world is ready. US inflation is above 2% (except when measured on PCE core) and the economy close to full employment.

At the same time, Europe’s unemployment rate is ticking down and its companies are the least leveraged in two decades. A small rate hike will not derail the corporate sector.

The value of the vote

November 8 could become a turning point in American politics if Donald Trump wins the election, setting a new course for the Republican Party and changing the status quo. The equity market may initially be spooked, but could come roaring back if Trump unleashes a big fiscal stimulus programme to kick-start economic growth.

If Hillary Clinton wins, we will get more of the same and equity markets will cheer, not because it is necessarily better long term but simply because equity markets like low risk.

The US presidential election, no matter what the outcome, will hopefully lead to a new agenda with bigger impulse from the fiscal side, something that is desperately needed as the world battles low productivity growth and weak demand.

There exists no conclusive evidence from history that equity markets behave differently depending on who wins the White House. It’s all noise and there is no signal. But one thing seems certain: whether we get Clinton or Trump, the health care sector is in for a rough ride with increased scrutiny over drug prices and the runaway inflation in health care expenses that the US has experienced over the past three decades.

If Trump wins, financials are likely to sell off while a Clinton victory will likely lead to a more positive reaction simply because she represents the establishment.


The burgeoning costs of healthcare in the US is a red flag for both presidential
candidates and pharmaceuticals could face a rough ride after November. Photo: iStock

Earnings have to stage a comeback

With global equity markets in an earnings recession (two earnings seasons with negative earnings growth) investors want to see a change for the better. Equity analysts have steep forecasts with global EPS set to rise by 35% over the next 12 months as oil prices are no longer a drag and the trade-weighted USD has stabilised.

Among S&P 500 companies, the expectation for EPS growth over the next 12 months is more muted at 17%.


MSCI World earnings per share are down almost 20% from their peak in late 2014, before the meltdown in oil. While most of the decline can be explained by lower oil prices and a stronger USD, it has also helped inflate equity valuations.

In the short term this is not a worry, but we need to see a bounce back in global earnings in Q3 and again in Q4 or else we face a fundamentally driven decline in valuation multiples across global equity markets.

How to trade equities in Q4?

We enter the fourth quarter on a cautious note but acknowledge that our trend-following model flashes long signals in most key equity markets except the S&P/ASX 200 Index. Given the events on the horizon, traders cannot be lax. We recommend being net long equities in Q4, but investors should be prepared to be flexible.

Based on recent changes in communication from the European Central Bank and Bank of Japan, we are betting heavily on European insurers as the downward pressure and flattening of the yield curve may be over for now.

Our main bets are long Aegon (AGN:xmas) and Generali (GASI:xmil).

Our strategic long positions in Amazon (AMZN:xnas) and Facebook (FB:xnas) are maintained as we believe both companies will continue to surprise against expectations.

Twitter (TWTR:xnys) has long been a lost case, but a nascent turnaround is beginning to deliver results with the recent NFL live feeds being a particular and notable success. The firm’s fundamentals have drastically improved and we are betting that the company will eventually be bought at a steep premium.

China’s manufacturing activity has improved significantly since September 2015 as measured by the Li Keqiang Index tracking annual growth rates in outstanding bank loans, electricity production, and rail freight volume.

The index’s annual growth rates have improved to 9% y/y in August 2016 from 1.2% y/y in September 2015. This has led to a comeback in emerging market equities, mining companies, and lately in the Baltic Dry Index.

We are playing the Chinese growth story through our long positions in Glencore (GLEN:xlon) and Golden Ocean Group (GOGL:xosl).

SaxoStrats Equity Portfolio (as of September 23)


-- Edited by Martin O'Rourke

Peter Garnry is Saxo Bank's head of equities strategy

AlexF AlexF
Hi Peter I think this article is not aligned to your morning call of exiting Amazon at 830 and potentially shorting it and same on twitter. I am fine cause I follow you but for other that just read that may open a position in Amazn while you are getting out.
Ramug65 Ramug65
Hi Peter, I felt the same, appreciate if you could clarify the strategy for Amazon
Peter Garnry Peter Garnry
Sure. I said that Amazon is warming up for a short position. But we are still long. Our stop is currently set to $817. The reason you don't see that in this article's screenshot is that it's from Sep 23rd and we placed a stop for the first time in Amazon a couple of days ago. So still long Amazon and think they will beat on Q3 earnings due to AWS. But the stock is getting priced for perfection so the tide will change at one point. And when it happens you could easily see a drawdown of 15% I hope it clarifies?
SierraPt. SierraPt.
Peter, and on Twitter - you still hold this 22.4 stop, which surely will be hit when the market opens?
AlexF AlexF
They are out and bought back at 20 for a day trade if I got it right
Johny Wine Johny Wine
What are the targets for Aegon and Generali?


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