Chief Investment Officer
Summary: Sell in May and go away... We are reducing risk into May as global liquidity, internals and valuations have gone too far. Reduce to 50% of exposure by the end of April.
Action: Sell in May and go away...
Reasons why?
Policy response: We fully expect a massive fiscal spending increase in Q3, when rising inflation + price of money meets the post-opening economic reality. China GDP for Q1 was disappointing in composition, we expect similar outperformance on headlines in US and Europe, but without a forward carrying momentum. So H2 will see rising 10Y to 200 bps then 250 bps, on the back of equal moves in the term structure (on rising deficits) and inflation expectations. This will create havoc and a need for further intervention. The Fed and ECB are far, far, far behind the curve as illustrated by both the rise in German Bunds (+35 bps since the beginning of the year) and the US long yields rising in reaction to a huge earlier rise in breakevens.
I find it a struggle to navigate the present macro environment of low volatility, high correlations, and low volume, but fortunately sometimes a fellow macro traveler, in this case Michael Wilson of Morgan Stanley can aspire me to think “differently” about the market.
Morgan Stanley and Michael Wilson are noticing that the IPO and SPAC space is losing momentum and as such could be “... a warning sign on real time liquidity dynamics”…. I will freely interpret this to mean that the recent heavy load of IPOs and SPACs has been so large that they take liquidity from the rest of the market and in the process make fund managers sell some names to make room for the new ones.
This has certainly been the case with Coin, Coinbase, which hyped managers like ARKK are buying heavily but in doing so reducing their exposure to the likes of SQ, ICE, NVDA, and even TSLA.
But let’s have a look at the ‘evidence’:
Below is the IPOX SPAC Index – tracking SPAC valuations. It peaked in late February and is now breaking down… if it closes below yesterday’s close, it looks like a downside breakout and sell from a technical point of view.
IPOX SPAC Index
The Renaissance IPO Index shows similar pattern:
We also have crazy stories like the valuation of the New Jersey Deli listed in the US with a market cap of $120 million. Greenlight Capital’s David Einhorn notified the market about that one.
Meanwhile the market overall is powering to new highs, the S&P 500, the Nasdaq 100 hit all time highs and the EURO STOXX 50 is hitting a post-global financial crisis high, under the umbrella of fiscal dominance….paying for shortcomings on earnings, yield and market functioning (price discovery).
Another great note is from BofA global research named: Five reasons to curb your enthusiasm (on US equities):
The five reasons amount to: Euphoria (according to their sentiment measure), S&P 500 Index expected return now less than 2% for next decade, the outsized 12-month performance from March 2020 to March 2021, is >50%, which has not been seen since 1936, the fair value model @ 3635 S&P, the Equity Risk Premium is below 400 basis points – only happened twice before: Jan 2018, Sep 2018, with -10 and -20% return following.
Finally, we need to talk about Europe, but in particular Germany. The 10YR German Bunds have risen over 50 basis points from the lows and about 25 basis points since the beginning of the year.
The likelihood of a Green Party government is rising by the day, compounded by a corruption scandal related to PPE procurement hitting the ruling CDU/CSU government, as well as the infighting between the CSU and CDU. The Green Party is extremely Pro-Europe, meaning that a future government with the Greens would increase not only the spending on the green transformation, but also on deeper European integration. This is music to the ears for the likes of Draghi and Macron. Geopolitically, the Greens are distinct in that they have promised to close down the Nordstream2 pipeline that provides natural gas directly from Russia and is nearly complete. I personally think Germany has already moved 120 degrees from the frugal, austere fiscal approach of the 1990s and 2000s, but if the Greens have the election they are expected to have, then Europe will be changed overnight.
Background: Green party leader Annalena Baerbock: Woman who could be Germany’s next chancellor and FT on Ms. Baercock
Besides the surge in the Greens, one of the most discussed politicians is Ms. Sahra Wagenknecht who has left Die Linke and started a leftist movement: Aufstehen (Stand up), which pursues an interesting cocktail of anti-immigration and far left policies which despite being announced only this month led to tens of thousands promising to support the cause:
By Friday, there was more good news for Wagenknecht's platform: A poll by Focus magazine showed that more than a third of German voters "could see themselves" voting for Aufstehen if the movement transformed into a political party. The response was overwhelmingly positive among the Left voters, where 87 percent were open to supporting her initiative at the polls.
Merkel is gone, and German politics will prove unrecognizable in her wake…
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
