Brevan Howard Positive On Economic Outlook

Brevan HowardBrevan Howard

Despite challenging weather that put a damper on hiring and consumer spending, as well as sliding industrial production in January, the investment team at Brevan Howard, one of the world’s largest hedge funds with over $38 billion in firm assets, is positive on the economic outlook.

“The fundamental drivers of the expansion are still in place – moderate job gains, impressive increases in household net worth as well as improved balance sheets, less fiscal drag at the federal, state and local levels, and accommodative monetary policy,” an investment letter reviewed by ValueWalk said, while also setting expectations low for forthcoming economic numbers. “Given the continued weather-related disruptions in February, it may be impossible to get a good reading on the health of the economy until April, when the March data are released.”

Inflation / deflation watch: Brevan Howard

After experiencing nearly a -1.3% loss in January across the board, the Brevan Howard group of funds, which generally experienced slight gains near 3% in 2013, is focused on deflation.  Noting that inflation is low, the investor letter observed, “What stands out recently is the large drop in goods prices into deflationary territory and the small further easing in services inflation,” which has occurred widely among categories, with nondurables such as clothing that have a large imported-input share leading the way down and healthcare inflation has slowed noticeably.

“Health care services prices plunged last spring because of budget sequestration-related Medicare cuts,” the letter said. “But with inflation in that category returning to about 2% since then, some of the disinflation in that sector may be behind us.” In services, however, the letter noted that housing inflation is edging up as that market tightens.”  Overall the letter said inflation is expected to edge slowly up this year as the expansion gains traction and some of the special factors unwind.

Central bank maneuvers

In regards to the US Federal Reserve, the fund noted that Janet Yellen “seemed unfazed by the recent soft patch of data. It will be interesting to see how these cross-currents play out in her first FOMC press conference in March.” Based on her testimony, the fund expects Yellen to await more information before making any large changes in policy.  Likewise in the United Kingdom, the fund notes inflation remains benign which “continues to surprise the Bank of England (“BoE”) on the downside. We expect inflation to drop below the target and remain subdued.”  The letter noted the BoE is facing a dilemma.  “If productivity growth does not pick-up, wages cannot sustainably pick-up either. The recovery will either fizzle out, or remain so unbalanced that it needs to be curtailed with tighter policy, most likely some macro-prudential tightening.”

Market could force BoJ’s hand: Brevan Howard

In Japan, the Breven Howard investment team notes consumer inflation expectations moved sideways and “Consequently, many expect the BOJ to up its dose of monetary accommodation. All else being equal the authorities probably prefer to wait and see how wage negotiations play out as well as measure some of the fallout from the consumption tax increase in order to calibrate their response,” the report said, then noted the expectation. “Financial markets, however, could force their hand. It is notable that in the early part of 2014, the yen has retraced half of the depreciation against the dollar seen over the last two months of 2013.”



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com