Riskelia's blog

2011, a year without trends? Not so sure…

Posted on 04. jan, 2012 by Riskelia in Weekly Focus | Commentaires fermés

Record of 2011’s successful and aborted trends

As showed in figure 1, the 19% return of our « best-of » portfolio in 2011 has been made mostly in the three months of July, August and September, with more than half of the performance generated in the sole month of August. This asymmetric behavior is characteristic of trend-following strategies: trends do not work all the time but when they do, they often do it with full force and you can lose your shirt being against them…

The year 2011 has actually been divided into 3 parts.

Up to the spring 2011, risky assets held on, the dollar tumbled and the markets were blind to the euro sovereign debt issues. The Radar was unable to capture major trends as punctual « black swan » events such as the Fukushima nuclear meltdown have prevailed on long-term developments.

The trend signals have been the most relevant at the end of the spring: everything started with deflationary signals on fixed income assets as early as May 2011, then the recommendations turned negative on a large set of European equities and the global risk aversion signal turned reddish in June as financial markets eventually acknowledged the worldwide repercussion of the Euro sovereign and banking crises. Most of our performance was achieved during the summer months between July and September 2011 where directional trades prevailed.

Then, from September onwards, the cyclical assets were muted. The European equities slightly rebounded whereas the US equities showed impressive resilience in the face of the financial crisis. Eventually, the Radar shifted its focus from the short equities and fixed income themes towards the bullish dollar theme achieving positive performance on selling Emerging currencies and the euro vs. the USD at the turn of the year.

Among our top bets of the year, two thirds are identified as long Fixed Income views; the trophy is awarded to the Emerging Bonds followed by investment grade, UK bonds, inflation bonds and US bonds. The long gold position eventually stands out as a clear winner thanks to the bubble indicator which managed to deleverage the exposure when prices skyrocketed during the summer. The position is presently immunized due to a declining trend towards neutrality. As highlighted in figure 2, the dominant themes of 2011 have been the Fixed Income markets. Meanwhile, many « muddle through » assets such as emerging bonds and inflation bonds have showed impressive resilience, making 2011 sharply different from 2008. Even the oil markets eventually ended up the year in neutral territory.

Among the flops of the year, there are three categories:

• Commodities have been mainly range bound with a good start and a sluggish –though not dramatic- end of year. Therefore, the commodities ended the year with a strong negative consensus as reflected by sharply negative flows from investors, yet not so much loss for the moment apart from the severely hit Base Metals.
• Some equities markets have been hesitating all year long between the « risk on » and the « risk off » modes. In this respect, the Radar recommendations on the Topix were not relevant because of the suddenness of the Fukushima meltdown which reversed the course of the Topix before the financial crisis
• Last but not least, the Radar has been particularly unfitted to capture the binary behavior of the Euro Sovereign Bonds. The August ECB intervention has produced a false positive signal which was later invalidated by the political hesitations of the euro leaders. Then the ECB decision to grant unlimited long term funding up to three years maturity flipped the recommendation back to the positive side.

Year 2012 perspectives

Five themes are presently highlighted by the Radar:

• The bull USD with a specific focus on short emerging bets and short European currencies; it remains to be seen if this theme will survive the probable launch of a QE3 in the first quarter of 2012
• The broad based euro devaluation beyond the dollar side, i.e. short EUR vs. a basket of dollar, US equities markets (S&P for instance), Oil Brent and Worldwide Inflation Bonds
• The downward pressure on specific commodities such as cyclical metals (silver, platinum, copper…) and some grains (corn, soybeans)
• In contrast with other commodities, the good resilience of oil, reflected in the shape of the curve moving to backwardation
• The positive outlook of defensive sectors around the world: STXE Food & Beverage, STXE Healthcare, S&P Utilities, S&P Consumer Staples, S&P Healthcare

A major OECD bonds’ bubble is also on the screen, carrying the threat of an epic bond crash in 2012…

Figure 1: Monthly performance of Riskelia’s best of portfolio

Figure 2: the top bets of 2011: 66% are Fixed Income bullish views

Figure 3: the flops of 2011

Tags: August And September, Black Swan, Crises, Debt Issues, European Equities, Financial Crisis, financial markets, Fixed Income, Full Force, Global Risk, Inflation, Month Of August, Nuclear Meltdown, Repercussion, Resilience, Risk Aversion, Risky Assets, Sovereign Debt, Term Developments