By 
Stock market bulls looking for hopeful signs on the horizon that a rally is out there, somewhere, might take a bit of comfort from some fresh thoughts on the matter from Societe Generale.
But the emphasis is on the “bit” part, as a team of strategists led by Alain Bokobza offer up three potential risk-on rallies, but only one that might actually deliver. So that hopes are not raised too fast, they stress off the bat that markets are “not yet” ready to “enter a new, more constructive chapter.”
The most important, and probably well-known, trigger would be a pause in the Federal Reserve’s plan to raise interest rates later this year, a hope many bulls may be clinging tightly to right now.
“This would mark the start of a chapter with lower risks on bonds, and an allocation to equities and credit that would depend on whether the U.S. economy can avoid recession. Current market positioning, leading indicators and fundamentals do not yet argue in favour of risk-on assets,” said Bokobza.
Here’s their chart showing a fairly high level of risk-off mood out there:
CTFC, SG Cross Asset Research/Global Asset Allocation
And despite the market correction that has been seen, valuations remain elevated, the analysts say, as they advise investors to stay defensive with income strategies and resource-related assets such as the Australian dollar
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-0.46%,
Indonesian and Latin American equities, and emerging market bonds, while avoiding credit.
Their second trigger is the most plausible of the three, say the strategists. That is, a rebound in the Chinese economy as Covid lockdowns are lifted that would help ease supply chain pressure and boost global growth.
“The key here would be a shift away from the zero-COVID strategy, which
depends on a higher vaccination rate among the elderly. Still too early to call, but given the relaxing of the Shanghai lockdown, housing releveraging and accelerated government spending, SG’s China economics team sees some infrastructure-spending-led recovery on the horizon,” said Bokobza.
This potential risk-on rally starter comes with bearish sentiment extremely bearish for China stocks, with shorts amounting to nearly 20% of Hong Kong turnover, unsual net selling by foreigners of domestic equities and bonds and a sharp drop in the yuan
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SG Cross Asset Research/Equity Strategy
As for the beneficiaries should China recover after a “disatrous April and a mediocre May”, they point to the country’s equities. For example the Hang Seng China Enterprises Index
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is deep in negative territory, while new and old infrastructure plays would line up with government stimulus policy and green transition plays with long-term trends.
Also benefiting would be China-related assets — again the undervalued Australian dollar, base metals and stocks elsewhere, such as U.S. chips and North Asia names, along with some European plays.
The final and least likely trigger would be a rapid solution to Europe’s biggest land war since WWII, Russia’s invasion of Ukraine. “Hope is not a strategy, but if the war is settled relatively soon, we would expect at least two impacts on global assets,” said Bokobza and the team.
Peace in Ukraine would trigger a fall in energy prices, helping bring an inflation peak peak closer, and a boost for the euro
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which would take some heat out of the dollar
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Assets hardest hit by the conflict and sanctions resulting from it would bounce the hardest — Eastern European equities and local goverment debt.
Bloomberg, SG Cross Asset Research/Global Asset Allocation
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