Monthly Chartbook

September 2018
The monthly chartbook presents a collection of the most interesting and important charts to have on your radar to
get the global macro picture and stay on top of the risks and opportunities across asset classes and markets. It
also brings together our key views and conclusions, which are summarised on page 2-3.

Topdown foreword: As the year goes on we’re confronted with an increasingly complex outlook.
Stress in emerging markets, though in some ways to be expected given Fed tightening and a
stronger US dollar, can still unfold in unexpected ways, and political risk remains front of mind; no
longer a simple platitude. Decoupling and capitulation on relative value are important short-term
themes. Medium term, it’s still a case of navigating increasingly turbulent markets as the cycle
matures and the global monetary policy experiment comes full circle. Looking ahead to 2019, a
key theme will be the transition of monetary policy from suppressor vs source of volatility.

1. Manufacturing activity softer – synchronized 2. Some conflicting signals on global trade;

slowing, reset of previous extended optimism. softer manufacturing and trade wars an issue.

3. Property prices, a major macro driver and 4. Monetary policy rates rising in aggregate
risk factor, still rising in the major economies (Fed + EM), yet credit standards still easing.

Publication date: 19 September 2018

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 The view from the top
Global Economic Outlook: There’s more question marks around the outlook for the global economy as
the higher frequency indicators point to an apparent synchronized moderation in growth. Adverse news
headlines and market volatility have clearly impacted on economic sentiment, and the real issues of trade
wars, tighter global monetary policy, and EM stress are of concern. Yet the tailwinds of strong consumer
sentiment, rising property prices, still decent global trade growth, and as yet only mildly tighter global
monetary policy settings mean we’re probably not facing imminent recession. Still, as the global monetary
policy tides turn and weak spots show up, it’s fair to say that growth risks are skewed to the downside.
For now the base case is that growth continues and inflation risks are still skewed to the upside.

Risk backdrop: Geopolitical risks remain front of mind, particularly as domestic (populism) and economic
issues put strain on international relations. Yet, more traditional market risks are taking over in terms of
probability and immediacy e.g. elevated valuations for a number of assets versus the removal of
extraordinary monetary policy stimulus (and quantitative tightening) as well as changes in market structure.
The flareup in risk pricing in Europe and emerging markets is concerning and may take some time to fully
play through; EM is at risk given USD strength, Fed tightening, and growth headwinds in China. This is
not 2017 where “buy the dip” was the rule.

Summary view across asset classes (global unless otherwise noted)

Asset Class Short-Term View
Mixed signals short term (event risk,
headline risk vs reset in sentiment in
DM Equities
DM ex-US), also mixed outlook by
country (momentum vs rel. value)
Medium-Longer Term View
Favour DM ex-US on relative value.
Elevated absolute valuations + gradual
withdrawal of stimulus present challenge
to MT global equity returns.

Decent odds of a very short term
bounce, but headwinds remain (Fed
EM Equities
tightening, softer growth in China, trade
war, stronger USD).
Relative value vs DM and lower absolute
valuations a real positive. EM looks
increasingly attractive longer term, but
conviction levels not very high (yet).

Wary of headwinds from USD upside, Cautiously optimistic medium-term as

Commodities weaker EMFX, stimulus removal, China commodities tend to do well this part of
slowdown scenario. the cycle. Valuations supportive.

Signs of overvaluation across selected

Many property markets still seeing
geographies, sectors. Clear reliance on
Property tailwinds, but an increasing number of
low bond yields. Expected returns = lower
markets are presenting as overvalued.
and more volatile going forward.

Credit spreads at rock-bottom, mixed Miniscule credit risk premium means very
Corp. Credit signals on the leading indicators. low compensation for taking on credit risk.
Orange lights, but no red lights as yet. Be very wary of pushing risk for income.

Softer macro a barrier to higher yields Low bond yields = low expected returns
Govt Bonds short-term, but US econ remains for buy and hold. Despite overvaluation,
robust, sentiment neutral, QT ongoing. bonds retain value as a diversifying asset.

Low cash rates = low real returns, but Expect a gradual normalisation in cash
Cash cash is still the most reliable means of rates globally over the medium term, led
capital preservation (which is valuable). by the USA, followed by rest of DM, EM.

Upside risk scenario is in play with
yield support and policy/macro
US Dollar
divergence. Political risk and crowded
longs add complexity to the outlook.
Late stages of USD bull market, valuations
neutral, expect short term upside
overshoot, but limited upside on a more
medium/longer term basis.

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TAA positioning guide
As a reminder, we do not manage any money, or provide personal financial advice, nor offer securities. The
purpose of the following tables is to provide a high-level positioning guide based on our analysis and
indicators across the various asset classes, from an unbiased/generic multi-asset perspective.

Max/Min: Qualitative ratings. Refers to overall view on that asset with 5 squares representing the highest
possible conviction in either the Max (long) or Min (short) direction.
*XXX vs XXX: Relative views, e.g. small vs large, interchange “min” with first mentioned e.g. for small vs
large a maximum bullish view on small caps vs large caps would show as 5 boxes on the left side.

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5. US equity valuations remain elevated overall, 6. Capex growth turning up for S&P500 as a
but a material reset seen in the forward PE. whole, a positive (and logical) sign.

7. High US valuations raises odds of relative 8. Volatility has turned up; base case is that the
performance in EM and particularly DM Ex-US. cyclical low has been seen for this cycle.

9. US equity risk premium getting squeezed by 10. Consistent trend in ERP across countries,
higher valuations and higher bond yields. albeit still comfortably above average in most.

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 11. Global cyclical sectors were a key source 12. Cyclicals performance maps to the PMI, but
of strength, now likely a source of risk. looks a little extended, at risk, and rolling over.

13. EM absolute valuations reset from high 14. Downturn in EM sentiment raises odds of a
levels, decent relative value (vs DM). bounce, but yet to reach 2008 or 2016 levels.

15. Stronger US dollar (and EM stress/slowing) 16. Commodities view nuanced across type and
a headwind for commodities. timeframe, but arguably strong relative value.

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 17. US commercial real estate had strong run: 18. Credit conditions bounced back somewhat,
looks extended vs LTA, but rents still growing. but different environment now vs previously.

19. Globally seeing trend of rising property 20. ‘SCANNZ economies’ overvalued, at risk;
prices, and greater incidence of overvaluation. commodity, policy, and rates sensitive.

21. Search for yield has seen a structural shift 22. REITs benefit from yield support vs fixed
lower for longer for US REIT yields. income, but rising bond yields are eroding this.

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 23. A secular/cyclical bottom in US nominal 24. Flattening yield curve reflects maturing
GDP growth will push bond yields up (to 4%?). business cycle, expect further flattening.

25. Despite significant move in bond yields 26. This puts bonds in the same basket as
YTD, bond valuations still look expensive. stocks and property as overvalued assets.

27. Global government bond universe is 28. Global govt bond universe has also seen
characterized by low nominal and real yields. duration move higher = E[return] down, risk up.

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 29. US labor market is running hot: expect 30. Fed funds rate still in the “sweet spot”,
wage growth to accelerate, lift inflation. although on a steady tightening path.

31. Composite economic sentiment scores 32. Thus developed economies see tighter
show strong but more divergent growth in DM. capacity, therefore still upside risk to inflation.

33. DM monetary policy is in clear transition to 34. The Big3QE are heading for the exits. This
headwind vs previous tailwind. will be a big test for markets the world over.

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 35. Yield support and relative macro strength 36. DXY bear market over as quickly as it
driving USD gains, Fed to carry it higher. begun. Upside risk scenario is compelling.

37. Economic cycle indicator remains 38. Yet the flattening yield curve points to less
supportive of tight spreads, for now… relaxed risk pricing in the coming years.

39. ECB policies helping keep a lid on spreads, 40. Eurozone risk pricing flareup a shot across
and fostering easy lending standards. the bows for those tempted to complacency.

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 41. China cyclical picture in question, 42. Path of least resistance is still higher for the
previous tailwinds turned, outlook mixed. USDCNY, tradewar escalation reinforces this risk.

43. Policy starting to turn from mild 44. Property defying lead indicator – animal
tightening towards easing, key chart here. spirits at work? Or stimulus going to property?

Report by Callum Thomas, Head of Research at Topdown Charts

About Topdown Charts

Topdown Charts provides chart-driven primary research across a global macro and
multi-asset universe. The key offering is the Weekly Macro Themes report which has
been designed specifically for multi-asset portfolio managers, active asset allocators,
and macro-driven fund managers. The perspective is that of a buyside strategist and
the key deliverables of the report are: investment idea generation, top-down global
macro insights, risk management input, and asset allocation research.

Disclaimer: This report is intended for the specified recipient and may not be forwarded or duplicated without permission. This report is for
informational purposes only. Topdown Charts Limited (trading as Topdown Charts and Topdown Charts Institutional) is not a registered financial
adviser and none of the content here should be construed as financial advice or an offer or solicitation for securities. The content of this report is
provided for informational purposes. The content is not intended to provide a sufficient basis on which to make an investment decision. It is
intended only to provide observations and views of individual analysts and personnel of Topdown Charts. Observations and views expressed
herein may be changed by the analyst at any time without notice. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, expressed or implied is made regarding future performance. The content of this report has been
obtained from or based upon sources believed by the analyst to be reliable, but each of the analysts and Topdown Charts does not represent or
warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes in market
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of a particular market. This report is intended for a sophisticated, professional and institutional audience and is not personalized financial advice.

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APPENDIX: Australia & New Zealand
Economic view: The Australian economy has remained robust on the tailwinds of improved commodity
prices, non-mining investment (and infrastructure spending), stable/mixed consumer, and a solid global
backdrop. Yet the housing market is entering a slowdown as supply growth has been substantial and credit
standards have tightened materially along with out-of-cycle mortgage rate hikes. The housing slowdown
means the growth/inflation outlook is skewed to the downside.

The New Zealand economy is looking late cycle in many respects (except headline monetary policy). Net
migration boom looks to have peaked, and building activity is likely to peak along with prices. Yet policy
remains overall supportive, likewise terms of trade, and still substantial net-migration gains. Macro-prudential
tightening measures have slowed house price appreciation and the change in government introduces
uncertainty with generally less business-friendly policy agenda and a likely less stable coalition. Economic
confidence has seen an abrupt fall, and a big part of this is due to political risk.

Monetary policy outlook: The RBA is on hold for now, and if anything, the housing slowdown means the
next move could well be a cut. The RBNZ extended its forward guidance to hold rates unchanged until late
2020 (vs 2019 previously) and made explicit reference to 2-way risk for the cash rate given its new
inflation/employment dual mandate. Lower for longer (if not just “lower”!).

Summary view across asset classes

Note: Given many of these assets have similar drivers, the view is for “Australasia” unless specified otherwise.

Asset Class Short-Term View Medium-Longer Term View

Both look short-term overbought.
Equities Dovish central banks and weaker
currencies a positive.
Vulnerable to a push higher in yields,
Listed
yet domestic monetary policy settings
property
are supportive. Residential bearish.
Direct Wary of rising bond yields vs rental
Property growth, slight negative bias.
Bearish duration globally, but rates
Fixed Income outlook makes it more nuanced here.
Cautious on corporate credit spreads.
Relative monetary policy settings
Currency favour USD vs AUD & NZD. But both
look short-term oversold.
Australian equities look better placed on a
relative basis as NZ equity valuations look
very stretched and uncertainty rises.
Negative bias over the medium term as
property market valuations generally
stretched vs history due to yield demand
Prices, valuations, becoming stretched,
vulnerable to a downturn or spike in yields.
Both countries see some relative valuation
vs global. And retain value as a
diversification asset in event of downturn.
Expect AUD to outperform NZD over the
medium term. Valuation around neutral for
both vs USD, expect downside overshoot.

The table below reflects a notional positioning indicator based purely on the above views.

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 i. Valuation picture shows NZ closer to US, ii. NZ equities look particularly expensive vs
while relative value favours Australia. history, next 4 years will not be the same.

iii. Australian economic confidence has been iv. NZ economic confidence wavering, political
on an improving path, but housing a risk. uncertainty a factor, and tailwinds fading.

v. Housing a risk on both sides of Tasman, vi. Still favour AUD vs NZD at the moment re
rates on hold …if not headed lower from here. swap rate IRD’s, but both see downside risk.

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