Now that developed world economies are beginning to pick up speed in their recovery, will we see a retail boom turn to bust? SocGen’s Klaus Baader thinks not. Although retail reports for May came in below expectations in both the US and the UK, Baader thinks we’ll just revert to a more normal set of figures.

“Sure, as the services sector reopens, it is almost certain that consumers’ spending will revert to a more normal pattern, i.e. spending more on services and less on goods. But it looks as if the shift is proving to be neither dramatic nor instant. Nor does it have to be, given the piles of excess savings that households are sitting on. In short, there is still life in this run for retail sales. In fact, in the euro area, the big reopening rebound had not even begun by April. But as non-essential shops reopen, a pick-up seems highly likely, albeit more likely to show up in June rather than in May data.”

Gerry Celaya, Chief Strategist at Tricio (www.tricio-advisors.com) is looking at the all important cable ($/£) rate this week in his weekly talking points.

“The chart below shows GBP/USD since 2007 which covers the spike above $2.10 in 2007 and the push below $1.15 in 2016 and 2020. The EU referendum in 2016 saw GBP sink below $1.50 and it hasn’t been able to regain that level. The trade deal struck with the EU at the last minute last year should have taken a lot of weight off the GBP. The market seems to be taking the view though that the ‘skinny’ nature of the deal leaves much to be desired for services and certain sectors of the economy, and the ‘border in the Irish Sea’ question keeps popping up as well.

Currencies are a relative play of course, and the USD story is not a clear strengthening play either. Economists can always point at the deficits in the US economy that require vast amounts of foreign money to fund. This is more of a long-term story though, with the near-term focus usually placed on rate differentials and sentiment. These seem to be a race of which central bank will start to raise rates first, which may be a ‘dead heat’. Chart levels to watch for are the $1.4240/1.4380 resistance area ahead of $1.50, with chart support at $1.3660/1.3500 and then $1.3130/1.3000 ahead of the $1.2660 area. GBP based investors need to be wary of USD exposure if $1.50 gives way though as currencies can overshoot, and the next big chart levels are at $1.70 to $1.80 9emphasis added)”.

Last but by no means least the value hawks at GMO have just released their latest (gloomy) 7-Year Asset Class Forecasts through May 2021.

According to the firm’s Peter Chiappinelli, “it gives us no pleasure to remind clients that U.S. stocks’ valuations, by almost any measure we can come up with — backward or forward-looking —are at levels that concern us.”

• “Many have wondered aloud whether GMO is not giving enough credit to some of these high growth new-business-model “disruptors.”  First, we have all sorts of models that take current optimistic growth forecasts into account.  Many are deserving of their current high multiples — we absolutely concede that somewhere in the Global Growth basket sits “the next Amazon.”   Unfortunately, they’re ALL being priced that way, and that is a bridge too far. 
• We also remind ourselves that during the month of May, the S&P 500’s real earnings yield (the inverse of P/E minus inflation) dipped into negative territory, the lowest in 40 years.   Even at the height of tech bubble mania this scary event did not occur.    
• Combine that sober statistic with the negative real yields being offered by sovereign bonds, and you may come to see why we are loathe to recommend a traditional 60/40 mix.    There will come a day when global equities and government bonds are fairly valued and should deliver a “normal” real rate of return. Today, however, is not that day.   
• But May’s forecast is not all doom and gloom, in fact far from it.   Emerging Markets Value, which has rallied strongly in the past year, with the MSCI EM Value index up 49%, is still priced to deliver quite decent relative and absolute returns.   Japan small value stocks are also quite attractive.
• Further, the valuation spread between global Value and Growth remains at some of the widest levels we have seen in our working careers, and there are all sorts of interesting ways to exploit this dislocation. Importantly, valuation spreads across asset classes more broadly in rates and FX and commodities, represent huge opportunities in non-traditional long/short space. “

 So, what do the hawks at GMO think that investors should do? Exploit the bubble (via equity long/short), avoid the bubble (via alts), and concentrate assets where the bubble ain’t (EM Value, Japan small Value, Cyclicals, and Quality).  I must say I have great sympathy for these ideas and I’m long alternatives, EM, Japan small cap and cyclical equities myself.