15 Mar Boom & Gloom: February 2016
Our view of the investment markets
This table reflects our view of the relevant assets, based on expected performance.
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.
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.
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.
Total return to 29/2/2016, in domestic currency
Total return to 29/2/2016
Please email us if you’d like to have Boom & Gloom delivered to your inbox every month.
The information in this document is proprietary to Ora Fund Managers (Pty) Ltd (Ora) and is not to be reproduced, distributed, published or used for any purpose other than the evaluation of any proposal contained in the document, except with the written permission of a representative of Ora. The information contained in this document (together with any opinions expressed or further information provided in connection with this document) is of a general nature and provided for illustrative purposes. It does not address the circumstances of any particular person or entity and it is not a recommendation or advice in relation to any transaction or investment. In making this information available, we are not purporting to act in any way as an advisor or in a fiduciary capacity. No one should rely on any of this information without appropriate advice from an independent financial adviser, based on a thorough investigation of the investor’s specific circumstances. While we have taken care to ensure that the information is accurate and not misleading, Ora makes no representations or warranties of any kind with respect to its accuracy, completeness or correctness. The information is provided on the clear understanding that Ora will not be held liable or responsible for any loss or damages that may be suffered by any person or entity as a result of that party placing reliance on or failing to act on any of the information provided.