Jan 14, 2020

Axios Markets

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🎙 "Don't call it a comeback. I've been here for years." - See who said it and why it matters at the bottom.

1 big thing: Investors jump on the EM bandwagon
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Reproduced from TCW Group; Chart: Axios Visuals

A growing chorus of U.S.-based fund managers is betting that emerging market stocks and bonds are poised to outperform U.S. assets this year.

  • The momentum for EM has grown so strong that it has become almost a consensus trade, with investors even urging clients to buy EM junk bonds.

What's happening: Following 2019's blowout returns for U.S. stocks and strong performance for high yield, government and even municipal bonds, investors expect U.S. assets to fall to earth in 2020 and are positioning in EM.

  • Companies located in emerging markets sold a record $118 billion of high-yield dollar bonds last year, doubling the pace from five years before, according to Dealogic, and are expected to see even more allocation in 2020.
  • In November, Henry Schwartz, founder of data provider Trade Alert, wrote in a note that investors had gone on a "spending spree" buying call options of the ETF that tracks EM equities.

What they're saying: "Emerging markets present top 2020 opportunities," UBS Global Wealth Management's CIO Mark Haefele wrote in a recent note to clients.

  • "Emerging market debt surfaced as our top choice," JPMorgan Asset Management CIO Bob Michele wrote in a late December note.
  • "The emerging markets will be the big winner of 2020," Jim Paulsen, chief investment strategist at The Leuthold Group, told CNBC.
  • “Don't stop believin' in Emerging Markets," analysts from Wasatch Global Investors titled a recent note to clients.

Further, top analysts at Deutsche Bank and Schroders have said they expect EM currencies to outperform in 2020, and Morgan Stanley and Citigroup are betting on emerging fixed-income assets.

Why it matters: Bullish fund managers are putting their money where their mouths are, laying down bets that EM equities, debt and currencies are primed to deliver solid returns for their clients, which include pension funds, retirement accounts and endowments, among others.

Yes, but: While emerging nations like India, South Africa, Brazil and Mexico have typically had stronger economic growth than developed countries like the U.S., Japan and Germany, that may not be the case in 2020.

  • If growth doesn't deliver, asset prices are unlikely to see significant gains, derailing the popular theme.

Threat level: Major asset managers largely ignored EM for years and they now may be facing “secular stagnation,” and a breakdown of growth, Robin Brooks, managing director and chief economist at the Institute of International Finance, warns.

  • Emerging countries also are facing challenges like "increased automation, climate change and de-globalization," which are "possible threats to potential growth in the decades to come."
2. Catch up quick

BlackRock will begin to pull out of some investments that “present a high sustainability-related risk,” but not all fossil fuel companies. (NY Times)

China’s exports rose in December for the first time in five months and by more than expected, despite a decline in shipments to the U.S., signaling a modest recovery in demand. (Reuters)

Visa said it would buy Plaid, a fintech startup that gives apps like Paypal's Venmo access to bank accounts, for $5.3 billion. (WSJ)

Gertjan Vlieghe became the third member of the Bank of England's policy-setting committee to suggest he'd be willing to cut rates at this month's policy meeting, following similar comments from governor Mark Carney. (BBC)

Britain's economy shrank by 0.3% in November and manufacturing output fell by 1.7%. (Guardian)

3. Why China is no longer a currency manipulator
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Data: Investing.com; Chart: Danielle Alberti/Axios

China will no longer be labeled a currency manipulator, the Treasury Department announced, just two days before President Trump and Vice Premier Liu He are set to sign "phase one" of a long-awaited trade deal.

What happened: China was added to the list just five months ago after its government allowed the yuan to slip below a 7-to-1 dollar ratio for the first time in more than a decade.

Between the lines: The yuan lost value largely because of the Trump administration's trade war and threats of further escalation as China abandoned its efforts to hold that level.

  • It had been working to strengthen, rather than weaken, its currency in recent years.

Reality check: The change in designation also makes little sense given where China's yuan was trading before the label was applied and when it was removed.

  • The currency opened at 6.895 yuan per dollar on Aug. 2, the last trading day before the "currency manipulator" designation was made on Aug. 5.
  • It closed at 6.893 yuan per dollar on Monday when the label was removed.
4. Fallout from Boeing's 737 MAX begins

After it laid off 2,800 employees last week, citing “ongoing uncertainty” related to Boeing’s 737 Max jet, Moody's downgraded the secured debt of airplane parts supplier Spirit AeroSystems and handed it a Ba2-PD Probability of Default rating.

What it means: Wichita, Kansas-based Spirit gets about half of its annual revenue from supplying parts for the Max, which has been grounded for months following two fatal crashes and remains in a production halt indefinitely.

  • Eoin Roche, Moody's lead analyst for Spirit, said he expects "Spirit's liquidity profile will quickly and materially erode" unless something drastic changes, and any developments that could help salvage it "remain largely out of the company's control."
  • Spirit's stock fell nearly 3% on Monday and has dropped almost 25% in the past two months.

Why it matters: This is the latest piece of fallout from Boeing's two crashes, showing how the production freeze could have ramifications throughout the manufacturing industry and the U.S. economy.

The big picture: Boeing's decision to suspend 737 MAX production could hit dozens of companies, Moody's warned in a separate note on Friday, identifying 24 firms with exposure to Boeing and its supply chain and placing four on review for downgrades.

  • "Several companies face potentially significant earnings and cash flow pressures that could erode their liquidity in relatively short order."
  • The decision to suspend production indefinitely means Boeing will share the financial burden of the crashes with its suppliers "on a fairly immediate basis, heightening operational disruption and financial risk for all."

Don't forget: Indonesia’s Lion Air considered putting its pilots through simulator training in 2017 before flying the 737 Max but abandoned the idea after Boeing convinced them it was unnecessary, Bloomberg reported Monday.

5. Tesla short sellers wish Elon Musk had funding secured at $420
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Data: Money.net; Chart: Axios Visuals

Tesla has been among the most derided companies in the world, but CEO Elon Musk has been getting revenge against hated short sellers since the electric car company's June swoon.

  • Many probably wish Musk had taken the company private at $420 a share, as he said he would in an August 2018 tweet in which he claimed to have "funding secured" for the move.

By the numbers: Short sellers who have bet against Tesla's stock price surrendered a total of $2.89 billion in net-of-financing mark-to-market losses in 2019, and have almost matched that total in less than two weeks of trading in 2020, according to data from S3 Partners.

  • Short sellers are down $2.80 billion in mark-to-market losses, including $1.25 billion in losses on Monday’s 9.77% price move.

Where it stands: Short sellers have largely tapped out as the company's stock has rocketed higher, but some are holding tight.

  • Tesla short interest is $12.79 billion with 26.74 million shares shorted, totaling 20% of its float. It remains the second-largest short in the domestic market behind Apple, S3 said.

What happened: Wall Street has gotten very bullish on Tesla in recent months, pushing the stock's price from $400 to over $500 in less than a month and valuing the company at close to $95 billion.

Between the lines: Musk has 1 billion reasons to keep his foot on the gas pedal.

  • He is now within striking distance of the performance-based stock grants he negotiated in his 2018 compensation package that would award him 1% of the company's stock if it reaches a $100 billion valuation, paying him $1 billion.

His mama said knock you out! The legendary James Todd Smith, who created the moniker Ladies Love Cool James (shortened to LL Cool J), was born on Jan. 14, 1968.

  • Authorities should be on the lookout for a tall, light-skinned brother with dimples today.