John Bridgeman Limited states:
Hit Pause at the Party
We believed equity markets would run into year-end and this has generally occurred. Partly, this may have been inspired by politics, but we think it was more seasonal and driven by improving economic data. The challenge during the past year has been to avoid significant drawdowns as markets have fallen and risen on huge volatility. US small caps are all the rage right now, but they were down 20% in February and looked like falling further. Other equity markets, including Australia, have performed similarly.
In that environment, we chose to be hedged for the whole year holding precious metals, bonds to some degree, and large positions in undervalued risk off currencies. There were enough bumps in the road to successfully trade around the hedges and, at times, book substantial profits. For example, we closed positions around Brexit and the Trump election surprise, generally booking profits on both sides of market moves around currencies and equities.
Of course, that is all history now and we are looking forward. We are opportunists looking for tactical and strategic plays and combining them where we can. So, for 2017, we see a land of opportunity, because we believe markets will be even more bifurcated and consensus will be even more wrong than usual.
Firstly, we think the equity markets, particularly in the USA, will become jaded with Trump and start to focus on tightening conditions, including rising short and long term rates and the rising US dollar. We believe Trump tax cuts and fiscal policy will not impact the markets until the end of 2017 or 2018 at the earliest, but the rate rises and dollar rise are already having an effect and the biggest risk is a contraction in multiples. Add in some risks in Europe and China in particular, and the environment could tighten considerably.
Do not forget that this is all short term tactical positioning and if we see a significant correction, we will be most likely buying it. For a part of the year at least, however, we believe the opportunities lie in some major anti-consensus trades. We think this could include selling the US dollar, buying US treasuries, particularly ten-year government bonds, and selling US equities. not shorting them, just booking profits.
We think investors should be patient as the dip may occur around mid-year, but we believe it may start in January – although we might be early. Then, at some point, after all the major European elections are done (Will the EU break apart? Forget about it!) and Trump has enacted policy, then equities markets will be king heading into 2018.