Valens Market Phase Cycle Monitor & Corporate Credit Macro View for November 2016

August 3, 2017

Market Phase Cycle™ Investing Strategy

Green shoots of growth are starting to emerge post-election

Equity markets expect continued subdued growth and ROA’ reaching historic peaks. Expectations that have been correct for most of the past 5 years. However, growing management confidence, renewed easing of credit standards and a changed political environment pointing to signs that growth may be just around the corner. This could lead to earnings growth that would warrant equity upside.

Management sentiment and policy changes signal growth opportunities

The Management Growth Confidence index is showing positive signals for the first time in over a year, and especially in areas like Finance, which may signal commitment to begin lending and investing. Also, the President-elect’s commitment to invest in infrastructure and reduce taxes may be a catalyst for growth and profit expansion to fuel growth.

Current valuations show expectations for ROA’ recovery, but continued subdued Asset’ growth

As has been the case for most of the last 5 years, market expectations currently are for ROA’ to continue to trend positively, but for Asset’ growth to remain subdued. Considering continued strong management execution and improvements in areas of headwinds like Energy, expectations for a recovery in ROA’ appear reasonable. If Asset’ growth remains as subdued as it has been, this would mean current market valuations are fair, but if growth accelerates, there is reason to expect upside.

Credit risk is not showing any near-term warning signs to disrupt the potential for growth

None of Valens’ proprietary credit metrics signal risk of a credit crunch, including near-term debt maturity analysis, iCDS and CDS analysis, and other fundamental metrics, limiting downside risk for the market. Also, while credit quality, as highlighted by delinquencies, is rising, in Q3 bank lending standards eased for the first time in five quarters, a potential positive catalyst for lending growth.

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