Technical Perspectives
John Leiper – Chief Investment Officer – 14th September 2020
In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.
Whilst the fundamental case for US tech stocks remains strong, growing concern that valuations had gone too far too fast saw the Nasdaq 100 equity index fall 11% from its high on September 2nd. Notably, the outperformance of US tech stocks relative to the MSCI World has now fallen below its 50-day moving average and dropped out of the uptrend it’s enjoyed since the start of the pandemic. Having pre-emptively reduced exposure to US technology, on valuation concerns, we will be monitoring this development closely over the coming weeks as further weakness could present an attractive entry point.
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Our investment process is grounded in fundamental economic research and driven by the broad macroeconomic and geopolitical trends that drive markets over time. However, we also use technical analysis, like the chart above, to help identify key turning points in these trends and to gauge investor sentiment over time.
For example, an improving economic outlook, accompanied by rising investor sentiment, may eventually cause prior winners to underperform and the laggards to catch-up. Growth stocks have outperformed value stocks by a considerable margin over the last few years and recent gains have been parabolic. Whilst the death of value investing has been widely documented, we are mindful of the potential for a ‘great rotation’ like that witnessed following the dot.com peak in March 2000. It is far too early to make that call today, but if the tech trade does start to unwind, and the yield curve continues to steepen, prompting a rotation into financials, then value names could become very interesting.
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Another key development this week has been Brexit, and the UK government’s announcement that it plans to re-write the Brexit divorce deal, breaking international law in a ‘very specific and limited way’. With fading hopes for a trade deal, and the EU threatening legal action, GBP took a hit. This renewed vigour from the UK government is partly political. Ratcheting up the aggression on Brexit will appeal to Boris Johnson’s support base during a period of perceived weakness. It’s also part bluster, to get the EU’s attention, and drive home a better deal which is clearly the intention of both sides. But the ambiguities within the Northern Ireland Protocol are real and inherently contradictory which is what the Internal Market Bill seeks to address. Then there is the issue of EU state aid rules, which would apply in Northern Ireland and require the UK government to notify the European Commission if it plans to subsidise businesses that do trade with the rest of the island of Ireland. Boris Johnson and Dominic Cummings fear this could scupper plans to reinvigorate the British economy via the creation of national ‘tech’ champions.
The situation remains extremely fluid and whilst we do not know how the negotiations will ultimately unravel we think that if an agreement is struck, it will likely be at the last minute ahead of the October 15 deadline, raising short-term risks to the downside. Indeed, since taking office Boris Johnson has shown himself to be a fan of political brinkmanship. However, a no-deal Brexit also remains an outside risk in which case GBP/USD could fall to prior lows around 1.20.
Our medium term outlook for a weaker US dollar forms the cornerstone of our strategic market outlook. However, in mid-August, we turned tactically cautious that a near-term rebound in the US dollar could translate into GBP weakness, particularly following a summer-of-love that saw GBP/USD rally to almost 1.35. Having broken to the upside through its 5-year resistance line our strategy has been to give sterling the benefit of the doubt. However, GBP/USD failed to find support off this line and then failed to re-enter it’s prior August range, prompting us to unwind a portion of our US dollar hedge earlier last week. We continue to monitor the situation closely with a view to dynamically adjust our currency exposure as and when required.
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Finally, a brief update on commodities. Since we made the case to go long in mid-June, the commodity carve-out, comprised of gold, silver, copper and coffee has performed extremely well, both on an absolute basis and relative to the MSCI World benchmark.
Following significant gains earlier in the year, which saw the price of gold reach a new all-time high above $2,000 per oz, we have since seen the yellow metal fall back slightly with price now testing old resistance as new support. If this support level holds and gold rallies from it, that is very bullish, and we could see gold rally towards a new upside target of $3,000 per oz.
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As this is something we are actively monitoring, we are emboldened to see that the Swiss franc recently broke above 1.10 versus the US dollar; something it has been trying to do for the last 5-years. Previous attempts to do so have failed and are consistent with gold underperforming equites (both are considered safe-haven assets). If the Swiss franc can lift itself off the yellow resistance line, and move decisively higher, we see that as bullish for precious metals, like gold and silver. This technical perspective is consistent with our strategic outlook that the ongoing devaluation of the US dollar will boost precious metals higher over time.
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This week we have a slew of central bank meetings including the Federal Reserve on Wednesday and the UK and Japan on Thursday. In the UK, markets are pricing in a 10bps rate cut by March, contributing to recent sterling weakness, but we are not expecting any action to be taken this week. We also expect the Fed and BoJ to stay on hold.
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.
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Rise of the Underdog
In its latest economic outlook, the OECD increased its expectations for global GDP. For 2020, the improvement is minimal, reflecting an upward revision, in real GDP, from -4.5% to -4.2%. But beyond that, growing economic momentum should boost global growth to pre-pandemic levels, estimated at 4.2% in 2021 and 3.7% in 2022.
Let the Good Times Roll
Markets are ebullient, and they have every reason to be.
Nothing Is More Powerful Than an Idea Whose Time Has Come
On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results. The story behind the breakthrough, which you can read here, is fascinating, not least because the husband and wife team behind the virus don’t yet know why it works.
Anatomy of an Election (So far…)
The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly. Anticipation for a huge fiscal stimulus package, estimated at $3 trillion+, lent itself to the global reflation trade which would stimulate the economy and revive inflation, benefiting cyclical assets whilst hitting government bonds.
Since the Market Low
The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.
Canary in the Vol-Mine
With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. Meanwhile a long/short basket of companies more closely aligned with Republican policy and values has steadily underperform.
Q4-2020 Quarterly perspectives
Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication.
Further For Longer
On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little.
Life Imitating Art
Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).
Let’s Get Cyclical, Cyclical
The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.
The Call-Up
Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.
The NASDAQ Whale
The ACUMEN Portfolios continue to perform well. As you can see from the table below, performance for the rolling quarter (to the end of August) remains strong relative to the market composite benchmark and the current assigned IA sector, which I understand many advisers use for comparison purposes. ACUMEN Portfolios 3-8 were all in the first quartile and ranked in the top 15 within their category.
A Speech For The History Books
In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’. This means the Fed will now allow inflation to overshoot its official 2% target to compensate for prior years where inflation failed to reach that level.
Room to Run
Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.
Rising Phoenix
In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.
A Currency For All Seasons
Having identified, and benefited from, the 7% fall in the value of the US dollar index since late April, we have now turned tactically cautious.
All That Glitters…
In last week’s blog, This Time It’s Different (24 July 2020), I suggested the US dollar was on the cusp of crashing through its decade-long uptrend.
This Time It’s Different
There are growing signs that the US dollar may finally roll over.
Q3 2020 Quarterly Perspectives
Welcome to the Q3-2020 ‘Quarterly Perspectives’ publication.
Commodities Move Higher
The 10 year US Treasury yield has remained remarkably steady over the last few months, particularly as inflation expectations have gradually risen.
The Bigger They Are, The Harder They Fall
Those stocks that outperformed during the corona crisis are the same ‘winners’ that outperformed before the crisis.
Pivot to ESG
The recovery in US equity prices, from the corona crisis, has been one of the most rapid in history.
The Chinese Tech Structural Growth Story
China’s economy has transitioned, from an industrial export-led model, towards services.
The Commodity Carve-Out
Commodities are nothing if not cyclical. They rise and fall in value with remarkable consistency over time.
The Return of Inflation
Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress.
The Powell Pivot 2.0
In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.
Don’t Fight The Fed
Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy.
The Liquidity Crisis Is Dead. All Hail the Solvency Crisis.
In response to the corona crisis, global central banks have unleashed a tidal wave of liquidity.
Economy ≠ Markets
One question I get from advisers and clients, more than any other, is why global equity markets have bounced back so far.
From Liquidity To Solvency
In the early stages of the Corona Crisis of 2020, the global economy faced a liquidity crisis.
Super Contango
In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63.
FT Adviser – 16 April 2020
In a trading update last week, the listed adviser warned that the outbreak has caused commercials conditions to become “extremely challenging”
FT Adviser – 16 April 2020
Bosses at Tavistock Investments have taken a voluntary, significant pay cut…
One Currency To Rule Them All
As the world’s reserve currency, the US dollar is the go-to currency. It is used to price assets, complete transactions and as a store of value.
Proactive Investor Interview – 8 April 2020
Brian Raven tells Proactive Investor its two protected UCITS trusts have proved themselves during the current market volatility caused by the coronavirus pandemic.
The beginning of the end?
The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt.
Return-of-capital is as important as the return-on-capital
Last week, we considered the debt story behind the coronavirus. The fear of a large debt overhang, as the economy slows, led to concern that households and companies could start to default on their...
Market Notes 23rd March 2020
In the past three weeks, global equity markets have fallen almost as much as in the Financial Crisis of 2007-08.
Fund veteran takes major stake in consolidator in UK wealth plan
Investment sector veteran Hugh Simon has taken a near 5% stake in wealth consolidator Tavistock in a strategic partnership.
Market Commentary – March 2020
In the past week, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.
Halcyon Days
Halcyon days, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.
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