Undercurrents

BEYOND THE OBVIOUS

2007

HOUSING CRISIS

The bursting of the US housing bubble revealed heightened risks right across the globe, ultimately leading to the 2008 global financial crisis.

While our models were signaling deep vulnerabilities in the global financial system, the epicenter of risk was in the United States. In other words, the crisis was made in America. Conversely, Asian economies were seeing a secular rise in macroeconomic conditions, the quality of their growth and their perception as safe havens (especially compared to traditional shock absorbing assets like the Swiss Franc, US bonds, gold, etc.).

The problem with recessions and associated market selloffs is that correlations among different asset classes. Where to hide? An often overlooked asset class is global currency. Correlations here tend to be stable both during normal and turbulent regimes and therefore provide some of the best diversification exposures for client portfolios. As such, we bought bonds denominated in the local currencies of select Asian countries (Japanese Yen, Chinese Renminbi, etc.) .

2014

Oil Collapse

In mid-2014, the price of oil began to melt down and fears of another global financial crisis spiked.

Contrary to conventional wisdom, falling oil prices have never correctly predicted an economic downturn. On all recent occasions when the oil price has at least halved, faster global growth followed. Conversely, every global recession in the past 50 years has been preceded by a sharp increase in oil prices. This became more apparent as the positive impact on global consumption, investment and liquidity materialized over time (especially in countries who are net importers).

Combining negative investor sentiment with a rapidly falling oil price, led our investment team to purchase Indian equities. Why? Indian assets had sold off dramatically, the economy was recovering and, importantly, the country is a net commodity importer. For a nation that imports 100% of its oil demand, the dramatic fall in oil provided a near-term catalyst to boost the earnings of Indian stocks.

2018

Trade Wars

2018 was the year of trade wars. With rising protectionism, investors panicked and markets sold off.

Two prominent Forstrong macro themes (over-loved U.S. equities and under-loved EM equities) forced us to take a closer look at the undercurrents. We saw a U.S. dollar index that was at a 15 year high and an equity market that had increased to over 60% of global market capitalization even though the U.S. share of global GDP had declined to less than 25%. Coincidently, we had witnessed EM equities steadily fall out of favour in spite of consensus projections that EM output would exceed developed market output by 2030.

We bought Chinese equities for our clients because undue and pervasive China bearishness had caused a broad-based and indiscriminate selloff. In other words, trade war risks were fully priced in.