That screeching sound you heard in equities last week was caused by a train wreck underneath the surface of a steady uptrend in the market as a whole. The hitherto outperformance of growth and momentum reversed sharply, a move that coincided with a steeper curve and a tasty outperformance of value and small caps. The dramatic rotation across equity sectors, and the steepening yield curve, vindicate the story peddled on these pages recently. But the question is whether this is the beginning of a sustainable shift in markets, or whether it’s merely an invitation to buy the dip in an eternally winning strategy? It’s difficult to say. Robert Wiggleworth’s expertly written overview of the flurry in the FT certainly suggests that strategists have taken note, equating last week’s gyrations to the so-called “Quant Quake” in 2007. Apart from the fact that the event is significant enough to merit at least a small footnote in modern finance history, the quotes garnered by Robin indicate that strategists are at least mulling the idea that the shift has legs. This, in turn, presumably means that they’re advising their clients to run with the reversal, which almost surely would do nicely for the portfolio.Read More
Last week I complained about information overload, but as we close the book on Q1, the overall story is relatively simple: It has suddenly become a lot more difficult for investors to extract value from markets across all major asset classes. My first chart shows what happened at the start of the year. Specifically, it shows the volatility-adjusted performance of the main asset classes in Q1 compared with their recent 12 month performance. The butcher’s bill for anyone who haven’t been sitting on piles of cash, and long volatility exposure, has been large. Equities have struggled, bond yields have increased, the dollar has weakened, again, while commodities and gold have outperformed.
The volte-face in equities has been extraordinary. The MSCI World, in dollar terms, was down 1.2% in Q1, while its 90-day volatility increased by about 55% compared to the 360-day trailing volatility. This is in stark contrast to the trend before the swoon at the start of February, when low volatility and a gentle rise in headline indices were the only the story that mattered. Across regions, emerging market equities have done relatively well, eeking out a small positive return in Q1. The S&P 500 is flat—the NASDAQ is up marginally—while European and Japanese equities have been underperforming—in local currency terms—primarily because these indices are very sensitive to FX.Read More
Barring a disaster in the final trading sessions of the year, the portfolio will return about 5%—excluding fees and dividends—in 2017. This is a far cry from the nearly 20% of the MSCI World, but better than a hole in the head. The good news was concentrated in the first half of the year. Profit-taking trades in Wells Fargo, Sabadell and Japanese equities added to the strong performance. From spring onwards, however, performance hit the skids, and only recently have returns started to improve. Slumps in General Electric, Xper have been the primary drags, but the dumpster fire has been more broad-based than that. A 15% allocation to gold and commodities—industrial and soft—for example, haven’t done me any favours either. Neither have exposure to producers of generic medicines and other small-cap pharma firms. Finally, various attempts to hedge out impending, but ultimately non-existing, sell-offs in the market as a whole also have hurt. Syntel and Urban Outfitters have been rising from the ashes in recent months, and I am hoping that further mean reversion will reach the rest of the portfolio next year. Given where we are in the cycle, the risk of a balanced equity portfolio losing money is rising. But let’s see whether I can’t come up with some ideas.Read More
One of the main tenets at this space has been to cut away the extremes in your [equity] investing strategy. There are those who see market tops and imminent crashes everywhere, and then there are those who believe debt-financed share buybacks and dividend payments can continue to propel the market higher forever. They are both wrong, but the persistence of these two narratives and their interaction has been a key story in this cycle. It is my firm belief that the oscillations between these two positions have created a huge middle ground, which allows investors to make money. In the peanut gallery we talk about "sector rotation," but it's more than that. It's also about different themes which cut across traditional equity sectors and allow for price movements of key industries—even country indices— in opposite directions. I suspect most market geeks would be able to agree on this over a pint in the pub. But can we quantify it?Read More