Cutting Equity exposure

We have cut back on our tactical Equity exposure and are now running a small net short exposure. 

Equity markets in the US have retraced back to just over the 50wma moving average (which we suspected they would in our note dated 14/01/19). After a nice run of generating 15% returns in the last few months since, we are happy to take money off the table. 

Our Tactical Equity exposure is up 15% on the year and close to 40%, since we initiated the strategy back in May ’18:

We expect US equity markets will re-test their 200wma.

The Daily chart shows how the momentum of the market has slowed and is rolling over:

While difficult to say when, a retest is coming in our opinion. There are a large number of charts and data points that drive this view – a few are highlighted at the bottom of this note.

And it’s not just the US, that is rolling over. The Stoxx600 looks to be also, and this is off the back of a weak 2017/18:

What shocks me though is that many Private Banks are still pushing their clients into the market. They appear blinded by their internal need for revenue generation – force feeding clients soundbites that they should stay fully invested. A few of them even note that the recent breach of the S&P’s 50WMA, may result in a significant break higher in the equity markets (and this after a record beating start to the year and at a time when underlying data is weak and weakening?).

I’m not going to name and shame, but here are a few snippets of what many PBs are recommending:

• That clients remain fully allocated. It is common practice across many Private Banks, to note the weak returns from holding cash. Hence, stay fully invested. What they completely miss-represent though is that holding an increased allocation to cash at market tops and having liquidity in a sell-off is a massively effective way of generating returns. Look at all the great investors and there is a common thread – they all piled into the markets when the ‘blood was on the streets’, a rather gross but descriptive term used by Buffett.
• Increase allocation to the corporate bond market. Do the PBs have any idea of the risks in the current corporate bond market? That around USD1.5trl of US Corporate bonds will be rolled over in the next three years and that BBB is now close to 50% of the Corporate Bond market in the US. A market which is now around USD7trl, compared to only USD3trl in 2007. And we shouldn’t forget that covenants are also weaker than they used to be. As this debt gets rolled over, we should expect a sharp increase in downgrades to junk, pushing bond prices lower. 
• Buy Structured products as a hedge or to diversify exposure. Equity Linked Notes (ELNs) and Fixed Coupon Notes (FCNs), are a classic PB revenue driver. These products look attractive, but clients are largely unaware that they have significant upfront fees built in, of between 1 to 3%. Furthermore, as they are usually short-term, there is plenty of opportunity for the banks to churn them. 

I can’t help but feel that integrity and honest thinking and reporting have become very secondary to the agenda of revenue generation. Longer term though a price will be paid for this, resulting hopefully in increased flows to the independent, client focused, advisors such as MWCM. 

Our recommendation is ‘buyer beware’: 

• Aware of the conflict of interest in the Private Banks. 
• Aware of necessity of being impartial, to consider both the threats and opportunities in the markets. 
• Aware of one’s own internal drivers/emotions, such as greed and fear. The snake oil salesmen feed on desire and understanding one’s temperament and drivers is a key factor in generating longer term returns. 

MWCM was established to offer clients independent un-conflicted advice – as a team we have gone through many cycles and understand the pain that investors feel being fully allocated in a down market. So, while nobody can time the market, it is possible to adjust risk exposure on the back of valuation, underlying fundamentals and trends. 

In this environment, we advocate:

• A cautious more trading orientated approach to the equity markets. We continue to be very cautious on Europe. 
• A cautious approach to Corporate debt.
• USD – we see a stronger USD.  
• Gold – we like it as a hedge and are looking to add.
• Mid–duration US Treasuries – we started taking exposure in October 2018 and are looking to add.

Some charts we think are worth highlighting:

In the US, Baby boomers are retiring in droves:

Europe’s biggest bank? DB doesn’t look very health from where I’m sitting:

Australia’s Household Borrowing /GDP and House Price Index:

Disclaimer:

This material is mean for accredited clients only. Nothing in this document should be perceived in any way as a recommendation or solicitation to buy or sell any security or fund. The securities and accounts highlighted have been selected to illustrate MW Capital Management Pte Ltd investment approach and are not intended to indicate how any MW Capital Management Pte Ltd fund or account has performed or will perform in the future. The securities and accounts discussed herein in do not represent any entire portfolio or account managed or advised by MW Capital Management Pte Ltd and may not be suitable for all or any readers. Any views, forward looking statements, projections and current investments are based on assumptions and judgements. Because of the significant uncertainty inherent in any assumption and judgements we make, you should place no reliance on such forward-looking statements or views – they may not prove to be accurate and actual results may differ materially. Furthermore, they will change over time and should not be relied on in any way. There is no obligation for MW Capital Management Pte Ltd, and the company expressly disclaims any obligation, to update or alter the statements, predictions or any other information contained herein. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to adopt any investment strategy. The views expressed may change without notice. Certain economic and market information contained herein has been obtained from published sources prepared by others. MW Capital Management Pte Ltd assumes no responsibility for the accuracy of such information. All investments involve risk, including the potential loss of principal. Performance data is estimated and has not been audited. Funds performance data is usually delayed by a few weeks after month end. It should not be relied on or imply future performance.