HOW WE ARE POSITIONED FOR THE END OF Q1 2018
After the wild gyrations and heavy plunges in the markets in February, we remain considerably cautious and expect the new volatile environment to stay.
The markets took a fright from the sudden spike up in bond yields and a considerable repricing of the pace of interest rates rises.
While we see significant headwinds in the new more hawkish interest rates paradigm, we think the momentum of bond yields rises will probably slowdown from here.
This environment should be still supportive for stocks as they will benefit from the US tax cuts, unless we get a real Trade War from the Trump Administration.
- We expect the Bond Markets to underperform, especially longer dated Government bonds, as the Central Banks led by the Fed will continue to raise rates and remove their accommodative monetary policies.
- Commodity markets are expected to remain at a mixed to stabilised level, with Oil taking a breather after the massive run up in the past few months, but we are still long term bullish, whilst Gold will remain range bound.
- The US Dollar is still on a long-term downtrend, as expected rate hikes have been discounted and the markets are now focusing on other countries to raise interest rates.
- The general consensus for the Fed to hike up to 3 times this year, but we see a real risk of 4 hikes, as growth and inflation are picking up.
- We still recommend to be overweight European and Japanese stocks, as valuations are cheaper and we believe the Euro and the Yen will keep appreciating versus the US Dollar.
- Whilst Brexit and the Italian elections might be causes of short term uncertainty, we are very impressed with Europe’s economic indicators.
- We are still constructive on Emerging markets and China as we see the economies growing at a fast pace and set to deliver strong EPS growth.
MARKETS OVERVIEW
Equities – Constructive
- Equities across the world had massive gyrations in the month of February, with huge losses in the first 10 days of the month, only partially recovered.
- Our forecast for Year End Word stock markets is still a positive return, albeit in the single digit.
Bonds – Bearish
- A rising interest rate means most bond markets are vulnerable. Treasury Yields have moved up a massive 50 bps in the last 3 months hovering around the important 3% level. We believe that the US 10yr will reach 3.25% by the end of the year and we expect the yield curve to keep steepening as long dated bonds will sell off, while short dated should stay stable.
- 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.
Commodities – Constructive
- Oil prices have rallied in the past 6 months with limit on supplies having supported prices.
- Oil demand continues to grow at a steady pace, notwithstanding the fact that the US rig counts has been increasing but at a lower pace than expected, whilst OPEC has been very successful in maintaining the current production unchanged. While we think that in the short term we could see a correction in the Oil price, we remain bullish for the long term, being also wary of developments in Saudi Arabia.
- Gold has also recovered the recent losses taking the lead from a very heavy sell off in the US Dollar at the end of 2017 and the beginning of 2018.
- We think Gold is still in a range of 1250/1350.
Currencies – Consensus bearish on USD
- While the passage of the Tax Cut plan and rising bond yields should be positive for the US Dollar, the greenback could be vulnerable in the case of a real Trade War.
- As rate hikes by the Fed are mostly discounted, the market is focused on other Central Banks to follow and change their accommodative stances.
- While we believe that the Dollar can strengthen in the short term, we expect the downtrend to carry on in the medium term.
Alternatives – Bullish
- We are generally positive on the 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
- Technology, Consumer Discretionary and Financials were the best performer sectors in February, while defensive sectors like Energy, Consumer Staples and Real Estate were the underperformers.
- Technology stocks are still a crowded sector and initially bore the brunt of the sharp sell off, but recovered very quickly to be the best performing sector. We remain buyers of selected Tech names on dips.
- We are still positive on Financials as the sector outperformed most sectors in the February sell off. 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, which will benefit the banks. We expect an eventual easing of capital restrictions, which could make it easier to increase dividends and buybacks.
- We remain positive on Consumer Discretionary stocks especially in Europe and in Asia, which will benefit from the strong growth in the economy and from sustained improvements in labour markets and consumer confidence.
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 portfolio Enhanced Income 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.