SPX Capital manager letter for the month ended July 31, 2016; titled, “A Short-Term At A Time.” Translated from Portuguese using Google Translate
The month of July started to show more clearly the limits of action of central banks. The Central Bank of Japan (BoJ) and the European Central Bank (ECB) disappointed the market with its plus lackluster performances. In the United States, the Federal Reserve (Fed) was also cautious and did not indicate the high market interest rates in the next meeting. In China, the government seems to have achieved some success in trying to stabilize the economy close to its goal of economic growth, around 6.5% to 7.0% for this year.
Europe breathed a sigh of relief, at least for now, in relation to the departure of England the European Union, called Brexit. The first numbers indicate that the impact on the euro zone economy was small. The most significant impact was felt in the United Kingdom itself, with reliable numbers and activity showing some deceleration.
In China, efforts to stop the downward trend of the economy seem to have not? been successful. We believe that these efforts will not be enough to sustain growth for long and that soon the government will have to adopt new measures to support economic growth, which tends to worsen the Chinese fiscal framework.
In the United States, economic growth in the first half was around 1% annualized, much influenced by a material adjustment to stocks. Were it not for this adjustment, the US economy would grow around 1.8% in annual terms, in line with the economic growth of recent years. In this sense, the Fed has shown extreme patience and cautious in removing monetary stimulus, which indicates that if there is a rise in interest rates, this will only occur at the end of this year. Another event, but this in the political sphere were the nominations of candidates for the US presidency. Donald Trump and Hillary Clinton will compete to be the new president. This event will be very important for the markets and will be the dominant issue in the coming months.
In Brazil, the country follows in anticipation of the outcome of Dilma president of the impeachment process. With the impeachment of approval prospect of President, what is being discussed now is the post-Dilma. What is the economic agenda of President Temer after the interim office? It will be the continuation of the kindnesses package that he has been practicing or after impeachment, President Temer will send to Congress the measures and constitutional reforms that the country so desperately needs to get out of the fiscal crisis that is?
We believe that the second option will prevail. No way, the fiscal crisis in the country is hard and requires painful adjustments. The agenda has to be built along with the society, and communication between the executive and legislative powers will be critical. Social Security needs urgent reform. On this point, we believe that there is a certain consensus in Congress and in society about the need for reform. Another measure that will be sent is the ceiling of expenditure in the correct direction to limit the continuation of the explosive trajectory of our public debt. However, neither of these two measures will be able to stabilize the debt. There will be need for the future president elected in 2018 continue to reform the country and have more measures to balance our public accounts, but that’s another story, to be analyzed in more detail in a moment later. As a partner of ours: “a short period of time.”
Here are our main allocations.
SPX Capital – Interest
We maintained our allocation applied, partly nominal interest and of real interest.
In US interest rates, despite the improvement observed in the economic data, the market is still pricing in a curve with less than a high for the year. We kept the allocation decision in the middle part of the curve.
We continued bought in the US dollar against a basket of currencies.
In the international part, still virtually no directional positions. The low level of global interest greatly increases the uncertainty of the scenario, given the current valuation of the stock markets.
In emerging markets, we maintained long exposure in Argentina, which this month was hampered by the interference of the judiciary in relation to the increase in rates occurred. We believe that this measure will not have major consequences and maintain our optimism. We continue zeroed in directional terms.
Regarding the Brazilian market, we maintained neutral directional position. We continue purchased in the financial services sector, we increased our position in utilities and increased our short position in metal commodities companies.
We continue purchased zinc, soybeans and oil, while copper sold.
In July, the SPX Nimitz yielded 0.36%, compared with a CDI of 1.11% in the same period.