Investors currently seem perturbed by two trends. Firstly, they are watching the crash in oil prices with part glee, part amazement, if not outright horror, depending on how much skin they have in the game. The second is that almost everyone seems sceptical about the sustainability, I even dare say “fairness”, of the rally in equities. I have little insight into the oil market, but something or someone is about to break. Demand isn’t coming back until the start of Q3, at the earliest, and while I get the supply-side dynamics of a broken OPEC oligopoly, I struggle to see that this Last Man Standing™ price war serves the purpose of any of the interlocutors. In any case, I’ll stick to the tape for this one, watching the price like everyone else. It’ll be a blast! On equities, it’s important to step back a bit and accept that Q1 was an outlier. The MSCI World fell 8.5% on the month in February, and then went on to crater nearly 14% in March, a denouement which includes a 32% round-trip from the highs in Mid-February to the lows in March. That’s record-busting pain, and no matter what type of bear market we’re in—and I do think we’re in just that—a rebound was coming, eventually. As I type, the MSCI World is up nearly 7% on the month in April, which doesn’t seem outlandish to me.
Read MoreEquities have wobbled a bit at the start of the month, but unless they lose the plot in coming weeks, it is fair to say that Q1 will be everything that Q4 wasn’t; decent and calm. Indeed, the finer details reveal an even more striking dichotomy with the calamity that culminated in the rout at the end of last year. Between June—when the PE multiple peaked at just under 21—and the low for the S&P 500 in the final weak of December, EPS rose by 13%, but the index fell by 10%. In other words, the multiple crashed, a story which was repeated across almost all key DM and EM indices. By contrast, the story so far in Q1 is the exact opposite. By my calculation, trailing EPS for the S&P 500 and MSCI World are down 0.5% and 2.1% year-to-date, respectively, but both indices have rallied smartly. This can only mean one thing; multiples have expanded, and they have indeed, by about 14% in both cases since the end of December. I am confident that the tug-of-war between multiple expansion and deteriorating earnings will determine the fate of many equity investors in 2019.
Read MoreUnfortunately, the stand-out move in markets since my last report—the crash in oil prices—is one on which I have little to say, let alone expertise. I didn’t see it coming, and I am not exactly sure why it happened. That said, I am not here to make excuses, so I’ll try to connect the dots as well as I can. A sudden fear of over-supply due to a shift in OPEC policy doesn’t seem to cut it as an explanation. I am more inclined to buy the idea of linking it with the jump natural gas prices, deeming it an erstwhile winning spread-trade gone wrong, at least in part. Pierre Andurand’s name has been mentioned too, which certifies that this has been a real rout in the oil market. Mr. Andurand’s $1B commodities fund reportedly shed a cool 20.9% last month. Whatever the causes of the swoon in oil, it serves as a decent entry the broader market discourse. I am sympathetic to the argument by Cameron Crise, a strategist with Bloomberg, that “Recent energy-price mayhem is just the latest sign that something about these markets looks broken.” Cameron goes on: “The presumption of a continuous liquidity spectrum is clearly an errant one.” Most readers of these pages will have plenty of recent examples that fit this picture, so I’ll jump straight to the grand conclusion.
Read MoreChurn is probably the best way to describe equity markets at the moment. Inter- and intra-day volatility have increased, which is great news for the traders—and investment banks, apparently—but it isn’t much help to the rest of us. It reduces the signal-to-noise ratio, which has already been stung by the persistent cloud of political uncertainty, the threat of trade wars and related themes. Everyone likes to talk about this, but these events have, so far, been of no consequence whatsoever to markets as far as I can see. All that moaning notwithstanding, I am happy to report that the portfolio had its first decent month of the year in April. I was beginning to wonder whether I could be that bad at picking my horses. My confidence is now restored slightly, although I am still behind the mighty Spoos. Also, the next calamity is never far away. Equity strategists are now telling me to worry about another thing: The multiple-crushing rise in oil prices. Looking beyond the idea that a higher oil price ought to result in divergence between energy and the rest of the market, the idea is simple. A sharp rise in oil prices drives up inflation expectations and bond yields, both of which are poison for valuations. Multiple-expansion turns into contraction, and equities struggle.
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