PAUL KRAKE: Do not extrapolate trends from quarterly flows (April 2)

Paul Krake

There are certain times when you have zero edge. US payroll reports are such a time. The dispersion of outcomes is so wide and unpredictable that making a bet on this is the proverbial monkey throwing darts at a dart board. Equally as uncertain are flows at the start of each quarter. While generally positive for risky assets, inflows provide limited insights into the outlook for asset markets for the balance of the quarter. They are not representative of the prevailing growth or profit scene. Remember the robust inflows at the start of the year? How did that work out?

Sentiment exiting the first quarter is awful. The mystique of large cap technology stocks has been shattered by the missteps of Facebook and a burgeoning regulatory threat to cozy tax treatment enjoyed by Amazon and other online sellers. While the headlines are US centric, negativity is global with a glass half empty mindset engulfing not just Chinese tech, but global beta. While dispersion is back, there are very few winners as the unwind of many 2018 “darling trades” is rocking performance. Short interest rates strategies are yet again stinging investors at the end of Q1. Inflation concerns are overblown for the fourth year running, taking global financials down with it. Will investors ever learn the lesson that tech and demographic pressures are everywhere?

This week is shortened due to Easter, distorted due to the Q2 flows, and unpredictable because of payrolls. If the stars align, equity and credit markets could squeeze higher in defiance of the awful global sentiment. Please do not extrapolate any broader meaning for returns over the next few months based on this. I feel strongly that technology sentiment and the news flow regarding US / China trade are going to get much worse before they improve, and this will likely see non-defensive equity sectors making new 2018 lows over the next several weeks. Global yields will head down, with US 10’s likely to trade 2.65% and 2-year notes could test 2.10% as positions get completely flushed out. There is limited support for financials in this environment.

My USD views have been cloudy at best, but it is difficult for me to see the USD making new lows against EUR and GBP near term. Risk v Reward favors a stronger USD, but it is low conviction. That said, the thematic model portfolio got a little more defensive last week by selling some USDJPY at 106.75. More risk off and yen strength continues. A trade deficit of 4% of GDP cannot be ignored.

All that said, by late April, news flow should improve. Q1 US earnings should be stellar, and signs of a North Korean détente are undeniably positive for the region. While the “dip buying” mentality is being truly tested for the first time in years, it remains the correct approach. The thematic model portfolio has bids 2% - 4% below to cover NASDAQ and EM hedges. At roughly 14.5 times forward, MSCI Emerging is providing true value on a two-year view. If you don’t have to be immediately correct, use weakness to allocate more capital to the emerging world. Ping An, China tech and banks, plus Korean equities are top of our list in the short term.

RBA and RBI are meeting this week. On Monday, the US, Canada, India, Japan, South Korea, and China report on PMI, and Japanese Tankan. On Tuesday, German, the UK and EU PMI, and South Korean CPI. On Wednesday, US Durable Goods Orders, and Australian Retail Sales. On Thursday, German Factory Orders. Friday, US Non-Farm Payrolls, Singaporean GDP, German Industrial Production, and Canadian Unemployment.

Paul Krake

Founder, View from the Peak

IND-X Advisors Limited

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