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Finlight Research - Market perspectives - Dec 2015

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« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com

Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com

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Finlight Research - Market perspectives - Dec 2015

  1. 1. Market Perspectives December 2015 Dec. 7th, 2015 www.finlightresearch.com Hi(Bear)nation?
  2. 2. “Market tops are a process, not an event” – Old Wall Street adage “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as the final and total collapse of the currency itself” – Ludwig von Mises Founder of Austrian School of Economics 2 FinLight Research | www.finlightresearch.com
  3. 3. 3 FinLight Research | www.finlightresearch.com
  4. 4. Executive Summary: Global Asset Allocation The outlook for the global economy is darkening and the upside on assets looks more limited. De-risking is the strategy we promote as medium term risk-reward is turning less favorable and markets appear unprepared for the imminent interest rate hikes. High valuations and rising rates, especially in the US, will present challenges for risky assets. We remain cautious on risky assets and expect lower asset returns and higher volatility to make the essence of next year. Concerns remain over deflationary pressures, Chinese growth, Emerging Markets, CNY devaluation, corporate profit growth, HY credit and falling commodity prices. Markets seem unprepared for interest rate hikes. We expect equity market volatility to drift higher through 2016 as a result of all these macroeconomic uncertainties We stick with our tactical positioning: Neutral on equities (A massive top forming could not be excluded on the S&P500), UW Govies and Credit, OW US Dollar, UW Emerging Markets and commodities We reiterate our view: A perfect storm is building… It combines historically overvalued stocks with stretched government bonds and corporate credits. Unlike previous storms (2000, 2008), investors would be left with almost no place to hide We summarize our views as follows 4 FinLight Research | www.finlightresearch.com
  5. 5. MACRO VIEW The Good US Personal Income is growing at a healthy rate (0.4% MoM and 5.3% YoY) November US Jobs Report was strong with 211,000 jobs added and unemployment rate holding at 5% Eurozone business activity grew at its fastest pace in more than 4 years, with the flash Eurozone PMI Composite coming out at 54.4 in November The Bad US ISM manufacturing showed contraction in November S&P 500 Q3-2015 profits are down 3.3%YoY. This is the second consecutive quarter of negative earnings growth and the worst decline since 2009 Both the Conference Board and the University of Michigan Consumer Confidence / Sentiment decreased sharply. The Ugly Main systemic risk resides in China: The Chinese debt burden is extremely high (Mckinsey stated that between 2007 and 2014, debt to GDP ratios have soared from 158% to 282%) and the credit cycle is probably starting to turn. We are probably in the early stages of a bursting credit bubble. The fixed-income / credit edifice is highly vulnerable to China’s need to liquidate Treasury reserves in order to maintain its currency peg, as capital outflows increase and market widely expects further devaluation in the USD-CNY 5 FinLight Research | www.finlightresearch.com
  6. 6. 6 FinLight Research | www.finlightresearch.com The Big Four Economic Indicators There is nothing new under the sun… The current picture is characterized by relatively strong Employment and Income, a weak Industrial Production and uncertain to weak Real Sales. The average of these indicators suggests that the economy is still trending sideways. But setting a new high still seems possible over the short term.
  7. 7. 7 FinLight Research | www.finlightresearch.com Industrial Production Industrial Production has been plateauing over the last 12 months
  8. 8. 8 FinLight Research | www.finlightresearch.com Personal Income Personal Income is growing at a healthy rate (0.4% MoM and 5.3% YoY). When we exclude Transfer Receipts, Personal Income in October rose 0.47% MoM (4.5% YoY) and 0.41% MoM (4.3% YoY) in real terms. In October, Disposable PI increased 0.35% ( 3.36% YoY) in nominal terms and 0.29% (3.14% YoY) in real terms
  9. 9. 9 FinLight Research | www.finlightresearch.com Retail Sales Seasonally adjusted (nominal) sales in October increased 0.05% MoM (1.7% YoY). Core Retail Sales (ex Autos) came in at 0.2% MoM and only 0.5% YoY. The big picture remains the same : retail sales and capex momentum are heading south
  10. 10. 10 FinLight Research | www.finlightresearch.com Consumer Sentiment The Conference Board's consumer confidence plunged to a multi-month low of 90.4. Both consumer sentiment readings clearly appear in a downtrend. Source: Thomson Reuters
  11. 11. 11 FinLight Research | www.finlightresearch.com GS – Global Leading Indicator (GLI) The Nov. Final GLI came in at 1.3%yoy. Its MoM momentum came at 0.13% (up from 0.07% last month) GLI stands now in the Expansion phase, but its momentum is still very weak and small fluctuations can move it back to the Slowdown phase Four of the ten underlying components of the GLI improved in November. We continue to think that the acceleration we’ve been witnessing since Jan. ‘15 is quite modest for a typical expansion phase
  12. 12. 12 FinLight Research | www.finlightresearch.com Global Economic Growth Global GDP has been revised to the downside. But most analyst expect it to bottom around current levels… Actually, the picture is clearly dependent on Chinese (and other EMs : India-Brazil-Russia) growth…
  13. 13. 13 FinLight Research | www.finlightresearch.com Housing Bubble II? The open gap between real house prices and real earnings is pointing towards a new bubble in US housing. The current gap is even wider than the one seen just before the 2008 housing crash. Housing bubble I Housing bubble II?
  14. 14. 14 FinLight Research | www.finlightresearch.com EM Leverage - Chinese Credit Bubble The significant buildup in leverage in their private sector makes EMs vulnerable to any global tightening in credit conditions But most of EM leverage is obviously concentrated in China.
  15. 15. 15 FinLight Research | www.finlightresearch.com Market Uncertainties Global volatility remains in an uptrend, mainly driven by uncertainties about Fed policy and global growth, monetary divergence, weakening US and Chinese macro momentum and increasing geopolitical risks On equities, the Volatility of volatility (VVIX) has even made an all-time highs this year (since its launch in 2006). We keep a long volatility bias in equities, commodities and credit
  16. 16. 16 FinLight Research | www.finlightresearch.com EQUITY We think that the equity bull market is aging, and has only modest further gains from here, certainly with higher volatility. Equities undoubtedly benefitted from the expansion of the Fed’s balance sheet and this is finished! The recent S&P500 relief rally was impressive, but one cannot discount the possibility of a massive top forming around 2135 (80% chance), as: US profit margins are showing increasing evidence of peaking. On Price/Sales metric, equities are trading at the top of the historical range. Earnings / revenues have declined for 2 quarters and aren’t expected to grow before Q1-2016. A resumption of earnings growth going into 2016 will be necessary for equities to move higher. Fed eminent tightening, plateauing margins and higher wages are not good news either. Credit market has entered its late-cycle stage Recent data shows more evidence of lower productivity, lower potential GDP growth and (later) higher inflation risk. This is a bad scenario for stocks Our alternative scenario from here (20% chance) : The S&P500 breaks the 2135-2140 resistance, opening the way to 2225. This scenario is supported by the fact that the index is above all its key moving averages and that seasonality is positive Stocks seem more vulnerable than ever to any external choc. The Federal Reserve has waited so long to raise rates, pushing valuations and profit margins higher than usual at the beginning of rate increase cycles.
  17. 17. 17 FinLight Research | www.finlightresearch.com EQUITY Bottom line : De-risking should continue… We remain tactically Neutral on equities due to limited return potential post the relief rally. We’ll stay so as long as the S&P500 remains in the 2020 – 2140 range. We may revise our positioning to OW (to UW) if a break to the upside (to the downside) occurs. We remain Neutral on Europe and Japan vs. US despite the policy divergence between the Fed and the ECB/BoJ and continued improvement in corporate profitability and balance sheets in Japan. According to the 12 month forward P/E, Europe is trading at 15 year highs, relative to the US. Weak demand from China is expected to continue to weigh on Japan's production. We remain UW in US small caps vs large caps. We remain UW EMs vs DMs, given incoming Fed hikes and USD strengthening. Negative spillovers from China will also likely have a strong impact on other EMs.
  18. 18. 18 FinLight Research | www.finlightresearch.com US Earnings For Q4 2015, 83 companies have issued negative EPS guidance and 26 companies have issued positive EPS guidance The 12-month forward P/E ratio for the S&P 500 now stands at 16.1, well above historical averages: 5-year (14.0), 10-year (14.1) Q3 2015 earnings (revenues) decline stands at - 1.5% (-3.9%) for the 99% of the companies in the S&P 500 that reported to date. FactSet's data shows a current forecast of a 4.3% decline (YoY) for Q4-2015 earnings (and +1.0% increase if the Energy sector is excluded) and a 3.0% decline in revenues. If this earnings decline becomes effective, it will mark the first time the index has seen 2 consecutive quarters of year-over-year declines since Q1/Q3- 2009. No earnings/revenue growth is projected before Q1-2016
  19. 19. 19 FinLight Research | www.finlightresearch.com European Earnings The bottom-up consensus forecast for 2015 earnings growth is now at -1% for the MSCI Europe (because of -14.5% growth for UK), at +7% for Europe ex-UK and +11% for Eurozone. Current IBES estimates for 2016 earnings are at their lowest levels since 2008 For 2016, the consensus forecast is for 6.5% earnings growth from the MSCI Europe. This is the second lowest level seen since 1988. MSCI Europe
  20. 20. 20 FinLight Research | www.finlightresearch.com S&P500 – Breadth Market performance is driven by very few stocks S&P500 is again near its highs when half of its components are trading below their major averages
  21. 21. 21 FinLight Research | www.finlightresearch.com S&P500 – A Long-Term Perspective Margin Debt hit a record high in April. Like in previous bullish periods, Margin Debt initially grew at a rate similar to the market before accelerating at the end of 2013. Is that a top formation signal?
  22. 22. 22 FinLight Research | www.finlightresearch.com S&P500 – A Long-Term Perspective Another way to look at Margin Debt is to analyze the Credit Balance: sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt Credit Balance is getting less negative after hitting a new all-times low. Could this record low act as a precursor to a major market decline as in 2000 and 2008?
  23. 23. 23 FinLight Research | www.finlightresearch.com US Equity vs. Credit Another warning signal is given by US High Yield. Historically, credit spreads were a leading indicator of the current positioning within the business cycle. Over the last 18 months, an important gap has been building between equity and credit (even when the Energy sector is excluded). Who’s right ? Stocks or credit spreads ?
  24. 24. 24 FinLight Research | www.finlightresearch.com S&P500 – Investors’ Sentiment Investors’ Intelligence Bulls-Bears gap (currently at +16%) provides a useful contrarian indicator with a significant correlation to: subsequent 6 month returns on stocks. The current levels seem compatible with positive return over a 6 month period. Asset managers’ net long position on S&P500 futures. Current positioning doesn’t seem excessive
  25. 25. 25 FinLight Research | www.finlightresearch.com European vs. US Equities Recent improvements in earnings in Europe ex-UK relative to the US are expected to continue . This should provide some support to outperformance from Continental Europe and Eurozone
  26. 26. 26 FinLight Research | www.finlightresearch.com European vs. US Equities The weakening of the Euro usually favors European stocks. But since mid-year, the relative performance of Euro Stoxx50 vs S&P500 has decoupled from the USD-EUR The lag occurred despite: Favorable macro in Europe Outperformance of Eurozone earnings vs US earnings for the first time in 5 years Expected rate hike in the US
  27. 27. 27 FinLight Research | www.finlightresearch.com European vs. US Equities But… we think that any outperformance of Europe will be capped for valuation reasons: Eurozone forward P/E, in absolute terms as in relative terms vs S&P500, is already trading in reach territories. Europe is trading at 15 year highs, relative to the US Thus, we keep our Neutral stance on Europe vs. US MSCI Eurozone 12m-Forward PE MSCI Eurozone 12m-Forward PE vs S&P500
  28. 28. 28 FinLight Research | www.finlightresearch.com S&P 500 – Tech. Perspective The move since Jul. ‘10 low is probably missing a last leg higher. This point will be confirmed by a break out through 2135-2140. A clean break would open the door towards 2225 (our alternative scenario – 20% chance) At this stage, we keep an eye on the Nasdaq Composite. The uptrend continuation on the S&P500 will be confirmed by the Nasdaq breaking above its 2000 cycle high (5133)
  29. 29. 29 FinLight Research | www.finlightresearch.com S&P500 – A Short-Term Perspective Our prop. Short-Term trading model has switched to mildly short on Dec. 4th S&P500 close (@2091.69). It has limited conviction, at this stage… The model has been in drawdown since Aug 20th, as it was massively long when the sell-off occurred. It became almost flat at the close of Aug 26th (@1940.51) and, since, has made up most of its losses partially. The model has boosted its return generation since Oct. ‘14, exhibiting a pattern similar to the one we’ve seen after Jun. ’07. Even the last drawdown is similar to the one started on Jun 6, 2008
  30. 30. 30 FIXED INCOME & CREDIT There is plenty of evidence that the Fed is ready to hike rates at the next meeting. We expect negative total returns on USTs. We still look for the bear market on USTs to resume. We remain tactically Neutral on USTs as far as the 10-year yield stays below 2.35. We wait for a material break either above 2.35 or below 2.00 to change our positioning We think that the risk is still biased to the upside on yields. Our ultimate target on 10y yields stands at 2.75 by H1-2016 We keep our short duration position in 2y USTs On German Bund, we remain Neutral. as long as the 10-year yield stays above the 0.40 – 0.45 area. We will switch to UW again as the 10-year yield breaks above 0.85-0.90 or below 0.45 We expect US Treasuries to underperform relative to Bunds and JGBs While we think the risk of high inflation is low, we expect an increase in the market pricing of long-term inflation in the US. Inflationary signs should be watched closely as they will foreshadow a steepening decline in Govies. We remain Neutral HICP Inflation as we expect breakevens to trade sideways in the Eurozone We move from Neutral to OW on TIPS breakevens given their historically-low levels but still expect US TIPS breakevens to widen modestly in H1-2016 FinLight Research | www.finlightresearch.com
  31. 31. 31 FIXED INCOME & CREDIT More signs tend to show that the US credit market is already in the late-cycle stage. Credit quality is deteriorating, but at a measured pace. Financing gap has turned strongly negative, making corporates more and more dependent on external sources of liquidity. But low cost of funding and continued investor demand have kept the asset class afloat… As said in a previous report, we feel concerned about the credit market liquidity as the rate of turnover in corporate bonds has steadily declined since 2009, despite the huge inflows. We do not think investors are getting paid enough to own less-liquid credits We feel cautious about the significantly negative CDS-Cash basis, especially on HY, induced by supply fears and the increasing use of CDS indices to get (through protection selling) exposed to the credit market with a reasonable liquidity. We remain UW on corporate credit, due to valuation, to rising volatility, to position within the credit cycle and given the weak total return forecast Higher US Treasury yields should be supportive of IG spreads, but large bond supply (due in part to large M&A activity) would be negative. Over the short term, we expect yields effect to dominate: IG credit spreads would rally into the early part of 2016, before resuming their uptrend We still prefer IG over HY on a risk-adjusted basis as we expect volatility on spreads to remain elevated and we believe IG corporates better positioned to absorb the impact of rising rates FinLight Research | www.finlightresearch.com
  32. 32. 32 FIXED INCOME & CREDIT European credit looks to be in a Goldilocks scenario. European growth is picking up but is not too hot yet and default rates are expected to remain low (around 2% - 3% versus 5% in the US) over next year Nevertheless, we feel cautious about EUR HY despite the prospects of further easing by the ECB. Next QE may drive a rally in European credit over the near term, but long positioning is getting crowded, liquidity scarce and volatility higher. Within the credit pocket, we remain Neutral on USD vs. EUR HY spreads, but we prefer USD on a total return basis, despite its higher beta to energy sector We still prefer US IG over Eurozone.IG, as we think that more attractive spread valuations and higher carry should fuel a stronger bid for US credit. Bottom line : UW Govies, Neutral US vs Eurozone Govies, remain long flatteners on the US yield curve and short duration in 2y USTs, UW credit, Neutral Eurozone vs US HY credit, UW Eurozone vs US IG credit, OW TIPS and Neutral HICP Inflation, UW High Yield vs High Grade, Neutral on EM sovereigns FinLight Research | www.finlightresearch.com
  33. 33. 33 US Govies – 10y UST Tactically, we’ve remained Neutral on 10-year USTs, waiting for a clean break either above 2.35 or below 2.00 to change our positioning We think that the risk is still biased to the upside on yields. The decline since 2007 seems to flatten, suggesting that a long-term low is already in place In order to confirm our bearish view, a clean break above 2.35- 2.40 is required. It will open the way towards 2.52 and then our ultimate target at 2.75 (H1-2016) FinLight Research | www.finlightresearch.com
  34. 34. 34 German Govies – 10y Bund On German Bund, we remain Neutral. as long as the 10-year yield stays above the 0.40 – 0.45 area. We will switch to UW again as the 10-year yield breaks above the downtrend from ’11 at 0.85-0.90 (with 1.05 – 1.15 as a target) or below 0.40-0.45 FinLight Research | www.finlightresearch.com
  35. 35. 35 US Govies – Trading the Curve Historically, when the Fed hikes, the yield curve flattens. We remain long flatteners on the US yield curve, targeting 50 to 75bps flattening over H1-2016. FinLight Research | www.finlightresearch.com Fed hike
  36. 36. 36 US TIPS 10-year TIPS breakevens reached multi- year lows in Sep. ’15 before bouncing. Breakevens are pressured by cheaper energy, strong dollar and soft core CPI and these unfavorable conditions may last for a while. But given their historically-low levels, the risk on TIPS breakevens seems biased to the upside. We think that going long TIPS and short USTs provides a nice risk/reward tradeoff. Thus, we move from Neutral to OW on TIPS breakevens FinLight Research | www.finlightresearch.com Source: Bloomberg
  37. 37. 37 Where do we stand in the Credit Cycle? More signs tend to show that the US credit market is already in the late-cycle stage: Default rates has bottomed out (since mid-2014) Profit margins are plateauing Rising leverage and dividend payouts to shareholders M&A activity reaching new peaks FinLight Research | www.finlightresearch.com Source: Invesco
  38. 38. 38 US Credit Being in the late-cycle stage of the credit cycle may explain the abnormally high levels reached by credit spreads (IG as HY) Current spreads are close to recessionary levels FinLight Research | www.finlightresearch.com
  39. 39. 39 US Credit vs Equity Since mid-2014, we’ve bet on equity outperformance over credit for 2 reasons : releveraging and buybacks (and other shareholder friendly activity) Now that we are in the late-cycle stage, and given the risk we see on margins and earnings, we think that the case for equities over credit is over in the US. We still see more (but small) upside in equities vs. credit in the Eurozone where recovery is still in the early stages and ECB is likely to deliver further support. But any bad development in US market will weigh seriously on the equity vs. credit outperformance in Europe. FinLight Research | www.finlightresearch.com
  40. 40. 40 US Credit The US corporate financing gap (cash flow less spending on capex and dividends) has turned strongly negative Corporates are becoming more dependent on external financing when funding conditions are deteriorating. Up to this point, these have been balanced by a very low cost of funding and continued investor demand for the asset class. FinLight Research | www.finlightresearch.com
  41. 41. 41 European Credit Fundamentals are deteriorating for European credit, also: Revenues are stagnant, and EBITDA is down YoY IG (debt weighted) net leverage has reached pre-crisis levels FinLight Research | www.finlightresearch.com European IG Net Leverage European IG Revenue and EBITDA Growth
  42. 42. 42 EXCHANGE RATES The dollar rally is not over. We reiterate our bullish view on USD over the medium-term and expect a rival of the appreciation cycle of the '90s Historically, USD cycles have been persistent, lasting 5-6 years in the appreciation phase. We thus see further medium term USD gains against the major crosses (especially EUR and JPY) and expect a cyclical low in EUR/USD somewhere in mid-2016 (probably before the ECB tapering) Besides the Fed’s hawkish stance, US dollar continues to be supported by the fears of a global growth recession The DXY index has finally broken above its downtrend from Mar. ‘15 in an impulsive move. Our target of 100 was reached but not preserved. Despite the sharp correction, we continue to think that the picture is still bullish as long as the 98.3 support is preserved. Ultimate target ~ 102 Our positioning on EUR-USD remains driven by (almost) the same trading rules: Our previous threshold of 1.0820 was broken to the upside. We switched from UW to Neutral again. From here, we’ll move to UW again as soon as 1.08 is broken to the downside. Next target = 1.0480-1.520 We will move to OW if the uptrend from March is reintegrated and/or there is a clean break above the 1.1088 resistance FinLight Research | www.finlightresearch.com
  43. 43. 43 EXCHANGE RATES On USD-JPY, we remain Neutral for the moment, as the spot failed to hold a break above 124-125 resistance. We think the pair has already reached the peak of this year and is likely to see a downward trend in 2016 (target ~115 – 113). Main reason for that: increasing current account surplus and expected unwinds of foreign assets by Japanese investors. We remain neutral as far as USD-JPY in the consolidation range (115-125). Below, we move UW. Above, we switch to OW. We remain UW EM and Commodity FX, given the Fed’s hawkish stance FinLight Research | www.finlightresearch.com
  44. 44. 44 US Dollar Index The uptrend in rate differentials between US and G10 is expected to persist. As a consequence, US Dollar TWI will continue to strengthen, probably through the end of 2016 FinLight Research | www.finlightresearch.com
  45. 45. 45 US Dollar Index Our previous target at 100 was reached, just before the recent sharp correction We continue to think that the picture would remain clearly bullish as long as the 98.3 support is preserved. We expect a range consolidation before moving higher with a target at 102. FinLight Research | www.finlightresearch.com
  46. 46. 46 EUR-USD EUR-USD has been moving closely with the 2-year real yield differential between Eurozone and US. Given the eminent rate hike cycle the US, we expect the EUR to continue its weakening. FinLight Research | www.finlightresearch.com
  47. 47. 47 EUR-USD According to our strategy, we moved Neutral as the spot broke above 1.0820. We keep however our bearish bias and think that the long-term downtrend will resume soon. We’ll move to UW again as soon as 1.08 is broken to the downside. Next target = 1.0480- 1.520 We will move to OW if the uptrend from March is reintegrated and/or there is a clean break above the 1.1088 resistance. FinLight Research | www.finlightresearch.com
  48. 48. 48 COMMODITY In 2015, commodities experienced their worst losses since the 2008 crisis Prospects for commodities are looking shaky. Commodity weaknesses (supply glut in oil, weakness in EM/China and associated tail risks of a global growth recession, US dollar strengthening…) are likely to continue. We don’t see any sustainable recovery without a pick-up in global growth or a substantial shrinkage in supply The expected Fed rate hike would put more pressure on the asset class as higher interest rates put a higher cost on holding commodities The next leg up in the US$ will put more pressure on commodity prices Over 6 to 12 months, return forecasts are negative for commodities as a whole. We remain neutral- to-underweight commodities overall . From a longer-term perspective, owning commodities makes sense in an asset allocation because of their structural low correlations to other assets and strong inflation hedging abilities, FinLight Research | www.finlightresearch.com
  49. 49. 49 COMMODITY Bottom Line : Energy: We remain of the view that the oil market is oversupplied, still think it is too early to expect major upside for the price and that the risks remain substantially skewed to the downside. Fundamentals are also negative from both a macro and micro perspective. The price war between the lower-cost producers (Saudi Arabia), and the higher-cost producers (shale) should last for a while. Oversupply will take some time to peter out The interim low around 42 was finally broken, increasing the probability of seeing the last leg lower we’ve been waiting for. We moved to Neutral again. From here, we keep exactly the same tactical rules: Move to UW if the August low (~38) is breached. Target : 35, then 28-30. It’s worth noting that cash costs are estimated at around $20/bbl Move to OW above 42 and trade the 42-52 range Go Neutral again if the WTI goes above 56.5 Go OW if the it breaks above 63 FinLight Research | www.finlightresearch.com
  50. 50. 50 COMMODITY Precious Metals: As expected in our previous report, a rebound occurred on the important support area of 1070. Gold is now mainly trading on Fed’s action and its subsequent impacts on US dollar, real yields and commodity prices. The main factors suppressing gold / silver prices in the near term are: higher US real yields, stronger USD, outflows from gold ETPs and weaker gold flows to Asia. We believe prices will likely trough in mid-2016 as these factors begin to fade. In the meanwhile, gold / silver are still due for a final leg down. Our ultimate target remains at 980- 1000 on gold and 12.5 on silver. Our positioning rules remain unchanged: Neutral between 1120 and 1070. OW below and above. We will wait for 1050 to progressively start accumulating Gold. FinLight Research | www.finlightresearch.com
  51. 51. 51 COMMODITY Base Metals: Risks to prices for industrial metals are skewed to the downside in the near term. The main reasons (growth disappointments in China and broader EM) behind the bear trend we’ve seen since 2011 are still alive… We remain Neutral on base metals Large-scale supply adjustments are required in order to restore a better balance to the physical markets and to stabilize prices. We expect base metals to trade lower for longer in order to match supply with demand. Despite our neutral stance on industrial metals, we’ve been avoiding holding Copper and Iron ore Agriculture: GSCI Agri was down -1.35% in Nov. We remain Neutral because of excess supply. We see a limited downside to grain prices from here when upside seems very interesting. FinLight Research | www.finlightresearch.com
  52. 52. 52 Commos – YTD Performance In 2015, commodities experienced their worst losses since the 2008 crisis The bullish trend we see on US dollar should continue to weigh on the asset class as whole. . FinLight Research | www.finlightresearch.com
  53. 53. 53 Base Metals - Copper Despite our neutral stance on industrial metals, we avoided holding Copper and Iron ore… For months now, we’ve been saying: “On the MT, we do not like holding Copper (our target of 5000 has been reached), nor Iron ore, as it appears highly overvalued relative to the dollar, the global growth and the Chinese demand. We see more weakness…” Our Nov. 10% expected downside in iron ore (~40) and 5% in copper (~4800) were both reached and exceeded. Given the impulsive move we’ve seen recently, reasonable targets stand down at 4400 on Copper and 35 on Iron Ore FinLight Research | www.finlightresearch.com
  54. 54. 54 Crude Oil – Downside Risk Oil inventories are at record levels. The risk to reach the limits of storage capacity is real. It would significantly increase if the demand fall and/or the supply surprises to the upside An additional price decline is still needed to clear the excess supply. FinLight Research | www.finlightresearch.com
  55. 55. 55 Crude – Tech. Perspective Over the medium term, we stick with our view that there is still potential for a last leg lower In September, we decided to move to OW and to trade the 42- 52 range We move to Neutral again as the WTI breaks below 42. From here, we keep exactly the same strategy : Move to UW if the August low (~38) is breached. Target : 35, then 28-30 Move to OW above 42 and trade the 42-52 range Go Neutral again if the WTI goes above 56.5 Go OW if the it breaks above 63 FinLight Research | www.finlightresearch.com
  56. 56. 56 Gold – Tech. Perspective We stick to our view that Gold (like Silver) are still due for a final leg down (over a 6month horizon)… Our ultimate target remains 980- 1000 Technically, gold is trapped in a falling converging wedge The $1014 (61.8% Fibonacci retracement of the entire 2000- 2011 rally) level remains the threshold to watch. Below we’ll probably see an impulsive acceleration to the downside. Our positioning rules remain unchanged: Neutral between 1120 and 1070. OW below and above. We will wait for 1050 to progressively start accumulating Gold. FinLight Research | www.finlightresearch.com
  57. 57. 57 ALTERNATIVE STRATEGIES The HFRI Fund Weighted Composite Index gained 0.5% in November (+0.3% YTD), reversing declines from Q3. Gains were lead by Macro (+2.1% MoM) as a result of their long USD and long equity positions and CTAs (+3.1% MoM, despite losses in commodities, especially shorts in oil and grains) We stick to our preference for risk diversifiers (pure alpha generation strategies) over return enhancers. Our strategy has been clearly rewarding during the last months including September. CTAs, Global Macro, Volatility Arbitrage and Market-Neutral Equity funds successfully navigated Q3 challenging period. Through November: The HFRI Macro Index leads all HF strategies with a YTD gain of +0.8% The RV Volatility Index leads relative-value strategies for 2015 with a gain of +6.5% Market neutral strategy performed well over the year with 4.1% YTD. We believe that diversifying portfolios with an increased allocation to alternatives is particularly attractive at this stage of the cycle, given the current macroeconomic and interest rate uncertainties We think that the widening gap between the Fed and ECB monetary policies (and its subsequent impacts on US dollar, commodities and Govies) is supportive for CTAs and Global Macros on which we remain overweight FinLight Research | www.finlightresearch.com
  58. 58. 58 ALTERNATIVE STRATEGIES We are not changing our recommendations on alternatives which we consider to be suited to current market conditions. We maintain our OW positioning on: Equity Market Neutrals both for their “intelligent” beta and their alpha contribution. CTA’s and Global Macro as a diversifier and tail hedge. These strategies should outperform as FX and commodity current trends are likely to persist. Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This is our way to take advantage from the higher volatility regime. FinLight Research | www.finlightresearch.com
  59. 59. Bottom Line: Global Asset Allocation The outlook for the global economy is darkening and the upside on assets looks more limited. De-risking is the strategy we promote as medium term risk-reward is turning less favorable and markets appear unprepared for the imminent interest rate hikes. High valuations and rising rates, especially in the US, will present challenges for risky assets. We remain cautious on risky assets and expect lower asset returns and higher volatility to make the essence of next year. Concerns remain over deflationary pressures, Chinese growth, Emerging Markets, CNY devaluation, corporate profit growth, HY credit and falling commodity prices. Markets seem unprepared for interest rate hikes. We expect equity market volatility to drift higher through 2016 as a result of all these macroeconomic uncertainties We stick with our tactical positioning: Neutral on equities (A massive top forming could not be excluded on the S&P500), UW Govies and Credit, OW US Dollar, UW Emerging Markets and commodities We reiterate our view: A perfect storm is building… It combines historically overvalued stocks with stretched government bonds and corporate credits. Unlike previous storms (2000, 2008), investors would be left with almost no place to hide We summarize our views as follows 59 FinLight Research | www.finlightresearch.com
  60. 60. 60 Disclaimer FinLight Research | www.finlightresearch.com This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by FinLight Research in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. FinLight Research expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
  61. 61. About Us… FinLight Research is a research-centric company focused on Asset Allocation from a top-down perspective, on Portfolio Construction, and all related quantitative aspects and risk management issues. Our expertise expands along 3 axes: Asset Allocation with risk control and/or risk budgeting techniques Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value, carry, volatility), real assets (real estate, infrastructure, farmland, timberland and natural resources). Private equity and venture capital should be the next step… Allocation with a factorial approach built on the understanding (profiling) of the risk/return drivers of the different asset classes FinLight Research is an innovation-oriented company. We target to fill the gap between the academic research and the investment community, especially on real assets and alternatives. We survey on a continuous basis the academic literature for interesting published and working papers related to quantitative investing, non-linear profiling, asset allocation, real assets... 61 FinLight Research | www.finlightresearch.com
  62. 62. Our Standard Offer Provide tailor- made quantitative analysis of your portfolios in terms of asset allocation, risk profiling and risk contribution Provide tailor- made quantitative analysis of your portfolios in terms of asset allocation, risk profiling and risk contribution •Risk Profiling Offer a turnkey 3- step factor-based process in GAA with factor selection, risk budgeting and dynamic portfolio protection Offer a turnkey 3- step factor-based process in GAA with factor selection, risk budgeting and dynamic portfolio protection •Factor-based GAA Process Provide assistance with alternative investments (including real assets) in terms of profiling, and integration in a GAA Provide assistance with alternative investments (including real assets) in terms of profiling, and integration in a GAA •Alternative Investments Provide assistance with asset allocation and related risk control and/or risk budgeting techniques Provide assistance with asset allocation and related risk control and/or risk budgeting techniques •Global Asset Allocation (GAA) 62 FinLight Research | www.finlightresearch.com

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