This monthly commentary will hit your inboxes a little bit later than usual. Two reasons. The first is that I took some days off at the beginning of July and I had a wonderful time relaxing under the sun after a long and tough year. The second is that, in an ideal bridge with the latest letter, I wanted to wait until the final act of the Euro2020 football championship. I am glad that I did. People of other nationalities must pardon me, but I am very happy to celebrate Italy’s win of an European tournament after 53 years. This is especially true because my team was not one the most likely candidates for winning the cup. Quite the opposite. We had a good track record going into this event, but we lacked the “A” Level players other countries could count on: superstars likes Ronaldo, Mpappe’, Kane. Italy had a bunch of very decent players. Not “As” but a good defensive leadership by “B”, “C” and “D” (Bonucci, Chiellini, Donnarumma). To me, our most important asset was Mister Mancini and his idea of the game. This is a good message for us “common mortals” in the world of finance. Be professional, hard-working, committed, enjoy what you do and you can achieve excellent results even if your IQ is not stellar. Warren Buffet famously said that in finance a high IQ is actually detrimental. His recommendation: “If you have more than 120 or 130 IQ points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor.”. I don’t have this super high IQ problem so I will keep mine as it is. Conscious of my limitations, I would try to give you my humble assessment of current market behavior. There is no doubt that things have changed in the last month. As far as the Fed, since their last FOMC there are clearly different opinions inside the central bank on the best way forward. This does not mean that we should expect much change in the near term or too hawkish moves. However, it does mean that the Fed has not gone completely nuts and sooner or later they will try to taper and/or raise rates (more news at the end of August at Jackson Hole). This has important implications for the USD. After over one year, we turn from negative to neutral on the USD against the other major crosses. Also, we recently learned that the “gigantic” 2.2 trn Biden plan will probably morph into a “grandiose” 1 trn plan. Again, do not get me wrong. These are big figures. Despite this, it is another sign that some moderation on the expectations of the big fiscal push is due. This happens at a time when the comparison YoY of the economic and earnings, albeit positive, shows less buoyant growth rates. There are some implications for the “reflation trade” we successfully put on end of last year (long value, cyclicals, commodities, Europe, credit spreads). During 2021, the rotation into these recovery themes became consensual and, in the last weeks, got hammered with flows favouring a return of the “US big tech” theme. It is our opinion that the market would be more difficult to read from now on. Having said that, is it the time to move to more prudent allocations? We discussed internally but decided to postpone this decision. The market signals justify some worries. However, we are not in the position to foresee a marked slow-down or even a recession going into 2022. Eyes wide open on the economic data and the upcoming reporting season but we believe it is premature to reduce risks now. Just be ready to digest more volatility. The only change we are doing in asset allocations is switching out from a position in the S&P500 Equal weight index back into the normal index. It performed nicely since last November and we take some profits. As far as Asia, we started the year with a sanguine view. Then, it became clear that the Biden administration would continue facing China the same way of the previous one (with less noise, so more serious). At the same time, the Chinese government reduced stimuli (the only area in the world) and tightened regulations on Domestic Big Tech. We reduced allocations towards the region in the last months in small steps and now monitor with great attention the developments. It is a controversial issue but this negative sentiment on Chinese Big Tech might morph into capitulation creating a buying opportunity in the coming weeks. We will keep you posted. Finally, as far as gold and gold miners. We are maintaining the positive stance on both. The recent moves in US and EU real yields should imply a much higher gold price. Quite frankly, this is a missing piece of the puzzle we struggle to explain. We would wait until correlations normalize.
And now, let’s celebrate and back to singing… poooooh, poppoh, poppooooh, pooh…
Peppe Ganci, CFA