Merry Christmas and Best Wishes…
Updated: Dec 29, 2022
2022 has been a challenging year for global markets and most investors in a year that delivered the worst of the three exceptions of the past century, with both bonds and stocks dropping in tandem, each shedding 15-20% as illustrated in the picture below.
This led the standard passive 60% stocks/ 40% bonds portfolio allocation that served investors so well for 20 years to fail investors last year.
One of the lessons to be drawn perhaps was the necessity to keep analyzing economic, monetary and political fundamentals but to assign a higher priority to technical observations.
By definition of the exceptional nature of this year’s outcome, the 60/40 may deliver better results next year.
Still, we need to consider that
- structural inflation is likely to remain elevated (despite declining from recent highs).
- the rate of (bond) default could double/triple/quadruple in function of the level of credit risk.
- Central Banks will keep taking the punchbowl away (implementing QT rather than QE), at least going into the new year
- steadily mounting geopolitical tensions may not remain “ignored” for much longer
- an economic recession, including a worse than currently expected earnings recession may become the most likely base case scenario
- currency tensions are likely to remain and intensify due to de-dollarization pressures with possible implication on relative bond yield levels
- further policy “normalization” in Japan (after the yield curve re-anchoring of 10Y yields from 25bps to 50bps) could send further shockwaves on global bond markets
Considering all the above, traditional bonds, stocks but also real estate (securitized, leveraged or not) may still deliver another poor performance next year and in unison.
Unless one stands ready, similar to the biggest Danish Public pension Fund (ATP) to lose 45% in 2 years, we ought to be ready to question passive investing of that nature. In the case of ATP, the loss materialized this year alone but we are citing this as an example of how some pension funds have been hit as a result of “risk parity” (volatility weighed leveraged diversified portfolios) or for blindly sticking to the passive traditional 60/40 allocation.
As a result, 2023 may favour a more dynamic albeit cautious management policy whereby not only standard valuation metrics take precedence (as opposed to growth, Fomo and Tina) but also technical and “trend following” considerations.
A time-tested investment rule is also to “keep winners and sell losers”. What investors who remained with the 60/40, unknowingly and passively did, was to violate this rule, leading to 20%+ losses in many cases. Those who levered this strategy via with “risk parity strategy” lost even more. Those who remained invested in so called faultless inflation hedges such as gold or silver, for most of the year, lost money on their investments, especially when inflation was at its peak.
In contrast, macro driven and quantitative trend following strategies delivered between 10% and 20% performance.
Whatever the path or method chosen, a more active and systematic portfolio management may be advisable for next year to prevent losses to compound and become so large that they cannot be taken...or have to be taken at the worst possible moment.
In some ways, it is the purpose of our newsletter to offer a point of reference with which to measure what works, what does not work and when (and perhaps why) in order to help our readers to assess global markets interactions involving stocks, bonds, commodities, FX and precious metals but also to help them identify turning points in each asset class individually when they occur.
Click on the Picture below for our latest Leaders & Laggards Report:
US stocks were struck by the twin arrows of a stronger than expected GDP report and further steep losses for Tesla.
Final Q3 GDP was revised higher to 3.2% (from the previous 2.9%). While analysts would generally consider this number as neutral to bullish, this time was different in a context where the labor market remains strong as it revived the fear that the Fed will keep raising interest rates.
Tesla dropped another -6%, dragging tech stocks down with it, bringing the month to date loss to -38%, en route for the fifth consecutive month of loss and most likely the worst one in its history.
Next week’s focus (for those still on deck) will be December consumer confidence and Chicago PMI.
S&P500 dropped -1,4% (-19,8% YTD) while the Nasdaq100 sold off by -2,4% (-32,9% YTD). The US small cap index dropped -1,3% (-22,0% YTD).
Cboe Volatility Index climbed 9,5% (27,6% YTD) to 21,97.
The Eurostoxx50 dropped -1,3% (-8,5%), outperforming the S&P500 by 0,1%.
Diversified EM equities (VWO) dropped -0,9% (-21,5%), outperforming the S&P500 by 0,5%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,1% (9,2% YTD) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (-4,5% YTD).
BRLUSD gained 0,5% (7,7%). RUBUSD gained 1,8% (7,2%). INRUSD dropped 0,0% (-10,1%). CNYUSD dropped -0,1% (-9,1%). ZARUSD gained 0,2% (-7,1%). MXNUSD gained 0,7% (5,0%).
EURUSD dropped 0,0% (-6,7%). EURCHF gained 0,5% (-4,8%). EURJPY gained 0,2% (7,5%). EURGBP gained 0,3% (4,6%).
10Y US Treasury yield rose 2bps (218bps) to 3,69%, with the 10/2 spread at -59 bps (-4).
10Y Bund yield rose 5bps (254bps, Z-score 2,1) to 2,36%. 10Y Italian BTP yield rose 5bps (331bps) to 4,48%, matching Bunds.
US Investment Grade Average OAS were unchanged (44bps) to 1,44%. US High Yield (HY) Average Spread over Treasuries rose 6bps (169bps) to 4,52%.US High Yield (HY) Caa Average Spread over Treasuries rose 5bps (446bps) to 9,95%. USD Repo Govt GC ON closed at 4,34% while the US Federal Funds Effective Rate stood at 4,33%.
XAUUSD dropped -1,1% (-1,9%) while Silver shed -1.3% (1,4%). Major Gold Mines (GDX) dropped -1,1% (-10,2%). Bitcoin was unchanged (-63,7%).
Goldman Sachs Commodity Index dropped -0,9% (21,3%). WTI Crude was unchanged (4,1%). COPPER (CPER) dropped -1,5% (-16,5%).
Overnight in Asia…
S&P future +4 points; Hong Kong -0.8%; Nikkei -1%; China -0.35%
Asian stocks dropped after the US slump.
Tesla recovered 3% (from the 6% lost yesterday) after E. Musk said he isn’t planning to sell any more Tesla shares for two years, having offloaded almost $40bn of stock this year to purchase Twitter.
Have a nice week ahead!
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.
BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.
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