- Macro scenario for 2018. Global purchasing managers’ index [PMI] momentum moderating, EPS growth slowing to high single digits, and yields rising. Recession probabilities remain low; inflation upside could spark volatility.
- U.S. 10-year Treasury yields. Upside risk to fair value above 3%, core consumer price index (CPI) up >2% (1.8% now).
- U.S. dollar: more modest losses in 2018 (U.S. Dollar Index [DXY] -10% in 2017). DXY range of 90-95 (now 92) as U.S.-EU yield spreads narrow. C$ trades around US$0.80 in 1H/18.
- WTI crude oil averaging >US$58/bbl in 2018; Gold benefits from fading PMIs in 2H/18.
- Recommended asset mix. Equities > Bonds preference intact, but with declining conviction. Rising yields + fading PMIs = less-attractive equity risk/reward outlook.
Global markets grinded higher over the past month notwithstanding a bout of profit-taking in recent days. Economic reports around the world continue to point to solid growth momentum with 2017 on pace to post among the best global GDP growth rates since 2011. Economic momentum has broadened out to the four corners of the world over the past year with every major economy posting positive growth, reflecting a sturdier global recovery phase. This has translated into solid double-digit corporate earnings growth in the third quarter once the insurance sector has been excluded following its large, hurricane-related losses. Having avoided a correction in excess of 5% since February 2016, the S&P500 equity index has experienced an unusually long stretch without a meaningful pullback, leaving on the table some potential for transient profit-taking at some point.
Chuck Magro must be sleeping well at night. His $30B+ mega-merger will close imminently, nitrogen is set to exit cycle lows over the next 12 to 18 months, recent demand strength means potash may not be as doomed as first thought, and Chuck has numerous levers available to unlock shareholder value.
We see Nutrien eventually hitting the low US$60s, implying a 30% total return from today’s US$48 price. Nutrien offers something compelling for all investors: a good yield at 3.3% with dividend growth, a share buyback story – likely to unfold over the next year, strong leverage to the start of the next nitrogen cycle, a balance sheet de- risking story, growth of its stable cash flow generating business, and most importantly, value. We have raised our targets on AGU/POT to US$130/US$23, derived from a US$58 Nutrien price. You need to own this name.
Global equities, commodities and bond yields trended higher over the past month on encouraging economic data and earnings reports. In particular, manufacturing surveys, GDP data and labour market numbers have remained consistent with a solid pace of economic activity that continues to trigger ongoing upward revisions to growth forecasts. In the ongoing third-quarter reporting season, U.S. earnings and sales results continue to outperform analyst consensus estimates with earnings per share (excl. the insurance sector) growing at a very healthy 7.4% y/y rate, in large part thanks to stellar results from mega-tech companies. Markets have a litany of event risk to manage through over coming weeks including awaiting U.S. President Trump’s nomination of the next Chairperson of the Federal Reserve, Congress introducing a long-awaited tax reform proposal (talk of phasing in corporate tax cuts has weighed on equities recently), a possible ramping up of NAFTA headline risk heading into early 2018 as termination threats linger, etc.