Note Précis July 27,2018: Q3/2018 – Much Ado About A Lot. Unlike the experience of recent years, friction between fiscal policy and monetary strictures have been more of a norm within which capital markets operate, most recently into the 1990s. It makes risk premium vigilance necessary. Given the size and duration of quantitative ease fostering complacency, reversion to more normal conditions would likely be uncomfortable for many strategies of politics and investment. With apparently little focus in aggregate on fixed income aspects like country deficits or equity aspects like the interface between valuation and deliverable growth, markets appear momentum driven still and depending on little from current conditions. However, some markets aspects appear to be evolving and not just beneath the surface.
With Fed Funds potentially rising to 3 ½% and irrespective of the durability of 4% U.S. GDP growth, rather than seamless transition, we expect a rising interface of policy and market volatility to prevail well into 2019. It is likely to be an interplay in political economy of a type prevalent decades ago. It would be unlike the immediate decade of 2008-18 in which massive quantitative ease has meant a less classic business cycle. In fixed income, we would focus upon shorter term maturities. Monetary policies appear clearer in the United States and smaller advanced countries. Both should be favored over those in Europe and Japan. Anticipating higher currency volatility as interest rates change, especially from U.S. policy, quality is likely to be particularly a factor in emerging market debt.
On growth versus value as well as of defensive versus interest rate sensitive performance , equity parameters seem mixed for sector and geographic allocations. For example, in our overweight Information Technology sector are present both high valuation and now volatile concept mainly social media components as well as strong growth but also the strong in financial structure and low valuation components that we favor over Healthcare in consolidation after massive M&A activity. Supposedly defensive growth Consumer Staples face both business change and high valuations as well as. In cyclicals, we favor Industrials for capital/infrastructure goods over Consumer Discretionary under business pressure despite stronger global economic growth. For diversification amid the potential for currency volatility and given the mature phase of this cycle amid trade strife, we also overweight Materials. Energy represents a value proposition amid commodity price recovery.
Massive quantitative ease appears to be changing from the Federal Reserve and potentially others, including the European Central Bank. Quality of operating delivery and strength of financial structure appear as key. In yield amid the potential for sustained U.S. interest rate increases into 2019, we favor restructured Telecommunications Services over Utilities or Real Estate. In the Financials, sector weightings appear geographically significant but strong bifurcation appears between those that restructured early and strongly versus laggards for example in Europe. On geographical sector weightings, markets in Europe and in Japan collectively each have close to 40% weightings in consumer and Healthcare areas as well as 5% or less in Information Technology where business growth appears strong. Instead of equity rotation to overweighting Europe and Japan at this stage, balance to U.S. and emerging market exposure can be achieved via commodity rich areas like Australia and Canada among others. We believe that above benchmark cash is appropriate. As portfolio hedge, we also espouse precious metals and underweight real estate.
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