Global Allocation commentary for the month of April 2017.
The month of April has been dominated by the first round of the French elections. Even though polls were giving Macron an 80% probability of success, as finally will most certainly happen, there were also probabilities of Marine Le Pen and Jean-Luc Mélenchon contending in the second round, both having radical anti-European positions. I always try to distinguish between volatility and risk. Brexit could mean an elevated volatility, as was the case. But French elections could have provoked a great risk.
As we mentioned last month, the EUR put options vs USD that we bought would have protected the funds NAV in its integrity. If an event had occurred, the losses in the EUR would have been massive, not that much in the equity space. The previous days to the elections we decided to offset our equity exposure, but for the US equities and gold and silver miners. By the way, these reached year maximums the days heading into the elections, just to fall strongly afterwards.
Thus, once elections were past, we decided to buy back the hedges to our equity exposure, leaving net exposure at 65% and incorporating, once more, a short position in 30 year German Government Bonds (73%). This yield level, even after the downward movement after the elections, is the same where we closed last years´ positions. We expect the combination of equities and bond exposure will work better than an equity long only position.
We think that after the French elections and given the good behavior of the principle macroeconomic variables and an inflation close to 2%, monetary policy driven by the ECB makes each time less sense with negative interest rates still in many parts of the curve. The short position in rates also works as a hedge to our equity exposure, which we only see derailing in case of an abrupt rise in yields.
We have increased slightly our exposure to gold and silver taking advantage of the strong corrections after the French elections. Inflation and North Korea risks should not be bad for precious metals.
See the full PDF below.
