“Markets advanced January’s returns into February as the appetite for equities continued unabated, despite political upheaval in Italy and sequestration in the US. This suggests a strong undercurrent of momentum, given now consensus perception of a lack of value in fixed income markets.
Total return trades
We begin to see signs that fundamentals may be reasserting themselves in markets, with a greater dispersion of returns between sectors and stocks. This will enable long-short equity managers, in particular, to generate better performance. With regards to index-linked bonds, we went slightly longer up the curve to extract more value. We were very underweight Japan, but are now neutral weighting, as the market is likely to benefit, in the short term, from further weakening of the Yen; however, we remain highly sceptical of a longer-term catalyst to support the market.
We bought a small position in gold equities as the valuation dispersion between gold equities and physical gold looks extreme - we anticipate that this will narrow eventually.
Have we seen a whole year’s gains in the first few months of year? Quite obviously, equities are up with events, thereby increasing the likelihood of disappointment. We believe, therefore, that markets are poised for a correction, given their speed and direction over the last few months. Economic data out of the US continue to be positive, reinforcing our view that the US harbours the potential for upside surprise. The UK market continues to decouple from the pallid UK economy, by virtue of its internationalised revenue streams. There is a similar disconnect between GDP growth (or lack of) and the direction of stock markets in Japan and Europe, begging the question does economic growth matter anymore?”
David Coombs, Head of Multi-Manager Investments, Rathbones