While macroeconomic events have once again dominated the headlines, it has been interesting to note that markets spent much of early 2013 attempting to shrug off any unwelcome headwinds as most started the year in positive territory.
Recently though, there has been some fatigue to the general air of investor bullishness and, as we have noted in recent post-crisis years, we entered the second quarter with some of this early year euphoria beginning to fade.
The inconclusive Italian election and chaotic Cypriot bailout received much air time and impacted markets negatively. But we have not seen the extreme reaction to bad news that we have in previous years. It appears that the impact of European Central Bank chairman Mario Draghi’s “we’ll do what it takes” moment last year is still providing the necessary backstop for now.
Of course, this sentiment has yet to be actually tested. It’s also worth pointing out that, although it didn’t come to pass, the original plans to restructure banks in Cyprus reneged on any commitment to protect deposit holders. An indication that nothing is sacred if the situation dictates.
With the fiscal cliff pushed down the road again, the US appears to be benefiting from its quicker response to the financial crisis; the absence of any truly bad news and Federal Reserve chairman Ben Bernanke’s unwavering support for continued monetary easing. Ongoing improvements in the housing market and energy independence, among other factors, have added to improving sentiment and markets rallied accordingly. From a low base, the dollar continues to strengthen. Indeed, large currency moves were a feature of the first quarter with both the Japanese yen and sterling suffering for different reasons.
For the UK economy, austerity without an obvious plan for growth does not as yet appear to be helping and downgrades from various ratings agencies during the first quarter of 2013, albeit expected, pointed to this. Chancellor George Osborne’s recent Budget hinted at a shift in agenda. We wait to see if this will have the required effect or merely reflate a housing bubble not yet completely burst.
Interestingly, selective Asian equity markets once again struggled in spite of the Western revival. Chinese equities lagged, along with some of the more China-related industries, particularly basic materials, in the West. Again, in part perhaps a nod to the necessary rotation in growth drivers in China that we have mentioned in this note previously.
We entered the year believing that there remained a significant opportunity in selective areas of cyclical value that had more than priced in the troubled macroeconomic environment in our eyes.
Government bonds remain a ‘return-free risk’ in our eyes, in spite of the safe haven tag still applied, so we remain uninvested. What credit we do own remains in low duration, higher yielding credit where selective spreads still look relatively attractive. We view fixed interest and cash as one part of our overall allocation so as a result of our trimming of credit and a lack of alternatives, cash has risen. However, we continue to allocate our cash actively, benefiting from holding a proportion in the appreciating dollar, which we have subsequently trimmed.
Marcus Brookes is head of multi-manager at Cazenove Capital
