TURNING POINTS AND VOLATILITY
Turning points in asset allocation are always a cause for volatility and this is no different. Last week was crucial as two major sources of uncertainty may have been removed.
Donald Trump has finally realised that he needed to cool it down on his war with China while the UK and the EU are close to an eleven hour deal as Boris Johnson and the Irish Prime Minister have apparently reached an acceptable agreement on the Irish border backstop issue.
Market reacted sharply on Friday sending equity indexes in the green for the week but nothing has really been solved yet and the earnings season is upon us with some companies having already reported.
In our view, the main beneficiary f the truce will be the Chinese equity markets and emerging markets while the US equity markets will remain hostage to earnings and valuations.
Being disciplined and having recorded buy signals at the beginning of the week, we removed our hedges on Chinese equities, went long the FT 50 China Index and increased our weighting quite substantially in the past few days, accumulating stocks that we believe are particularly attractive in terms of prospects and valuations.
We had also increased our exposure to Emerging markets at the beginning of the week by adding Vietnam, Turkey and the UAE. In Europe, we added NORSK HYDRO and bought a UK ETF on Thursday as the news came out on the BREXIT front.
In terms of asset allocation, we moved to a more neutral position with 43.71 % long and 42.2 % short exposure.
In terms of performance, as the Asian markets have not yet reflected the good news on the Trade War that came out Friday afternoon, we took the negative effect of our US short positions but have not yet had the positive effects on our Asian and Emerging markets positions.
We therefore expect the negative performance of the week to be reversed next week.
Amongst the most notable thing, ARGENTINA bonds seem to be moving out of the doldrums now that we are nearing the elections there, and investors are starting to be attracted to the 22 % yields offered by the US dollar denominated bonds. They rose 9 % over the week.
Other notables moves are in our “Trade War Victims” TONGDA GROUP and AAC TECHNOLOGIES which rose respectively 7 and 9 % and are just starting to recover.