Note Précis April 21,2018: Q2/2018 – Markets, Algorithms and the Political Economy. Adding up to expanded volatility when compared to 2017 are the actual market levels of today in equities and fixed income, the new algorithmic data centricity of today and the assumptions of many market and economic models compared to more classical behavioral views of actual economic activity as being not always rational. Geopolitics including those about trade appear seeping into markets. There appear requirements for higher risk premiums in capital markets as quantitative ease is sluiced back led by the Federal Reserve and fair value issues percolate, including about leverage. We are underweight fixed income with holdings focused upon the shorter durations. We also espouse diversifying asset holdings by including precious metals as overweight while also underweighting real estate. We expect currency volatility to include not just emerging areas but also the U.S. dollar, the Yen, the Euro and the Renminbi.
In equities, even as strong earnings growth is reported for the S&P 500, valuation is elevated. The value discovery process of volatility is likely to be sharply higher for the next 12-18 months. We see espousal as being overdone of the lower valuation hypothesis as favoring Europe and Japan. It is likely an extension of the momentum thinking that has predominated in this global cycle. Instead, we would devote more attention to stock selection and sector rotation. We have underweight Japan and Europe. We favor the diversity of U.S. equites, growth as driver in emerging markets as well as the commodity aspects to Australia and Canada. We see Consumer Discretionary as being in fundamental restructuring beyond simple leverage to better economic growth and have it as underweight. We are underweight Consumer Staples as it is quite likely that their business turmoil could be intense for some time. We are overweight Energy via leadership companies likely to dominate emergence from restructuring with oil prices in our $ 60-70/ Bbl. WTI target range. As events in Europe and Asia especially demonstrate, laggards in restructuring persist a decade later but in our Financials overweight we favor early movers mostly U.S. based as adding to their advantages. Within growth sector alternatives, we have underweight Healthcare as its dynamic undiscovered hypothesis phase based restructuring seems past and operations delivery from M&A accrued has to occur amid political policy flux.
On infrastructure and corporate spending, we have overweight industrial products as cyclically more favorable than consumer areas but various conglomerates appear wanting. We are overweight basic information technology with erstwhile favorites in this cycle of social activity have appeared to lose fangs. Precious metals as portfolio diversifiers amid currency volatility potential rising, tariffs in other commodities and economic growth all represent reasons to overweight Materials. We have underweight REITs after having progressively cut favor before from consumer areas to industrial and commercial – finance cost and its availability have classically been the bane for Real Estate as conditions change. As it seems consolidated from a free for all geographically, we have overweight Telecommunication Services but as alleged collusion reviews in the U.S. show, regulatory risk appears. With administered interest and fixed income yields likely to rise while global climate issues wax not wane (U.S. policy notwithstanding), we expect Utilities to underperform.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e