Before one can start the process of forecasting where we wish to focus our portfolio strategy for the year ahead, it’s always best to review where we have just come from first. Notwithstanding that a Christmas rally may still eventuate (yeah, right!), the year to date numbers do not make pretty reading. As of this Monday USD returns year to date are:
- MSCI AC World TR index (-5.03%)
- MSCI Emerging Market index (-17.30%)
- Japan TOPIX (+10.50%)
- FTSE China 50 TR USD (-13.80%)
- iShares Global Tech (+3.10%)
- Oil WTI (-44.30%)
- CRB Commodity index (-24.00%)
- US 10 Y Govt Bond (Flat)
- Iboxx High Yield Bond (-11.30%)
- Cash (Flat)
- Gold bullion (-9.80%)
Obviously the strong US Dollar (+10% vs. the Euro, +2.5% vs. the GB Pound and a massive +24% vs. an Emerging Market proxy such as the Rand) can distort some of these performance numbers, but if, as a US Dollar investor, you had a positive year, then you clearly avoided some big down-drafts. US Dollar cash and the much unloved G7 Government bonds have had a flat year. However, exposure to high yield corporate debt (c.f. the iBoxx index) or EM bonds would have been very negative and the recent announcements of the suspension of a small number of US High Yield mutual funds (due to market illiquidity) will do nothing to help sentiment in the sector.
Within global equities, Japan, UK smaller companies, Technology stocks (most notably FANG – Facebook, Amazon, Netflix and Google) and European equities (hedged back into US Dollars) were the only real stand-outs. The broader US market and Global Real Estate were flat(ish), but the big avoids were Emerging Markets and the Resources sector. Surprisingly, a year ago they were also underperformers and the trend has just continued in 2015, with many fund managers jumping in too early.
Commodities have just had a shocker and the only question is: have we reached capitulation stage yet?
One of our preferred themes for the year was cheap volatility, which we have looked to exploit through ownership of a “tail risk” vehicle. Despite a very positive contribution in August, which usefully reduced overall portfolio drawdowns, this hasn’t exactly set the lights on over the past 12 months either. Similarly, Hedge Funds and other alternative strategies have also delivered lower volatility, but nothing flash in absolute performance terms over the year.
We all hang on every word that Central Bankers speak, but they would appear as unsure as the rest of us as to how the great QE experiment will ultimately play out. Perhaps then, we should turn to animal signs of the Chinese New Year for help? (After all, acupuncture tends to work when traditional medicine fails to provide answers). Given that we are currently (until February) in the year of the Sheep, it is arguably not surprising that we saw “more of the same” and a herd mentality was followed from the previous year? Next year is the year of the Monkey, followed by the Rooster in 2017. No prizes for which is going to give financial markets their wakeup call!
To quote Ruffer and Co. earlier in the week: “When entire industries are priced for the end of the world, it can come as a pleasant surprise to find that Armageddon is merely a temporary phenomenon”.
In pondering the outcome for the year ahead, it is dangerous to simply concur with our most recent experiences of this year and behave like sheep. To quote Ruffer and Co. yet again “It may still be too early for the move from safety into such highly visible danger, but 2016 may be a year when it proves better to be embarrassingly early than even a fraction too late”.
A Tough Year