Snapshot of Weekly Allocation, Performance & Post-mortem (SWAPP): 28 Oct-17


Allocation

Strategic allocations (23.4%):

  • Equity (12.5%):

  • DM equity longs: France, Japan, S&P 500

  • EM equity longs: China small-caps, South Africa

  • EM equity shorts: Egypt, Russia, Brazil, India, Turkey

  • RV-Tech: Long AAPL/PYPL vs short NFLX/FB

  • Other: Cyber security, MSCI World, VIXY

  • FX (10.2%):

  • Longs: NZD, MXN, CHF

  • Shorts: AUD, EUR, GBP, ZAR, RUB, CAD, JPY

  • RV: Short AUD-NZD, short EUR-JPY

  • Fixed Income (0.7%):

  • Long: 7-10yr USTs

  • Short: Euro HY

Tactical allocations (35.7%):

  • Equity (8.6%):

  • Longs: Argentina, Pakistan, Qatar

  • Short: Ibex

  • FX (27.1%):

  • Long: Gold

Other/cash (41%):

  • ‘Cash-Plus’ and SGD hedge (30.9%)

  • Vs EUR: Short CZK, short HUF, short PLN

  • Short SGD-CNH

  • Short SGD

  • Cash (10%)

Performance summary

We bounced back from last week's relatively muted performance challenged by de-risking ahead of our trip to Hong Kong.

Week to 28 Oct: 2.8% (prior week 0.4%):

  • Positive contributions from:

  • Strategic equity longs: AAPL, Argentina, France, Japan, VIX

  • Strategic equity shorts: Russia, Brazil, Turkey

  • Strategic FX: Short AUD, short AUD-NZD, short EUR-JPY, short ZAR, short RUB, short CAD

  • Tactical equity: Long Nikkei 225 (realized Thu, 26 Oct), Qatar

  • Tactical FX short EUR (into ECB, realized Fri, 27 Oct)

  • Tactical FX short CAD (into BOC MPC, realized Wed, 25 Oct)

  • Tactical FX short AUD (on CPI miss, realized Fri, 27 Oct)

  • Cash-Plus: Long EUR-HUF

  • Performance detractors:

  • Strategic equity longs: China small-caps, South Africa

  • Strategic equity shorts: Egypt, Facebook, India, Netflix

  • Strategic FX: Long MXN, long CHF

  • Tactical equity long: Pakistan

Post-mortem analysis

Missed opportunities:

  • Long Brent oil: It was top 3 in our model predictions for the week. It would've been worth a deeper dive.

  • Short ZAR and TRY: We could have expressed our long USD and short UST view by going even more short EM FX (rather we expressed tactical bullish dollar views against CAD, AUD and EUR this week). Shorting ZAR and TRY would have been attractive this week in particular ahead of Gigaba MT budget presentation and Germany tightening the screws on Turkish funding.

  • Long Indian state banks: We missed an unexpected double-digit surge in the sector after the govt announced a bazooka $32bn plan to recapitalize state banks strained by corporate defaults. Modi govt loves to surprise positively (and mildly disappoint rest of the time?).

  • Any/all FAANG stocks, but especially Twitter: TWTR was up +21% this week (!) after reporting +4% monthly active users, +14% daily active in Q3. As an active tweeter and big-time believer in Twitter as a productivity tool (and investment performance enhancer), I probably ought to have had token position. In related news, we hit 2k followers this week. According to a NBER study (FT, 10 Apr-17), it paid to follow euro-dollar tweets, especially a week like this (link):

  • Odds of beating FX markets are best if you track Twitter users with >500 followers, dubbed “informed agents” - NBER study

Rank of Conviction-Correlation model output (Predicted) vs Actual week-on-week returns:

Learnings/what struck me:

  • US tax bill expectations had been way too low - at least according to hearsay in the market. After this week's developments, this leaves (still) much room for the market to be less pessimistic between now and House bill draft release (expected around 1-3 Nov).

  • This whole Fed Chair selection process is likely responsible for circa 10-15bp-jump in UST 10yr yields. What happens once a Powell-Taylor Chair-Vice Chair combo is confirmed? (our base case)

  • UST-Bund spreads are wide for the current EUR level – which one will give? EUR has to give - and one reason we are bearish EUR, targeting 1.125 by year-end. Check out yesterday's post-ECB blog post (link).

  • Once it was clear that the ECB had dovishly tapered, technical analysts seized every reason to be bearish euro (ref: ‘head-and-shoulders’, necklines, geometric hexagons, dma’s and Ichimokus). Another reason to be ‘level-aware’ in tactical trade implementation.

  • When the outlook for ECB tightening (and a stronger EUR) falls apart, so too would tightening cycles/currency outlooks for those Euro-linked economies whose monetary policies hinged greatly on that of Frankfurt: NOK, SEK, HUF and PLN underperformed EUR.

  • EUR-JPY is sitting at 50dma (131.94). Further EUR weakness in the coming week could drag JPY with it until/unless the cross sinks to 130.09 (100dma).

  • Nikkei 225 rises to 22k for first time since July 1996 … just before the Asian financial crisis. But lots of compelling reasons to go long Japan equities according to one of my favourite FT columnists John Authers. Charts are there, there and there:

  • Topix price-book discount vs US is largest in at least 10yrs. Yet Topix has underperformed, even against more geopolitics-sensitive Kospi (link)

  • Despite relative price-to-book being cheap, global and local Japanese investors are underweight and selling. The only ones buying are trust banks (proxy for Japanese pensions) and corporates (buybacks) (link)

  • Dividend yields are comparable to those in the US, yet payout ratio is low. Profit margins are at record highs but can go higher towards SPX and MSCI World levels (link)

  • Japanese earnings are growing in spite of JPY strength (link)

  • Aussie dollar has multiple reasons to fall – eg OIS swap spread over US narrower, commodity px volatility, low inflation pushes back RBA hikes, still long spec positioning – even if politics is not one of them. Little market reaction post-Joyce court ruling makes sense to us given his likely re-election in about a month, but we're monitoring if the odds of this falls any.

  • Overriding the model's picks on Brazil Bovespa/BRL spared us big losses from longs (we flipped to a small strategic short due to local political developments and - in our view - investors finally caring a bit more about the hollowing out of pension reform)

  • Temer braced for sweeping concessions to pension reform. Only a few core elements stay (e.g. minimum age of 65/62yrs for men/women)

  • This:

#swapp #zar #try #faang #twitter #eur #eurjpy #aud #twtr