Boom & Gloom: February 2016

Boom & Gloom

Boom & Gloom: February 2016

Our view of the investment markets

This table reflects our view of the relevant assets, based on expected performance.

table 1

Divergent trade since the start of 2014

The divergent trade is driven by change in monetary policy and economic growth. At the beginning of 2014, the market started anticipating tightening in US monetary policy while expecting the European Central Bank and Bank of Japan to loosen monetary policy more. In addition, economic growth divergence was expected by the US, European Union and Japan and also emerging markets (especially China).

The result was an increase in the expectation of a dollar withdrawal from the market. This caused pressure on emerging market currencies, especially countries with large current account deficits. Emerging markets have been leveraging debt up since just after the great recession of 2008, while developed markets generally de-leveraged.

graph 2

Short positions were implemented on the Japanese Yen, Euro, commodity currencies like the Australian dollar, physical commodities as well as on metal, mining and energy stocks. Long positions were implemented on the Nikkei index, technology, consumer discretionary stocks, US dollar and European long bonds.

The divergent trade strategy worked well from the beginning of 2014 to the end of 2015. Then the strong dollar caused a squeeze on the US and emerging markets, and market participants realised that the US Federal Reserve Bank would have to taper interest hike expectations. The uncertainty caused the norm to be challenged, and so a heavily oversold market (short side of trade) underwent an aggressive correction.

graph 3

What really changed?

Not much. The expected growth scenarios are still similar: subdued growth mainly driven by a slowdown in the emerging markets, particularly China; US growth is still intact and the slightly weaker dollar will aid growth a bit more, while Europe and Japan keep pumping money in to the system which should allow for some economic growth.

What we saw in the market over the past month is behavioural finance 101… The market gets carried away, lots of emotions, assets get over sold and over bought, and then a catalyst causes a correction.

MARKET PERFORMANCE

Total return to 29/2/2016, in domestic currency

graph4

SECTOR PERFORMANCE

Total return to 29/2/2016

graph 5

COMMODITY PERFORMANCE

graph 6

 

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Eugene Goosen

Eugene Goosen

 

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