Returns are about levels, not timing
The View from the Peak Thematic model portfolio added 11% in equity length last week and we will continue to increase into weakness. This is not a statement that selling pressure will abate in the next week. It is not a statement that any rebound will be aggressive, making Q1 weakness a distant memory. This is simply an indication that we have reached valuation levels in names we like that are enticing to us on a two-year view. Emerging market equities are attractive and while picking bottoms is impossible, being brave enough to trust your research should reward you long term.
Momentum investors spend far too much time and energy trying to work out when markets will turn. The ridiculous games we play of guessing whether this or that is “priced” distracts us from what truly matters. Returns are determined by the level at which you buy and the level at which you sell. It isn’t about the “when”. This is what makes shorter term momentum investing sub-optimal. It isn’t about valuation. Arbitrary market constructs of whether or not negative factors are “in the price” play far too big a role. I get that many investors don’t have the luxury of buying assets to see them go down for a few weeks, for them the re-rate on a multi-quarter view but the best returns will be generated by those who focus on price and valuation and not by picking turning points.
There are still plenty of news headwinds facing sentiment near term. We don’t know when the negativity towards US / China trade will ease or when the attitude towards mega cap US tech will turn, but I remain convinced that the global growth and profit outlook will not deteriorate because of these issues. Global profits remain compelling and while European PMIs are coming off very elevated levels, I just don’t see global growth being anything but a positive for risk appetite for the balance of the year. If anything, the slight slowing of activity takes the overheating scenario off the table in the near term.
This week, Zuckerberg in front of Congress is great theatre but probably little more. US bank earnings on Friday will drive beta later in the week. Inflation in the US and China has the potential to stem the fall in yields and the summit of the Americas could see President Trump spew more uncertainty.
Tactically, I am sticking to my thinking markets head lower, going into US earnings season which should confirm profits are in good shape. Developed market yields will move in lockstep, but it is tough for me to see US 10-year yields going below 2.70%. The dollar is a side show, but EM currencies should outperform led by Brazil. We have a 40% short position in USDJPY which trades fine despite the equity concerns. We will leave a bid to cover this position at 106.75 which was our entry point. It is one of those tactical trades where I just don’t see the point.
We will cover all our equity hedges down 2%-3%. EEM at 46.25. QQQ at 153.50 which is roughly the February lows. If all our levels are met, the equity exposure for the portfolio will be 80% up from 44%. This could happen in a day or several weeks. When doesn’t matter. Levels do.
The Bank of Korea meets this week. On Monday, Japan releases Current Account Balances. On Wednesday, China CPI and PPI, Japanese PPI, UK Industrial and Manufacturing Production, South Korean unemployment, and the US reports on CPI. On Thursday, Australia publishes Home Loan data and India reports on Industrial Production. On Friday, German CPI and the US releases U. of Mich. Sentiment.
Founder, View from the Peak
IND-X Advisors Limited