The canary in the coalmine again?
The 2nd quarter US earnings season has produced a 24.6% increase in quarterly earnings, with 79% of companies reporting positive surprises (91% of companies reported, source Factset). This is close to the strongest result since the Global Financial Crisis, only tempered by a more modest revenue increase of 10%. We suspect the difference comes from earnings repatriation following the Trump administration’s tax amnesty. As a result, US valuations are looking less stretched: the forward PE on the S&P is 16.6x, still well ahead of the long-term average but broadly in line with the more recent past.
The bulls see this as evidence that equity markets can cope with recent rate rises, signs of distress in the Emerging Markets, and the opening shots in what looks more and more like a trade war. At Linchpin we beg to differ. The liquidity data at the end of July, as provided by our friends at CrossBorder, continues to be at its lowest level since 2007 or 1989, both of which presaged major downturns. The only major central banks continuing to expand their balance sheets are China, India and the UK, and each of these has their own peculiar problems.
The problems – admittedly neither unexpected nor surprising – rearing their heads in Emerging Markets also cause us concern, as they so often turn out to be the ‘canary in the coalmine’. We see some parallels between the current Turkish situation and Thailand in 1997 in that both followed a major US monetary tightening. Turkey has exacerbated the situation by printing money to solve its liquidity shortage. The situation may not be contagious for Emerging Markets, as it was in 1997, but for the time being and despite the US earnings numbers we remain very firmly risk-off on all risk assets.
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