Monthly Markets Update - April 2017

Market Risks and Opportunities - Q2 17

Dear Clients,

Please see our current views regarding markets, including where we see the risks and opportunities at present.  

HOW WE ARE POSITIONED FOR THE REMAINDER OF Q2 17?

We anticipate that markets will remain mixed and in a consolidation mode for the remaining of the 2nd Quarter.

• Investors will be taking some profit on the US stocks longs after the impressive run up and some uncertainty over the US politics.
• Bond prices to remain under pressure as the Fed is set to increase interest rates twice more this year.
• Commodity markets to remain mixed or bearish, with oil in a range and gold still trading at a premium into the French elections.

• Overall we remain medium term constructive on stocks; however, we would be wary at the current levels and we would buy into a correction. US equities have led the rally, with Europe and Japan underperforming, initially. However European stocks have outperformed after the US political impasse and the first French Presidential ballot. Nonetheless, we remain vigilant and see political risk rising from Trump policies, and with elections in Europe as the wild cards.
• Market complacency is at its extreme and we don’t think this can be sustained: therefore, we advise to buy protection even after a positive result of the French elections. 
• It is interesting to note that since the expected rate hike by the Fed on 15th March, the USD has weakened and the US yields have declined.
• The market is now expecting two more hikes by the Fed before year end.

• While we still see few political risks in Europe even after a Macron victory, with elections in Germany and possibly Italy, and the implementations of Brexit, we think that the existence of cheap valuations, a generally underweight positions in the European assets and a cheap currency, make European equities attractive.
• We are constructive on Emerging Markets, as markets look solid and seem immune to the US interest rate rises.
• We still like South East Asian economies, as reforms have helped to boost investments and growth. India, Indonesia, Vietnam and Philippines are our favourite.

MARKETS OVERVIEW

Equities – Cautiously Bullish

• Equities have rebounded in late April after the initial dip at the beginning of the month. However, with valuation multiples looking stretched, and the political impasse that we saw over the vote on Obamacare, we are concerned that a pullback could be coming.  For this reason we prefer to lighten our long equity positions in the short term. For the long term we are selectively overweight equities : over a 12-month horizon they still offer the best return prospects versus other asset classes, especially bonds.

• The US stock market has been the key beneficiary of flows out of bond markets and into USD denominated assets Investors will want to see more progress on economic plans rather than additional promises. Any disappointment with scale or timing would leave markets vulnerable. Therefore, we caution not too be overexposed at current levels. It will be a stock pickers’ market and remain focused on preferred sector exposures including consumer, cyclicals, durables and financials.

Bonds – Bearish

• With a rising interest rate environment, most bond markets are vulnerable. After the big rise, last year, US bond yields have stalled in a range, as the market has been watching the Fed and news over the tax policy. A large fiscal boost could push growth higher and widen the budget deficit with grave implications for bond yields. Most sovereign bonds are looking especially overbought, core countries still offering negative yields. Low grade corporate bonds also look 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 – Expected Sideways Markets

• Oil prices remain toppy with continued high inventory levels and signs that non-OPEC production will keep rising in response to the rebound in prices over the past year.

• Oil demand continues to grow at a steady pace around 2%. On the other hand, supply is quickly increasing. The US rig count has almost doubled from the lows of May 2016, so we think a range 45/55 seems reasonable, with short term risk to the downside.

• Gold has been rallying in the past months amid European political risks and worries about US fiscal policy. We finally saw a sell off after the positive outcome of the first round of the French elections. At the current level, we are neutral on Gold.

Currencies – Consensus neutral on USD

• The US dollar will continue to move sideways against G7 currencies, until we see more clarity on Trump’s policies. 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 for US dollar strength will come from the US interest rate rise, and if the Fed were to be more hawkish than expected, we could see a renewed interest to buy USD. We are moderately constructive on Euro and Sterling as investors are still too underweight, and Economic data could surprise on the upside pushing the ECB and BOE to start raising rates earlier than anticipated.

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 are positive on Private Equity, as we see better growth opportunities at lower valuations compared to most stock markets.

BULLISH SECTORS

• Cyclical names, like Consumer Discretionary, Industrials and Technology outperformed. Energy was the biggest loser.
• Technology has been the best performing sector over the past 12 months, and given that it is the most expensive sector, we think it could be time to reduce longs and take some profits, as  exposure to China could be negative.
• The Healthcare sector continues to benefit from improving pipeline productivity with an increasing number of new drugs approved by FDA.
• We also like the Consumer Discretionary sector given the domestic nature of its business. Its names are less vulnerable to Trump trade wars and valuations are attractive, potentially allowing these sectors to benefit from the domestic economy.
• Lastly we like the Financials again, as valuations have cheapened and we see a renewed push up in US rates.
• Improving business and consumer confidence should continue 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.