Markets Live: Bank tax talk sparks $14b rout

That's it for Markets Live today.

Thanks for reading and your comments.       

Have a great evening, watch out for pies, and see you all again tomorrow morning from 9.

Talk of a new tax on the big banks combined with an underwhelming CBA trading update to trigger a vicious selloff in the big four lenders on Tuesday, shaving nearly $14 billion off their market capitalisation.

The S&P/ASX 200 fell 0.5 per cent to 5839.9, led by the banking sector, which suffered its worst day since last year's Brexit shock. All other sectors ended the day higher.

Investors, already jittery after soggy earnings results from the major lenders, rushed to the exit as reports came in that the federal budget would include a new tax on their balance sheet liabilities, aiming to raise $6 billion over four years.

"This represents around 5 per cent of the banking sector's profits," UBS banking analyst Jonathan Mott said.

Earlier in the morning CBA posted underwhelming third-quarter figures, book-ending a week of updates that started with ANZ's disappointing earnings result last Tuesday.

"CBA had a bad result in the morning and shares were pretty expensive to begin with," Regal Funds Management analyst Omkar Joshi said.

The country's biggest retail bank was hit hardest on Tuesday, falling 3.9 per cent, its biggest slump since February last year, but the other three weren't far behind, with Westpac dropping 3.5 per cent, ANZ losing 2.6 per cent and NAB down 2.1 per cent.

The past week of earnings results abruptly ended the April rally in the big banks, which had taken their shares to two-year highs.

Since May 1, ANZ - which also went ex-dividend on Monday - has plunged 11.3 per cent, Westpac has lost 6.6 per cent, CBA has shed 6.4 per cent, and NAB has dropped 4.9 per cent as local and global investors took profits.

"Offshore selling by big hedge funds, who see the stocks as highly priced, has also been a factor over the past week," Mr Joshi said.

The heavy losses in the banks masked a broadly upbeat tone, which saw 136 stocks in the benchmark index closing higher.

Telstra was among the biggest winners among blue chips, rising 2.3 per cent. But energy stocks also fared well, as did the big miners.

BHP Billiton added 0.8 per cent, South 32 rose 1.5 per cent, Origin Energy gained 2.6 per cent and Santos closed up 2.2 per cent.

More on that new tax the Treasurer is allegedly planning to slap on the banks in tonight's budget (see post below). UBS analyst Jonathan Mott reckons, based on the AFR reports, that it could be equivalent to a 5 per cent hit on bank earnings per share.

"It is unclear whether this tax will only apply to the major banks (most likely), include Macquarie (potentially) or also include the regionals (unlikely)," Mott says. He's talking a transaction, or Tobin, tax, while the AFR's latest is a tax on retained earnings. In any case, the banks "would be likely to pass [higher costs from a new impost] on to customers," Mott reckons:

The Australian Banks have a very good track record of passing on higher funding costs, credit risks and other headwinds to customers. Although there is likely to be political pressure and further calls for a Royal Commission, we would expect the banks to pass a potential transaction tax onto borrowers.

We believe the easiest way for the Banks to achieve this would be to reprice their mortgage books. To offset a $1.5bn headwind we estimate the Banks would need to reprice their variable mortgage books by 12- 15bp.

Alternatively, the Banks could increase owner occupied mortgage rates by ~10bp and investment property loans by ~25bp (Interest Only loans by more). This would also help the Banks meet their lending caps imposed by APRA

Looks like that bank levy we mentioned earlier is coming in today's budget:

Australia's big four banks are bracing themselves for a new tax on balance sheet liabilities in the 2017 federal budget which is said to raise $6 billion over four years, the AFR's Tony Boyd is reporting:

In a move reminiscent of Labor's mining tax, Treasurer Scott Morrison is planning to impose a tax on the aggregate liabilities of the major banks, according to banking sources.

The sources said Treasury Secretary John Fraser will call the big four bank chief executives tonight at 6.30pm before Morrison delivers the bad news.

The tax will come directly out of retained profits, which is of great concern to the banks because this is a source of capital for finance to small business.

Morrison could defend the tax by pointing to the strong profitability of the big four which make about $30 billion.

There are numerous ways of taxing banks. The most popular has been a financial transactions tax, also known as a Tobin tax in honour of a Nobel Prize winning economist James Tobin. Tobin taxes are in place in about a dozen countries including France, Hong Kong, South Africa, Italy and the United Kingdom.

But Morrison has opted for the same system used in the United Kingdom. This is a tax on liabilities for banks which have aggregate liabilities in excess of £20 billion. The UK tax is being phased out from 0.21 per cent to zero over the next five years.

Here's more at the AFR

Losses in the big four have accelerated since this morning, with CBA down 3.5 per cent, on track for its biggest daily loss since February last year, Westpac off 3.2 per cent, ANZ losing 2.4 per cent and NAB down 2 per cent.

Altogether, the big four have lost nearly $13 billion in value just today and more than $30 billion since the selloff started last Tuesday after ANZ posted underwhelming earnings.

Retailer JB Hi-Fi was revealed as a short by Trafalgar Copley's David Copley at the Sohn Investment Conference's forum for up-and-coming hedge fund managers in New York overnight.

Speaking at Next Wave Sohn, one of the world's flagship investment conferences for hedge fund ideas, Copley told the audience that he held a negative view on Australian property which includes Sydney and Melbourne - two of the world's six most expensive cities. The investor also proposed being short Mirvac and the New Zealand dollar.

We believe there is a bubble in residential Australian housing supply, says David Copley of Trafalgar Copley. #Sohn2017

— CNBC (@CNBC) May 8, 2017

According to one account of his presentation, Copley believes that JB Hi-Fi is vulnerable to the entry of Amazon in Australia and that its $870 million The Good Guys acquisition increases its exposure to housing. He also alluded to JB Hi-Fi's roll-out as being mature.

According to ASIC short position data, 7.65 per cent of JB Hi-Fi's capital is held by short sellers and 1.53 per cent of Mirvac, as of May 2. JB Hi-Fi shares are down 13.6 per cent this year after Tuesday's 84¢ or 3.3 per cent fall to $24.24.

It is one of a basket of domestic retailers that are under pressure since Amazon confirmed its Australian strategy including Myer, Metcash and Super Retail Group. Mirvac was unchanged at $2.29.

Here's more at the AFR

The FT 's revered Lex column has taken a look at TPG's $2.2 billion offer for Fairfax, recommending management turn down the private equity firm's bid:

Journalists see themselves as fearless seekers of truth. TPG, would-be owner of the Sydney Morning Herald, sees them as producers of clickbait for property listings.

Shareholders in Fairfax Media, owner of Australia's oldest newspaper, should reject the private equity group's $2.2bn approach because it understates the value of key assets financially, rather than socially.

The break-up bid is also an exercise in cherry-picking. The TPG-led consortium wants to buy Domain, an online property listings group, for 95 Aussie cents per Fairfax share in cash.

Newspapers, including the Herald, would change hands too, partly because their online reach extends that of Domain. This would leave Fairfax investors owning a rump business whose assets include rural Aussie titles with net debt of some $125m.

According to Fairfax, TPG attributes a value of 25-35 cents to this listed B-team. Some analysts think 15 cents would be closer. The lower estimate is consistent with the price of $1.09 at which Fairfax shares were trading yesterday.

The cash offer, meanwhile, assigns an enterprise value of 15 times earnings before interest, tax, depreciation and amortisation to Domain and its journalistic appendages. That looks cheap, considering online property businesses such as Australia's REA and Zoopla of the UK trade at 25 times.

TPG has shown intelligent opportunism in attempting to low-ball the board and shareholders of Fairfax. The group is embroiled in a strike with journalists over proposed job cuts.

However, the very weakness of newspapers could mean Fairfax gets a better offer from within the industry.

Consolidation is likely if Australia relaxes ownership rules to support the faltering industry. A defensive plan by Fairfax to demerge Domain could also deliver more for shareholders than TPG's approach. The bid belongs where old-fashioned editors once put all the news not worth printing: on a spike.

The Australian dollar has hit a fresh four-month low after disappointing retail sales figures reinforced expectations of steady interest rates for months to come.

The Aussie fell as low as US73.55¢ in the wake of the retail data, down 0.4 per cent on the day, and is currently fetching US73.61¢. Another wave of selling could hit the currency when European trading desks wake up around 4pm, AEST.

Watching interesting support level on A$ this evening over Federal Budget. 50% of 2016/17 range and downtrend support both come in at 0.7331 pic.twitter.com/Sd5jJlTozd

— Robert Rennie (@R0bertRennie) May 9, 2017

The weak data, however, barely changed expectations of a steady rate outlook with interbank futures showing almost no chance of a move this year.

"The annual rate of retailing values stands near levels not seen since 2013 when the RBA was in the midst of a rate-cutting cycle," St George chief economist Besa Deda said. "This time round, weak retailing growth is unlikely to lead the RBA to slice the cash rate in the near term ... because it is cognisant of the risks from rising household debt levels."

In other words, the RBA is worried a lower cash rate could prompt households already indebted to the tilt to take on even more debt.

The Aussie is down 1.7 per cent so far this month, largely due to retreating iron ore prices. The most-traded iron ore on the Dalian Commodity Exchange is down another 2 per cent, below 460 yuan a tonne and nearing January lows.

Meanwhile, the pound popped above $1.7600, the highest since September last year. A break above $1.7797 would open a test of the symbolic $2.00 last seen nearly one year ago.

Should investors be worried that the recent slump in commodities prices might indicate the next global economic downturn? HSBC chief economist Paul Bloxham asks.

Since mid-April, the prices of oil, iron ore and copper are down -12 per cent, -17 per cent and -4 per cent, respectively, although they are still well above their early-2016 troughs.

It's too early to really tell if the slump is the sign of something more serious, but Bloxham says there are good reasons on the supply side to believe that the price falls are not signalling a sharp fall in demand:

• For oil, the main story is that higher prices are bringing US shale producers back to life and that there could be global oversupply, not weak demand
• Iron ore supply is also ramping up and, so much so, that the decline in iron ore prices was widely anticipated
• With copper, the ending of strikes at the world's largest copper mine in Chile is set to boost copper supply, so, again, it is not necessarily a demand story 

Bloxham says the slump in metals prices is really more a China story than anything else, considering the country consumes more than half of global supply.

"We concede that it may very well be the case that the metal price decline is signalling that China's growth will slow in coming quarters."

But this has been widely expected, he says. HSBC's China economists are forecasting that China's growth peaked in Q1 at 6.9 per cent and will ease through the year to 6.6 per cent by Q4.

"At these rates, China's growth is still pretty hefty," he says, adding "The expected shift in the composition of China's growth away from metal-intensive housing investment is also consistent with some pullback in metals prices."

Pie face day. Here's the historical view:

The Bill Gates pie-in-the-face is widely regarded by experts to be the greatest CEO pieing. pic.twitter.com/YjqWHxvfZu

— John McDuling (@jmcduling) May 9, 2017

"The retail sector is verging on recession", says Citi economist Josh Williamson.

In a note that lobbed into our inboxes just after that last post, Williamson points out that "retail trade growth has now been negative in three out of the last four months (no growth per month on average), the sector's worst performance since July to November 2012".

The March data pre-date APRA's announcement at the end of March to tighten lending conditions, which has seen lending rates rise, especially for investors and interest-only borrowers, and our bank analysts expect some further rises. This will add to the downward pressures on the consumer. This is why we downgraded our outlook for consumer spending to flat line at slightly below trend both this year and next.

The data place some near term downside risk to the RBA's view that household consumption will increase at a rate slightly above the average since the GFC. But as there are no economics related speeches by RBA officials ahead of the next board meeting on June 6 we can't gauge the Bank's reaction.

Furthermore, the weaker retail data wasn't hinted at in yesterday's business confidence and conditions data that showed an improvement in March and April and which the RBA considers valuable. In the meantime, investors should look to the wage cost index data on May 17 and Labour Force on May 18.

This morning's poor retail sales figures will "add to growing concerns about the health of the household sector", Capital Economics economist Kate Hickie writes:

In particular, the much weaker than expected rise in real retail sales in the first quarter suggests that real consumption growth eased notably last quarter.

Nominal retail sales fell outright for the second consecutive month in March. This is a very rare occurrence (it has been seven years since it last happened) and means that there wasn't any momentum in retail spending going into the second quarter. 

The sales data were "unequivocally weak", and suggest "not every cloud has a silver lining," JP Morgan's Tom Kennedy says:

This is a material deceleration from the prior quarter, which was also revised down two tenths to 0.7% q/q, and confirms our sense that the pace of household consumption recorded late last year was facilitated by a sharp drop in the saving rate, and was unsustainable.

While the retail sales and national accounts data are not perfectly aligned (retail sales has a narrower scope, even within goods spending), today's print creates some downside risk to 1Q household consumption.

Barclays economist Rahul Bajoria also highlights how the weak consumption growth implied by retail sales data could weigh on Q1 GDP:

The bounce higher in consumption in Q4 appears to be an aberration, and in Q1, we think consumption GDP growth is likely to slow, as evident from the weakness in real retail sales for Q1 17.

Real retail sales fell to 0.1% q/q growth, the weakest print in 11 quarters, and may only show a modest recovery going into Q2, in our view. We also believe that the improvement in employment may take time to spill over into consumption growth, as higher corporate profitability will likely only gradually spill into wages.

RBC Capital's Michael Turner writes:

The weakness in spending over Q1 is somewhat surprising given that i) household wealth grew further over H2'16 given the rise in residential property prices and ii) the labour market added 130k jobs over Q4 and Q1. 

To be sure, we have long held a below-trend consumption profile in our numbers.  However, we had expected a gradual slowdown over 2017 as a slower housing market and consolidation of household balance sheets helped the savings rate stabilise, leaving spending growth closer to (weak) income growth. The lack of momentum in household spending already apparent to start the year leaves a heightened focus on incoming data on consumption.

Finally, ANZ's Jo Masters writes:

The recent speech by RBA Governor Lowe highlighted the Bank's growing concern about the vulnerability of the economy to shocks to the household sector given the high level of indebtedness. In line with this concern we have argued in earlier research that the household saving rate is likely to have risen in Q1. The soft retail sales data is consistent with this.

With interest-only loans comprising 50 per cent of its mortgage book, is Westpac "the most exposed bank to the Australian housing bubble"?

That's the question being asked by UBS's straight-talkin' banking analyst Jonathan Mott, who has downgraded Westpac shares to "neutral" in a note titled "Nowhere to run".

"For the first time Westpac [WBC] disclosed its exposure to interest-only (IO) lending, which contributes 50% of its mortgage book and 46% of 1H17 flows," Mott writes in a note to clients.

"This compares to ~40% for the system. While WBC indicated that IO mortgage applications have recently fallen to the mid-30s, there is still a long way to go for WBC to get below APRA's 30% cap (we expect banks will need to target 20-25% to allow a buffer)."

The analyst's 12-month share price target has dropped to $32.50 from $33.50. The stock last fetched $33.19.

All that said, Mott described Westpac's capital build as "strong". And the call is a neutral, rather than negative one, belying the dramatic headline.

A couple of weeks ago UBS economists rang the bell on the housing construction boom, saying that new housing starts will fade next year and that property price growth is set to "moderate" from here.

Mott picks up on that theme, writing:

We expect the housing market to slow sharply as APRA's macro-prudential changes come into effect. We see risks to household cash flows as banks reprice their books and borrowers face ~30% increase in repayments as they move from IO to principal & interest.

We have been supporters of Westpac and continue to see it as a well-managed, conservative organisation. However, with the stock having rallied to 14.1x 18E P/E and a more challenging outlook for the banks and the housing market, we have moved our rating back to neutral.

We expect the revenue outlook to remain challenging over coming years as credit growth slows.  While some [net interest margin] expansion is likely near term, this is likely to be offset by a normalisation in credit charges from low levels.

Mott is on a bit of a roll: yesterday he downgraded Macquarie to neutral.

James Packer's Crown Resorts has ended its 12-year adventure in Macau, selling the remainder of its stake in Melco Crown Entertainment for $1.34 billion.

Crown formally announced the sale this morning, and said the proceeds from the sale of the 11.2 per cent stake would "initially be used" to reduce debt.

The sell-down is the final part of Crown's exit from Melco; in December 2014 it sold a 13.4 per cent stake in Melco, raising $1.6 billion.

Crown will also formally end its joint venture with Melco and its chief executive, gambling scion Lawerence Ho.

In a statement Mr Ho described Melco's tie up with Crown as "the world's most successful global gaming partnership" and thanked Mr Crown for being a great friend and partner for the past decade".

Importantly, the end of the joint venture means Melco and Crown will now pursue separate proposals to build casinos in the newly opened market of Japan.

"Despite our positive history with Crown, I made the strategic decision to terminate the joint venture arrangement and allow Melco to pursue Japan alone," Mr Ho said.

Japan is seen as a trophy for casino operators around the world, given its proximity to China, its wealthy population and its stable regulatory environment.

By contrast, Macau casino operators have been caught up in a broader corruption crackdown driven by Chinese authorities.

Just hours before Crown announced its sales, Macau authorities announced they will require facial recognition and identification card checks at ATMs before Chinese UnionPay cardholders can withdraw cash. The measure is aimed at further curbing money laundering in the world's largest casino hub.

In November last year, 18 Crown staff were detained in China amid a further crackdown on wealthy gamblers.

Crown paid a special dividend to investors following its December Melco selldown, but it is unclear whether this will repeated with the latest deal.

Crown shares are up 1 per cent at $12.63.

And here are some responses from the Twitterati to this morning's disappointing retail sales data:

A surprise 0.1 per cent monthly fall in retail sales over March has sent the Aussie lower, with annual growth in retail turnover dropping to 2.1 per cent, its weakest in nearly four years.

The figure is well off the consensus economist prediction for sales to expand by 0.3 per cent over the month.

Currency traders reacted swiftly to the miss, sending the Aussie lower by a quarter of a penny on the release. It last fetched 73.7 US cents.

Over the March quarter, and after stripping out price effects, turnover rose 0.1 per cent in the March quarter 2017, following a rise of 0.7 per cent in the December quarter 2016, the ABS reports. The main contributors to this rise were food retailing (0.6 per cent), household goods retailing (0.4 per cent) and other retailing (0.4 per cent).

"Inclement weather was expected to restrain sales with the March month featuring abnormally wet conditions over the major eastern states and Cyclone Debbie impacting Qld and parts of NSW late in the month," Westpac economist Matthew Hassan said.

"That impact looks to have been more substantive, retail sales fell 1.3 per cent in Queensland. Sales across the rest of Australia rose 0.2 per cent over the month."

We interrupt this blog for an important message: Qantas boss Alan Joyce has had a pie shoved in his face while speaking at a business breakfast in Perth.

Joyce was the keynote speaker at a West Business Leadership Matters event at the Hyatt Regency this morning when a man appeared on stage with a pie, according to the ABC.

The man, reportedly in his 60s, then grabbed the Qantas CEO before shoving the pie in his face and casually walking off stage.

Qantas boss Alan Joyce copped a cream pie in the face during a talk at a leadership breakfast in Perth. Report in 7 News at 6pm. pic.twitter.com/P6zsOTOW9X

— 7 News Adelaide (@7NewsAdelaide) May 9, 2017

It's not clear why Joyce became victim of a pie attack but apparently he dealt with it very well, leaving the stage to get cleaned up and returning a few minutes later to continue his speech.

The attacker seems unlikely to be a Qantas shareholder, as he'd have little to complain about: the stock has hit a fresh nine-year high today of $4.72, up 1.3 per cent for the session and a whopping 41 per cent since the start of the year.

Investors have been cheering strong earnings growth and last week's trading update showed the airline is on track for its second-best profit ever.

And Credit Suisse reckons the shares could even rise to $7.00 if the airline achieves its longer-term targets of a 10%-plus return on invested capital through financial year 2020, and loyalty pre-tax earnings to hit $500 million by 2022.

"These are tough but potentially achievable targets, with strong management execution and limited adverse market conditions (ie, fuel spikes, new entrants, economic/political crises...), " said analyst Paul Butler.

We say, Joyce clearly deserves cake.

Reports of a new levy on banks in today's budget have spooked investors, accelerating the May selloff in the sector.

It didn't help that CBA's trading update this morning came in on the softer side of expectations.

Cash earnings for the quarter were $2.4 billion which was slightly weaker than consensus expectations of $2.45 billion, but on an underlying profits basis, the result was about 6 per cent below consensus expectations which Regal analyst Omkar Joshi says  highlights the weak revenue environment the banks are in.

"Overall, the result was slightly weaker than expectations but the composition was also soft," Joshi says.

Shares of the big four are all down around 2 per cent for the day, with CBA's 2.6 per cent drop leading the way.

Bank shares have been under pressure ever since ANZ released disappointing numbers last Tuesday, retreating from multi-year highs hit just the day before.

ANZ is leading the sector's decline, plunging 11 per cent since May 1 - a fall of greater than 10 per cent is deemed a 'correction' - while the other big banks are down around 5.5 per cent since then. It's worth noting, though, that ANZ went ex-dividend yesterday, which in itself accounts for 80¢ of the $3.70 drop.

Altogether, the big four banks have lost around $30 billion in value in just one week of trading.

Even the smaller banks are deep in the red this month, with Bank of Queensland down 3.9 per cent and Bendigo and Adelaide Bank losing 4.6 per cent. Macquarie is holding up better, thanks to last week's strong annual result, but shares are still down 2.2 per cent since May 1.

The government is believed to be considering a levy on the big four banks as part of today's budget, Sky News Business reported late yesterday.

The proposed levy would not touch the savings of normal Australians, Sky said, but target the hundreds of millions in institutional loans the big four banks make to each other.

"However (the levy) is described it will represent an additional tax or fee and the market is likely to be nervous about this prospect until they get details of what might be involved and what capacity of banks might have to pass this cost on to customers," said CMC chief market analyst Ric Spooner.

The tax talk came after Treasurer Scott Morrison signalled yesterday that the budget would target the major banks on a range of measures, announcing a Productivity Commission inquiry into competition in the financial services sector.

In an interview with the AFR, Morrison said despite some competitive advances driven by innovation and technology, the major banks had grown more powerful since the Global Financial Crisis.

"There should be no denying that there has been an increased consolidation of the position of the major banks," he said.

We mentioned below that "implied" or "expected" volatility on the S&P 500 index, as per the Vix, is at its lowest since 1993. But actual volatility is also at multi-decade lows on both sides of the Atlantic, the FT reports.

The realised 90-day volatility of the S&P 500 index has fallen to just 6.7 per cent, which makes this the most tranquil market since 1995, while realised European stock market volatility is near its lowest level since 1990.

"It's quite something," said John Vail, chief global strategist at Nikko Asset Management. "It seems we're in a goldilocks environment right now. But it's quite surprising that with all the uncertainty in the world that Vix would be so low."

"The more volatility gets compressed, the more volatility expands when it is released," said Nigol Koulajian, the chief investment officer of hedge fund Quest Partners. "When something happens, it's going to be really bad . . . Volatility has become completely useless as a measure of risk."

A reasonably balanced sharemarket performance has been overwhelmed by heavy selling in the big banks and miners, after CBA's quarterly update fails to spark interest in the sector.

The ASX 200 is off 39 points or 0.7 per cent at 5832, with as many stocks higher as there are lower.

CBA is down 2.3 per cent, Westpac 2 per cent, ANZ 1.8 per cent and NAB 1.4 per cent. Macquarie has dropped 1.9 per cent. Resources stocks are also lower, with BHP down 0.3 per cent, Rio 0.6 per cent and Fortescue 2.2 per cent.

Woodside is up 0.3 per cent, pacing gains in the energy sector and the oil price. Santos is up 0.7 per cent.

Industrials are doing well as investors turn away from the major mining and banking sectors. Brambles is up 0.7 per cent and Aurizon 0.6 per cent, while Computershare has added 0.7 per cent.

Retail stocks are getting beat up again this morning after yesterday's plunge in Myer after a broker slashed their earnings expectations ahead of the department store's quarterly trading update on Friday.  Myer is steady, but Harvey Norman is down 3.9 per cent and JB Hi-Fi has dropped 3.7 per cent. Retail sales data from the ABS is due today.

DoubleLine Capital's Jeffrey Gundlach recommends shorting the S&P 500 index and going long on emerging market stocks despite conventional wisdom that raising US rates will lead to a stronger greenback.

Specifically, Gundlach recommended wagering long on the iShares MSCI Emerging Markets exchange-traded fund and betting against the SPDR S&P 500 ETF. He also said it's a myth that the Federal Reserve raising rates necessarily leads to a stronger US dollar.

"What the heck, let's have some fun," Gundlach, chief investment officer of DoubleLine Capital said overnight at the Sohn Investment Conference in New York. "Let's leverage it one time."

At last year's conference, Gundlach recommended a pair trade, going long on a mortgage REIT ETF while shorting a utilities sector ETF. After covering the cost of one turn of leverage, the trade yielded 40 per cent in the year through Friday.

This year's bet is a relative value play and not a forecast that the S&P 500 will fall, Gundlach said.

"For about a year and a half now, there's been no outperformance of the S&P 500, but rather the emerging markets had been competing well and now they're outperforming year to date," Gundlach said during his Sohn presentation Monday.

Gundlach is primarily a bond investor. On a May 2 webcast, he advised sticking with gold and emerging-market debt while warning the stock market may face a correction and oil prices are likely to fall.