As we enter the second quarter of 2018, Saxo's chief economist gives his take on the state of the markets and how best to navigate these troubled times. Below is a quick run through of the most salient features. The full slide presentation is available here. Happy reading!
• Long negative growth here – Short inflation (credit impulse driver on growth – on inflation net lending is about to go negative in the US! (ie: velocity of money still dropping).
• Trade War is real factor – Next phase is the final move from a globalist to a nationalist agenda – but short-term compromise will play to mid-term election freebies for Trump, but the trend is for more isolation both ways.
• Facebook signals the start of the repricing of technology due to regulation and new pricing mechanism incoming – furthermore, it is a democratic problem due to monopolies destroying productivity and growth…
• Long CAPEX – as EV will drive biggest spend from companies and hence gradually replace buy-backs for free cash flow (potential price negative).
• Still negative dollar – this is start of de-dollarisation.
• Theme-based investment about to replace stock index trading – selective value.
• Biggest risk remains the market itself – which is short what is effectively a 5% out-of-the-money strangle.
All our models are risk-based. Quant and tactical are in capital preservation mode .
Our Stronghold Fund,which has maximum 2% tail-risk allowed, holds its highest cash in years as a function of the February increase in volatility. Also, our risk metrics are very elevated (see attached presentation, flashed in red).
Equities – underweight
Our preferences are in the battery, healthcare innovation, agribusiness and Euro banks and Euro travel & leisure sectors.
Our negatives: oil & gas, US real estate, gold mining, China and technology!
Fixed income – neutral
Slow-down in growth – credit impulse – Fed’s policy mistake into 4-5 hikes, but mostly sees dramatic slowdown in US and China growth into the second half of 2018.
Commodities – neutral
We like agriculture and metals but are sceptical about crude oil.
Cash – overweight
Overweight: JPY, NOK, and EUR
Underweight: Dollars, EM (from here – negative carry)