Sky-high equity valuations here to stay?

• Have we witnessed the formation of a US equity bubble on the verge of bursting? Or can current valuations be justified by a shift in macro fundamentals?
• We model an S&P 500 fair value range and attribute medium-term price changes to their fundamental drivers. We find that the nine-year bull run can be largely explained by rising dividends and falling real yields. Elevated valuations are consistent with compressed discount rates and, without a significant repricing of real yields, they could be here to stay.

G4 vs Emerging Markets: where are we in the economic cycle?

• After nearly a decade in decline, the growth gap between emerging markets and developed markets is rising once more, but where is each group in its respective economic cycle?
• Although both groups were synchronised before the crisis, their respective economic cycles have since diverged. G4 economies appear to be well into their cycle, but EMs could be at the beginnings of a new cycle – a positive signal for EM currency investors.

Terminating NAFTA: What would the impact on Canada be?

• As NAFTA negotiations become increasingly fraught, the risk of a complete termination by US President Donald Trump is increasing
• The long-run impact of such a termination is likely to be limited, based on the MFN tariffs the US could apply
• The most likely impact would be in terms of the real economy, as the shock generated would hit consumption, spook investment and delay the Bank of Canada’s hiking cycle.
• To investigate the magnitude of this effect, we model the impact on real economic variables and interpret the impact on the Canadian dollar. Our results suggest that a 6% depreciation of the Canadian dollar against the US dollar could be justified.

International borrowing and the US dollar

• Some market participants are worried about the ever rising market value of US borrowing vis-à-vis the rest of the world – as measured by the Net International Investment Position
• Currency depreciation can function as an effective method of adjustment following an increase in external borrowing
• However, there are reasons to be cautious about this line of thinking, especially with respect to the US dollar. These include asset valuation effects, and the role of the US as a global facilitator of excess saving.