In recent days, some strategists traditionally optimistic or at least not pessimistic about the fate of the stock exchanges have suddenly pulled the brakes, declaring their concern about the valuations achieved by the markets and reiterating their recommendation to remain overweighted in cash. In particular, the strategists of Goldman Sachs, who also had not disclosed any details
wavering during the storms of August 2015 and the beginning of this year, have pointed the index to the historically high valuations of US and European equities, with the sole exception of the financial sector.
Growth, they say, also looks weaker than expected, while earnings continue to be revised downwards. In these considerations, what is striking is not only the change of tone, but the fact that the year-end targets (we are referring in particular to the American stock exchange) are kept unchanged at a slightly higher level than the current one. Why show all this structural concern and underline the risks of a summer correction if we are then confident of its reabsorption in a relatively short time? Goldman Sachs strategists, in any case, strive to support their arguments with a considerable amount of respectable data.
Other houses go much more hurriedly and speak generically of a seasonal Sell in May. A reversal of roles between markets and strategists is therefore perceived in the air. The markets, which have long disliked share price hikes and always found a reason to exit the sector (just think of the redemptions of equity funds in August-September and February-March) are now calm and confident. Strategists (with interesting exceptions such as those of David Bianco and Chris Potts) instead appear more cautious than they have been in recent years.
So let's try to see what is making the market so calm and constructive. We do this with a series of portraits of investors, whose names we have changed for obvious confidentiality reasons. Let's start with Reginaldo, who often travels to China for work and has been in cash for two years because he is worried about the continuous increase in the debt of Chinese companies due to holding not only the renminbi but the entire financial system. Off-balance sheet instruments of banks such as Wealth Management Products remind them more and more of the Special Purpose Vehicles that in 2007-2008 were filled with poor quality paper and readily sold around. Reginaldo continues to be worried on a structural level, but he has had to swallow his doubts about the ability of the Chinese government to stabilize the stock market and the exchange rate and to relaunch growth through credit for the umpteenth time.
Now he thinks that a new phase of dollar strength will scare the markets less and that a new modest slide in the renminbi can be managed without too many problems. As a result, he took a small position in global equities for the first time in a while. For his part, Egberto is tired of spending his life worrying about the rise in American interest rates. One thing, he says, is a Fed that wants to automatically tighten every quarter (as was thought in January) even if the economy slows down. Another thing is instead a flexible Fed that agrees with the market on times and methods, choosing moments of strong stock exchanges and, above all, of a re-accelerating economy to normalize monetary policy. If rates rise because the economy is healthy and with inflation moderate, that's a sign of strength, not danger.
Egberto then started buying American bank stocks. They are undervalued and will benefit from a rate hike. Grunilde, who has always been fond of the European idea, has been agonizing over the idea of Brexit for weeks. After selling poorly in February she has only partially reconstituted her position lest June 23 lead to the beginning of the dissolution of the Union. For a few days, however, she has been calmer. In the first place, the polls indicate a two-digit gap in favor of the Remains. Second, June 23 is a known unknown, not a black swan that suddenly appears. Everyone has therefore had the opportunity to embed at least some risk in their portfolios, making them less vulnerable to a negative outcome. Grunhild is therefore buying what is still under water from the beginning of the year, such as the Eurostoxx, and is ready to buy pounds on weakness in the coming weeks.
Agilpert, who has burned out on Greece in past years, has been reluctant to go public since the February crash. Today, however, he breathes a sigh of relief. The positions of the IMF and Germany on the settlement of the Greek debt, which seemed irreconcilable, have reconciled and the Tsipras government, for its part, has adopted austerity measures which in other times would have been unthinkable. Until the end of the year, thinks Agilperto now, Greece will no longer make news and the moment is good to take advantage of the gains in these hours and buy Greek public bonds.
Next year we will be all over again, but for now we can be more relaxed. For a time Amalafrida was agitated by oil. The recovery of these three months is fragile, he thought, and a consolidation of 5-10 dollars is perfectly possible and capable of putting the bad mood back on the stock markets. However, due to a series of circumstances, from the Canadian fires to the continuous production hitches in Libya, Nigeria and Venezuela, crude oil has continued to rise, while the cancellation of many large extraction projects is definitive and will not be re-discussed even with crude oil at 60 -70 bucks.
Amalafrida therefore began to buy bonds of oil companies and emerging producing countries. Drocperto is a prudent man, but not totally risk averse. In recent years he has earned well on corporate bonds in euro even if the small share of bank subordinates has made him suffer from time to time. However, Drocperto is now thinking of making the leap towards European equities. The day after the British referendum (a known unknown, precisely) the ECB will start buying high-quality corporate bonds and will bring their yield down to practically zero. At that point the bag is better.
Drocpert isn't too worried about his subordinates. The European economy is doing well and is not generating new bad debts for the banks. Now it's just a matter of not making any more mistakes and managing past suffering intelligently. What returned the smile to Walamanno, who had reduced his positions on the German stock exchange, was instead the fact that the euro did not strengthen up to 1.20 against the dollar. In early May, at a time when silence had fallen on the US rate hike (many were betting it never would), the euro had broken out of its range and traders were ready to push it further up.
However, the weak dollar made it easier for the Fed to revive the practice of the hike and the euro immediately began to weaken again. The threat to the competitiveness of large German industry has subsided and Walamanno is buying back some Dax. Things are also going better for Ildegarda, who has reluctantly reduced his positions on the Bovespa in the last two years. But now the political change in Brazil is strong and irreversible. Meirelles is moving well, proceeding smoothly, as is his style, but in the right direction. Real has not
great potential for further recovery, but the current yield on Brazilian bonds is very good. Now Ildegarda buys Brazil and emerging funds.
Brunrico is a disenchanted man. He doesn't love or hate stocks, they are simply buying or selling opportunities to be evaluated by looking at market positioning. The recovery of these three months has been strong, he points out, but it has taken place with low volumes. This means that portfolios, precipitously lightened in February, are still too drained and find themselves immersed in the foul atmosphere of zero or negative interest rates on cash and risk free. After some time that air becomes unbreathable and if the circumstances are not exactly adverse the money has to be put back to work. This second part of the recovery will certainly not be as strong as the first, because the Fed will sequester a large part of it by raising rates in June-July and making it clear that another adjustment could arrive in December.
The concerns of strategists, he adds, are perfectly legitimate and a surprise on Brexit would reopen all the games, but for a new market correction to cause profound damage, the pendulum must have swung back towards the overinvested. It still takes time.
