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Global Equity Strategy Summary

Core Content

This document outlines the current state of the US and global equity markets, focusing on capital expenditure trends, earnings revisions, and fund flows. It highlights key developments and insights from Jefferies analysts, particularly regarding the impact of Federal Reserve policies, sector-specific performance, and market sentiment.

Key Takeaways

• Market Performance: The S&P 500 dropped nearly 2% over the past week, while US Treasury yields rose by 21 basis points. Industrial commodities, including copper, saw significant gains, hitting a ten-week high.
• Fed Policy and Capital Expenditure: The Fed's balance sheet expansion has not significantly boosted consumer lending or spending. However, recent signs indicate a shift, with commercial and industrial (C&I) loans beginning to follow a more typical cyclical pattern.
• Earnings Revisions: There is a noticeable improvement in earnings expectations for several sectors, including Consumer Durables, Distribution Services, and Electronic Technology, with analysts becoming less bearish.
• Fund Flows: Global fund flows into equities have been positive, with the Consumer Discretionary sector drawing the second largest net inflows year-to-date (YTD) at $28bn, followed by Industrials and Information Technology.

Main Points

US Capital Expenditure Trends

• US capital expenditure as a percentage of GDP remains below trend.
• The net stock of private fixed assets is at its lowest since the 1950s, indicating a potential shift in investment activity.
• C&I loan growth has lagged behind the Fed's balance sheet expansion but is now more in line with typical economic cycles.

Earnings Revisions

• Consumer Durables: Earnings revisions for FY1 and FY2 have improved, with analysts becoming less bearish.
• Distribution Services: Earnings expectations for FY1 and FY2 have seen a shift towards more positive outlooks.
• Electronic Technology: Analysts are more positive on FY1 earnings and have also become more optimistic about FY2.
• Producer Manufacturing: Earnings revisions for FY1 and FY2 have shown a positive trend.
• Consumer Services: Expectations for FY1 earnings are still cautious, with analysts turning more bearish.
• Process Industries: Earnings revisions for FY1 are flat, but there is some caution for FY2.
• Energy/Minerals: Earnings expectations for FY1 are cautious, and the outlook for FY2 remains uncertain.
• Non-Energy Minerals: Earnings revisions for FY1 and FY2 are flat, with no significant change.
• Retail Trade: Earnings expectations for FY1 are at their worst, but there is a slight improvement for FY2.
• Transportation: Earnings revisions for FY1 are at their lowest, but there is a slight positive trend for FY2.

Fund Flows

• Consumer Discretionary: Second largest net inflows YTD at $28bn.
• Energy: Reasonable net inflows YTD at $17bn, but performance has been sideways.
• Industrials: Reasonable net inflows YTD at $18bn.
• Information Technology: Third largest net inflows YTD at $25bn.
• Materials: Lagged behind other sectors in terms of net inflows YTD at $9.2bn, despite a 5% rise in the MSCI ACWI Materials index.

Key Information

• The upcoming release of the Minutes of the July 30th-31st FOMC meeting will provide insights into the Fed's potential tapering of QE.
• The document includes a list of Jefferies stock picks, reflecting their views on US capital expenditure (CAPEX) opportunities.
• Analysts at Jefferies are emphasizing the importance of understanding the link between Fed policies and the commercial sector's response.
• The document also includes detailed disclosures about the analysts' certifications and potential conflicts of interest, highlighting that the ratings and price targets are based on personal views and not directly tied to compensation.

Analysts and Contact Information

• Sean Darby: Chief Global Equity Strategist, +852 3743 8073, sdarby@jefferies.com
• Kenneth Chan: Quantitative Strategist, +852 3743 8079, kenneth.chan@jefferies.com
• Vivien Hu: Equity Associate, +852 3743 8078, vhu@jefferies.com

All analysts are employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC, and are not registered with FINRA. This may affect their compliance with certain regulations.

Jefferies Ratings

• Buy: Expected total return of 15% or more within 12 months.
• Hold: Expected total return of plus or minus 10% within 12 months.
• Underperform: Expected total return of minus 10% or more within 12 months.
• NR: Investment rating and price target temporarily suspended.
• CS: Coverage suspended.
• NC: Not covered.
• Restricted: Describes stocks that may have specific restrictions on trading or communication with the subject company.