Dear readers, what a difference a week makes in markets.
Today I don’t have that much different to say than this time last week so let’s recap on those views and update the charts to see what has happened over the last week and what comes next.
First you can re-read what I wrote last week here.
So far what I wrote last week has proved accurate. The US S&P500 Index has bounced off the 200-day moving average, regained the 100-day moving average and is now only 1% below the 50-day moving average. I suspect there’s every chance that US equities regain the entire fall within a month. That’s the classic V shaped recovery I described last week that has been the hallmark of this bull market.
S&P500 Index. Holds and regains technical support.
This recovery in US equities has come despite US 10yr bond yields making new highs of 2.92% on the back of higher-than-expected CPI data. This is telling you US equities can handle higher US interest rates, with three federal reserve rate hikes now priced in.
USGG10yr
That is partially because heavyweight US financials are taking over price leadership on Wall Street in response to steepening yield curves and the prospect of higher interest rates. Bank of America (BAC) is only 50c below all-time highs and has bounced +10% from last week’s lows.
BAC.US
Interestingly, the US Dollar Index (DXY) has resumed its downtrend, even though expectations of Fed rate hikes have increased. This is because the Trump administration’s fiscal ill-discipline will lead to structural budget deficits and that is why the US dollar continues to be sold.
US Dollar Index (DXY)
On the other side of that, the Australian dollar looks to me like it’s headed back above 80 US cents, driven by US dollar weakness and commodity price strength. Personally, I think the Aussie dollar is headed to 85 US cents this year as the RBA will surprise and raise rates twice in 2018, while strong Chinese GDP growth will drive commodity demand.
AUD/USD
What to watch
The way I see this is I am bullish on financials, emerging markets, China, the Aussie dollar and commodities. I am bearish on bonds, the US dollar and any equity that has bond-like characteristics. It’s classic “reflation” positioning.
On that basis, the AIM Global High Conviction Fund I run has been busy in the last week increasing our conviction to global themes we believe in.
European equity markets are still down around 5% year to date and the Hong Kong equity indices are back to around flat year to date. That is where we see the best opportunity and the fund has increased its conviction to our key European and Hong Kong ideas. We have added mostly large cap banks in both the EU and Hong Kong.
We feel this is a typical trading correction, not a collapse, and that the peak of volatility is potentially behind us already. In Europe and Hong Kong we see the combination of value and growth, with catalysts to release that value over the next 12 to 18 months. We see this is a buying opportunity and have done exactly that, while simultaneously reducing our short exposure.
A clearance sale
The fact the global equity correction was index futures led, meant that pretty much any stock in an index went down with the index. The “clearance sale” gives high conviction stock-pickers the ability to buy unchanged earnings and dividend forecasts at lower prices. That attracts us and that is why we have increased the concentration of the portfolio in our key European and Hong Kong ideas.
We also believe at the prices we see in front of us today, we are buying with a clear margin of safety. Classic example is Ping An insurance in Hong Kong, which has pulled back to a P/E of 13.1 times yet offers prospective eps growth of 22%. Buying the leader of China’s structurally growing insurance industry on 13.1 times will prove cheap in our opinion. Ping An is the fund’s second largest holding.
All in all, we are focused hard on taking advantage of the present and positioning the fund for the next six, twelve and eighteen months in the best risk adjusted ideas we can find globally. The vast bulk of those equity ideas lie in Europe and Hong Kong right now, while we maintain our caution on the long bond markets, the US dollar and broader US equity market valuations.
There is clear investment opportunity in volatility. As the trading dust settles, the potential for strong total returns is clear in 2018. I say again: don’t run away from the clearance sale. This just could prove to be the best buying opportunity of 2018.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
