View: Despite widespread optimism in late 2011 that the US economy was on course for a renewed surge in activity, we held to our view that the recovery would continue to be weak and erratic for several quarters yet with quarterly annualised real GDP growth of between 1.0%-3.0%. However, we also believed that a double-dip recession would be avoided, in part because of a renaissance in the housing market, and because the Federal Reserve would enact a third round of quantitative easing by the end of the year.
Result: After a 4.1% q-o-q real GDP growth reading in Q411, growth averaged 1.1% in the subsequent three quarters – with erratic growth exhibited by figures of 2.0%, 1.3%, and 3.1%. The Fed enacted QE3 in September. Meanwhile, our out-of-consensus positive view on the recovery of the housing market proved accurate.
Quote: “In general, though, the US economic outlook remains as it has for most of the recovery which began in Q309. Namely, real growth is likely to fluctuate between 1.0%-3.0% q-o-q annualised for several quarters yet, as the hangover from the credit binge of the previous decade works itself out... in 2012 we see residential investment making a modest positive contribution to headline growth.” (11 January 2012)
View: In 2010, we believed that the outperformance of emerging economies’ equity markets over their developed world counterparts was at an end, and that developed states equities – led by the US – would begin to charge ahead.
Result: The ratio of the MSCI World equity index (consisting of developed world markets) to the MSCI Emerging Market equity index rose by more than 20% from the time we initiated the view in Q410 until we went neutral in Q412.
Quote: "EM equities promised much going into 2010, and for the most part, they delivered, with stellar returns amplified in many cases by local currency appreciation. They can go higher, but one view taking shape is that developed state equity markets will outperform their emerging market counterparts in 2011. Though we continue to see gains for many emerging market bourses over the course of the year, the upside in developed markets could be greater on both a technical and a fundamental basis." (21 December 2010)
View: On 29 February 2012, we initiated a bullish view on US homebuilders, in light of improving US economic conditions, our Infrastructure team’s belief that investment in residential construction had bottomed out and encouraging building permits and housing start data in spite of the fact that sales data remained weak. We chose Lennar Corp as our preferred way to gain exposure to this view.
Result: Despite mixed data releases throughout the year, leading indicators continued to improve and by the second half consensus had swung towards our view that a US housing market recovery was underway. We closed out of our bullish view on Lennar Corp on 15 November 2012 as the technical picture began to look overextended with a gain of 59.9%.
Quote: “Lennar Corp, our top pick for gaining exposure to the bullish US Homebuilders story, has shrugged off slightly mixed US housing market data over the last few days. US housing starts data came in strongly, albeit a little below expectations, while US building permits data for August dipped slightly. Our focus on forward-looking indicators such as the latter, has helped us to realise tremendous gains on this view, having gone bullish homebuilders while the rest of the market was still sceptical of calling a bottom in US housing” (20 September 2012)
View: In June 2012 the market bottomed-out at US$90/bbl for Brent. At the time we decreased our 2012 average Brent and WTI forecasts to US$110/bbl and US$95/bbl respectively, from the previous US$115/bbl for Brent and US$100/bbl for WTI. This was a modest decrease compared to the scale of the sell-off in the markets, but it was based on our expectation that the second half of the year would see a recovery in prices, that would sustain the average for the year around those levels. On the supply side we identified a cut to Saudi oil production in the second half that would support price recovery while we did not price in an escalation in the Iranian saga. On the demand side, we forecasted stable demand as we did not price-in a deterioration of the crisis in the Eurozone.
Result: Brent closed the year at an average of US$112/bbl and WTI at US$93.3/bbl. The recovery in prices over Q3 2012 took place as expected, before settling into a sideways, stable trade for the rest of the year. Saudi Arabia began cutting output in November 2012, while the risk premium on the price stemming from fears about Iran moderated.
Quote: “Brent has fallen 27% since its March 2012 high of US$126.22 per barrel (bbl) in a dramatic shift that has left oil bears sitting pretty. The rout has been driven by a deteriorating eurozone debt crisis, alongside signs of a Chinese slowdown. Moreover, a market which just months ago looked dangerously tight now seems to be fairly well supplied as Saudi output continues to run close to 10mn barrels a day (b/d) and US crude production hits a 14-year high. We expect demand fears are slightly overdone and that Saudi Arabia will move to cut production in Q3-Q412. As a result, we have cut our 2012 production forecasts for Brent and WTI by just US$5/bbl to US$110/bbl and US$95/bbl, respectively”. (Monetary Stimulus And Production Cuts To Boost Oil Prices In H212, 28 June 2012)
View: Anticipation of weaker economic growth, the ongoing global hunt for yield and political stability prompted us to turn bullish towards several Emerging Europe local government debt markets in mid-2012. We placed bullish Poland’s PLN 5.75% 2011 bond in our asset class strategy table on July 11, 2012, followed by a bullish view towards Turkey’s TRY 9.50% 2022 bond on September 21, 2012.
Result: On January 10, 2013 we removed our bullish Polish debt view from our asset class strategy, with total returns (on a US$ basis) of 22.3%. At the time of writing we remain bullish towards Turkish local debt, and our view is currently up 158 basis points in our asset class strategy table.
Quote: ‘Although yields on two-year government paper have already fallen 50 basis points (bps) since the beginning of the year, we expect further compression in 2012. We expect the National Bank of Poland to cut rate by 50bps to 4.00% by the end of 2012 as inflation falls and economic growth slows in H212. Given that we expect looser Polish monetary policy and slightly weaker growth than consensus, we anticipate somewhat lower yields across the yield curve. In addition, fiscal consolidation (supported by resilient domestic economic demand), will improve Poland's sovereign risk profile.’ (March 6, Asset Class Strategy: Favouring Fixed Income)
‘[Turkish] 10-year government bond yields are currently trading around 8.3%. While fixed income has had an impressive rally since the start of the year, we still believe yields can head lower over the medium term. We expect consumer price inflation to continue to slow over the next few quarters, albeit gradually, and this will help the central bank to maintain its current monetary easing bias (the interest rate corridor was narrowed on September 18 with the overnight lending rate dropping from 11.5% to 10.0%). Moreover we expect portfolio flows into Turkey to pick up more strongly next year after Turkey gains investment grade status from the major credit rating agencies.’ (September 20, ‘Asset Class Strategy: Fixed Income Still Safest Play’)
View: On December 14 2011 we placed a bullish view on Russian discount retailer Magnit in our Macro-Industry Equity investment table, at a price of RUB2,660 per share.
Result: Magnit’s share price rallied from RUB2,660 to RUB4,301, representing nominal gains of 61.7%.
Quote: “Our medium-term confidence in Russian consumer plays remains intact. Discount retailer Magnit, whose low-price model has captured the interest of consumers trading up to organised retail and which is better-positioned to weather a slowdown in discretionary spending, is one such example.”
View: In early 2012 we argued that Polish growth would decelerate sharply from 2011 levels, following the drop in infrastructure investment following Poland’s hosting of 2012 Euro FIFA championship, and our expectations of a slowdown in regional growth in H212. We forecasted real GDP growth of 2.5%, against consensus of 3.1% back in April 2012.
Result: Polish real GDP growth slowed from 3.6% y-o-y in Q1 to 1.4% in Q312 as investment spending collapsed, in line with our below-consensus view.
Quote: ‘We forecast Polish GDP growth to slow from 4.3% in 2011 to 2.5% this year, substantially below consensus expectations.’ (May 2, Investment Slowdown To Drag On Growth’)
View: At a time of high political uncertainty and large sell-off in the Serbian dinar and fixed income, we argued that Serbia assets would stabilise in the H212 because the next government would be forced into fiscal consolidation and a gradual rapprochement with the IMF and the EU after the May general election. Consensus at the time implied that the dinar would continue its multi-year depreciation trend because of external imbalances and that a nationalist government would throw Serbia off the path of EU integration.
Result: Since August, the dinar has appreciated by 5.9%, while Serbian government 2021 eurobond and local currency bond yields have compressed by 240bps and 189bps respectively.
Quote: ‘We expect the next government to resume the IMF programme and adopt the resulting fiscal retrenchment in H212. These developments should help stabilise investor sentiment. Against this backdrop of fiscal consolidation, we expect external debt to outperform in 2012’. (May 5, Asset Class Strategy: Still Grim But Stabilisation In H212).
‘The dinar is at historic lows, trading at RSD111.46/EUR at the time of writing...However, we expect the unit to strengthen slightly in Q412, ending the year at RSD108.30/EUR, as Serbia returns to the IMF and reduces the budget deficit’ (April 17, ‘Asset Class Strategy: Grim Across The Board’).
‘We maintain the view that the dinar is vulnerable to further short-term sell-offs despite currently trading at historic lows of RSD117.90/EUR, but expect it to strengthen towards the end of the year as government austerity measures boost confidence and reduce imports. The new FIAT plant, which opened in June, will also reduce the pressure on the balance of payments as production increases from 50 to 550 units a day by early November. The central bank also has the capacity to continue intervening to support the currency in the short-term, with net reserves of EUR5.5bn, larger than the IMF's recommended size.’ (July 24 Asset Class Strategy: Continue To Expect Late 2012 Stabilisation)
View: At the start of 2012 we called for a sharp downturn in China, forecasting 7.4% growth versus consensus expectation of 8.5%. We also called for a prolonged contraction in the manufacturing sector and a contraction in nominal imports.
Result: Real GDP growth in China slowed to 7.4% year-on-year (y-o-y) in Q312 and is likely to have come in at 7.7% on a full-year basis. to levels not seen since early 2009. The manufacturing sector was in contraction for most of the year according to the purchasing manufacturers indices (PMI) and imports posted a contraction in Q312.
Quote: China's economic growth story has rapidly turned from one underpinned by productivity gains to one engineered by inflationary monetary and fiscal policies, and the quality of growth has suffered considerably as a result. Several years of poor capital allocation will have to be unwound eventually, leading to much slower headline expansion, and with the global economy stuttering in H211, we caution that 2012 could yet be the year of the Chinese 'hard landing'. Could 2012 Be The Year Of The Chinese Hard Landing? September 14, 2011
View: We turned bullish towards Japanese equities in November 2012. With, valuations very attractive, and cash flows booming, we believe the Topix represented an attractive dividend story. With regards to the technical picture, we noted that the market’s bubble gains have finally been erased and long-term technical support has held firm.
Result: Since then, the Japanese equity market has continued to rally, clearly outperforming both global and regional indices. Indeed, the country’s benchmark Nikkei and Topix indices are up almost 30% since we turned bullish. Even in the face of yen weakness, we note that both bourses are up by double-digits in US dollar terms.
Quote: ‘We are bullish Japanese equities on a relative basis...While the outlook for the Japanese economy is weak, and profit margins face a multitude of headwinds over the coming years, valuations finally look cheap enough to have priced this in, and the potential for cash to be returned to shareholders could well be a bullish medium-term story.’ Bullish Yen, Overweight Equities, Bearish Bonds. November 5, 2012
View: Sri Lanka is in the latter throes of an emerging market boom-bust credit cycle, with real GDP growth set to miss consensus expectations in the coming quarters. That said, much of the island’s macroeconomic imbalances have started to iron out, which should allow policymakers to ramp up easing before long. These dynamics favoured an outright bullish stance towards Sri Lankan local debt in late 2012.
Result: Our bullish view on 2-year Sri Lankan local debt has continued to play out well. The yield on 2-year paper stood at 10.99% as of January 7 – representing a 166 basis point (bps) move in our favour since October 25. A key catalyst of the recent collapse in yields was the Central Bank of Sri Lanka’s surprise policy rate cut in December.
Quote: ‘These dynamics favour an outright (and un-hedged) bullish stance towards Sri Lankan local debt. A stable currency, falling inflation, and the likelihood of monetary easing all bode well for the island’s local currency fixed income markets...Indeed, we are gunning for precipitous declines in two-year yields into single-digit territory...’ Attractive Entry Point For Local Debt. October 25, 2012
View: In early November we believed that market expectations for a payout of GDP warrants in Argentina in 2013 and 2014 were misplaced. A payout in 2013 would require 3.03% real GDP growth, which at the time matched consensus expectations of 3.25% growth. We, however, believed that consensus expectations would gradually converge with our forecast for just 0.9% real GDP growth in 2013, leading to a sharp sell-off in the GDP-linked warrant.
Result: Despite initial moves against us, the accumulation of negative economic data saw consensus expectations adjust lower, sending the price of the GDP-linked instrument fall by 43.9% in our favour by December 12 2012, just over a month after our initial call.
Quote: “We believe Argentine economic growth will prove insufficient to trigger payment on GDP-linked warrants in 2012 and 2013. As such, we believe that warrant prices will stay weak for the foreseeable future, despite the potential for temporary rallies, especially as the market moves toward our currently below-consensus view for 2013 growth.” (‘GDP Warrants To Slide As Markets Price In Slower Growth’, November 9 2012).
View: Back in September 2012, we highlighted that supply-driven inflation in Mexico has likely peaked that month and would begin to converge with our 3.8% average annual inflation forecast. This would see the central bank hold its policy rate at 4.50%, in contrast to growing expectations for a prospective rate hike by year-end.
Result: Headline inflation in Mexico began to cool from September onwards, with the full-year average consumer price inflation rate ending the year just below our forecast, at 3.6%. In line with our expectations, the central bank has kept rates on hold at 4.50%.
Quote: “In the first half of September, Mexico's bi-weekly consumer price inflation came in at 0.25% month-on-month (m-o-m) while core inflation was 0.12% m-o-m. While above the prior month's readings of 0.24% m-o-m and 0.05% m-o-m respectively, both headline and core inflation were comfortably below Bloomberg survey. We believe these readings are in line with our forecast that supply-side price pressures will peak this month before easing through the end of the year, and supports our view that the central bank will hold the policy rate at 4.50% through end-2012.” (Data Release – ‘Inflation To Peak In September’, September 25 2012).
View: Since 2011 we suggested that President Hugo Chávez’s ruling party would retain power in Venezuela after the October 2012 election. In September, we acknowledged that despite the odds for an opposition victory having increased somewhat, with a growing number of calls in the research community for an opposition victory, a win for Chávez always remained our core scenario.
Result: On October 7 2012, Hugo Chávez was re-elected as Venezuela’s president with 54% of the vote, compared with 45% for the opposition candidate Henrique Capriles Radonski.
Quote: “While the likelihood of a victory by opposition candidate Henrique Capriles Radonski in Venezuela's October presidential election has increased in recent months, we still believe President Hugo Chávez is the most likely winner.” (‘Election Outcome Will Not Fix Economic Imbalances’, September 11 2012).
View: In our Q412 Sovereign Risk Ratings update, we highlighted Tunisia as a likely candidate to see its long-term foreign currency credit rating downgraded before the end of the year. From our standpoint, the country’s economic outlook was significantly weaker, and its political transition considerably more volatile, than many of the official ratings agencies were forecasting.
Result: On December 12 Fitch Ratings cut Tunisia’s long-term foreign currency rating to ‘BB+’ from ‘BBB-‘, stating “the country's economic and political transition is proving longer and more difficult than anticipated and downside risks around the process have therefore increased”.
Quote: As we have mentioned on previous occasions, we believe our proprietary ratings can help assess future moves by the official 'Big 3' sovereign credit ratings agencies. In particular, we highlight Morocco and Tunisia as the most likely candidates that could be downgraded over the coming months, which would push their credit ratings into non-investment grade, or 'junk' territory.
View: Since the onset of Egypt’s 2011 political revolution, we had been arguing that a devaluation for the Egyptian pound was on the cards. Rapid capital outflows and a burgeoning current account deficit meant that the country was experiencing a classic balance of payments crisis. We believed the central bank’s efforts at defending the currency would be in vain, and that only by allowing the currency to depreciate against the dollar would a degree of competitiveness be restored.
Result: In late December 2012, the central bank announced that FX reserves were at a critical level, before subsequently introducing a new exchange rate regime. As of early January, the currency had hit an all-time low near EGP6.5626/US$.
Quote: We hold to our long-held view that the Egyptian pound will be devalued at some point in 2012. Although determining the precise timing of such a move is inherently difficult, the majority of macroeconomic and financial market indicators are pointing to a marked weakening in the currency over the coming months.
View: Following Libya’s civil war, we highlighted our view that a sharp curtailment in oil production and stalled infrastructure projects would see a massive contraction in real GDP growth in 2011. Despite data limitations, our forecasting methodology – which combines macro level data with micro indicators from our Oil and Gas and Infrastructure Research teams – proved extremely valuable. We estimated that real GDP contracted 61.7% in 2011.
Result: In October 2012, Libya’s central bank released data showing that North African economy contracted 61.2% in 2011.
Quote: Libya's robust macroeconomic recovery is expected to continue apace through the latter stages of 2012, with a faster-than-expected resumption of oil production supporting a V-shaped recovery in the oil economy. Household and government spending should also rebound over the coming months, primarily given the pent-up demand as a result of the collapse in consumption patterns witnessed in 2011. We forecast real GDP growth of 86.4% in 2012, following upon an estimated contraction of 61.7% in 2011.
View: In April 2012 we turned outright bullish on Kenyan equities, predicting that stocks would rally given the cheap valuations, promising long-term macroeconomic fundamentals and falling local debt yields.
Result: The Nairobi Stock Exchange-20 equity index rose by over 16% between April and December 2012.
Quote: “Cheap valuations, a positive long-term macroeconomic picture and the fact that government debt yields are on the decline all bode well for gains in the equity market.” (‘Turning Bullish Kenyan Stocks’, April 20 2012)
View: In December 2011 we warned that the South African economy would likely suffer a slowdown in 2012 due to global headwinds and potentially high investor risk aversion. Moreover, our forecast for real GDP growth (2.7%) was significantly below Bloomberg consensus (3.4%).
Result: Growth was sluggish throughout 2012 and Bloomberg consensus moved successively lower throughout the year. Severe industrial unrest in the mining sector in the second half of the year meant that even our bearish forecast proved too optimistic.
Quote: “Given the poor outlook for growth in the US and eurozone, as well as the potential for a hard landing in China, South Africa is likely to suffer from the weak global growth environment and potentially high investor risk aversion… our 2.7% projection is below Bloomberg consensus (3.4%).” (‘Growth Slowdown On The Cards’, December 9 2011)
View: In March 2012 we initiated a bullish view on Nigerian equities, highlighting bank stocks as particularly promising given various structural reforms, improving investor sentiment and attractive valuations.
Result: Nigerian bank stocks rallied by over 53% between March and December 2012, as measured by BMI’s customised Nigerian banking index which is composed of 14 key banks and bank holding companies.
Quote: “The banking sector, which comprises a large portion of the overall (equity) index, is expected to perform well in 2012, as questions about the sector's viability have been largely resolved. Looking ahead, investors will likely be substantially more confident about the sector's future”. (‘Equities Heading Higher Over The Long Term’, March 20 2012)
View: In July 2012 we predicted that the Kenyan economy would rebound in the second half of the year thanks to lower inflation and interest rates, which would boost consumption and investment.
Result: Real GDP growth picked up, rising to 4.6% year-on-year in Q312, from 3.3% in Q212 and 3.4% in Q112.
Quote: “Macroeconomic conditions continue to improve and this should see economic activity picking up over the course of the year and into 2013… Central Bank of Kenya will begin to ease monetary policy in the second half of the year providing a boost to domestic firms and consumers.” (‘Growth: Long-Term Optimism Despite 2012 Downgrade’, July 3 2012)
View: On September 28 we turned bearish grains (S&P GS Grains Index), calling for a multi-month decline resulting from easing supply fears and unwinding of overly bullish speculative positioning.
Result: The S&P GS grains Index edged lower before weakening sharply in December. As of January 25, the index had declined by 10.6% since we initiated the view, which we retain as part of our commodity strategy.
Quote: “Grains prices have broken lower and we see this as the start of a multi-month decline, as the global supply picture will continue to improve. This is in line with our long-held view that the Q312 spike in prices was temporary" (See: 'Grains Reversal Playing Out', September28)
View: On August 28 we turned bullish Industrial Metals (S&P GS Industrial Metals Index), calling for a temporary rebound in H212. This ended the bearish view we initiated in March that had played out strongly.
Result: The S&P GS Industrial Metals Index rallied strongly from Sep-Dec and had gained 8.8% by the time we closed this view on December 14. In line with our view, the 2012 high for the index set in Q112 was not surpassed.
Quote: “We remain modestly bullish industrial metals on a three-month horizon, as prices have continued to stabilise. We expect additional monetary easing and economic stimulus measures in China to boost prices in the near term." (See: 'Monthly Metals Update', August 28)
View: On August 2 we turned bullish gold and silver, calling for an upward break from the respective trading ranges that had characterised the year-to-date.
Result: Both gold and silver broke higher in late-August, with gold racking up almost 12% gains by late-September. We managed to capture 8.0% of silver's rally in our key market views. As of January 15 2013, we retain this bullish gold view as part of our commodity strategy.
Quote: “We remain bullish gold and silver, particularly on a 3-6 month horizon. We expect prices for both to break higher out of the contracting ranges they have been respecting in the year-to-date. Key to this view is our expectation for further loosening of global monetary policy in H212." (See: 'Gold & Silver Setting Up For A Rally', August 02)
View: Despite mounting fears in the summer of 2011 that the US would enter into a double-dip recession, we held to our view that the economy would manage to continue growing on the back of strong business investment and a slow but steady recovery in household consumption.
Result: This view played out well, with recession clearly avoided and economic growth in the second half of 2011 coming in above expectations, rising to 2.4% from 0.9% in H111. Business investment and household consumption led the way. And data since the beginning of 2012 indicates that growth has proven to be ‘erratic and weak’ as we had expected. A slowdown in growth in the first quarter of the year has been followed by weak economic data in April and May, confounding consensus expectations for strong growth.
Quote: “Following disappointing economic data in the first half of 2011, we expect a modest acceleration of growth in the second half of the year. But we reiterate our core view that the recovery is set to be erratic and weak on the whole, as households continue to deleverage.” (July 2011)
View: Despite its apparent reticence in deploying monetary stimulus to shore up the banking sector and fragile recovery, we highlighted back in March 2012 how the European Central Bank had in fact become larger than the US Federal Reserve and the Bank of England relative to the economy. Moreover, we warned that given the anemic pace of economic reform and breakdown in political unity, the central bank would be forced to intervene further in order to stabilise the currency union. As such, we expect the ECB to continue to expand relative to the economy, with severe implications for financial stability, inflation and economic reform in the future.
Result: While the ECB’s balance sheet has only crept slightly higher in the past three months, it is clear that the central bank is on the cusp of having to deliver further monetary stimulus given that the eurozone is sliding into recession and both Spain and Italy are at increased risk of losing market access.
Quote: “Continued policy inertia is forcing the European Central Bank (ECB) to take a more active role in managing the eurozone sovereign debt crisis. Although the ECB is a key component in any credible and lasting resolution, the central bank can at best only buy time for policymakers to tackle serious economic reform. We warn that continued deferment of economic restructuring would not only raise the costs of cleaning up the eurozone crisis, but could also see the ECB come to dominate the markets for sovereign debt and bank funding.”
View: In February 2012 we argued that the Turkish central bank’s decision to begin loosening monetary policy would prove premature owing to heightened financial stresses and significant inflationary pressures.
Result: After beginning to cut banks overall funding costs in February, the central bank was forced to reverse course in March, raising the overnight rate from 7.0% to above 10.0% where it has been maintained since.
Quote: “The central bank has been extending funds to banks at the lower end of its interest rate corridor since mid-January. Not only does this appear overly hasty given that consumer price inflation continues to head higher{...} but it also raises the likelihood of major capital outflows should investor sentiment take a turn for the worse. Given the strong potential for further economic and political shocks emanating from the eurozone in the foreseeable future, this would force the Turkish central bank to once again reverse course and tighten monetary policy to stem capital outflows.” (Monetary Loosening To Prove Premature’, February 13, 2012)
View: Back in late March we added a bullish Hungarian government debt view to our regional asset class strategy given our expectations for a new IMF/EU deal to be secured. The high yield on offer, the prospect for currency appreciation and the growing potential for rate cuts by the end of the year further bolstered our bullish view.
Result: By the beginning of May, Hungarian 10-year government bonds had returned 12.5% in adjusted-euro terms. We also targeted the 5-year credit default swap for a decisive move lower on the back of improved sovereign risk perceptions in late April, and in the end saw a move of 54bps in our favour.
Quote: “We still believe 10-year Hungarian debt provides attractive opportunities over a medium-term perspective, not only given the current yield of 8.7%, and the prospect of mild currency appreciation from current levels. Whilst timing is increasingly difficult to judge, we still believe that an IMF/EU deal is inevitable (most likely in Q212/Q312), and once in place will allow the central bank to begin cutting rates to help stimulate growth.” (Asset Class Strategy: Debt Attractive Despite Political Risks’, March 22)
View: In March we argued that Croatian local debt was well placed for a rally based upon an improving sovereign risk profile and a weak inflationary outlook.
Result: This view played out very well with the yield on the 2017 4.75% bond compressing by 98.38bps between March 13 and May 15 when we pulled back on the view.
Quote: “Despite the risk of a sovereign credit rating downgrade this year, we see value in Croatian government debt. We believe local debt is well placed given what we view as an improving credit profile, low debt-to-GDP, low inflation and a subdued growth outlook. Bonds will also benefit from Croatia's accession to the EU, expected in 2013 and the related positive investor sentiment that will follow (though we caution that we do not expect this to be as euphoric as that which followed the 2004 expansion wave). The 4.75% bond is currently offering an attractive yield of 6.8%, with yield compression likely over the coming months.” (Asset Class Strategy: Local Debt Better Placed’, March 13, 2012)
View: In February we argued that despite heightened political uncertainty, following the collapse of the Romanian centre-right government led by Emile Boc, Romania’s solid progress within the terms of the country’s EUR3.5bn IMF Stand-By Arrangement (SBA) and EUR1.5bn EU balance of payment support would anchor investor confidence. Combined with a period of disinflation and the National Bank of Romania administering 75 basis points (bps) of cuts since January, we anticipated a significant compression on Romanian 5-year local debt.
Result: The yield on Romanian 5-year local debt compressed by around 80bps between first expressing our bullish local debt view on February 9, and our decision to turn neutral on February 24. Furthermore, despite the ousting of the centre-right interim government of former Prime Minister Mihai Ungureanu in a no confidence vote on April 27, our conviction that the opposition Social-Liberal Union (USL) coalition would adhere to the terms of the IMF SBA has kept investor confidence towards the sovereign in place. With the USL forming a new interim government in the run-up to parliamentary elections in November, yields on local debt have remained relatively stable despite volatile financial market conditions.
Quote: “Despite the recent uptick in political risk, following the resignation of Prime Minister Emile Boc, the country's successful completion of a recent IMF review, as well as the Boc government meeting the country's refinancing needs through a US$1.5bn Eurobond issue, have gone a long way to shore up investor confidence in Romania's sovereign risk credentials. Indeed, we now believe that the recent bullish sentiment towards Romanian assets could have further to go in the near term and we believe that Romanian local debt stands to be a key beneficiary.” (Local Debt To See Further Gains’, February 9 2012)
View: In March we flagged up the potential for the Serbian conglomerate Energoprojekt to do well over a long-term horizon based on our view for accession prospects in the Balkans to improve the energy infrastructure outlook in the region and the company’s heavy involvement in the sector.
Result: Energoprojekt is the second-best performing stock on the BELEX15 equity index since the start of the year, on a total returns basis, returning 9.82% in local currency terms.
Quote: “Given the high degree of involvement in energy infrastructure development, we expect that Serbian industrial conglomerate Energoprojekt Holding could see further upside as the company could benefit from increased investment in energy infrastructure in Serbia.” (Accession Prospects Brighten Balkan Energy Infrastructure Outlook’, March 22, 2012)
View: In June 2011 we suggested that a change in monetary policy direction would lead to continued weakness for the Serbian dinar. A shift in central bank rhetoric prompted us to revise our exchange rate forecast for 2012.
Result: Over the almost 12-month period to early June 2012, the Serbian dinar lost some 17.8% in value against the euro, since making our bearish call a year earlier.
Quote: “We believe that recent weakening of the Serbian dinar against the euro is likely to continue through the short term, as the move by the central bank moving towards monetary loosening reduces the carry appeal of the currency.” (RSD: Rolling Over’, June 16, 2011)
View: In September 2011, we put forward our argument for a hard landing in China’s economy in 2012. From our perspective, major property price declines, manufacturing sector contraction, and depreciatory pressure on the currency were all likely to occur in the coming 12 months.
Result: Few would argue that China’s economy is not in the midst of a major slowdown. Manufacturing activity has contracted for much of the year, property price declines can be seen nationwide, and the Chinese yuan has weakened against the US dollar for the first time in 16 years. Going forward, we believe that further stimulus measures will not be sufficient to arrest a slide in headline economic growth.
Quote: “China's economic growth story has rapidly turned from one underpinned by productivity gains to one engineered by inflationary monetary and fiscal policies. Several years of poor capital allocation will have to be unwound eventually, leading to much slower headline expansion, and we caution that 2012 could be the year of the Chinese hard landing.” (China 2012: From Miracle To Meltdown’, SPECIAL REPORT Q311)
View: We adopted an ultra-dovish stance towards Vietnamese interest rates in November 2011, despite headline inflation running close to 20% year-on-year. Not only did we see inflation retreating back into low single digit territory, but we also forecast 400bps of interest rate cuts in early 2012. Coupled with our view of Vietnamese dong stability, we saw fit to turn outright bullish towards Vietnamese sovereign debt.
Result: The State Bank of Vietnam embarked upon a major monetary easing programme in March 2012, slashing the policy rate by 400bps to 11.00% in just four months. Furthermore, yields on 2-Year Vietnamese government paper fell 360bps in our favour to 8.9% (as of June 11).
Quote: “Vietnamese two-year government bond yields, which are currently trading at 12.5%, present a compelling play for investors given that we expect inflation to fall quickly into the single digits.” (Rate Cuts To Come Early In 2012, Bonds Looking Attractive’, November 25 2011)
View: Having been below-consensus on Indian economic growth since early 2011, we cautioned in April 2012 that the country would face a sovereign ratings downgrade to junk status should macro imbalances – most notably gaping twin deficits in the fiscal and current accounts – fail to improve.
Result: In June 2012, ratings agency Standard & Poor’s published a report titled ‘Will India Be The First BRIC Fallen Angel?’ in which it outlined the risks to the country’s investment grade status. A month earlier the agency had downgraded the outlook on India’s ‘BBB-’ from stable to negative.
Quote: “India's score in our sovereign risk ratings has fallen to 'C-', which according to our previous work corresponds roughly to one notch below investment grade... we believe that a local currency downgrade remains the most likely course of ratings agency action this year.” (Eight Key Questions On Sovereign Creditworthiness’, April 12 2012)
View: Since President Cristina Fernández’s election in late 2011 we have held an increasingly bearish stance towards Argentina’s investment climate, arguing that the government’s attempts to stem capital flight were addressing the symptoms rather than the causes of the country’s economic imbalances. For this reason we have been bearish Argentine equities since the start of 2012.
Result: The government’s failure to address declining productivity and the country’s overvalued exchange rate has forced it to adopt a more aggressive stance towards foreign multinationals, nationalizing Spanish-owned energy giant YPF in late April, and threatening other sectors (ranging from mining to gaming) with similar action. Argentina’s Merval equity index hit a two-year low in May 2012.
Quote: “As long as the government refuses to tackle the root causes of spiraling inflation - which unofficial estimates put as high as 25% - and maintains virtually unaltered the pace of money supply growth, we maintain a bleak outlook on Argentina's operating environment for foreign business.” (Only Temporary Relief From Foreign Exchange Restrictions’, January 1, 2012)
View: On January 5, 2012, we highlighted the Mexican peso, Brazilian real and Colombian peso as the three currencies most likely to strengthen against the US dollar over a medium-term perspective, and on February 15, 2012 we turned from bullish to neutral towards these three currencies.
Result: The Mexican peso, Brazilian real and Colombian peso were the three top performing regional currencies against the US dollar between January 1 and February 15, 2012. Immediately after turning from bullish to neutral, regional FX appreciation started to slow, with all three currencies suffering heavy losses against the US dollar over the next few months
Quote: “We are amending our Latin American asset class strategy this month, primarily because the appreciatory run in the region's currencies played out better than we had initially expected. At the start of the year we named the Mexican peso, Brazilian real and Colombian peso as three currencies we liked most against the US dollar over a medium-term time horizon, …[and] since then our three favourites have outperformed all other regional currencies.” (Latin America Asset Class Strategy’, February 15 2012)
View: On February 8 2012 we called for the spread between Peru and Brazil’s respective five-year credit default swap (CDS) markets to compress, as our proprietary sovereign risk ratings implied that investors were too concerned about Peru and not concerned enough Brazil.
Result: Six days after writing our sovereign risk ratings, the spread between the two had fallen from 19 basis points (bps) to just 9bps, before moving to parity a few weeks later.
Quote: “[W]e believe that investor concerns towards Peru are somewhat overblown, whereas in Brazil's case they are likely to underestimate the likelihood for fiscal profligacy to continue until the 2014 general elections at the earliest, implying that the CDS spread between Brazil and Peru could well compress over the medium term.” (Sovereign Risk Rating - Gap Getting Wider ’, February 8, 2012)
View: On January 5, 2012, we outlined our medium-term bullish view towards Brazil’s Bovespa and the Colombian IGBC equity indices, based on attractive valuations and an oversold technical picture. We turned from bullish-to-neutral towards these two bourses in mid-March.
Result: After performing very strongly since the start of 2012, both Brazilian and Colombian equities experienced a period of consolidation in late March, before suffering losses.
Quote: “Our bullish view [towards Colombian equities] has played out extremely well in the year to date, as the IGBC rallied 19.1% by March 14. Given substantial gains this year, overextended momentum indicators on the daily chart, and a bearish divergence on the daily RSI, we have turned neutral towards the index. Due to the above factors we believe we will see some consolidation in the IGBC over the next few months, and the extent of that correction will inform our view on the bourse moving forward.” (Colombia – Turning Neutral After A Very Strong Start’, March 15)
“Back in January we noted that Brazil's benchmark Bovespa equity index would outperform over the short- to-medium term based on a constructive technical picture, attractive valuations, solid investment prospects at the sector level and a positive growth outlook for the country (see our online service, January 18, 'Brazilian And Colombian Equities To Outperform'). Our view has played out well, as the Bovespa rallied 16.1% in the year to date. However, a less favorable technical picture now informs our decision to move from bullish to neutral on the index in our regional asset class strategy table.” (Turning Neutral On Brazilian Equities’, March 22)
View: In our Q311 Sovereign Risk Ratings update, we argued that Tunisia was at risk of seeing its sovereign credit rating downgraded at some point in 2012. Despite a tentative calming in the country’s political crisis, we highlighted that a weak growth outlook, heavy exposure to the eurozone, and deteriorating balance of payments position, meant that the economy would likely lose its investment-grade status at some point in the near future.
Result: On May 23 Standard & Poor’s cut Tunisia’s long-term foreign currency credit rating to BB/B, thereby classifying the country’s bonds as non-investment grade. In a press release following the downgrade, S&P stated that Tunisia’s economic, fiscal and external indicators were weaker than previously anticipated.
Quote: “As our proprietary sovereign risk ratings tend to be more forward looking than those of traditional ratings agencies, we believe they could provide some insight into possible downgrades (or upgrades) further down the line. Tunisia stands out as a particularly likely candidate to experience another official downgrade from either S&P, Moody's or Fitch in our view, which would be significant given that their debt is currently rated only one notch above 'non-investment grade' status”.
View: In April 2011, as the Arab Spring was casting a large shadow over the entire Middle East, we upgraded our growth forecast for the UAE to 3.3% from 3.0%, believing that the economy would benefit from the fundamental reappraisal of risk perceptions taking place across the region. In particular, we saw scope for the UAE’s tourism and banking sectors to benefit from unrest in Bahrain, as investors flocked to countries perceived as safe havens.
Result: In March 2012, the UAE Economy Ministry stated that real GDP growth for 2011 came in at 3.3%, which was slightly higher than consensus had previously expected.
Quote: “Regardless of the looming clouds on the horizon stemming from the political crisis in the Middle East and North Africa (MENA), the outlook for the United Arab Emirates (UAE) has gradually brightened since the start of 2011. As one of only a handful of countries that have not seen large-scale public demonstrations as a result of the regional upheaval, perceptions surrounding underlying economic and political stability in the UAE have been given a considerable boost in recent months. Although significant challenges await over the coming quarters, most notably Dubai's lingering debt repayment schedule, we are nevertheless becoming increasingly confident about the economy's growth potential this year. We are revising up our forecast for real GDP growth in 2011 to 3.3% from 3.0%.”
View: In October 2011, we argued that public protests in Kuwait were set to escalate following a political corruption scandal, and that there was a growing likelihood that the Emir would ultimately be forced to accede to opposition demands for parliament to be dissolved and for new elections to be scheduled. When the prime minister resigned in November – a move intended to appease protestors – we maintained that the resignation would not be sufficient to placate the opposition, and reaffirmed our view that fresh elections would eventually be scheduled.
Result: In early December, the Emir announced that he had dissolved parliament, and scheduled new parliamentary elections for February 2012.
Quote: “We see a growing possibility that anti-government discontent in Kuwait could translate into increased political instability. Recent actions by the government demonstrate the extent of its concern over underlying political tensions. If controversy over a corruption scandal escalates further over the coming weeks, there is an increasing chance that the Emir may accede to opposition demands for a dissolution of parliament.”
View: In December 2011, we highlighted the attractiveness of Uganda local debt, particularly at the short end of the yield curve. We believed that both foreign and domestic investors could make good returns given the very high nominal yields, as well as the likelihood that inflation was peaking and the Bank of Uganda had reached the end of its hiking cycle. Furthermore, we viewed the Ugandan shilling as being strongly supported. We consequently entered a bullish position on Ugandan 91-day T-bills in our global key market views on December 29 2011.
Result: Our key market view yielded a total return of 10.2% within the two months that we held it.
Quote: "The prospect of falling inflation, the end of an aggressive monetary tightening cycle and a stable currency have led us to initiate a bullish view on 91-day Ugandan government treasury bills" ('Bullish Local Debt', December 29 2011)
View: In January 2012, we outlined our bearish view on the Ghanaian cedi, highlighting the multiple downside pressures on the currency. We argued that a combination of negative macroeconomic fundamentals and weak local sentiment would drive the cedi lower over the months to come.
Result: The cedi subsequently depreciated by over 12% against the US dollar between January and June 2012.
Quote: "In our view, the currency weakness is being driven by multiple factors: high import demand, US dollar strength, foreign investor risk aversion, a lack of local confidence in the cedi and high seasonal demand for foreign exchange...we expect the cedi to stay relatively weak over the short term." ('Bearish Cedi View Playing Out', January 11 2012)
View: In January 2012, we took a bullish stance on Côte d'Ivoire's US$2032 eurobond, arguing that forthcoming negotiations with international creditors and an economic recovery following post-election conflict would boost investor demand for the instrument.
Result: The US$2032 eurobond rallied sharply, with yields declining by over 240 basis points between January and May 2012.
Quote: "We think it is possible that a significant amount of arrears accumulated since the December 2010 default will be repaid. Our forecast of a robust recovery in Côte d'Ivoire from the post-election violence in early 2011 also informs our bullish view." ('Bullish View On Eurobond Playing Out', January 16 2012)
View: We called for a pullback by oil from Q112 highs in April, in line with a bearish shift in our expectations for the commodity complex as a whole. We highlighted oil as particularly vulnerable to weakness in Q212. Non commercial net speculative positions were turning lower from elevated levels, which suggested that bullish investors banking on a geo-political driven supply scrunch in the Middle East were losing patience.
Result: From a level of US$121, Brent Crude swiftly pulled back to US$116/bbl. Weakness persisted for the remainder of Q212, with Brent pushing just below US$90/bbl in late June. This low represented a price decline of 27% from when we turned bearish.
Quote: “One market that looks vulnerable to additional weakness is oil. Brent Crude is flirting with support in the US$121/bbl area and a weekly close below this level would suggest that a move down towards US$116/bbl is likely. With geopolitical tension around the Straits of Hormuz easing slightly in recent weeks, investors have begun to pare back bullish bets on oil. Net speculative long positions for Brent have started to unwind, having surged in Q112.” (Subdued Q212 On The Cards)
View: In line with our below-consensus bearish medium-term view on industrial commodities, we called a 2012 top in copper prices in late March. This was primarily based on our expectation that Chinese copper demand would slow in 2012, despite strong import numbers at the time. In contrast to consensus, which called for a continued price recovery back to new highs, we targeted a move down towards the US$7,000/tonne area from US$8,300/tonne.
Result: Copper consistently weakened in Q212, sinking to just above US$7,000/tonne by late June. The 15% price move in our favour not only vindicated our short-term price projections, but saw medium-term sentiment towards copper prices start to turn towards our own bearish view.
Quote: “Following the impressive gains of Q112, most base metals have moderated and we expect they are nearing their highs for 2012, as we expect Chinese economic growth to disappoint over the course of the year… These dynamics could see prices head down to long-term support at US$7,000/tonne area by the end of the year, a far less optimistic picture than the current LME futures curve, which has the December 2012 contract trading at US$8,421/tonne.” (Copper & Lead: 2012 Peaks Already Reached)
View: The surge in corn prices from Q310-Q311 saw corn significantly outperform other grains over the period. In January, we called for this trend to reverse and be replaced a sustained period of soybean outperformance. This was based on a number of factors including our recognition of the risks La Ni?a presented to the 2012/13 soybean crop in South America. To quantify this view, we targeted a significant move higher in the soybean/corn price ratio (in soybean's favour).
Result: Soybean prices dramatically outperformed the wider grains complex in H112, with the soybean/corn price ratio rising by 28% from January to June. Soybean prices surged to a four-year high in May, as South American crops were downgraded due to adverse weather.
Quote: “We call for a return to soybean outperformance as we highlight a recent break higher of the soybean/corn price ratio. This is because we have seen lower plantings for soybean compared to corn, on higher prices for the latter. Also, we believe the return of La Ni?a could hamper the soybean crop more than the corn crop as it is mainly concentrated in Latin America.” (Return To Soybean Outperformance)
View: On March 25 2009, we stressed that risk appetite was back on, indicating that a major bullish reversal was likely across global assets. In particular, we highlighted US financials stocks as having major upside potential. With the S&P Financials index at 129.00, we set a medium-term target of 280.00.
Result: Risk appetite came back in force through the second and third quarters of 2009, with benchmark equity indices rising by 50-150% globally. The S&P Financials Index was one of the best performing developed world indices, at one point up by 62.7% in Q309. It has subsequently risen further to average 200.00 In Q110.
Quote: "Bank stocks are looking good. Having promoted the bearish view of the S&P financials index back in Q107 around the 440.00-450.00 area, we are now turning bullish at the 129.00 mark. We believe the index can jump to 280.00 over the coming months. In this regard, shares like Citigroup and RBS have major upside potential from very low levels." ('From Risk Appetite Is Back... For Now,' March 25 2009)
View: We went bearish US bank stocks from early on in the global recession and highlighted several opportunities to take advantage of an over-extended market. In particular, we highlighted the January 2009 Citigroup put option as likely to appreciate dramatically.
Result: The put option traded as high as US$7.50 before expiration, a 17-fold gain.
Quote: "With regards to bank stocks, we highlight the negative technical outlook for Citigroup , which paints a somewhat worrying picture of the company's valuation over the coming months, despite the extent of the past twelve months' decline. In fact, we would not be surprised by a move towards the US$15.00 area. As a result, we have run the chart of the premium price of the January 2009 US$12.50 Citigroup put option. Trading at present at US$0.43 the chart would indicate that the price is cheap, and has the potential to move substantially higher, in line with our bearish view of the underlying stock price, and of higher volatility in general." (From 'Banks On The Run' May 27 2008)
View: In March 2007 we highlighted the risks posed by overleverage in the US market and the risks from an asset price bubble in real estate. We specifically highlighted weakness in two key lenders: Countrywide Financial and Washington Mutual.
Result: Following several months of financial deterioration, Countrywide and Washington Mutual were eventually acquired by larger institutions. The US mortgage market collapsed, dragging the economy into a severe recession.
Quote: 'Despite assurances from various major US investment banks that losses in the subprime mortgage sector are manageable in respect to the overall size of their respective businesses, the charts below paint an interesting picture. The charts show the short- and long-term price action of two key subprime mortgage lenders. Indeed, Countrywide Financial and Washington Mutual came in at number 3 and 9 respectively of the top ten lenders in Q406...The [recent] bounce is clearly encouraging and suggests further short-term upside. However, the long-term charts suggest a somewhat different outlook, with both share prices having experienced spectacular gains over recent years. From a technical analysis perspective, valuations look somewhat stretched, with the potential for significant medium-term losses. The risk, of course, is the spill-over effect on the rest of the US mortgage market, and by extension the US economy.' (From 'Subprime Lender Charts', March 15 2007)
View: In late 2010, we outlined a financial markets strategy favouring developed over emerging market equities, particularly highlighting, US and stocks as outperformers.
Result: From December 2010 until late February 2011, the ratio of the MSCI World over the MSCI EM index (a proxy for developed/EM relative performance) rallied 10% in developed market's favour. The German DAX and US Dow also rallied commensurately during this period.
Quote: "...one view taking shape is that developed state equity markets will outperform their emerging market counterparts next year (2011)."
View: At the beginning of 2010 our core Eurozone outlook was predicated on two key views: 1) That growth would be highly divergent with France and Germany stabilising and Spain, Ireland and Greece would be among the world's worst performing economies. 2) That the existential crisis risks facing the eurozone were overblown.
Result: Our out-of-consensus bullish forecast for German real GDP growth played out with the country recording a multi-decade high 3.6% growth rate. France also stabilised, while the peripheral economies of Ireland and Greece continued to contract in the year. The euro bounced back strongly as multilateral financing facilities sharply mitigated the risks of a break up.
Quote: "Some of the most moribund growth stories going into 2010 lie within the eurozone bloc. These are Spain and Ireland, both of which are forecast by BMI to contract in 2010 before staging tentative recoveries in 2011, with deflation reigning all the while. Slightly tighter monetary policy might arguably be appropriate for the likes of Germany and France, which are showing signs of stabilisation, but it would not be appropriate for the Spanish or Irish. The potential death of the euro is greatly exaggerated, but internal divergence will certainly put the principle of monetary union to the test in 2010."
View: Confident that Turkey's central bank will no longer cut interest rates to discourage 'hot money' inflows, we suggested back in February 2011 that the Turkish lira looked ripe for a bounce against the US dollar at around the TRY1.6200/US$ level. Our view is predicated on the expectation that the central bank will ultimately have to tighten monetary policy more aggressively, forecasting a rate hike before year-end.
Result: The Turkish lira came back strongly, rallying from close to TRY1.6200/US$ to TRY1.5000/US$ by April, marking a 7.5% appreciation of the unit against the dollar.
Quote: '[W]e believe that the unit is currently well supported, having held key technical support against both the greenback and the euro. Indeed, we see scope for a retracement towards TRY1.5500/US$ in the short term.' (From Currency Forecast – TRY: Regaining Lost Ground In H211, February 24, 2011)
View: Belarus's enormous external imbalances are unsustainable and will require a considerable balance of payments adjustment via an official devaluation of the national currency.
Result: The Belarusian central bank has established a floating exchange rate for the ruble on April 20, at around the BYR5,000/US$ level, from BYR3,020/US$ at the time of putting out our view.
Quote: Our view that Belarus would end up running a mammoth current account deficit in 2010 has firmly played out according to the most recent data released by the National Bank of Belarus (see our online service, December 7, 'Ruble Devaluation In 2011). In fact, our projection that the shortfall would hit US$6.1bn (equivalent to 11.3% of GDP) was exceeded, with the deficit in fact ballooning to a massive US$8.5bn (15.3% of GDP). We reiterate our core view at this stage that Belarus's external imbalances are unsustainable and a major adjustment is set to take place in 2011, most likely via a further devaluation in the ruble. (From C/A Adjustment Unavoidable In 2011, March 17, 2011)
View: In late August 2010 we suggested that Russian equities looked primed for a strong bounce as the technical picture suggested upside potential and wildfires that month brought stock valuations down. Combined with an ongoing bounce in commodity prices and a broad-based recovery in global demand, we turned bullish towards the RTS equity index.
Result: Since our bullish call in late August 2010, the RTS index was at one point up by as much as 50.2% in April 2011, aided in large part by strong investor risk appetite and the bull-run in oil prices.
Quote: 'A case in point is the RTS equity index, which pushed through the key psychological 1,400 level at one point on August 26, having previously held major support at 1,385. A crossover on the slow stochastics indicator implies that a bounce is on the cards, and we target a move up to 1,500 in the first instance.' (From Upside Potential For Russian Assets, But Stopped Out Of WIG20, August 26 2011)
View: Since the start of the year, we have been turning increasingly constructive towards the euro-area growth prospects, underpinned by a favourable outlook for private consumption in France, where fiscal tightening measures were being delayed, and strong external demand for German manufactured goods. We have remained above consensus in our eurozone growth forecast of 1.8% for 2011 since.
Result: Strong business sentiment, near-record earnings for German exporters and the initiation of the European Central Bank's tightening cycle support our constructive outlook on the single-currency bloc's growth for 2011. Though we remain above consensus in our aggregate real GDP growth forecast for this year, consensus forecast have moved in line with our own projections.
Quote: 'Despite eurozone Q410 flash estimates for real GDP growth coming in somewhat below Bloomberg consensus expectations, we are nevertheless turning more constructive in our own outlook for euro-area economic growth in 2011. Coming fresh on the back our upward revision to French real GDP growth for 2011 to 1.7% from 1.4% previously on February 11 (see our online service, Upward Revision To 2011 Growth'), we are raising our growth forecast for Germany to 3.0% from 2.1% previously for this year, which takes us above the consensus forecast for 2.6% growth. We have also adjusted our 2012 growth forecast from 1.8% to 2.0% as a tightening labour market and improving business and consumer sentiment pave the way for stronger domestic demand.' (From Growth Revisions Underpin Constructive Euro-Area View, February 15 2011)
View: Since the beginning of 2011 we have been bullish the British pound against the US dollar, which at the time was trading around US$1.5500/GBP. Our view was predicated on a likely shift towards monetary policy normalisation and fiscal consolidation in the UK, as well as a bearish view towards the US dollar. The government's fiscal consolidation programme has buoyed confidence in public debt dynamics and reduced economic stability risks, while surging inflation and concerns about a loss of credibility were likely to spur the Bank of England into hiking policy rates. Meanwhile, we believed that a continuation of the US Federal Reserve's quantitative easing programme through H111, coupled with a lack of strategy on fiscal consolidation, would undermine confidence in the dollar.
Result: The pound has posted significant gains against the US dollar thus far this year. Indeed, hitting US$1.6700/GBP at the end of April, the pound has appreciated nearly 8%.
Quote: 'The unorthodox nature of [US] quantitative easing has distorted the signalling power of the foreign exchange market. Indeed, a strong surge in US$/GBP is as likely to reflect a flood of new dollars entering the market as a positive UK growth story. This is a major factor underpinning our medium-term forecasts. The Federal Reserve is still erring on the dovish side and willing to buy up more government bonds should the US recovery appear to falter. In addition, US President Barack Obama's administration is doing little to address the bloated fiscal deficit, instead opting for a fresh set of tax breaks to stimulate the economy. This could further go in the pound's favour should investors start to unwind dollar assets.' (From Sterling Poised To Pound The Dollar, January 5 2011)
View: In October 2008, we stated that as the forthcoming global recession would be driven by sharp deleveraging in the developed world, that economies with high debt refinancing requirements and large external imbalances such as Ukraine, Bulgaria, the Baltic states and Romania would be worst affected.
Result: Through 2009, Latvia, Lithuania, Estonia, Romania, Bulgaria and Ukraine were among the worst performing economies in Europe, with real GDP contracting by an average of 14.9%, far worse than the 5.1% decline recorded for emerging Europe as a whole.
Quote: "We reiterate our long-held view that as this ultimately is a question of where to find capital, the countries with large external asymmetries will be hardest hit. Primarily, these include the 'current account deficit five' in the EU of Bulgaria, Estonia, Latvia, Lithuania and Romania as well as Ukraine in the CIS"(from 'Strategic View: Demand Destruction Key For Negative Outlook' October 13 2008)
View: At the beginning of the global credit crunch in October 2008, we highlighted Turkey and Poland, as among the best positioned economies within CEE. This was followed consistently through 2010, where we firmly established these two countries as strategic outperformers through the long term.
Result: Poland was the only major economy in Europe to avoid recession in 2009, expanding by 1.7%. Turkish real GDP growth accelerated to become the fastest in the region in Q409, coming in at 6.0%.
Quote: "...Turkey and Poland are looking healthier and better positioned to withstand the pressures of a global credit crunch." (from 'Strategic View: Demand Destruction Key For Negative Outlook' October 13 2008). "Once global credit markets begin to stabilise, we believe that the significant macroeconomic differentiation within emerging Europe will become more evident and this will certainly play to Turkey's advantage." (from 'Why Turkey Will Be A Strategic Outperformer' June 11 2009)
View: At the beginning of February 2009, we forecast a significant devaluation of the Kazakh tenge in light of the slump in global oil prices and previous devaluation of the Russian rouble. Specifically, we targeted a 25% devaluation of the tenge against the US dollar.
Result: The National Bank of Kazakhstan devalued the tenge by 22% on February 4
Quote: "Having come under considerable pressure on the back of a stricken banking sector and broader economic woes, the Kazakh tenge now looks poised to undergo a substantial devaluation. Though we have been cautious in the past of going outright bearish on the tenge, owing to the significant arsenal of foreign currency reserves which can be used to prop up the currency, we cautioned that a breach of KZT121.90/US$ would nonetheless signal that a significant devaluation would be on the cards. As such, we believe that the sharp sell off to KZT123.52/US$ at one point on February 3 suggests that the National Bank of Kazakhstan (NBK) is now preparing for a significant weakening of the currency"( from 'Targeting A 25% Devaluation Of The Tenge' February 3, 2009).
View: In November 2009 we highlighted that Ukraine's 2010 presidential election would lead to a significant improvement of relations between Kiev and Moscow, regardless of whether Yulia Tymoshenko or Viktor Yanukovych won. This in turn, would significantly help to mitigate macroeconomic risks through the medium term.
Result: Following Viktor Yanukovych's victory, relations between Russia and Ukraine are at their most stable point since 2004. This was reflected in an agreement signed in April 2010 which resulted in Russia reducing the costs of its natural gas exports to Ukraine by 30%, in exchange for a 25-year extension of the Russian lease on the naval base at Sevastopol.
Quote: "...our core view remains for bilateral relations between the two states (Ukraine and Russia) to improve after the vote, which should reduce (but not eliminate) the likelihood of frequent flare ups in tension through 2014" (from 'Political Risk In 2010: As Bad As it Gets' November 26 2009)
View: In February 2011, we argued that China's excessive railway boom was overly-ambitious and would have to be capped owing to financial constraints at the Ministry of Railways (MoR). We also noted that despite historically cheap valuations, railway construction companies would suffer as bullish sentiment towards the railway boom faded.
Result: A first quarter loss of CNY3.8bn at the MoR was quickly followed by a tragic train crash (which the government has conceded was due to poor safety standards), and finally a suspension of new investment. Meanwhile, the stock prices of China Railway Group and China Railway Construction Corporation have nosedived by roughly 40% respectively.
Quote: "We believe that the current boom in China's railway investment is unsustainable, despite highly ambitious official projections. Debt levels at the Ministry of Railways (MoR) are mounting, and the poor economic viability of major high-speed rail projects suggests a sharp slowdown in investment growth going forward. Major railway construction companies are set to suffer, with China Railway Construction Corporation and China Railway Group looking technically precarious." ('Railway Boom Unsustainable', February 25 2011)
View: In July 2011, we warned that instability in the Chinese banking sector should be expected on the back of mounting loan repayment concerns at a local government level. From a financial markets perspective, we adopted a negative outlook on the Hang Seng H-Financials index, which is comprised of China's largest financial companies. We also expected to see China's sovereign 5-Year credit default swap (CDS) head significantly higher, as concerns over a potential financial sector bailout intensified.
Result: China's commercial banks have come under serious duress due to their heavy exposure to local government investment vehicles. Interbank rates, for instance, have doubled in the space of 12 months. Meanwhile, the H-Financial index plummeted 35% in Q311, and Chinese 5-Year CDS spreads have soared to levels last seen during the global financial crisis.
Quote: "As the repayment capacity of loans extended to local government investment vehicles comes under threat, we continue to expect instability in China's banking system. With valuations still lofty (at 1.9x book value) and not reflective of crisis risks, we have turned bearish on the Hang Seng H-Financials index... (also) we believe the 5-year sovereign credit default swap has significant upside potential". 'Banking Sector Instability Playbook', July 13 2011
View: On July 4, 2011, we placed a bullish Peruvian equities position in our Key Market Views, based on our belief that investor concerns towards recently-elected President Ollanta Humala's policy trajectory were overblown.
Result: Following his cabinet selection, comprised mainly of economic moderates, the IGRA index rallied strongly, as investors became more optimistic towards Peru's business environment. We removed our bullish IGRA position from our Key Market Views on July 22, with implied gains of 15.4%.
Quote: "We are placing a bullish Key Market View on Peru's IGRA equity index, with a short-term target of 22,000 as the technical picture aligns with what we believe is an increasingly constructive medium-term outlook. This target implies 15% upside from the current level of 19,207. We strongly expect President-elect Ollanta Humala to appoint an investor-friendly cabinet soon, especially in the key roles of minister of finance and central bank president,restoring some of the investor confidence lost in the run up to and immediate aftermath of his electoral victory in June." (From 'Bullish Peruvian Equities', July 4 2011)
View: Towards the end of May 2011 we started highlighting our caution towards the Mexican peso, based on what we believed was a increasing reliance on short-term portfolio inflows to fund the current account shortfall. The bearish outlook towards the peso was reinforced in early June with the technical break of the MXN11.80/US$ level, which we argued pointed towards further downside for the unit.
Result: Following a break through technical resistance at MXN11.80/US$ in early June the peso sold off almost 20% against the US dollar to reach MXN14.00/US$ by late September. Although we had not expected the sell-off to be as severe, this took place alongside a significant re-pricing of domestic interest rate expectations, which as we had consistently argued was the main driving force of peso strength throughout 2010.
Quotes: "One currency where the fundamental story is becoming less compelling is Mexico. We first liked the unit back in mid-to-late 2009...but the 12 month horizon is no longer so rosy, with question marks about the shape and pace of the US recovery combining with what could be a quite divisive Mexican electoral cycle." (From 'FX: Holding In There', May 25 2011)
"...the staggering levels of short-term portfolio inflows [are] causing a substantial risk to external account stability. Indeed, 61% of the total US$34.9bn foreign investment into the country over the past two quarters has been into Mexico's money markets, proof if it were needed that the carry trade remains in full flow." (From 'No Improvement In External Account', May 27 2011)
"...as we have been highlighting increasingly of late, from a longer-term perspective there is plenty to be concerned about, with massive short-dated portfolio inflows posing serious risks to Mexico's external account stability. Therefore, while the daily chart suggests the peso could be in for a breather, our fundamental concerns combined with the RSI on the monthly suggest recent weakness may have much further to run. If the MXN11.95/US$ gets taken out, we see the next level of support at MXN12.20/US$." (From 'MXN/US$: Still Looking Weak', June 13 2011)
View: On July 6 we argued that the drop in Venezuela's credit default swaps (CDS) markets, following news the President Hugo Chávez was seriously ill, was an overreaction, as even without Chávez we believed the country would be unable to immediately improve its very weak fiscal position. Since we had not seen any improvement in the country's credit risk, and called for the CDS spread on the benchmark 5-year contract to reverse, back towards the 1100 basis points (bps) level.
Result: Between July 6 and August 8 2011 the spread on Venezuela's 5-year CDS contract widened 157bps, hitting our near-term 1100bps target. The spread continued to widen until early October, reaching 1226bps (255bps from when we first called for the spread to widen), before falling, although still remaining outside the 1000bps level.
Quote: "We believe that rapidly compressing spreads on Venezuelan benchmark 5 year credit default swaps (CDS) following the news of Venezuelan President Hugo Chávez's poor health are overdone, and we...expect to see a reversal in CDS spreads, targeting a move back to 1100bps in the near-term as investors wake to the grim reality of Venezuela's underlying fiscal problems." (From 'Overreaction In CDS Markets', July 06 2011)
View: In late 2009 we started highlighting our bearish outlooks towards Trinidad & Tobago (T&T)'s long-term growth story, despite what had been a very strong average real GDP growth rate of over 7% for the previous 15 years. Our view was based on what we what we saw as a major decline in the country's key energy sector, lack of dynamism in the non-energy sector and a weaker external environment outlook. We called for anaemic (albeit positive) growth in 2010, and deteriorating fiscal and debt dynamics.
Result: Recently-revised down 2010 growth estimates from T&T's central bank show real GDP growth was -0.6% in 2010, the second consecutive year of recession. In addition, the public sector debt burden increased 19.0% from 2009 levels, despite elevated energy prices, highlighting the borrowing requirements facing the government despite elevated energy prices.
Quotes: "Trinidad and Tobago's central government balance continues to deteriorate, with August figures showing a year-to-date deficit of TTD3.2bn, compared to a surplus of TTD8.3bn at the same point in 2008. With the islands set to post the first full-year fiscal deficit since 2001, and political reticence to rein in spending, we are concerned about a significant uptick in government debt levels going forward." (From 'Debt Pile To Rise As Fiscal Woes Continue', December 23, 2009)
"With Q309 data showing T&T's economy taking a further turn for the worse, we see limited potential for a strong recovery in 2010...Moreover, we are identifying signs of deepening structural economic problems stemming from the islands' ongoing overreliance on the petroleum sector (From 'Difficult Recovery Ahead', February 02 2010)
View: In early August, we warned that despite an improvement in sentiment towards Egyptian stocks, particularly given the cheaper valuations on offer, further losses would be on the cards. In our view, the market was not properly pricing in the difficulties inherent in the country's democratic transition.
Result: Since the time of writing, Egypt's benchmark stock index, the EGX30, has lost a further 11.4% of its value, bringing year-to-date losses in 2011 to 42.2%.
Quote: "From a more fundamental medium-term perspective, we maintain our long-held view that there is too much uncertainty surrounding the country's post-crisis transition to hold a bullish outlook on the index. Although some investors have certainly been enticed by the relatively attractive valuations on offer in some cases, in our view the ongoing democratic transition taking place remains fraught with risks which have not yet been priced into the market. From a macroeconomic perspective, growing fiscal and current account deficits, weak investment inflows, and a period of significantly lower growth will weigh heavily on corporate profitability through end-2011." (From 'Stocks: Outlook Varies Depending On Time Horizon', August 10 2011)
View: In February at the onset of the Arab Spring, we highlighted several countries we thought were at risk of experiencing a similar type of popular uprising as had just been witnessed in Egypt. Yemen and Bahrain stood out as particular flashpoints of instability in our view, particularly given the ethnic and sectarian cleavages that existed in each state.
Result: Bahrain experienced the worst unrest witnessed in the Gulf Cooperation Council in many years, with several dozen deaths recorded in the process. The popular uprising of the country's Shi'as against the Sunni al-Khalifa regime was a particularly notable moment in the Arab Spring, as it forced investors to reassess their fundamental views that states in the GCC were inherently insulated from such unrest due to their oil wealth. As of mid-October, the country's political crisis is far from being resolved, with almost daily anti-government demonstrations continuing to take place
Quote: "Moreover, it is also important to note that underlying political stability in the Gulf Cooperation Council (GCC) should not be taken for granted, with Bahrain in particular standing out as potential flashpoint of unrest. As we previously noted (see our online service, 28 January, 'Contagion Effect: Will Regional Protests Reach Bahrain?'), ongoing tensions between the country's Shi'a majority and Sunni rulers, in addition to a relatively weaker economic growth outlook, make Bahrain a likely candidate to see an increase in protest activity this year. Tentatively scheduled protests for February 14 should be monitored closely in this regard, as it may portend a more pronounced period of unrest" (From 'Stability Increasingly In Doubt', February 10, 2011).
View: In early February we outlined our core views on how the regional political unrest would shape MENA's macroeconomic landscape. Among our main themes was a forecast for governments to aggressively ramp up spending in the face of large-scale demonstrations. We highlighted the GCC as being in a particularly strong position in this respect, and noted that such stimulus measures would help support growth in the current environment.
Result: As of October, every single government in the Middle East and North Africa had announced a new set of fiscal stimulus measures. New spending plans in the Gulf in particular have been unprecedented, with Saudi Arabia alone pledging over US$130bn in expenditures over the coming years. Other fiscal stimulus measures have included one-off cash grants, subsidies on food and fuel, promises of public sector jobs, and plans to construct new housing units.
Quote: "As rising food prices, low living standards, and a lack of job opportunities have hitherto been among the most prominent grievances driving large-scale demonstrations, regimes across the region will not only be more likely to maintain costly subsidies (particularly on food and fuel) in an effort to quell the risk of unrest, but could in fact aggressively ramp up their spending plans" (From 'Egypt Unrest To Alter Regional Growth Trajectory', February 11, 2011).
View: In April, we highlighted our view for a rally in GCC international bonds. In particular, we singled out Qatar's US$2020 and Abu Dhabi's US$2019 sovereign bonds as looking ripe for further gains in the months ahead. Our view was predicated on the belief that these two economies were increasingly being seen as safe havens in the Middle East, and would therefore benefit from a fundamental reappraisal of risk perceptions in their favour
Result: Over the next few months, both sovereign notes experienced a pronounced rally, while benchmark international bonds in other MENA states sold off. Qatar's US$2020 went from 104.9 in April to a high of 115 in August, while Abu Dhabi's US$2019 went from 115.0 to 123.0 in the same time period.
Quote: "We expect the recent rally in sovereign bonds for a host of states throughout the Gulf Cooperation Council (GCC) to continue in the near term, despite having seen few signs that the regional political crisis across the Middle East and North Africa (MENA) is in any way nearing its end....We hold a particularly constructive outlook on the prospects for Abu Dhabi and Qatar's benchmark sovereign bonds. Indeed, contrary to the trend seen across MENA since the onset of public unrest in Tunisia and Egypt, the growth outlook for both of these economies has actually strengthened since the start of the year. Not only will these states stand to benefit from higher oil prices, but strengthened perceptions surrounding Doha and Abu Dhabi's standings as relative safe havens in a volatile region has also bolstered the outlook for growth in their respective non-hydrocarbon private sectors." (From 'GCC Bonds: Rally To Continue...For Some', April 15)
View: Following a series of measures enacted by the Central Bank of Syria in May to bolster the value of the Syrian pound, government officials touted the success of their efforts in the following months. In July 2011, however, we stated our scepticism that the policies introduced would have the desired effect, and we noted our wariness that the unit could depreciate further.
Result: The measures kept the exchange rate stable at approximately SYP47.00/US$ until September 14, when the unit began to depreciate. From July 15 (when the story was published) until October 13, the unit fell from SYP47.43/US$ to SYP49.37/US$ (implying depreciation of 3.9%).
Quote: While it appears that the exchange rate has stabilised (with the pound trading at the official exchange rate of SYP47.43/US$ on July 15), we caution that depreciatory pressures remain.[...] If the CBS continues to bolster the currency through foreign exchange intervention, we would expect those reserves to decline precipitously. At that point, the central bank would be forced to either continue its policy of intervening until reserves are completely depleted (a scenario we see as unlikely), or to stop supporting the currency and allow a sharper depreciation to occur. (From 'SYP: Still Wary Of Depreciation Risks', July 15 2011).
View: In June 2011, we outlined our view that Tunisia's TUNINDEX equity index would outperform Egypt's EGX30 equity index. Tunisia's favourable technical picture, more homogeneous demographics, and lack of an entrenched military presence in politics were primary factors underpinning our relatively optimistic outlook on the country's transition and, in turn, its equity market.
Result: This view has played out extremely well over the course of the third quarter. The TUNINDEX gained 8.3% from June 30 (when we published the view) until September 30, while over the same period the EGX30 lost 23.0% of its value.
Quote: "Indeed, ongoing uncertainty regarding the political transitions in Egypt and Tunisia, along with public unrest in Morocco, will weigh on the Morocco All Share Index (MASI), Tunisia's TUNINDEX, and Egypt's EGX30 over the coming months. For the moment, we prefer the TUNINDEX over the EGX30....We see scope for minor gains for the [TUNINDEX] index going forward owing to the generally positive technical outlook, as well as still-positive sentiment regarding the political transition, and we set a target of 4,500, though noting the possibility of a short-term retracement of the current uptrend." (From 'Equities: North African Markets Neutral At Best', June 30 2011)
View: In November 2011, we highlighted that because overnight rates were elevated in Kenya and the outlook for the shilling was positive, there was an attractive carry trade available for foreign investors. We consequently entered a bullish position on the Kenyan shilling on November 2 in our global key market views.
Result: Our key market view yielded a total return of 3.4% within the two weeks that we held it.
Quote: "With overnight deposit rates spiking to 21.00% in response to an aggressive rate hike by Kenyan monetary authorities, we have decided to open a bullish KES/US$ position at KES96.50/US$ into our key market view portfolio in order to take advantage of the extremely attractive carry." (from 'Key Market View: Bullish Kenyan Shilling On Carry' November 2 2011)
View: In March 2011, we argued that the Arab Spring would not spread into Sub-Saharan Africa as the authorities would be quick to stifle popular movements that appeared similar to North African uprisings. Moreover, the ethnic divisions and less urbanised populations would make mass mobilisations difficult.
Result: Although a number of countries have seen protests in 2011, especially surrounding elections, these have not been anywhere near the scale of those seen in North Africa.
Quote: "BMI believes that while idiosyncratic political risks remain in a number of SSA countries, on the whole momentum for 'Egyptian-style' uprisings has yet to build." (from 'Will The North African Unrest Filter South?' March 24 2011)
View: : In September 2011, we argued that the central bank of Uganda would need to hike interest rates aggressively in order to countenance soaring core and headline inflation.
Result: The Bank of Uganda hiked rates by a massive 700bps over October-November 2011, taking the policy rate to 23.00%.
Quote: "We expect that inflation will remain elevated, and as a result the Bank of Uganda will need to retain its hawkish stance through the rest of 2011" (from 'Inflationary Environment Demands Aggressive Policy' 6 September 2011)
View: At the start of August 2011, we made a bullish call on South African bonds, believing that the instruments would rally as investors moved to capitalise on the high nominal yields and relative stability of policy.
Result: Bonds rallied sharply: the yield on the four-year treasury, for example, declined by over 100bps over the course of August 2011.
Quote: "We continue to see South African bonds as attractive. Against the backdrop of the Eurozone debt crisis, US macroeconomic woes and policy uncertainty in Turkey - South African local debt is gaining traction as a relative safe haven. Further gains are likely to be fuelled by adjusting interest rate expectations.." (from 'Market Strategy Update: Liking Select FX and South African Bonds' August 3 2011)
View: In September 2011, we argued that fears of a radical change in policy in Zambia following the election of President Michael Sata were overblown, as it would be in the government's interest to maintain the status quo.
Result: Although there have been some changes to taxes on the mining sector, we have not seen any major changes to policy. Indeed, foreign investment has held up strongly, indicating that the business environment remains hospitable.
Quote: "While we believe that his (Sata's) victory will mean significant modifications in the all-important mining sector, we do not believe that mine nationalisation poses a significant risk, and many of the proven policies of the previous government will be maintained." (from 'Sata Upset Means Changes Imminent, But No Time To Panic' 23 September 2011)
View: In September 2011, we noted that data released by the Bank of Ghana showed imports were growing at a very rapid pace, boding ill for the currency. This being the case, we became cautious regarding the cedi, highlighting the downside risks.
Result: The Ghanaian cedi subsequently depreciated, selling off by over 7.0% against the US dollar over the ensuing months.
Quote: "We have adopted a more cautious stance following a data release from the Bank of Ghana on September 1. Imports are growing at a worryingly fast pace (45.4% y-o-y over January-July 2011), exerting downside pressure on the currency." (from 'Market Strategy Update: Bearish Equities, Cautious FX' September 6 2011)
View: In July 2008 we thought that oil prices were significantly overextended to the upside.We initially targeted a move from US$140/bbl area to US$80-90/bbl. Then in August, we set a target of US$50/bbl.
Result: This has been one of BMI's best commodities calls as we picked the top of the market before it collapsed. Oil eventually even traded well below US$50.00/bbl.
Quote: "The likely cooling of economic activity in EM, the taming of inflation and the bottoming of the dollar could well see oil prices turn sharply at some point over the coming quarters." (from "Oil: Bubble Forming" July 2 2008)
Bullish View: In August 2009 we targeted a move in sugar prices from USc20/lb to USc32/lb.Supply side issues in India, the world's second largest sugar producer and largest consumer, led us to believe that sugar could head significantly higher.
Result: Sugar prices surged to a high of USc30/lb in January 2010, just shy of our USc32/lb target.
Quote: "Sugar has posted a weekly close above multi-decade trendline resistance at USc20.52/lb and could be heading significantly higher. We have been bullish sugar since mid-February, when it became increasingly apparent that supply side issues would come to the fore this year" (From 'Sugar To Average USc19.30/lb In 2009', August 10 2009)
Bearish View: After significant gains, we turned bearish sugar in February 2010. A bounce off the USc30/lb level combined with the imminent onset of the 2010/11 Brazilian sugar harvest underpinned our view.
Result: Sugar prices collapsed from USc25/lb to USc18/lb within days and eventually bottomed out around USc13/lb two months later.
Quote: "We believe that the technical picture is deteriorating, and this combined with expectations of a loosening market in 2011 suggests that the rally in sugar prices is over.' (From 'Sugar: Deteriorating Picture Suggests Additional Downside' February 22 2010)
Bearish View: Despite a move up to 30-year highs at the end of 2010, we consistently called for a bearish reversal and significant correction over 2011.
Result: Sugar collapsed from USc30/lb to USc20lb between mid-March and mid-May.
Quote: "We are wary of a downside move by sugar and any decisive break below the USc30.00/lb area would see us turn short-term bearish, targeting a move down to the USc25.00/lb area... Our forecast for a moderation in prices is based on an expected improvement in global supply over the coming months." (From 'Sugar To Average USc25.00/lb In 2011' February 22 2011)
View: In April 2010, we highlighted that after a sustained bear trend, grains and particularly wheat, were forming a base and had upside potential.
Result: Grain prices bottomed soon after, before embarking on a multi-month rally. By Q111, wheat, corn and soybean markets were up between 50-100% from mid-2010 levels.
Quote: "Recent price action has bolstered our view that the grains complex could be forming a base around current levels...The S&PGS Grains Index has broken above multi-month trendline resistance that we have been highlighting and it appears increasingly likely that the index will respect its 2009 low......Meanwhile, we note that non-commercial net speculative positions for wheat are currently flirting with historic lows, which potentially indicates limited scope for the market to get significantly more bearish." (From 'Grains Forming A Bottom', April 26, 2010)
View: Although wheat prices stole centre stage with a significant spike in July 2010, we firmly expected that corn would be the outperformer in the grains complex over the medium term. We targeted a significant compression in the wheat-corn spread.
Result: Corn consistently outperformed other grains from mid-2010 and the wheat-corn spread narrowed from around USc370/bushel in July 2010 to parity by April 2011.
Quote: "We continue to expect corn to play catch up in the coming months. In particular, we see room for the elevated premium at which wheat is currently trading over corn to narrow considerably over the medium term. We have repeatedly highlighted corn's supportive underlying fundamentals and more recently, the technical picture has started to look increasingly promising." (From 'Grains: Assessing Relative Potential', August 19 2010)
View: We highlighted upside potential for coffee prices as early as February 2010, and became outright bullish in early May.
Result: Coffee prices exploded higher from the USc130/lb area in June 2010 and hit USc300/lb in May 2011, which implies a gain of approximately 130%.
Quotes: "Multi-month support around USc129.75/lb has proven fairly robust to date and given the relative tightness of international coffee supply, our bias is for an eventual break to the upside." (From 'Coffee To Average USc145/lb In 2010' May 13, 2010)
"While it is difficult to predict spikes, we caution that the recent price action could be setting up for such a move, particularly given that the market remains tight, and weekly momentum indicators suggest potential for additional upside." (From 'Coffee: Potential For A Major Spike In Prices', June 25, 2010)
View: We targeted tin as an outperformer in the base metal complex from early 2010 based on tin-specific supply-side prospects.
Result: Tin consistently outperformed the base metal complex from April 2010 through to April 2011, when prices hit a record high of US$33,600/tonne. Over that period, the LMEX to tin ratio moved (in tin's favour) from around 5.0x to 7.6x.
Quotes: "We also believe that tin could also outperform the LMEX index in coming quarters as supply side issues come to the fore... These dynamics will likely help buoy prices going forward." (From 'Metals Relative Performance', April 20, 2010)
View: We turned outright bearish Brent Crude in May 2011 and targeted significant downside, from around US$121/bbl to US$110/bbl.
Result: Brent crude collapsed over 12% in subsequent trading to trade around US$105/bbl in a matter of hours.
Quotes: "We see little scope for a sharp move higher in Brent at the present juncture and believe that fundamental and technical risks to the oil price are now skewed firmly to the downside. As the chart illustrates, oil appears to be running out of momentum, and we believe a medium-term reversal may be afoot." (From 'Short-Term Picture Deteriorating', May 5 2011)