Review of 1st Quarter 2017 & Portfolio Update

While it was a decent 3 months for both broad equity and bond markets, all my trades did not work out as expected and I cut all my initial positions that were initiated in January. Additionally, a couple of my positions that were USD-denominated also saw valuations affected by the slight weakening of the Dollar against the SGD over the quarter.

NAV.JPG

In particular, one short EUR/USD trade since mid-December was taken out as , and I took a 300 bps loss and realised I broke one of my own rules in terms of position sizing for a crowded trade (I knew it was a crowded and consensus short back during Christmas last year but I still sized it too big). With this mistake, I’m paying the dues for it at the moment.

After talking about the grains market back in late-January, I initiated a long on both wheat and corn via spot CFDs, and both positions did not work as intended as price action reversed downwards after breaking out. I got out of both positions and took the losses and will further review the softs in the near-future.

I also initiated a small, speculative long position in Uranium Resources Inc (URRE) back in late-January to play a possible turnaround and recovery in the uranium mining space (which I talked about here previously). The trade took too long to work out and I decided to cut and take a loss on it and move on. There will be a day again when the entire sector will recover, but it is not yet now.

URRE.JPG

Moving forward, I’m further reducing position sizes for new positions, as well as reducing my open overall portfolio risk.

Currently in the book, I have initiated long positions in 2 growth stocks (GAIAM Inc. & Videocon d2H) that have a low correlation to the broader market and economy (the 2 ideas are courtesy of the Maco Ops community which I have the great privilege of being a part of). I’m also long Natural Resource Partners (NRP) which was initiated since November 2016, and its price hasn’t worked out as expected thus far and I may cut the position moving forward.

I’ve also got a small long position in the British Pound against the US Dollar. It is an obvious short as the triggering of Article 50 brings in political uncertainty for Britain’s fate, and CFTC futures positioning reflects this overwhelming bearish sentiment. Thus far, a less-dovish Bank of England (BOE) and higher than expected CPI data has led to slight increases in GBP against the USD. While there is no doubt that risks remain to the downside for Sterling, the potential for short squeezes may benefit my small long position, and I’m ready to get out and re-enter a short once any squeeze materialises and once short positioning declines. Interestingly, the GBP/USD 2 month implied volatility is tracking its EUR/USD counterpart since February, suggesting that political elections in France and Germany has some effects on the Brexit negotiations and the fate of Sterling as well.

But what goes for the second quarter of 2017 and beyond? For that, one of the first things to take note of is the US Dollar.

USD Bull Market: dead or in limbo?

The greenback weakened broadly in the first quarter, taking a hit in March following the withdrawal of the Health Care bill that was supposed to be the Trump administration’s reform of the existing Affordable Care Act (Obamacare). Markets remained concerned that the new administration may not fulfill tax reforms and roll-out infrastructure spending, weighing on the USD’s broad outlook.

DXY weeklu

Looking at the DXY Index on a weekly time frame; it’s currently hanging above its 50-day week moving average and hanging around the key psychological level of 100.0. I do not believe that the USD bull market is over yet as positive interest rate differentials still exist between the greenback and major developed market’ currencies, but should the DXY move below 98.0 (200-day MA) there could be a sharp correction as USD bulls are shaken out. In that possible scenario, I’m planning to go long risk-assets that benefit from USD weakness. Assets like:

  • Precious metals / Precious metals-related equities
  • EM equities (either via the ETF (EEM) or single countries like Indonesia, Brazil, Colombia, Chile, etc)
  • High carry EM FX (RUB, MXN, TRY, INR, etc)

Speculators are still overwhelmingly long the greenback:

DXY COT.JPG

Depending on the severity of the correction, the theme may either be a short-term investment horizon or a mid-term one.

Geopolitical instability remains number 1 concern…

A survey done by management consultancy McKinsey revealed that many are still worried about geopolitical risks and political instability. It’s probably the issue on every global investor’s minds. In fact, ‘China’s slowdown’ and ‘rising interest rates’ are now occupying a much lower ranking when compared to 12 months ago. Even Bridgewater Associates has released a 60-page report on populism for us all to understand. Here’s a snapshot from McKinsey:

mckinsey snapshot

It is difficult to anticipate what could happen from unexpected shifts in the political sphere, and as such, being nimble in such an environment makes sense. You don’t really want to be outright long risk-assets with a buy-and-hold mentality. 

Europe’s markets have been on a bull run!

stoxx 50

The chart above is a weekly price chart of the European Stoxx 50 Index, and one can easily see its brilliant performance since late-2016. Leading indicators across the continent as well as coincident economic data indicates that recovery in Europe is increasingly entrenched. This is what the markets have bought into and I’ll play along with the trend for now.

Despite all the uncertainty surrounding the French elections, the French stock market has totally ignored it, with the benchmark CAC Index soaring and breaking above a long term wedge formation existing since the end of the Dot.Com bubble. Should the right-wing, EU-sceptic candidate Madame Le Pen blow her chances during the two upcoming rounds, there could be a strong relief rally across risk assets (including French equities). My central scenario is that Le Pen has a very low probability of winning, yet alone being an effective President (even if she wins she may end up as a lame duck president).

CAC

I find French equities expensive on various valuation metrics given its growth outlook as well as its socialist leanings, but I like what I see in the periphery like in Spain and Portugal. Both countries are painfully seeing economic recoveries, and their equity markets there trade at relatively more attractive multiples, and recent technical price action indicated a potential start of a bullish uptrend:

IBEX.png

PSI.png

Other than the ETFs that track benchmark equity indexes in Spain (EWP) and Portugal (PGAL), I’m also considering to use single companies to  So far, a cursory search has brought me to the attention of Banco Santander and Sonae; these would be potential plays to leverage off domestic recovery in Iberia.

While it is tempting to go short Eurozone sovereigns (like Bunds) one expects inflation to rise across the continent, European insurers also look interesting to play a rising rate environment in the Eurozone, as the European Central Bank (ECB) winds down its asset purchase programme, gradually steepening the yield curve in the process. More than 14 months ago the world was worried that a negative rate policy in Europe would harm the business models of Europe’s insurance companies, and markets indiscriminately wrote off all hopes for all insurers. Since then, earnings estimates for the sector have been gradually upgraded, and sentiment on the industry is slowly recovering. While certain insurers could have some asset/liability issues, better-managed insurers like AXA, Allianz and Muenchener Rueckverischerungs-Gesellschaft could be a value turnaround play in this current environment.

Singapore market recovering…

At the start of 2017, I identified SGX (S68) as a potential candidate to play a recovery in the local equity market (which sports relatively attractive valuations vis-à-vis other ASEAN markets), and Singapore equities have since then seen a broad-based recovery across several sectors. SGX (S68) will benefit from a gradual improvement in volumes and a rekindling of investor interest, which has already happened (albeit slowly). The stock price also has not just a capital growth return driver but also from a dividend yield which will attract yield-orientated investors. A friend of mine have taken up a long position and you can view his update here.

I’ll be playing very defensively for the second quarter, and will continue to stay nimble and adapt to market conditions as well as opportunities unfold. It’ll be an interesting year this 2017…

*image credits to http://thecorner.eu*


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