Global Allocation Fund commentary for the month ended November 30, 2016.
Last month we were right about the plausible reaction of markets after a Trump´s victory.
Even though the previous days to the elections markets started to discount the scenario of a Trump´s victory, their reaction was opposite to what finally happened. Thus, stock markets fell and bond prices rallied, just the opposite of our assessment.
Global Allocation Fund
But after the sharp initial collapse of risk assets and the consequent rally of safe havens, markets completely reversed. Maybe they took a closer look at the electoral program of the elected president: Lower income and corporate taxes; more infrastructure spending; and possibly more restrictive trade measures. This measures are good for the stock market (especially US market, not that much for emerging markets), good for the dollar and very unfavorable for bonds (some of the bond indices have witnessed the worst month in more than 20 years). Interest rates hikes are at hand, this seems to be the clear conclusion from the elections´ come out.
While bond prices were collapsing as well as credit spreads, which was clearly in detriment of some equity sectors, we decided to close our equity exposure. The movement was abrupt and affected more to Italy, Spain and Portugal and even to France in comparison to Germany. Anticipating the possible flight to quality towards German bonds, given the negative news coming from Italy´s polls and Marine Le Pen leading French polls as well, we also decided to close our short in 30 year Buxl.
After the brief correction of bank stocks, we started to rebuild our exposure to the sector at lower prices. We still think banks are quoting at a very big discount and will be positively affected by the new scenario. We have also added a long in DAX. We think this index has not discounted the positive effects of the Euro devaluation and in case that the Italian referendum caused a panic and/or a reappearance of the Euro disintegration fear, the German market would benefit relative to periphery. With the same rationale, we have taken a 20% position long Sterling vs. Euro. Fundamentally we see Sterling artificially devaluated and therefore correcting in the medium term.
Once German bond´s spreads relative to other European countries have normalized, we have reentered the short exposure in bonds, in this case in 10 year French OAT´s. The yield is relatively close to Bunds and in case of “turbulent” markets this position would behave better than a similar one in German bonds.
See the full PDF below.
