Investors Shun Equities

A slow week with a bit of cheer for equity investors
US small caps recover the most – up 1% for the week but still down 21% over the last three months
REITS gave back some gains last week (down 1.7%) and are now also in negative territory for 2018
Commodity indices remain driven by lower oil prices with no sign of resurgent inflation
Aggressive, domestically focused multi-asset class strategies out-performed less risky options
YTD lower risk asset allocation strategies have outperformed especially if allocations involved international equities
Within equities, Growth slightly under-performed Value but Growth remains solidly ahead for the year
Cash remains the best performing of the major asset classes for the year

Currencies:

The USD is losing some strength as budget discussions in Washington remain unresolved and the Fed has indicated being close to done with rate hikes
A depreciating USD will boost international asset returns
The British Pound continued depreciating due to major uncertainty regarding BREXIT early in 2019
The Yen is now in a Break Out phase as investors remain very risk-averse and the Yen is usually considered the “safe” trade
Resource-oriented currencies experienced the biggest losses last week relative to the USD as commodity prices remain in a Down Trend
In general, FX volatility has increased substantially in the last couple of months

Commodity indices continue in a Down Trend as oil markets had another down leg
On the flipside, grain prices have been recovering since the summer
Natural gas prices were down over 8% due to warmer predicted weather and lower levels of fuel switching than anticipated
Gold and Silver had good weeks as investors have become more risk averse and the Fed has indicated only 2 more rate hikes for 2019
However, we still view US Treasuries as the best hedging option for equity risk

The year of risk-off continues with little to offer us hope that risky assets will recover soon – there may be a spike in January but risk is being shunned at the moment
While not comfortable, US investors should allocate more money to non-US stocks due to their lower valuations
The strong USD will not persist much stronger as the FED appears close to the end in terms of interest rate hikes
The Value/Growth discussion is being overshadowed by sector rotation but on a risk-adjusted basis we believe that higher allocations to Value are warranted
We are also watching out for any jump in inflationary expectations (which have been trending down). Tariffs are inflationary and will be reflected in higher consumer prices eventually
EM equities, in particular, are recovering. We still believe that an allocation is warranted. Our biggest concerns revolve around blowing out interest rate spreads and a slowing global economy
Leverage on the balance sheet of companies should be cross-checked for sustainability
We still see a risk on/off market next year making it difficult for short-term investors – probably best to extend horizons

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Eric J. Weigel

Global Focus Capital LLC

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