Investment Bulletin – January 2016

22 Mar

From a momentum perspective, the pessimists were clearly in charge since mid-2015. On the other hand, the sheer size and scope of the setback opens the door to a possible market bounce… a volatile mode the market has been in for recent times. Only time will really tell if this oddly excessive poor start to the New Year was a fluke or the shape of things to come. It’s best to prepare for both possibilities. I’m pleased to say – this is part of our core philosophy.

 

We have been very busy reviewing and reassessing your portfolios, considering the impact of the recently and sometimes violently changing market conditions. The general outcome of our review so far, there are possible changes required and we will speak about this on a one-to-one basis.

 

The results so far indicate, a seriously vulnerable market but I’m pleased to report, we have seen excellent results relative to the general market. We’ve had the panic phase, so is it now time for the panic to subside? I believe there are strong indicators and potentially positive scenarios but as always, only in certain market geographies, sectors and themes.

 

Market Outlook

We believe the key catalysts have been :

 

  • concerns about Chinese exchange rate policy and associated GDP
  • a renewed collapse in oil prices
  • the problems in the Middle East have led to a dire refugee situation
  • the rate hike in the US followed by increased fears of a slow-down in the US economy.
  • the news that Brexit might become a reality after the June Referendum.

 

Macroeconomic and geopolitical factors look certain to play a key part in investor thinking again in 2016, and the outlook is as mixed as it was a year ago. Most western economies are improving slowly, with the US Federal Reserve finally raising its interest rate in December after holding it at an historical low for seven years. European economies also appear more steady, even on the periphery, it appears 2016 will see the continued divergence of central bank monetary policy, with the European Central Bank (ECB) and Japan both continuing their quantitative easing stance.

 

Fixed income was one of the stragglers in 2015, with low yields forcing many investors to seek alternatives, or to move higher up the risk spectrum. The expected divergence in monetary policy between the US and Europe will be a key theme in bond and currency markets.

 

Unless there is some surprise from central banks, it seems clear that the momentum for an even stronger dollar is likely to persist into 2016.

 

An increase in volatility is expected in the months ahead given the shift in the US monetary stance and the increasingly accommodative strategy of the ECB. If there is any sense that the Federal Reserve may be more aggressive than currently priced in, this could possibly lead to higher bond yields and a more negative reaction from credit markets.

 

In Europe, a sharp fall in the euro could trigger a steeper bond curve if inflationary expectations start to build, and this may be temporarily negative for credit spreads.

 

Pseudo-Economics

To paraphrase the late Jude Wanniski – the history of man is a battle between the creation of wealth and the redistribution of wealth. Jude was a Supply-Sider, which means an economist who believes that entrepreneurship and supply (not demand) drives economic growth.

 

Many pseudo-economists have sprung up since the recession voicing opinion rather than understanding, fuelled by a misunderstanding of 2008. They have clearly, used selective excerpts from Economists (such as, Hyman Minsky and the Minsky Cycle), have created an entire theory that the US economy (for example) is in a “crack-up boom.” The boom, according to these “pundits”, has been suggested to be solely caused by the Federal Reserve (Fed), Quantitative Easing (QE) and 0% interest rates, and now that the Fed has tapered and started hiking rates, it’s over and a bust is on its way.

 

These Pseudo-Economists have focused almost solely on money; they’ve forgotten the entrepreneur. We believe quantitative easing did not boost economic growth because banks shovelled that money straight into excess reserves.  We also believe in new technologies – simply, good old entrepreneurship is driving profits and economic output inexorably upward.

 

Volatility in The Markets

Most people think of volatility as a bad thing. It is assumed that higher volatility leads to higher risk of a negative outcome and as it is in our nature to be risk-averse, this tends to take the form of trying to avoid or hedge a loss.

 

Volatility can, however, be an investment opportunity and there are strategies that focus on exploiting bouts of market uncertainty to capture a return premium. Investors need to treat volatility like any asset that has a long-term expected return and a risk profile.

 

Investors should also bear in mind that periods of high volatility are usually short-lived. It is therefore key, to focus on the important developments and ignore the transient ones.

 

Summary

Maintaining a nimble and responsive portfolio is more important than ever. We have chosen to employ a systematic investment approach and diversifying across a number of underlying volatility strategies has the potential to add value to an investor’s portfolio. Particularly in this high-volatility environment, a number of different risk strategies to achieve the desired risk/return outcome to meet investment objectives is considered.

 

We have found the most effective and successful approach to investing, is to focus on the macro-backdrop potentially identifying short-term investment risks and with the potential of tactical advantages. The short-term volatility helps to provide longer term buying opportunities. We see these recent events as a superior opportunity to add value through the service we provide. Our wish is, within your attitude to investment risk, to target potential returns while focusing on capital preservation, where possible.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

(If you require personal advice based on your circumstances, please contact me.)

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