Our market analysis
Investors now feel calm, optimistic and proud of their good decisions (any move towards increasing beta or market exposure during this year has been, to date, profitable). On the other hand, whenever investors are in pain they look back and wish they had bought protection at all time highs. Now is the time to buy protection, even if markets are on the rise and global growth continues. If you are patient enough, you will book the profits of such protection.
Even at the risk of seeming to fall into the temptation of forecasting future market moves, we can state that it is safer now to buy protection that it was at the beginning of this year. Positive news are priced in, and the risk of strong upside near term moves is much lower than it is after a 20% drop. Volatility is low and market sentiment encourages investors to believe that central banks have found the Holy Grail of the everlasting bull market. In our opinion, risks are high from a global perspective.
However, we are positive and constructive in global growth, human innovation and labor productivity. Technology adoption in companies and households is increasing at full speed. Creativity is booming; a very favorable environment for growth companies with sound service and product innovation to find capital and turn investments into real profits. Irrespective of short term market trends, the underlying growth investment themes offer very attractive opportunities.
The downside is that poorly managed companies, low growth industries and obsolete business models also find capital and low cost debt to finance projects that are likely to destroy value and consequently, capital.
Risks are thus hidden behind a thick blanket of central bank intervention. There has been a very dangerous paradigm shift: politics, once thought to be detrimental for monetary policy management, have regained full power and influence within central banks. Monetary and fiscal management, originally designed to counterbalance economic cyclicality and to deter asset bubble development, now uses an obsolete indicator that no longer reflects increases in the cost of living (inflation), to justify the “need” to ultra-expand money creation, debt and asset bubbles. Negative yields drain future returns from next generations to profit from them now. This is the same as cutting down all trees on earth to boost human wealth.
Our market positioning
Growth opportunities are attractive and we remain constructive on them. Visible risks are low while hidden risks are high, creating good opportunities to purchase protection at low prices.
This global market scenario favors strategies capable of dynamically balancing risk, and/or generating alpha with an efficient allocation of assets offering protection in downside market corrections. Bonds offer very little protection now, so you can either use cash as protection (and pay for it), or use derivatives such as futures and options. Long-short managers that seek alpha by shorting over-valued companies can also excel in the market environment that is likely to develop in 2020.
– Growth equity long term buyers
– Global equity indices medium term sellers
– USD long term buyers
– 10y US and German government bond sellers (long yield, short price)
Our returns YTD
In 2019, our equity strategies averaged +33% YTD, tolerant balanced strategies averaged +9% and moderate balanced strategies averaged +7%. Risk wise we approach year end on the low range of our risk appetite for each risk profile, aiming to maximize cash levels and downside protection while remaining constructive in global growth.