Current Economic Indicators and Forecast
April data showed weakness, reflected in a dovish CPI report, reports analyst Oskar Vårdal. However, May activity is picking up, with Vårdal’s Truck Demand indicator signaling a business cycle upturn from May onwards. Manufacturing indicators are strong, with the ISM manufacturing to services spread expected to rise.
Equities: Best Sectors for Cyclical Expansion
Despite some skepticism about survey-based economic improvements, ISM manufacturing is forecasted to stay above 50, suggesting a strong equity season. Materials sectors, which were previously undervalued, are once again cheap relative to the cycle and are recommended for exposure to an ISM Manufacturing >55 scenario.
Global Equities and Risks
South Korea is looking attractive if the US cycle continues to boom. China, while cheap, poses significant idiosyncratic risks, making it less favorable.
FX Market Opportunities
The USD’s recent volatility has created value opportunities in cyclical FX. G7 currencies like EUR and GBP appear cheap relative to the cycle, with AUD and SEK also offering potential gains against the USD. Vårdal mentions a short USDJPY and long EURUSD position to capitalize on downward USD pressures and positive rebalancing flows, with a potential long GBP trade under consideration.
Commodities: Sensitive to Manufacturing Data
Commodities remain highly sensitive to changes in manufacturing data. Although value gaps have normalized after a strong Q1 performance, commodities still appear undervalued relative to the cycle. Industrial metals like copper are particularly strong, with palladium/platinum being interesting if EV production in China increases. Crude oil is also seen as undervalued, making it a compelling investment.
Conclusion
Investors should monitor manufacturing indicators closely, as these can provide significant insights into asset performance. Vårdal’s analysis highlights the potential in equities, FX, and commodities, emphasizing the importance of aligning investments with the current business cycle trends.