The S&P 500 has largely recovered from its January slump, and many analysts have blamed the disappointing US economic data that caused the downturn on bad weather, but according to North MaxQ Macro Fund, higher volatility is going to be with us all year.
Markets face multiple difficult transitions this year
“The highlight for the month of January was the increased market volatility,” North MaxQ wrote in its monthly investor letter, a copy of which was reviewed by ValueWalk. “Consensus positions were severely hit during the latter part of the month, with equities and emerging markets selling off, while government bonds, the Japanese Yen, and gold all rallied. Increased market volatility will most probably be a feature that will be with us during most of 2014 as the global economy, markets and policy-makers are facing several transitions.”
Arguably the biggest transition is tapering, and the very gradual movement towards normal levels of liquidity, but it comes at a time when emerging market economies are cooling and countries that have been running deficits could face strong economic headwinds. It wouldn’t take much more to push some EM markets into crisis, and frequent discussion of the possibility of EM contagion will likely keep investors jittery all year.
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EM will be subject to further re-pricing
“Particular emerging markets, such as Turkey and South Africa, which have been running large twin budget and current account deficits, reliant on non-resident portfolio flows, will be subject to further re-pricing as investors demand higher risk premiums to compensate for the increased macro-economic risk,” says the letter.
While North MaxQ thinks volatility is going to be higher for most of this year, the fund isn’t actually bearish on the economy.
“Again due to the weather related issues, it is difficult to extrapolate too much out of these data points. Our base case is that the US economy is losing some short term momentum, but it is premature to suggest the slowdown signals a significant deterioration in the economy’s trend performance,” they write.
This would be welcome news for hedge funds that couldn’t keep up with US equity returns last year. Reasonable average growth with lots of volatility is the ideal setting for stock pickers who are able to find value dislocations and move quickly.