2015 : Global Macro and Dispersion

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Published on 17 December 2014

As global top-down investors, we specialize in exploiting market opportunities, no matter where they are. The agnostic nature of our process, along with its focus on discipline, allow us to invest without any bias. This means we are able to dynamically allocate to the highest number of structurally profitable assets and reduce exposure to systemic risk at the same time. We believe the year 2015 will be a quintessential set-up for strategies like SMART.

We have therefore prepared five charts which we think should be treated as “food for thought”. Indeed, while making predictions is outside of our circle of competencies, analyzing trends and profitably trade them is what we are good at. At the very least, these five points should convince you of one thing: dispersion across asset classes is about to increase in a significant way.

Chart 1 – Euroglut



Source: Banque Pâris Bertrand Sturdza, Bloomberg

The Euroglut is a process described and named by Deutsche Bank strategist George Saravelos: the concept refers to $400 billion of excess European savings over meager European investment. Saravelos argues that the European export of savings is structural, driven by a refusal by European investors to invest in a stagnant Europe with rising debt and mass unemployment. This has  significant implications for international trade and capital flows as well as financial assets around the world.

Chart 2 – US Dollar Secular Uptrend



Source: Banque Pâris Bertrand Sturdza, Bloomberg

A corollary of point 1 is the structural rise in the US dollar. Because of institutional factors (trade-liberalisation cycle at the turn of the century leading to a global savings glut), the US dollar is the cheapest it’s been since the mid-1990’s in real terms. We may be witnessing the start of a multi-year counter-trend with capital flows shifting back to USD denominated assets.

Chart 3 – Emerging Markets Can Be Cheaper



Source: Morgan Stanley

The new dollar cycle is negative for EM assets which find themselves vulnerable to balance sheet shocks and falling commodity prices. Over the last five years, the global search for yield coupled with an explosion of US$-denominated liabilities issuance by EM corporations have created new sets of risks. Clearly, EM equities are cheap vs DM but history suggests they can get cheaper.

Chart 4 – Rotation out of Small Caps into Large Caps


small vs large

Source: Citi

The forward looking nature of equity markets is nowhere best illustrated than in the rotation from Small Capitalisation to Large Capitalisation stocks in the US. The valuation differential between the Russell 2000 and the S&P500 stands in excess of one standard deviation above the 35-year average.  The chart shows that a mean-reverting process is underway and reflects investors’ preference for holding less risky stocks in a financial context that should see more asset class dispersion in the coming years.

Chart 5 – Dispersion



Source: Banque Pâris Bertrand Sturdza, Bloomberg

Dispersion between asset classes has found an extreme low in 2014 following a year dominated by strong trends and divergence between financial assets. Indeed this year has been subject to three episodes of significant drawdown as positioning and liquidity came head to head with capital flows and the start of economic and policy divergences at the international level. Dispersion should therefore bottom out in 2015, which should be supportive of active strategies and put passive approaches at risk of violent mean-reverting moves.

2015 for the PBS SMART Investor


If 2014 year was a year of low differentiation in terms of returns (global bonds are flat and stocks returned ~5% in USD unhedged), it also saw three episodes of double digits drawdown, and the start of important rotations at the regional and style level (EM to DM, Small Caps to Large Caps). In general, this tends to be associated with transition phases where capital flows reflect investors’ changing risk preferences.

Typically, these situations offer great opportunities for us as divergence among asset classes rises and with it, the value of active management. We are very confident that our portfolio construction process will be able to capitalize from this environment and offer value to investors, either as an alternative to Global Macro or as a diversified strategy within a global portfolio, in the buffer zone between stocks and bonds which requires a dynamic approach.

While this year’s returns were largely dominated by nominal effects, most notably FX, it is important to remind you that we hedge currency exposure, in order to provide you with a “pure” risk/reward profile. Indeed, we believe that FX is an exogenous risk that should be neutralized since at the end of the day, the reason one should invest in SMART is to get exposure to its process, not some random factor that taints returns. You can therefore express a strong view about the direction of the US Dollar, by investing in the USD share class (for EUR based investor, the SMART USD share class is up 13%) for example.

The team wishes you a happy holiday season and a profitable year 2015!