This week was unusual for me in that I had three institutional investor friends come a-calling here in my sleepy little hamlet. Always great to see old friends who speak the same language. Lots of good discussion.
The upshot is that it forced me to distill my thoughts for the next six months or so. You will have already picked up on them in bits and pieces if you’ve been tracking @Behavioralmacro tweets closely over the past month or so. And I insert here the usual caveat that what I’m about to say could turn out to be totally and utterly wrong. But, all of us need a base case, so here’s what I boiled mine down to:
I call it the ascending triangle scenario.
The shock and pain of the January-February selloff forced everyone to take a deep breath and reassess the backdrop. We now need to wring out that extreme reading of euphoria, digest the rate hikes that we had been shrugging off, and recognize that growth is much more likely to have a run rate with a two and than a three handle. In short, market and growth expectations have to continue the process of coming off the January boil
In a sense, the shock created a mini disaster myopia dynamic. This process often plays out in an ascending triangle type pattern (if you can conceptualize one for growth expectations as well). And it resolves to the upside once the oscillations decline in magnitude, volatility dies down, and the January shock starts fading in our memories.
This is what an ascending triangle looks like:
We are entering the “bad” season for risk taking, many are licking their wounds from Q1’s volatility, and fundamental and technical consolidation referenced above needs time to play out.
The implication is while we can expect to return to the highs, it’s hard to imagine us getting anywhere meaningfully beyond them until this rough triangle plays out and risk appetite is replenished, which I’m guessing would likely be sometime this Fall.
To set up for this period, I added to discounted fixed income products to increase carry, taken the overall beta of the Investment book down, and increased in selected sectors like US home builders, which, in my view got hit too hard out of overdone fears of higher rates and higher wage inflation. I also like names that have a secular growth story–to the extent one can find them and get good entry points.
I have not changed my views on EM, but I do expect it to under-perform over much of this upcoming period. In part because its relative strength is no longer a surprise to anyone, and in part because any decent USD rally would shake out EM investors who came to the party late.
Hope this is helpful. Good luck.