HOW WE ARE POSITIONED FOR THE REST OF Q2 2018
After the sell off in February and March, the global stock market had a positive run up in April.
While the European and Japanese markets completed a strong bounce, the US and the rest of Asia underperformed.
While the current environment of strong earnings and solid economic growth should be supportive for stocks, we see the new volatility here to stay as geopolitical risk is back and so is inflation risk, with US 10 year Yield hovering around the 3% level.
Source: Bank of Singapore – Monthly Investment Guide, April 2018
- It is our view that global Bond markets to underperform, as the Central Banks led by the Fed will continue to raise rates and remove their accommodative monetary policies.
- Commodity markets are in a bull market, with Oil trading at 3 years high, while Gold is on the upper band of the recent trading range.
- The US Dollar is still in a downtrend for the long run, while a more aggressive Fed in the short run could help the greenbuck bounce from here.
- The general consensus was initially for the Fed to hike up to 3 times during 2018, but now we see a real risk of 4 potential hikes, as growth and inflation are picking up, with a quarterly rate rise of 0.25% each quarter.
MARKETS OVERVIEW
Equities – Cautiously Constructive
- Equities across the world had a positive April after losses in February and March, we remain positive, but we believe prudence is warranted.
- Our forecast for Year End Word stock markets is still a positive return, albeit in single digits.
- We still like to be overweight European stocks, as valuations are more attractive and we believe the Euro will keep appreciating versus the Us Dollar.
- While Brexit and the Italian political impasse might be negative factors, we think Europe from here will outperform the US market.
- Japan had a better month in April as selling pressure from foreign investors eased.
- Asia ex-Japan underperformed in April as the market grew concerned about the region’s growth.
- Taiwan and Indonesia were the worst, while Singapore and India were the top performers.
- Emerging Markets have been struggling with notable examples like Russia and Turkey.
Bonds – Bearish
- A rising interest rate environment means most global bond markets are vulnerable and may come udner pressure. Treasury Yields moved up a massive 50 bps towards the end of Q417. Q118 is now hovering now around the important 3% level. It is our view that the US 10yr will reach 3.25% by year end .
- 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.
Commodities constructive
- Oil prices have rallied for the past 6 months as limits on supplies have been supportive of prices.
- Oil demand continues to grow at a steady pace, while the US rig counts has been increasing but at a lower speed than expected. Opec has been very successful in keeping production unchanged. While we think short term we could see a correction in the Oil price, we remain bullish for the long term, being also conscious of developments in Saudi Arabia and Iran.
- Gold has sold off from the recent highs after a bounce in the US Dollar and with the stock market stabilising.
- We think Gold is still in a price range 1250/1350.
Currencies – Consensus bearish on USD
- While the passage of the Tax Cut and the rising bond yields should be positive for the US Dollar, the greenback could be vulnerable in case of a real Trade War.
- As rate hikes by the Fed are mostly expected, the market is focused on other Central Banks to follow and change their accommodative stance.
- While we believe that the Dollar can strenghted 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, Japan, 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 was the best performer sector in April, as oil price surged to 3 years high, while sectors like Industrials , Consumer Staples and Technology were the underperformers.
- Technology stocks suffered as the market grew concerned about a slower than expected smartphones replacement cycle, with semiconductors performing the worse in an otherwise crowded sector. We remain neutral and opportunistic buyers on best names.
- We are still positive on Financials after the underperformance in April, as we think the worry about banks suffering a flat yield curve is overblown. We think a renewed push up in interest rates in the US and in the rest of the world, that 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 especially in Europe and in Asia, that will benefit from the strong growth of the economy and from sustained improvements in labour markets and consumer confidence.
- We like Energy stocks as a defensive play and a possible hedge in case of more geopolitical turmoil for the long run, but we are aware that the market could be toppish in the short term.
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.