Newsletter n°04
April 2013
First Quarter 2013 Review
Bond Market
Summary:
• Bonds
• Shares
• Gold
• The dollar
The first quarter of 2013 is now over and
surprise, the bond market still has not
collapsed as many banks and analysts
were predicting. Our buy and hold
conviction remains strong in the High
Yield Corporate Bond market. “The
great rotation”, money fleeing out of
bonds and into the stock market, as
many financial commentators wanted us
to believe, never happened. Reading
such nonsense on practically a daily
basis since last December has felt like
the latest attempt by some equity-loving
gurus to scare investors out of the bond
market and into the equity market, no
doubt, to give it some traction. We
remain convinced there are some good
opportunities to make decent returns,
especially in the corporate bond market.
Economy wise, the FED policy remains
accommodative, however unwinding
could start in second half of 2013,
earlier than the market anticipates with a
slowing in quantitative easing. ECB is still
on hold with expectation that a recovery
will materialise; with no firm plan for nonstandard policy easing, is this possible?
In our view, key risks are a degrading
crisis in Europe (political breakdown,
unemployment, anti-reform government
in Italy and Cyprus levy unclear
consequences)
and
earlier-than
expected monetary policy exit by the
FED. Both events will positively impact
the bond markets worldwide.
Finally our view on Emerging Market
(EM) Bonds. EM Bonds remain very
attractive on a risk/return basis. We
would caution that EM denominated in
local currency should be hedged. Also
note the increase of Turkey’s credit rating
to BB+ which is one step closer to
"investment grade".
Equity Markets
Since the beginning of the year, the
S&P500 (500 biggest stocks in the U.S.)
is up 10.01% and the Russell 2000
(benchmark representing small and
medium size stocks) is up 11.99%, both
trading at an all time high. U.S. equity
markets have continued to benefit from
positive investor sentiment created by a
prolonged period of low interest rate and
the FED’s continued policy of quantitative
easing (the FED injects 80 billion U.S.
dollars per month into the economy by
repurchasing assets). In an environment
of consistently negative economic news,
market growth does not entirely make
sense to many investors (and we agree
with staying away from the stock market
for the moment) who anticipate a major
pull back. Unfortunately the market does
not trade on logic but on future
expectations.
European markets did not perform as
strongly in this first quarter of 2013 as
investors were scared by a number of
© R-Squared Partners SA 2013
issues (mainly inconclusive elections in
Italy and the Cyprus levy) which
postponed the likelihood of any
imminent resolution to the European
crisis. This deterred the spectre of
deepening crisis led by Spain and Italy.
Both countries stock markets lagged in
this first quarter with the Spanish IBEX
falling over 3% and the Italian MIB falling
nearly 6%.
The question remains if the U.S. equity
markets can continue their rally in the
second quarter of 2013. There is
significant positive sentiment and U.S
markets appear to have digested the
Cyprus worries with ease. Equity market
performance will therefore continue to
be driven by U.S. economic figures,
particularly unemployment which is the
new “benchmark” for the FED monetary
policy. Any indication of an end of the
quantitative easing is likely to lead to a
massive pull back in markets.
Eurozone markets and the Euro are
likely to be driven by continued austerity,
the Italian elections and continued
worries over the health of a number of
smaller economies such as Cyprus and
Slovenia. The UK economy may
continue to struggle as severe austerity
Gold
The gold rally lost its momentum in this
first quarter of 2013. The reason for this
is twofold: firstly, many investors added
gold to their portfolios for the wrong
reasons - mainly protection against a
falling dollar. Secondly, pure short-term
participation in upside growth potential.
February witnessed hedge funds selling
unprecedented amounts of gold (mainly
through ETF SPDR Gold Trust) as their
remains a barrier to growth. Japan is
likely to continue to seek a weaker Yen
with further talks of quantitative easing
which could help support the equity
market as it was the case in the first
quarter of 2013 with the Nikkei gaining
19.27%.
is up 16.63% over the last 6 months of
2012
view on the U.S. dollar switched from
negative to positive.
Unfortunately the gold market is under
considerable speculative downward
pressure. In this context, and despite a
strong demand for physical gold from
major central banks which cannot
reverse the downtrend, we have decided
to liquidate our positions.
The dollar
Recent U.S. data indicates a recovery
which is stronger than expected and may
lead to a gradual exit of quantitative
easing by the Fed. We believe they will
be the first major central bank to start
unwinding ultra-accommodative policies
and hike interest rates in early 2015.
We expect, therefore, the USD has
entered in a sustained multiyear uptrend.
If we look at the chart below, the USD
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Thierry Di Raffaele
Managing Partner
thierry@r2partners.com
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© R-Squared Partners SA 2012
trends follow long term cycles lasting 6
to 10 years and the most recent
identifiable trend was the 9 year
downtrend that began in 2002 and
ended in 2011.
By end of 2014, we expect EUR/USD to
reach 1.15 and most emerging market
currency should weaken (including TRY)
vs the U.S. dollar.
Markets are indeed challenging, and have been since early this year. We still
believe there are exciting investment opportunities both on and off markets;
associated risks must be carefully assessed.
R2 Partners are available to discuss your financial needs and objectives and to
provide sound, professional advice. Please do not hesitate to contact us to
discuss any of the above market commentaries.
This document is provided for your information only. It has been compiled from information collected from sources believed to be reliable
and up to date, with no warranty as to its accuracy or completeness. By their very nature, markets and financial products are subject to
the risk of substantial losses which may be incompatible with your risk tolerance. Any past performance that may be reflected in this
documents not a reliable indicator of future results. Nothing contained in this document should be construed as professional or
investment advice. This document is not an offer to you to sell or a solicitation of an offer to buy any securities or any other financial
product of any nature, and R-Squared Partners assumes no liability whatsoever in respect of this document. R-Squared Partners
reserves the right, where necessary, to depart from the opinions expressed in this document, particularly in connection with the
management of its clients’ mandates and the management of certain collective investments. R-Squared Partners is an external asset
manager subject to regulation and supervision by the External Asset Manager Autoregulatory Commission (OAR-G).It is not authorised
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strongly advise you to seek independent legal and financial advice from qualified professional advisers before taking any decision
based on the contents of this publication.