Note Précis May 9,2018: Multipolar Jolt and Grind Markets – Since early 2018, investments have likely entered into multipolar jolt and grind capital market performance. As such, they have likely evolved from a decade long tryst with massive quantitative ease as dominant interlocutor. In fact in Zurich on May 8, 2018, the Federal Reserve Chairman made reference to friction, the evolving global economy and monetary influences therein. In addition to covenant light issuance amid low fixed income yields, an additional anomaly exists of CCC corporate bond yields being sticky close to 12 month low levels while other fixed income yields both rise and are volatile. The market mechanism within fixed income likely needs risk premium enhancement. Not singularly so in Latin America, Argentina and Venezuela illustrate risks as rising of concept investing, even if not as widespread as in the early 1990s. More focus is overdue in fixed income on credit quality and generating free cash flow rather than the erstwhile focus on coupon spreads over sovereign benchmark yields like U.S. Treasuries or German bunds.
In equities, after the deluge from the United States, the sluice of European based corporate results will soon start to flow. Urgent appear revisions for the early leaders in hitherto profitable logistical positioning of the early 2000s. Some express surprise over the paucity of positive equity response to strong earnings growth. The reality seems that the practically unipolar mechanism that so favored momentum has already shifted, amid elevated S&P 500 P/E multiples, year-over-year earnings momentum likely to slow and other uncertainties, not least energy costs.
We are overweight Energy as noted in our Quarterly Asset Mix Note of April 21,2018 titled: Q2/2018 – Markets, Algorithms and the Political Economy. Notwithstanding the hoopla, wholesale hydrocarbon displacements seem not imminent. They are crucial for energy and for goods from pharmaceuticals to information technology to kitchen items. Their production from say biomaterials has a likely two decades long evolution. Oil has long has been a political commodity from its discovery in Petrolia to expansion into Texas/Oklahoma , the Middle East, the North Sea, frontier regions and most lately in shale oil. It becomes more so now as Iran, Iraq, Venezuela pressures reemerge and Russia flexes. The same can be said for natural gas being widely transportable, only comparatively recently. Since 1973 and increasingly so in recent years, a strong market component has added onto crude oil politics. We have assigned a trading band of $60-70/Bbl. WTI in a likely volatile balance between production excess containment against rising demand.
A multipolar jolt and grind market environment appears in place. Rather than pullbacks being dismissed as temper tantrums as in 2013, they presage quality of delivery and of financial strength imperatives. Investment advantages likely also lie with strongly financed, severely restructured energy companies – dovetailing into our portfolio strategy favor for restructuring, quality and value.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.