Over the last 18 months markets have had to digest a huge amount of conflicting news and data globally on macro, micro and geopolitical levels.
For some time we have advocated that, since the Fed first started tightening policy, the investment environment should see the return of active managers outperforming after years of highly correlated markets favoured the passive route. We have been of the view that equities will produce better returns than fixed income, given the negative real returns offered on government bonds, over the medium term but that stock markets will trade to extremes along the way. The fact that central banks, particularly the Fed, are so focused on financial stability given the dominance of corporate bonds and the repo market within the system, means that the Fed ‘put’ is likely to remain.
However, while the outlook for global growth going forward is reasonably benign providing central banks maintain liquidity and do not lose control, although the world is long overdue a modest slowdown, markets also need to deal with other headwinds, particularly on the trade and political front.
Our equity screen monitors the relative and outright attractiveness of markets in real time. Although we missed out on the rally going into the summer of last year, albeit that was mainly driven by tech stocks at the latter stages, we had earmarked the fact that markets were overstretched going into Q4 2018 and adopted a cautious approach. Markets had become overbought technically and expensive fundamentally. We then had the sell off in Q4 2018 which, on a relative basis, suited our stance. By year end the markets had moved to the opposite extreme, oversold and fundamentally cheap, and in January we added risk to the funds. We have recently put more cash to work after another extreme move last month.
In summary, we expect some of the zombie community to come unstuck in a more precarious monetary environment, and the wild swings in markets will provide good opportunities to add value tactically.
The chart below illustrates how we have been tactically trading the market within the Optimal Multi Asset Opportunities fund to adjust our net exposure (red dots highlight where we have sold the S&P 500, green dots where we have bought back the S&P 500):
Source: Bloomberg; MitonOptimal