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Global Equities in Charts Summary

Core Content Overview

This document provides an analysis of global equities, focusing on key market dynamics across the US, Europe, Japan, and China. It includes insights on macroeconomic factors, political risks, equity valuation, volatility, and investment strategies, particularly in the context of derivatives trading and market positioning. The content is intended for institutional investors and is marked as private and confidential, with a note that the views expressed are those of the Goldman Sachs sales and trading desk and not necessarily those of the firm.

Main Points by Region

United States

• Fed Uncertainty: A June Fed rate hike is unlikely, and the focus should shift back to value investing. The SPX vs. USSW10 correlation may face pressure.
• Political Risk: The presidential election and potential for a Brexit referendum are increasing political uncertainty, which could impact market sentiment.
• Energy Equities: The oil rally may be self-defeating as energy equities are exposed to high multiples. US Energy equities outperformed compared to pure-play companies with similar business mixes.
• Equity/Yield Correlation: The correlation has been negative for most of the past century, with SPX puts returning the most in the CCAR scenario.
• Volatility: The 6-month normalized skew for SPX is at a high level, suggesting potential upside.

Europe

• Brexit Risk: The Brexit referendum is a key event with potential downside risk. UK mid-caps are more sensitive to policy uncertainty than the FTSE 100.
• EU Banks: EU banks are experiencing loan growth and positive growth surprises, but valuations are near a decade low.
• Equity/FX Correlation: The normalization of European equities is shifting the correlation with EURUSD. European volatility curves price in some referendum risk premium.
• Volatility Structures: Volatility term structures are generally flat, with elevated skew across European indices like FTSE, GDAXI, and others. The correlation between SX5E and EURUSD has declined since the "whatever it takes" period.

Japan

• BOJ Policy: The BOJ may be running out of tools to stimulate the economy. The increase in ETF purchases could lead to an overconcentration in certain stocks.
• Equity Valuation: NKY long-dated implied volatility and skew are attractive relative to global peers. Shareholder return themes continue to outperform the broader market.
• Market Events: Key events include the Japan Q1 GDP release, G7 Summit, and potential BOJ policy decisions in May/June 2016.
• Volatility Dynamics: Japan's volatility term structures are flat, and the low interest rates combined with high dividend yields make forward prices inexpensive.

China

• Market Sentiment: Short-term China fear is subsiding according to recent client surveys, suggesting a potential entry point for medium-term hedging.
• MSCI China Futures: The launch of MSCI China futures is seen as a significant macro instrument for exposure to "New China".
• Sector Exposure: The HSCEI is heavily weighted toward financials (70.9%), while other indices like MSCI China have different sector exposures. The equity/FX correlation is inverted, with HSCEI showing a negative beta against USDCNH.
• Volatility and Skew: Volatility and skew in China are relatively low compared to other markets, with the ratio of put vs. call volatility showing potential for upside.

Key Information and Insights

Market Correlations and Volatility

• Equity/Yield Correlation: Negative for most of the past century.
• Volatility Structures: Flat across the globe, with Europe and Asia showing elevated skew.
• Volatility Term Structures: Long-dated forwards in NKY and SX5E are near multi-year lows, indicating potential for stock replacement opportunities.
• VIX ETPs Impact: VIX ETPs have an impact on implied volatility, with the Gross VIX ETN Total Vega showing significant levels.

Investment Themes

• Shareholder Returns: In Japan, shareholder return themes outperform the broader market.
• Corporate Reform: In China, corporate reform is a key theme, with a focus on cash deployment and buybacks.
• Equity Re-rating: UK equities have underperformed due to missing out on recent equity re-rating.

Risk and Uncertainty

• Political Risk: Brexit and US presidential elections are key risks.
• Credit vs. Growth: In China, credit issues are a concern, but growth is showing signs of improvement.
• Downside Risk: The oil rally could lead to self-defeating outcomes due to high valuations in energy equities.

Key Tables and Data

CCAR 2016 Market Shocks

FTSE-250 vs FTSE-100 Exposure

BOJ Purchase Split

Sector Exposure in MSCI China

Conclusion

The document outlines the current market dynamics and investment opportunities in global equities, emphasizing the impact of macroeconomic and political factors. It suggests that while the US remains a key focus with Fed uncertainties and equity re-rating, Europe and Japan present unique opportunities due to volatility and political risk. The analysis also highlights the importance of understanding volatility structures, equity-FX correlations, and sector-specific themes for strategic investment decisions.