After the noise of Summers has gone | MBMG Investment Advisory Report and Outlook 1st September 2022
Those days are gone forever….
In last month’s backdrop, we expressed concerns about how long the rally in risk assets, which we considered to be unconvincing, could continue. We didn’t have to wait long for the answer. By the middle of August, the NASDAQ had rallied a further 6% and the broader S&P 500 a further 4.5%. However, by the month end, these ephemeral gains had been given back plus further losses of over -3.5% on NASDAQ and -4.2% on the SPX.
This ties in with views that we had expressed in Paul’s Bloomberg appearance at the end of May, when the spoke of unconvincing ebbs and flows in markets trying to rally built on unsound foundations and starved of liquidity.
We made the point that markets were dancing a drunken Lindy Hop dance to an out of tune, accompaniment by The Fed with chaotic changes of time signature.
The late July to mid-August rally was mainly built on FOMC chair Powell’s incoherent but highly telegraphed pivot from being determined to drive the economy off a cliff to promising that he wouldn’t, if the data told him not to:
The FOMC arrive in the nick of time in order to explain to the lorry driver
that really there’s plenty of room ahead and nothing to worry about
The FOMC even gave themselves for credit that the scale of economic damage is so great, it must mean that their fight against inflation is clearly working.
This confused thinking was extremely unlikely to ever produce a ‘Goldilocks outcome’.
By mid-August, markets started waking up to the twin realisation that the damage wrought by US policymakers wasn’t yet nearly enough to trigger the much-heralded policy pivot and that the economic dangers were greater than they’d previously been led to believe.
As we noted last month
“it’s possible that the feelgood factor of Chair Powell’s soothing words may be enough to boost the markets for some time – maybe even until the FOMC realise how bad things are and start to reverse their policy of attacking supply problems by demand destruction.
But we wouldn’t want to rely on that.
It’s possible that everything will align so that inflation dies a death before the Fed damage the economy beyond any easy or fast repair, that the FOMC are sensitive to this and that we see much looseer Powell movements.
It’s possible.
But to us, it seems unlikely.”
It so happened that at the time that markets were, as we now know peaking, Paul explained many of the key themes dominating our investment outlook in his appearance on CNBC’s Asia Street Signs on August 17th. While a great deal has happened in the intervening fortnight, the themes remain intact. We have summarized these in this month’s Backdrop.
1. MBMG Portfolios based on the average performance of MBMG IA’s private client portfolios of USD 1 million or more, from 1st January 2017 to 31 Aug 2022 (based on latest actual & provisional data to 31 Aug 2022).
2. Average US$ portfolios based on estimated ARC Research Private Client Indices from 1st January 2017 to latest available data to 31 Aug 2022)- https://www.suggestus.com/pci.
Over the past five ½ years, MBMG’s average portfolios have generated cumulative gains of over 43%. This equates to around 3.5 times the return of the average wealth manager portfolio across all asset classes and is equivalent to an annual rate of return (CAGR) for MBMG IA advisory portfolios of around 6.7%, versus the industry average of 2.2%. The average MBMG portfolio loss of -4.6% year to date compares favourably with the average wealth manager loss of –14.9% this year:
Nobody on the road,
Nobody on the beach.
I feel it in the air,
The summer’s out of reach.
Empty lake, empty streets,
The sun goes down alone
–
Boys of summer – Don Henley
The Backdrop
A bit of a BoJ job?
Paul explained many of the key themes dominating our investment outlook in his appearance on CNBC’s Asia Street Signs on August 17th. While a great deal has happened in the intervening fortnight, the themes remain intact.
Paul was asked first to explain his call to sell USD and buy Yen above 134 to the Dollar.
“This isn’t simply a tactical trade but it’s not strictly strategic either. We just see so much value in the Yen right now mainly because of the divergent economic differentials between Japan and, the USA:
Inflation is not a problem in Japan; it’s at relatively low levels still, so Japanese policymakers are still welcoming inflation.
There’s fiscal space in Japan; consumers still have a greater level of personal savings now than before the pandemic, unlike in the United States.
So, we believe that interest rate expectations are going to favour Yen, in that we see weakening expectations for monetary policy in USA going forwards with increasing talk of a policy pivot increasingly having to happen.
So, it’s partly a weaker US Dollar story, but it’s also a stronger Yen story.
It may not happen right away.
It almost certainly won’t happen in a straight line.
But I think by the end of next year, we need to be looking at perhaps somewhere between 100- 110 on the Yen.”
Paul was asked if the reversal could take so long, why should investors buy now?
“Why now? Because we don’t know when the optimum entry point will be, we never do, but now no one can predict the behaviour of the Fed and one of the keys to this is the Fed’s behaviour. Whenever we take any position, even a tactical position, we usually recommend trying to buy in phases, in instalments, gradually over time.
We actually started recommending adding Yen last month, and we’re continuing to favour buying. I think the first positions our clients got were nearly at 140, so perhaps we should have bought more back then, but it’s hard to know if that will be the bottom, even in the really short term. This is far from being a one-month slam dunk, although that’s not impossible either, but that’s not our expectation and we’re suggesting gradually building a position on further weakness in order to profit in the medium term.”
CNBC’s Tanveer Gill noted that the fall in Yen-Dollar from 110 to 140 had largely happened in the last three months, so it made sense to approach the rebound in this way and if not, be able to benefit from a more gradual retrace.
Disclaimer: The above information has not been independently verified. This investment brief is given for information only and does not represent an investment proposal, recommendation or advice to invest in the shares or business of the subject company. Additional information shall be made available to interested parties subject to the execution of the requisite confidentiality undertakings. The financial information, actual and/or forecast, provide herein is based on management representation.
