Global Allocation Fund Letter- Warning To European Debt Buyers

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Global Allocation Fund commentary for the month ended October 31, 2017.

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This month has been pretty convulsed, going round and around the Catalan crisis.

Besides this fact, the European market has moved in a range below a 1% range during the  whole month, except the day corresponding to Mr. Draghi’s conference. Hence, the real power not elected in the ballot boxes.

We have been invested pretty much during the entirety of the month, although unfortunately, after analysing how the consensus of the market waited for a BCE intervention, rather directed to persevere in time with the purchase of assets and negative interest rates, we decided that it would be better to wait for the possible correction that would arise after a little deception.

It wasn’t to be, but rather the opposite. Basically, Mr. Draghi said, in other words, that he wasn’t worried about the level of prices at which most assets currently are, currently moving in an absolute bubble environment, but instead, stated that he would love for them to continue in the same path.

Global Allocation Fund

Please bear in mind that not only does the European Central Bank buy government bonds, some already in negative terrain and some that haven’t reached that level yet, who are currently growing (price) through the roof (especially the outlying countries, including Greece), but also corporate bonds. The latter ones are beating all historical records, with the spreads on Euribor around an average of 20bp in investment grade bonds, and the junk bonds, lying in their lowest level in history, paying less than 2%. A total nonsense. The historical average of defaults in this sector exceeds 4% per year. The average. This year, everything is being refinanced.

I heartily recommend all of you to have a fixed income fund which generates positive returns. It is true that they have done well these last few months, but this is due to the narrowing of margins. For the next 10 years, the return expectancy is thought to be negative, and normally, not in a straight line. This means, that in a certain moment we will witness a strong decline of these assets. Sooner or later, a crisis will come around, and, as I always say: all crisis is a credit crisis.

Global Allocation Fund

When this happens, we will try to stay alert to cash in as soon as possible all the equity positions, the only asset that still has some margin. In fact, we estimate that in order to break even with fixed income, equities would have to increase even up to a 50% more in relation to the actual levels.

The same could be applied to the real estate asset prices. Although, this month, those that were experiencing a higher increase, (those in Barcelona, more than a 20%), are even suffering overall downfalls. Another atrocity.

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