Monthly Market Update – Oct 2017

Oct 10, 2017 | Articles, Global Markets Update

HOW WE ARE POSITIONED FOR Q4 17

We anticipate that markets will be trading still well supported into year-end. US stock indexes have made new highs after an impressive run-up and overcoming uncertainty over US politics and headlines about North Korea, and the HK market broke above the 28,000 level; meanwhile, European and UK stocks have been underperforming, dragged down by a much stronger Euro and worries about Brexit.

• Bond prices have tumbled as the market has been preparing for interest rates rises and the end of Quantitative Easing.
• Commodity markets are expected to remain at a mixed to stabilised level, with Oil once again finding support at $45 per barrel, but unable so far to break 50 convincingly, while Gold’s massive bull run has been partially reversed with prices dipping below the 1300 support level, helped by the strengthening of the US Dollar and diminishing fears about North Korea.
• The US Dollar is likely still to be weak in the medium term, as expected rate hikes have been discounted, and the markets are now focusing on other countries to raise interest rates.
• Overall, we remain medium-term relatively constructive on stocks; however, we are wary at the current levels and we would buy into a correction. We see uncertainty about the next Central Banks moves and geopolitical risk and so we think stock markets could be moving sideways for the month of October. For this reason, we advise buying high dividend stocks and to generally carry and rotate from overvalued sectors to more undervalued.
• Market complacency is still at its extreme, but we do not think it is sustainable. Therefore, we suggest buying protection via hedging strategies to protect against market volatility while it trades at multi-year lows. Strategies like buying puts, selling call spreads, buying bear ETFs or allocating more to cash for this month are advised.
• It is interesting to note that since the last Fed Meeting in September, the USD has strengthened and the US yields have spiked. Now both USD and Bond yields are trading well off the year lows.

• However, we believe that the rate outlook seems pretty much discounted, and that we can expect to see the start of offloading the Fed Balance Sheets. This would be more crucial for the market.

• Another hike is forecasted for December, with the market giving an 80% chance of a hike as the Fed seems comfortable with the current pace of economic growth. However, the weakening USD this year has loosened financial conditions by increasing the levels of exports.

• While we are wary of Brexit and the stronger Euro, we believe that the existence of cheap valuations and a generally underweight position in European assets make certain European equities attractive.
• A stronger Euro, while a small drag on some European exporters, will be overall beneficial as it will contribute to a positive outlook for Europe.
• We are constructive on Emerging Markets, as markets look solid and seem immune to the US interest rate hikes.

• We still like South East Asian economies, as reforms have helped boost investments and growth. India, Indonesia, Vietnam and Philippines are our favourite markets to watch closely. 

MARKETS OVERVIEW

Equities – Expecting Sideways Moves

• Equities across the board have made new highs on the year. However, we are still concerned about a possible pullback due to valuation multiples looking stretched and the potentially stubborn political impasse in the US, plus more geopolitical worries about North Korea, and uncertainties about the Central banks tapering. For this reason, we prefer to lighten our long equity positions in the short-term. For the long-term, we are selectively choosing overweight equities, especially versus bonds: they offer the best return prospects versus other asset classes over a 12-month horizon.
• We discussed last month that it would make sense to take profits on very overvalued sectors like Technology and rotate into more undervalued sectors like Healthcare and Energy, and we still think the same way.

Bonds – Bearish

• With a rising interest rate environment, most bond markets are vulnerable. After the big climb last year, US bond yields have stalled in a range, and then have come off, while European yields have been trending higher in the last few months as the ECB has announced that the end of QE could be approaching. Most sovereign bonds are still looking expensive and vulnerable to any hawkish changes from the Central Bank policies, especially in Europe, UK and Japan.
• If investors need to be positioned in fixed income, we prefer either inflation protected bonds (e.g. TIPS) or high quality corporate bonds with short durations trading at or near face value.
• Our previous view was to use bonds as an alternative for cash balances which were earning next to nothing. However, in this environment the risk of capital loss on bonds outweigh the potential rewards for trying to get a better than zero percent coupon.

Commodities – Expected Sideways Markets

• Oil prices have been in a range with continued high inventory levels and signs that non-OPEC production will keep rising in response to the rebound of prices over the past year.
• Oil demand continues to grow at a steady pace of 2%. On the other hand, supply is quickly increasing. The US rig count has almost doubled since the lows of May 2016, so we think a range of 45/55 seems reasonable with short-term risk to the downside. From a medium-term perspective, we still remain bullish.
• Gold has come off after the big rally of the past few months, as geopolitical risks have faded and the US Dollar and strengthened from the lows. At the current level of 1280, we are neutral to bullish on Gold for the short term, but we are less positive for the long term.

Currencies – Consensus bearish on USD

• Until there is more clarity on Trump’s policies, the US dollar will continue to move loweragainst most currencies. While interest rate hikes will benefit the USD, the Administration’s fiscal policies could put a ceiling on the value of the greenback. The main driver of the US dollar’s strength will come from a US interest rate rise, and if the Fed is more hawkish than expected, we could see a renewed interest in buying USD. We are bullish on the Euro as investors are still too underweight. Economic data has been solid, pushing the ECB to talk about increasing rates earlier than expected, as Draghi has mentioned in the last meeting.

Alternatives – Bullish

• We are generally positive on property markets, with a preference for commercial over residential. Our favoured countries for exposure include Australia, UK, South East Asia, USA, and Vietnam. Please ask for more information on some of the projects we are currently working on.
• We also have a positive outlook on Private Equity as we see better growth opportunities, whilst lower valuations are seen across the industry compared to most stock markets.

BULLISH SECTORS

• Energy, Financials and Industrials outperformed. The Utilities sector was the biggest loser, with Technology and Telecoms underperforming.

• Technology stocks have had the best performance Year to Date. Given that it is the most expensive sector, we still have the view that it is the right time to reduce long positions and take profits particularly because we believe exposure to China could be negative.
• The Healthcare sector continues to benefit from improving pipeline productivity and an increasing number of new drugs approved by FDA.
• We think it is time to take profit on the Energy sector after the strong performance in September.
• Lastly, we still like Financials even after a 4% rally in September: valuations are still not expensive, and we see a renewed push up in interest rates in the US and in the rest of the world.
• Improving business and consumer confidence should continue to support credit demand.
• Stronger economic growth will reduce non-performing loans.
• Capital ratios have improved, and a steeper yield curve should be positive.

HOW WE MANAGE RISK – PORTFOLIO PROTECTION, HEDGING & TAKING PROFITS

As opposed to just going to cash, we prefer alternative strategies such as hedging via options and option writing strategies to smooth out portfolio volatility.

We also actively monitor profits using trailing stop losses with the view of protecting and locking in gains.

PORTFOLIO MANAGEMENT SERVICES

Please let us know if you would like to hear more about our Discretionary Portfolios and how we consistently generate an additional 0.5% to 1.5% per month using our Options Overlay.

CONTACT

We would be more than happy to have an informal chat about these and the other services we offer as well as the current opportunities we are looking at.

Monthly Market Update – Sept 2017

Sep 11, 2017 | Articles, Global Markets Update

HOW WE ARE POSITIONED FOR THE REST OF Q3 17

We anticipate that markets will be trading on a defensive stance and jittery for the rest of the Quarter. US stock indexes have made new highs after an impressive run-up and overcoming uncertainty over US politics and headlines about North Korea, and the HK market is breaking above the 28,000 level; meanwhile, European and UK stocks have been underperforming, dragged down by a much stronger Euro and worries about Brexit.

• Bond prices have rebounded as the market has been scaling back interest rates rises and discounting any pick up of inflation for the time being.
• Commodity markets are expected to remain at a mixed to stabilised level, with Oil once again finding support at $45 per barrel, while Gold has seen a massive run breaking the 1300 resistance helped by the weakening of the Dollar and fears about North Korea.
• The US Dollar is likely to be trading at lower price levels, as expected rate hikes have been discounted, and the markets are now focusing on other countries to raise Interest rates.
• Overall, we remain medium-term relatively constructive on stocks; however, we are wary at the current levels and we would buy into a correction. We see uncertain about the next Central Banks moves and geopolitical risk and so we think stock markets could be moving sideways for the month of September. For this reason, we advise buying high dividend stocks and generally carry and rotate from overvalued sectors to more undervalued.
• Market complacency is still at its extreme, but we do not think it is sustainable. Therefore, we suggest to buy protection via hedging strategies to protect against market volatility while it trades at multi year lows. Strategies like buying puts, selling call spreads, buying bear ETFs or allocating more to cash for this month are advised.
• It is interesting to note that since the expected rate hike by the Fed on 14th June, the USD has weakened and the US yields have declined. Now both USD and Bonds yields are trading at the year low.

• However, we believe that the rate outlook seems pretty much discounted, and that we can expect to see the start of offloading the Fed Balance Sheets. This would be more crucial for the market.

• Another hike is forecasted for December, but the market getting less and less convinced of that as the Fed seems comfortable with the current pace of economic growth. However, the weakening USD this year has loosened financial conditions by increasing the levels of exports.

• While we are wary of Brexit, the stronger Euro and the upcoming German elections at the end of the month, we believe that the existence of cheap valuations and a generally underweight position in European assets make certain European equities attractive.
• A stronger Euro, while a small drag on some European exporters, will be overall beneficial as it will contribute to a positive outlook for Europe.
• We are constructive on Emerging Markets, as markets look solid and seem immune to the US interest rate hikes.

• We still like South East Asian economies, as reforms have helped boost investments and growth. India, Indonesia, Vietnam and Philippines are our favourite markets to watch closely.

MARKETS OVERVIEW

Equities – Expecting Sideways Moves

• Equities across the board have experienced a significant rebound from the sell-off in mid-June.

However, we are concerned that a pullback may be coming due to valuation multiples looking stretched and the potentially stubborn political impasse in the US, plus more geopolitical worries about North Korea, and uncertainties about the Central banks tapering. For this reason, we prefer to lighten our long equity positions in the short-term. For the long-term, we are selectively choosing overweight equities, especially versus bonds: they offer the best return prospects versus other asset classes over a 12-month horizon.

• We think it would make sense to take profits on very overvalued sectors like Technology and rotate into more undervalued sectors like Healthcare.

Bonds – Bearish

• With a rising interest rate environment, most bond markets are vulnerable. After the big climb last year, US bond yields have stalled in a range, and then have come off, while European yields have been trending higher in the last few month as the ECB has announced that the end of QE could be approaching. Most sovereign bonds are still looking expensive and vulnerable to any hawkish changes from the Central Bank policies, especially in Europe, UK and Japan.
• If investors need to be positioned in fixed income, we prefer either inflation protected bonds (e.g. TIPS) or high quality corporate bonds with short durations trading at or near face value.
• Our previous view was to use bonds as an alternative for cash balances which were earning next to nothing. However, in this environment the risk of capital loss on bonds outweigh the potential rewards for trying to get a better than zero percent coupon.

Commodities – Expected Sideways Markets

• Oil prices have been in a range with continued high inventory levels and signs that non-OPEC production will keep rising in response to the rebound of prices over the past year.
• Oil demand continues to grow at a steady pace of 2%. On the other hand, supply is quickly increasing. The US rig count has almost doubled since the lows of May 2016, so we think a range of 45/55 seems reasonable with short-term risk to the downside. From a medium-term perspective we still remain bullish.
• Gold has been rallying in the past months amid geopolitical risks and worries about US fiscal policy. Gold has been rallying as the Dollar was sold off. At the current level of 1350, we are neutral on Gold, unless the situation with North Korea would escalate. However, we would be buying on any dips close to the big 1300 level.

Currencies – Consensus bearish on USD

• Until there is more clarity on Trump’s policies, the US dollar will continue to move lower against most currencies. While interest rate hikes will benefit the USD, the Administration’s fiscal policies could put a ceiling on the value of the greenback. The main driver of the US dollar strength will come from the US interest rate rise, and if the Fed is more hawkish than expected, we could see a renewed interest in buying USD. We are bullish on the Euro as investors are still too underweight. Economic data has been solid, pushing the ECB to talk about increasing rates earlier than expected, as Draghi has mentioned in the last meeting.

Alternatives – Bullish

• We are generally positive on property markets, with a preference for commercial over residential. Our favoured countries for exposure include Australia, UK, South East Asia, USA, and Vietnam. Please ask for more information on some of the projects we are currently working on.
• We also have a positive outlook on Private Equity as we see better growth opportunities, whilst lower valuations are seen across the industry compared to most stock markets.

BULLISH SECTORS

• Utilities, Materials and Technology outperformed. Energy was the biggest loser, with Financials and Consumer Discretionary.

• Technology stocks have had the best performance over the past 12 months. Given that it is the most expensive sector, we still have the view that it is the right time to reduce long positions and take profits particularly because we believe exposure to China could be negative.
• The Healthcare sector continues to benefit from improving pipeline productivity and an increasing number of new drugs approved by FDA.
• We also like the Utilities sector of the stable business and high dividend. Its names are less vulnerable to Trump trade wars and valuations are attractive.
• Lastly, we like the look of the Financials again: valuations are still not expensive, and we see a renewed push up in interest rates in the US and in the rest of the world.
• Improving business and consumer confidence should continue to support credit demand.
• Stronger economic growth will reduce non-performing loans.
• Capital ratios have improved, and a steeper yield curve should be positive.
• Energy shares could be the wild card if oil rebounds; they look much cheaper compared to 3 months ago.

HOW WE MANAGE RISK – PORTFOLIO PROTECTION, HEDGING & TAKING PROFITS

As opposed to just going to cash, we prefer alternative strategies such as hedging via options and option writing strategies to smooth out portfolio volatility.

We also actively monitor profits using trailing stop losses with the view of protecting and locking in gains.

PORTFOLIO MANAGEMENT SERVICES

Please let us know if you would like to hear more about our Discretionary Portfolios and how we consistently generate an additional 0.5% to 1.5% per month using our Options Overlay.

CONTACT

We would be more than happy to have an informal chat about these and the other services we offer as well as the current opportunities we are looking at.

2016 – A MIXED YEAR FOR ASSET MARKETS

Jan 23, 2017 | Articles, Global Markets Update

Generally, 2016 was an another difficult year for most money managers, especially for long only mutual funds. The year was notable for the high levels of volatility, significant policy moves, geopolitical risk, and declining economic growth and other various shocks. We believe the below chart summarises the year and the events that unfolded quite nicely.

Below is a selection of key equity market indices performance for the 2016 year:

The below are the assets that performed well in 2016:

SHORT TERM – HOW WE ARE POSITIONED INTO 1Q17

• We believe markets will remain mixed for the 1Q ahead, although consensus longs are for stronger USD denominated assets especially equity indices, on the back of expected inflation and expansionary fiscal policies for the newly elected Trump government. Bonds are expected to remain under pressure as the multi-year bull market comes to an end and with the Fed looking to increase interest rates in the year ahead. Commodity markets remain unloved and a consensus short. However, there may be a time to revisit as a contrarian play some time in the next 12 months.

• Overall we remain cautious, although more constructive than we were 6 months ago. It is our view that portfolio outperformance will be more about correct asset selection than previous years where it was all about asset allocation. Nonetheless, we remain vigilant on the risks and see policy risk and central bank movement as once again the key wild card for the year ahead.

• Many risks and uncertainties remain. Both geopolitical and economic.

• This all means that the quarter ahead is expected to be a bit more eventful than prior years, and therefore we continue to keep a very close eye on the positions within the portfolio as well as being nimble enough to take advantage of opportunities as these arise.

• We remain optimistically cautious and are slowly re-allocating capital to only those assets we believe hold the highest promise of delivering out performance as we expect a moderate upwards trend. Overall we are taking a quality bias in our stock selection.

LONG TERM – PORTFOLIO STRATEGY & OPPORTUNITIES – 2017 OUTLOOK

Our Investment Committee continues to expects another difficult and volatile year for asset markets in 2017. The outlook and performance of asset markets will be greatly influenced by the following major areas of focus:

• Trump presidency and likely unconventional policy initiatives and announcements.

• The start of a normalisation of interest rates and potential inflation in USA.

• Continued political risk in Europe with 3 major elections being held.

• China continuing to slow and increased government debt programs.

It is now a consensus view that the path of US interest rates is on an upwards trajectory. The market is predicting between a cumulative 50-75bps of interest rate rises this year. The communication as well as the actual pace and extent of USA interest rate rises, will be key for market volatility and pricing of risk. It is interesting to note that, historically global equities are on average 6% higher 12months after a Fed lift off.

With 2016 being a year where we saw votes for both Brexit, Trump, and Italian referendum which saw the resignation of the country’s PM, all eyes are on the other political events where we could see continued populist vote and protest. This is most of concern in Europe where we will be seeing elections from France, Netherlands and Germany. All of which could see seismic changes to the status quo and potential pressure on the Eurozone as well as global economies.

Concerns remain over whether China economy will be able to muddle through a transition into lower structural growth economic growth its currency devaluation will not be too aggressive (at least not compared to its neighbours). There is a real fear that China will be exporting deflation through depreciation of its currency, lower export prices, and overcapacity in its manufacturing and construction sectors. All eyes will be on whether China can achieve a successful transition from manufacturing and investment led economic growth model to consumption driven model. This change and transition is not expected to be a smooth one. Hence we expect a continued period of higher volatility in asset markets in the year ahead.

KEY QUESTIONS FOR 2017

If the above is not enough to contemplate, other key questions to be asked this year include:

• Will Japan be able to achieve escape velocity for its economy through continued QE and currency depreciation?
• Will OPEC production cuts stick, or will we see continued volatility in energy prices?
• Will Emerging Markets be the key loser in a stronger USD environment and will this cause systematic risk in the region?
• Are we at risk of inflation and are we entering a multi-year bear market for bonds?
• To what extent will political tensions generally in the Middle East and Russia also add to overall volatility?

BULLISH SECTORS

• Overall, our Investment Committee’s view is that many sectors will be hampered during the year by earnings disappointments, challenging growth environments, Emerging Market weakness, and risks to the downside.  While sector outlooks appear generally cautious, we believe 2017 will be won with selective stock picking and a focus on sector and style rotation.

• Our key sector overweight include US financials, infrastructure and healthcare, which are all expected to be beneficiaries of a Trump presidency. While we are neutral on energy prices, we are selectively overweight Oil & Gas sector due to more favourable valuations and strengthening balance sheet and improved pipeline of project development.

• The global Financial Sector has historically performed well in a rising interest rate cycle, and remains one of our key sector overweight. Valuations remain attractive and EPS momentum is improving.

• We are underweight bond proxy sectors including telecoms and utilities. For REITS and property, we are less bearish as we see valuations supportive and somewhat pricing in the first few interest raises.

MARKETS OVERVIEW

EQUITIES – Becoming Constructively Bullish

• Investors have strongly cheered the new Trump presidential win, given inflation expectations rising, expectations of increased fiscal spending, reduced taxes and remove regulatory burdens for business, all spurring S&P to near record highs. However, with valuation multiples looking stretched in most regions, we are selectively Overweight equities over a 12-month horizon as we forecast they still offer the best return prospects vs. other asset classes. We expect 7% global earnings growth, which is consistent with a circa 2.5% GDP growth forecast.

• Interestingly, USA equity market appears the most fully priced at 19x forward earnings. However, this market is expected to be the key beneficiary of any continued flows out of Bond markets and into USD denominated assets. We see single digit returns for the S&P this year mainly on moderate earnings growth with limited scope for multiple expansion. Therefore, it will be a stock pickers market and also remaining focused on preferred sector exposures.

• At the same time, Europe and Japan equity markets look relatively cheap and are expected to keep their strategic Quantitative Easing and liquidity policies to spur inflation and support their asset markets.  While, this is positive for equity markets from a liquidity perspective, we remain cautious on corporate earnings growth in a low inflation environment, as well as still weak underlying GDP and inflation rates, which we consider to still be well below historically desired levels.

• Our Investment committee therefore continues to actively monitor a core portfolio of 20-25 securities within our broader watch list. More generally, our preferred e uity exposures are for high quality blue chip dividend yield stocks in USA as well as currency hedged European and Japanese equity exposure. We are more cautious on Emerging Markets (both in local and USD equivalent currencies), also neutral UK equity markets.

BONDS – Bearish

• With a rising interest rate environment, and a multi-year bull market and inflows, most Bond markets are looking overbought. Most sovereign bonds are looking especially over bought, with some core countries still offering negative yields. Low grade corporate bonds are also looking expensive from a risk to reward perspective.

• If investors need to be positioned in fixed income, we prefer either Inflation protected bonds (e.g. TIPS) or high quality corporate bonds with short duration trading at or near face value.

• Our previous view was to use Bonds as an alternative for cash balances which are earning next to nothing. However, in this environment the risks of capital loss on bonds outweigh the potential rewards for trying to get a better than zero percent coupon.

COMMODITIES – Remain Cautious but Valuation Support Emerging

• We have remained cautious on commodities across the complex for some time. However, with prices remaining low for so long, new supply continuing to be constrained, and a move to more inflationary and fiscal spending policies for USA and other developed economies, could 2017 be the time for commodities to finally shine?

• For investors wishing to take a more contrarian and perhaps longer term view, we would prefer to invest in blue chip high quality listed producers rather than explorers or ETF on the physical commodities. It is interesting that many large cap blue chip mining companies are currently showing good balance sheet and dividend paying ability.

• We are overall neutral on Oil and energy markets at current levels, although see some potential earnings upside should the Trump government remove regulation and speed up on project development.

• We are still (counter consensus) relatively cautious on Gold and believe this 20-year cyclical commodity is now on a long term downtrend. Gold however, has been a difficult asset to price and has also caused some volatility in the portfolios over past 18 months. Hence, we are preferring to position in assets where we have a clearer view of the risk and rewards in the current environment.

CURRENCIES – Consensus Bullish on USD

• We expect the US dollar to continue to perform well against most currencies, especially JPY, EUR, AUD and Emerging Market currencies.

• Interestingly USD is now the most consensus bullish call from the investment community for the second year in a row.

• We still believe that countries that rely on export growth will try to devalue their currencies in order to compete globally, i.e. “currency wars”. The main driver for US dollar strength will come from the US interest rate rise, as well as increased expectations of inflation (which are often more important driver than inflation itself).

• Currencies most at risk are many of the Emerging countries that have trade deficits and borrowings in USD.

ALTERNATIVES – Bullish

• We are generally positive on Property markets, with a preference for commercial over residential. Our favoured countries for exposure include: Australia, UK, South East USA, and Vietnam. Please ask for more information on some of the projects we are currently working on.

• Our positive view on property markets is despite an increased interest rate environment in USA, as we feel any interest rate rise will be stimulatory (initially at least).

• We are also positive on Private Equity, as we see better growth opportunities at lower valuations than compared to most local equity markets, especially as private market multiples are coming back down to more attractive levels, after a bit of mania especially in the tech sector over the past few quarters.

• Importantly, one has to recognise that PE also has relatively higher risk (execution risk, liquidity risk, etc).

HOW WE MANAGE RISK – PORTFOLIO PROTECTION, HEDGING & TAKING PROFITS

As opposed to just going to cash, we prefer alternative strategies such as hedging via options and option writing strategies to smooth out portfolio volatility. We also actively monitor profits using trailing stop losses with the view of protecting and locking in gains.

CONTACT

Please let us know if you would like to hear more about our Discretionary Portfolios and how we consistently generate an additional 0.5% to 1.5% per month using our Options Overlay, we would be more than happy to have an informal chat about these and the other services we offer as well as the current opportunities we are looking at.

THANK YOU

We would like to take this opportunity to thank you for you for your support during 2016 in what was a difficult year, and look forward to working with you in the year ahead and growing your portfolios and net worth!