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Jay Pelosky: U.S. Market Pullback is Healthy Correction

2020年10月30日 20:43 来源:证券市场红周刊 作者:Li Jian & Ge Lin

There are a few more days to go before the U.S. presidential election. Global stock markets have been swinging in the past two months trying hard to find directions. Among the bulls is Jay Pelosky, Co-Founder and Chief Investment Officer at TPW Investment Management. He expects a Democrat sweep to be in place in the United States, which would bring large fiscal stimulus to boost the market.

But on where to allocate investments, the former Morgan Stanley PM and strategist told Weekly on Stocks that he has shifted to an underweight of U.S. equity vs. the rest of the world, with a strong appetite for China.

Pelosky also says he has shifted the Tech-Value barbell to more Value and Cyclical sectors of the market. “We think we are in the early stages of a Rotation trade away from Growth to Value, away from Tech to Financials, Industrials, Materials etc.”

The following is a recap of Weekly on Stocks’ interview with Jay Pelosky, Co-Founder and Chief Investment Officer at TPW Investment Management.

Part One: “Early stages of a new bull market”

Q: The U.S. stock market has been swinging recently after a strong recovery from its March low. What are the reasons behind it?

A: The strong rebound in stocks off the March low reflects the very aggressive monetary and fiscal policy response in many key countries including the U.S., Europe, China, Japan and elsewhere. Importantly, because the economic sudden stop was caused by policy makers, everything was front loaded - meaning the worst of the recession happened immediately, and from that point forward economic data started to get better. Equity markets are forward looking, so it makes sense that equities have rallied, especially tech stocks that benefited from the work from home process.

The recent pullback in U.S. equities was a healthy correction after a very strong run off the March bottom. Seasonality played a part in the pullback as the September - October period is known to be a weak period for stock market returns. In addition, uncertainty regarding U.S. stimulus and the upcoming elections also led to some investors taking profits.

A healthy correction can lead to further upside once we gain clarity on the big 3 issues of: stimulus, elections and vaccines. I think we are at the early stages of a new bull market that could last several years.

Q: You just mentioned the three issues of fiscal stimulus, the U.S. elections and the introduction of vaccines. How do you think things will fare in the near future?

A: I expect clarity on all three in the coming weeks and months. For example we will soon know the results of the U.S. elections, which will tell us what type of stimulus we are likely to have.

1.A sweep by the Democrats of the Presidency, the Senate and the House will mean a large stimulus.

2.A Biden win with a Republican Senate will mean much less stimulus as Republicans will obstruct spending by a Biden administration.

3.A Trump win with a Democratic House will likely bring medium amounts of stimulus.

We are expecting a Blue Wave/Democrat sweep. We also expect vaccines imminently with several Phase 3 trial results likely in the next 3-6 weeks. The combination of a synchronized global economic recovery coupled with record setting liquidity, the removal of U.S. electoral uncertainty and the arrival of vaccines suggest that we are setting up for a global economic boom in 2021 and beyond with low interest rates supporting risk assets.

Part Two: “Globalization is dead”

Q: On the macro front, protectionism is disrupting global investment and supply chains. How do you find the course in such a global environment?

A: Our research framework starts with the Tri Polar World (TPW) thesis, which argues that globalization is dead and is being replaced by regional integration in each of the three main regions: Asia, led by China, Europe and the Americas.

There are 5 main drivers to this process: each region's growing ability to self-finance, self-produce, self-consume, self-innovate (tech) and self-sustain (climate).

Underneath the TPW lies our Global Risk Nexus (GRN) system, also our original work, which analyzes economics, politics, policy and markets in each of the three regions plus globally.

Q: You said that globalization is over, and how will it affect your emerging market strategy if what you said is true?

I am not sure that Emerging Markets will be the best place for the next several years. EM broadly is at risk of losing its place as the offshore production center for the developed economies given my TPW view that each region will have its own ability to self-produce. But I do think China and Asia broadly has good upside in the years to come as it integrates more closely, a process already underway in terms of how venture capital is moving throughout the region.

I favor more the non-U.S. Developed Markets like Europe and Japan. Both of these are cyclical equity markets and should do well in a global economic recovery that I expect. They are also very under-owned as the U.S. has been the best market since the bottom of the Great Financial Crisis in 2009.

Q: So what’s your exposure to each of the regional markets?

We are global, multi asset investors and use ETFs to express our investment outlook. We currently favor Cyclical, Value and Small Caps in the U.S., non-U.S. Developed Markets like Europe and Japan, East Asia and China within EM.

We have also shifted to an underweight of U.S. equity vs. the rest of the world. In MSCI All Country World Index, the U.S. represents roughly 56% of the index; our weighting is well below that. We have an overweight position in Europe, Japan, China and South Korea. We prefer to have our tech exposure outside the U.S. for the most part as well as in the semiconductor segment of tech.

Fixed Income is tricky given how low rates are globally. We like Emerging Markets’ dollar debt, U.S. High Yield and are starting to look at Real Estate.

Part Three: “China’s high yields attract foreign capital”

Q: As the U.S. pushes for “U.S.-China Decoupling”, China counters with a “Double Development Dynamic” or “Dual Circulation” that attaches more importance to domestic demand. How successful do you expect China’s new strategy to be?

A: Our Tri Polar World thesis has long suggested that China would focus more internally and within Asia to benefit from its position within the world's fastest growing region. Under President Trump, U.S. policy has been to push China to move even faster towards self-reliance, which we think makes a lot of sense.

As the world economy shifts to more of a regional focus, China's capacity to develop its own tech stack together with its own internal demand drivers will determine its success. We call the tech split between the U.S. and China “Splinternet”; we see it continuing and expect Europe to become the Tech regulator between the U.S. and China.

Q: Would you expect more international capital to flow into China?

A: China now has its 10-year interest rates well above that of the U.S. and Europe – rates that are attracting foreign capital, which supports the Yuan and helps to drive China's Double Development Dynamic.

Around the globe, there is over $30T in negative real yielding Sovereign Debt, so the Search for Yield will remain a big part of the investment landscape. We expect rates to stay low for several years as both the U.S. Fed and the European Central Bank has suggested and so where there is yield there will be investor interest.

Q: What are your suggestions on the further opening-up of China’s capital market?

A: I think the opening of China's capital market is very positive for China and the rest of the world. China was first in and first out of Covid-19 and has clearly overcome the disease to reopen its economy fully. Opening its capital market will reduce China’s dependency on the USD and boost demand through a stronger foreign exchange rate.

Opening-up will also help professionalize China’s capital markets, reduce the boom-bust cycle, support China's need for foreign exchange as the current account surplus disappears, and help further integrate Asia more broadly.

Part Four: “Away from Growth to Value”

Q: Sector-wise, what stocks are you betting on?

A: We have shifted our Tech - Value barbell to more Value and Cyclical sectors of the market. While Growth/Tech has widely outperformed Value/Cyclical, we think we are in the early stages of a Rotation trade away from Growth to Value, away from Tech to Financials, Industrials, Materials, etc.

Tech has benefited immensely from the Work from Home focus as well as the collapse in interest rates, which has led to Tech's cash flows being valued much more highly. I expect both of these drivers to reverse in coming months as the economy recovers, vaccines are implemented, work from home recedes and rates rise. Rising rates/vaccines are "kryptonite" for tech stocks, while being very bullish for financials that are the main sector in most Value ETFs for example.

Q: There’s one similarity between the Chinese and the U.S. stock markets over the past years, that is, growth stocks’ valuation kept rising, while that of value stocks remained relatively low. Do you think there is a “growth” bubble?

A: Value stocks tend to do well when there is a general upswing of growth. One of the surprises of the past few months is that Value sectors did not do as well as history would suggest. For example, a rise in PMIs usually triggers an up move in value, but it didn’t happen in the past months.

I believe this is because interest rates have not really risen at the long end in the U.S. and Europe, muffling the signal for value in general and financials in particular. However, I believe we are right on the cusp of this move with long dated U.S. Treasuries threatening to break below support while U.S. financials are breaking above long term resistance. Fiscal stimulus and vaccines are likely to lead to a bear market in U.S. Treasuries. In markets like these, understanding and incorporating technical analysis makes good sense.

Q: So you believe that valuation is still the foundation of investment decisions.

A: I believe Value investing remains a valid concept and expect it to have its day in the sun in the not too distant future.

Q: Last, would you share with us some thoughts on life, health and family?

A: I am a big believer in work-life balance if one wants to have a long and successful career investing. It is not an easy business to succeed in, as one is competing against very smart people from around the world who are putting their own or others' capital at risk. In order to run a marathon at a sprinter’s pace, one needs to be in good physical and mental shape. I have a morning stretching and meditation process that I have been doing daily for over 20 years; I exercise regularly and spend time with my family including my two teenage sons.

Q: Before you go, please leave some suggestions for our audience, mostly Chinese investors.

A: I would encourage Chinese investors to learn about ETFs which I think are great ways to express asset allocation ideas. Single stock investing is very risky if one is not focused on the screen during trading hours. With ETFs one may not capture the huge upside of a fast moving stock, but nor will one suffer the great losses of a rapidly falling stock.

I also encourage Chinese investors to start to learn about markets outside of China, maybe first in Asia and then the U.S. and Europe. As China opens its capital markets, I expect the ability of Chinese investors to invest abroad will also increase. This is something that is happening in many Emerging Markets around the world, and is a very exciting development; one I am happy to observe as I started my investing career looking at emerging markets in Asia and Latin America.


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