巴黎银行-新兴市场-宏观策略-新兴市场投资策略：游戏后期-20190625-10页 (2).pdf

|TRADE IDEAS 25/06/2019 1 FOCUS|EMEA 25 June 2019 Please refer to important information and MAR disclosures at the end of this report TRADE IDEA KEY MESSAGES We have created long and short baskets of European companies we think could benefit or suffer from the current late stage of the economic cycle.In our view,the US economic cycle is in its late stage,while the eurozone has just entered this stage.Given the low-inflation backdrop,we think this stage of the cycle could extend into 2020.We expect wages,pricing power and leverage to become key drivers of profit margins,and expect investor sector allocation to shift from cyclical to defensive exposure.Consider going long the BNP Paribas European long late cycle basket against short BNP Paribas European short late cycle basket.Backtesting suggests the strategy has generated positive alpha during sharp market corrections.Late in the game:The global economic cycle is in its late stage,in our view(see Outlook:Q3 2019:Late-cycle carry,published 21 May),and low inflation means it could extend into 2020.We continue to expect below-trend and below-consensus global economic growth over 201920,but not a recession,though we think the probability of a global growth recession over the next 12 months is still much as it was in March:a relatively high 25%.Some brighter data do not change our view of sub-par growth:The main culprit of the loss of momentum in the global economy late last year namely the drag from geopolitical uncertainty on trade and investment is still present,offsetting the tentative signs of improvement seen in early 2019.Earnings downgrades ahead:Earnings growth expectations for eurozone equities look frothy to us,despite earnings being revised down by around 5%since the beginning of 2019.Consensus currently expects eurozone equity earnings and revenues to grow 8%and 3%respectively over the next three years;above realised growth since the financial crisis.We think these expectations are likely to be disappointed,and expect negative revisions to become a key theme in the next earnings season.late cycle long/short baskets:As the last few years of mid-cycle were dominated by the Growth factor outperforming,we believe the end of the cycle will be led by defensives.The current cycle has been prolonged by central bank action,with a mid-cycle that lasted longer than an average cycle.As a result,we have constructed two baskets to position for this theme.Late in the game Long BNP Paribas European long late cycle basket against short BNP Paribas European short late cycle basket.Risk:Buyers of TRS may lose the full notional amount of the swap.Fig.1:BNP Paribas long/short late cycle basket performance*Fig.2:RV trade performance vs benchmark*EQUITY&DERIVATIVES Ankit Gheedia CFA,Equity and Derivatives Strategist,BNP Paribas London Branch All sources:Bloomberg,BNP Paribas.*These hypothetical,past performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above graph is for illustrative purposes only As of 12-Jun-201918Q118Q218Q318Q419Q1 19Q2Late Cycle Long3.4%10.4%7.2%-10.1%17.1%1.3%Late Cycle Short-4.4%-0.8%-1.8%-21.7%15.3%0.7%Rel.Perf 7.9%11.2%9.0%11.5%1.8%0.6%SXXP-4.0%4.3%1.5%-11.7%14.6%1.7%CountryEurope Late Cycle LongEurope Late Cycle ShortRel.SXXPDenmark14%0%14%4%Spain8%0%8%4%Switzerland10%6%4%9%Norway4%0%4%2%Finland4%0%4%3%Sweden10%8%2%7%Belgium2%0%2%3%Poland2%0%2%2%Germany24%24%0%13%Britain2%2%0%24%Netherlands4%4%0%5%Italy6%8%-2%5%Ireland0%4%-4%2%Austria0%4%-4%1%France8%38%-30%14%|TRADE IDEAS 3 The late cycle dispersion among equities is primarily driven by the following key themes in our view:1.Wage inflation:Corporates with high profit per employee are likely to tolerate this better,in our view.In the latter stages of the economic cycle,wage inflation tends to be a key risk for equity profit margins.Headline inflation remains low and has been trending lower,driving down nominal GDP growth and,as a result,revenue growth.At the same time,job markets in key economies remain tight,driving up wages.Meanwhile,the escalation in trade tensions and risk of an oil price rally due to geopolitical inflation are pushing up cost inflation for the corporate world.The opposing forces of headline inflation and cost inflation are already starting to weigh on the profitability of some stocks.2.Leverage:Corporates with high leverage are most at risk from the following trends,in our view.The latter stages of the debt cycle typically see default rates start to rise,as corporate fundamentals deteriorate and credit risk premium starts to rise.Companies with high debt repayments coming up may also start seeing their debt burden rise as the cycle continues.3.Price makers versus price takers:Corporates with high profitability are more likely to operate with less price competition and we therefore categorise them as price makers,and rank them higher in our long basket screening.Corporates with a poor profitability ratio are likely to face more margin pressures due to price competition and hence are termed as price takers and ranked higher in our short basket.4.Bond-like equities:As the late cycle progresses,we think bond-sensitive equities could continue to outperform.Over the past 10 years,a correction in the EuroSTOXX 50 of over 10%has been accompanied by a sharp decline in bond yields.Late-cycle screening criteria The BNP Paribas European long late cycle basket is composed of liquid non-financial European stocks with 1.a low number of employees relative to net income;2.a low ratio of net debt to net income;3.a high net margin;4.a high correlation with the 10y Bund;and 5.average daily volume above EUR10mn.BNP Paribas European short late cycle basket is composed of liquid non-financial European stocks with 1.high number of employees relative to revenue;2.high ratio of net debt to net income;3.low net margin;4.low correlation with 10y Bund;and 5.average daily volume below EUR10m.Sector exposure:The long late cycle basket is biased towards bond-sensitive names such as real estate,healthcare and consumer staples.We prefer defensive exposure via these than telecom and utilities,as in our view the latter are faux defensives,and over-levered for this point in the cycle.The short basket is biased towards cyclical sectors such as industrials,materials and consumer discretionary(Figure 7);the sectors most at risk from an escalation of trade war between US and China,in our view.In our backtesting,the long basket underperformed the market by around 10%in the Q4 2018 market sell-off,while the short basket had a beta of 1.0 x,while the long basket still outperformed.Country exposure:The long/short basket has a significantly negative bias towards French equities,due to the fact that the CAC 40 has 40%weight in Consumer Discretionary and Industrials.Fig.7:Sector breakdown Fig.8:Country breakdown Sources:Bloomberg,BNP Paribas.Sources:Bloomberg,BNP Paribas.EQUITY&DERIVATIVES Ankit Gheedia CFA,Equity and Derivatives Strategist,BNP Paribas London Branch BNPP late cycle baskets screening and sectors SectorEurope Late Cycle LongEurope Late Cycle ShortRel.SXXPReal Estate18%0%18%5%Health Care24%10%14%9%ConsStaples10%0%10%8%Technology14%8%6%5%Utilities8%2%6%5%Energy4%2%2%4%Telecom4%6%-2%7%ConsDiscr10%24%-14%11%Materials2%18%-16%9%Industrials6%30%-24%20%25/06/2019|TRADE IDEAS 4 The BNP Paribas late cycle long basket suggests a better profitability and brighter earnings outlook:The long basket demonstrates a 12m forward return on equity of 18.2,indicating a much stronger profitability compared to the short basket(12.0)and aggregated market(10.3).At the same time,the earnings trend of the long basket has been solid since 2014(Figure 10).For more on corporate profitability see Deep Dive:Profit cycle anatomy,published 13 June.Nine out of ten sectors deliver better profitability in the long basket than the short basket,according to our relative value analysis(Figure 11).The exclusion of financials in both baskets means even the short basket looks more profitable than the market.Valuation:Overall,the long basket is trading at a higher price to earnings and price to book ratios(Figures 12 and 13),while the short basket is trading at a discount.We think the higher valuation can be justified by better profitability trends and better earnings momentum.The relative-value trade has the highest price earnings ratio in materials(Figure 14).We dont expect this to weigh on future share performance,as materials are very light weight in the long late cycle basket(2%)and in our view,the high profitability ROE of 33 for the long basket and 11 for the short basket may not be priced in.EQUITY&DERIVATIVES Ankit Gheedia CFA,Equity and Derivatives Strategist,BNP Paribas London Branch Fig.9:Long basket appears to have better profitability Fig.10:and stronger earnings momentum Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Fig.12:Long basket is trading at a premium Fig.13:Long basket is trading at a premium Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Fig.14:12m fwd PE comparison by sector Fig.11:12m fwd ROE comparison by sector Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Expensive valuation versus higher profitability 25/06/2019|TRADE IDEAS 5 Risk contribution by sector:The risks for our relative trade idea come mostly from the industrial,consumer discretionary and materials sectors,which are significantly underweight in the baskets compared to the market.Factor exposure:Among style factors,the trade idea is most exposed to momentum,profit and value factors.Currency exposure:The trade idea is positively exposed to the Danish krone and negatively exposed to the euro Figure 17.Our FX strategists forecast EURDKK to remain close to the current spot for the rest of the year,so we see marginal risks from currency bias of this basket(See Corporate FX and Markets Monthly:June edition).Alpha generation:Figure 18 ranks the year-to-date alpha of the long/short trade by sector,and shows that defensives have contributed the most.Even though the market has rallied by 15%since the start of the year,defensives have still managed to add positive alpha to this trade.Debt/EBITDA:Eight out of ten sectors have a relatively-low debt/EBITDA ratio due to the low debt pressure screening criteria,which could provide protection for equities when refinancing risks rise at the end of the cycle(Figure 19).Correlation to bonds:The long basket has bond-like features and we expect it to benefit from the current low rate regime.Fig.15:Risk contribution by sector on a RV trade Fig.16:Factor exposure of a RV trade Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Fig.19:Debt/EBITDA difference between the two baskets Fig.20:RV trade negatively correlated with sov.yield Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas EQUITY&DERIVATIVES Ankit Gheedia CFA,Equity and Derivatives Strategist,BNP Paribas London Branch CurrencyLate Cycle LongLate Cycle ShortRel.SXXPDKK14%0%14%3%NOK4%0%4%1%CHF10%8%2%15%SEK10%8%2%4%PLN2%0%2%0%GBp0%0%0%24%EUR60%84%-24%52%Fig.17:Short basket is more exposed to EUR Fig.18:Year-to-date alpha contribution by sectors Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Factor exposure:Long bonds,short cyclicals 25/06/2019|TRADE IDEAS 6 Fig.21:BNP baskets versus Low Vol and Quality factors(rebased)*Fig.22:Performance versus Growth factor(rebased)*Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas Fig.25:Revenue exposure of long basket Fig.26:Revenue exposure of short basket Sources:FactSet,BNP Paribas Sources:FactSet,BNP Paribas EQUITY&DERIVATIVES Ankit Gheedia CFA,Equity and Derivatives Strategist,BNP Paribas London Branch Fig.23:Sector exposure versus Low Vol and Quality factor Fig.24:Sector exposure versus Growth factor Sources:Bloomberg,BNP Paribas Sources:Bloomberg,BNP Paribas SectorLate Cycle LongEurope LowVolEurope QualityRel with LowVolRel with QualityReal Estate18%5%0%13%18%Health Care24%11%21%13%3%Technology14%2%9%12%5%ConsDiscr10%8%17%2%-7%Materials2%3%9%-1%-7%Energy4%5%0%-1%4%Utilities8%9%0%-1%8%Industrials6%11%18%-5%-12%Telecom4%10%1%-6%3%ConsStaples10%19%22%-9%-12%SectorLate Cycle ShortEurope GrowthRel with GrowthConsDiscr24%12%12%Materials18%7%11%Industrials30%21%10%Telecom6%2%4%Utilities2%1%1%Energy2%2%0%Real Estate0%1%-1%Technology8%10%-2%Health Care10%16%-6%ConsStaples0%25%-25%The BNP Paribas late cycle long basket has outperformed European low volatility and quality factors for the past two years,backtesting suggests.The long basket is overweight in healthcare and the real estate sectors,and underweight in consumer staples compared to the two factors(Figure 23).The late cycle short basket is more cyclical than the growth factor,demonstrating a higher beta to the EU growth factor during last years market correction(Figure 22),although in this years market rebound the beta was below 1.The basket has a higher cyclical weighting and a lower consumer staples weighting,(Figure 24),which is driving these relative performance characteristics.Revenue exposure:Both the long and short baskets focus on the domestic market,with nearly half of revenue coming from Europe.The short basket generates more revenue out of the EU(55%)than the long basket(46%).Late cycle baskets versus Quality and Low Volatility*These hypothetical,past performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above graph is for illustrative purposes only.25/06/2019|TRADE IDEAS 7 Fig.27:Backtest on 2007 recession(rebased)Fig.28:2007 Late Cycle baskets sector breakdown Fig.31:Backtest on 2015 market correction(rebased)Fig.32:2015 Late Cycle baskets sector breakdown EQUITY&DERIVATIVES Ankit Gheedia CFA,Equity and Derivatives Strategist,BNP Paribas London Branch Fig.29:Backtest on 2011 market correction(rebased)Fig.30:2011 Late Cycle baskets sector breakdown According to our backtesting*,the strategy is fairly defensive,and its outperformance starts to fade only when growth rebounds.Our trade idea outperformed the benchmark during three periods in which there was an equity sell-off.The biggest drawdown was between 2007 and 2009,after which it took a longer time to recover than in the other two cases.Overall,the strategy outperformed the benchmark by 37.9%over the three years.In 2015 the strategy basket performed until Q1 2016.The relative strategy started to underperform once the Chinese stimulus kicked in and global growth rebounded.With output gaps now closed in most key economies,we see a lower marginal impact of easing policies from central banks to stimulate growth at this juncture.The worse the drawdown,the bette