Safety in numbers?
Sell in May, but when is it safe to come back in?
In last month’s MBMG Investment Advisory Outlook, we expressed concerns about how determined policymakers appeared to be to inflict significant pain on investors and lasting damage on the economy. As we said, with more than a hint of sarcasm,
The FOMC even gave themselves for credit that the scale of economic damage is so great, it must mean that their fight against inflation is clearly working.
We described the policy of using interest rates to undermine anaemic economic growth in order to defuse inflation stemming from rolling waves of supply shocks as
“confused thinking….extremely unlikely to ever produce a ‘Goldilocks outcome’ ”
In fact, September was really a month when policy chickens came home to roost.
In this month’s Outlook we focus on what actually happened last month and look ahead to how that may continue to play out from here.
We are currently planning to release MBMG Flash notes this month on the September effect, currency volatility and the UK’s unTrussedworthy new Prime Minister, but that really depends on how markets continue to (mis)behave.
Some points raised within the outlook-
Stock answers?- A major factor in the outperformance of our private advisory portfolios has been the positive contribution of our equity holdings. We have derived significant alpha, resulting in a positive return on equities this year, in 3 distinct ways, which we explain.
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Opportunity knocking? - The buying opportunities in attractive assets (long treasuries, Yen, gold miners, Chinese smaller companies) are so compelling at this time, that it makes sense to remain fairly fully invested. Recent treasury market inflows indicate both that fear is rising and that appetite for treasury bonds is increasing. The main flows have been at the short end of the curve, which is understandable with an inverted curve (where the short end pays high yields than the more volatile long end). Not only is this a useful fear gauge but it’s also an indication that as the curve flattens, these flows will move further down the curve, which reinforces our convictions that long treasuries are among the assets with the greatest risk-adjusted potential at this time.
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More opportunity knocking? Additionally, the Hong Kong Dollar looks vulnerable on the basis of widening interest rate differentials, potentially finding itself in a bind in terms of future rate hikes if Hong Kong continues to face growth constraints. This vulnerability, during a period of such currency volatility creates the possibility of HKD being de-pegged or having its band widened to enable additional weakening. Either way, a small carry position in HKD is interesting as HKD overdraft rates are almost 0.25% per year less than US one year treasury rates (indicative one month fixed HKD portfolio loan rates 3.65% at the time of writing).
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Strategies
For us, a focus on risk management remains paramount.
Perhaps what disturbs us most about the advice coming from other parts of the private wealth community is that we are having problems understanding their strategic reaction to being punched in the face.
They have taken pretty big hits but now are selling and have typically 25% cash positions in their cautious portfolios. Without second-guessing, it seems that the market, in general, is trying to close stable doors long after horses have bolted. This seems like just one step away from panic.
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Baht humbug? - For Thai residents, holding US Dollars, it may also be worth starting to think about converting any future Thai Baht requirements. This also applies to greater or lesser degrees to investors, businesses and families with liabilities or expenses in local currencies (including Pounds and Aussie Dollars)
We don’t know how much further THB can fall but 38 seems a reasonable point (at the beginning of the year, Thai banks were generally forecasting around 32-33 for the year end whereas we forecasted 37).
I suspect that we were all wrong.
I suspect that Baht can fall further.
I also suspect that at some point, it can rebound sharply.
We may be approaching an opportunity for those who at some point need to buy Thai Baht and currently hold US Dollars.
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In Lehman’s terms? Going forwards, the disruption in sovereign bond markets that we’ve recently seen in the UK, the FX volatility and the financial, economic, social and human stress being experienced by large parts of the population, especially in Emerging Markets (so severe that the UN have nipped the hand that feeds it by criticising US monetary policy because of the consequences that they are seeing), is a potentially major systemic risk.
Geopolitical and domestic political risk in just about all regions and every country is extremely elevated and needs to be monitored.
The UK bond tantrum is a symptom of tighter liquidity – yes, it was also inane ideology masked as economic policy, but the consequences wouldn’t have been so extreme in markets with high degrees of liquidity. The key takeaway is that this isn’t necessarily limited to being a UKcentric, idiosyncratic, idiocycentric event – illiquidity is a risk lurking beneath the surface that could impact credit markets, pension funds, life insurance policies, housing markets and ultimately trigger a further spiral down in risk assets, especially the most liquidity sensitive ones (think Ark, growth stock, crypto, meme stocks) and of course, isn’t helping beleaguered banks, like Deutsche and Credit Suisse. We’re not aware of the imminent failure of any major systemic institutions but tighter liquidity, more expensive funding, falling asset prices and higher default rates is a potentially toxic brew that can quickly turn fatal when it encounters existing vulnerabilities.
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Please email us to request a full copy of the October Outlook at info@mbmg-investment.com
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
Do you have any questions? Do not hesitate to contact me directly by email: Paul@mbmg-investment.com
For more information and to speak with our advisors, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.
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