Finlight Research - Market perspectives - Jan 2015

Market Perspectives

January 2015

Jan. 6th, 2015

www.finlightresearch.com

Is the plunge in oil prices the new black swan?

“Although the junk bond market is nowhere near as large

as the home mortgage market, widespread defaults from

energy-related debt could cause a crisis, which could

make wider ripples throughout the financial edifice ”

– Peter Schiff

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FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation

� As 2015 starts, the story remains one of continuing global weakness, but

positives in the US.

� The Fed is now faced with the challenge of finding a low-drama course to

higher rates

� Deflationary risk in the Eurozone is significantly higher than 6 months ago.

Inflation data should be supportive of expectations for ECB QE operations to

begin in January

� The divergence theme continues to propel the dollar higher

� The bull market remains intact. But, with no significant selloffs to rebalance

sentiment, greed is flourishing out of control.

� Between slowing growth, coming rate hikes, falling oil, and the strength of the

dollar, we still believe equity markets are on borrowed time.

� But expansionary monetary policies, low interest rates and abundant liquidity

are still keeping us from moving to an underweight on equities. We

remain neutral on global equities and think earnings growth should be the

only driver of markets from here.

� Volatility is finally back… This is for certain!

� We don’t agree with those who continue to assert that lower oil prices are

good for the US economy and the stock market, as the benefits to consumers

is supposed to outweigh the decline in the energy sector (less than 10% of

corporate earnings and market valuation).

� We remain underweight government bonds and corporate credit overall

(but with an intra-asset class preference for IG vs HY, and Eurozone non-

financials IG vs US IG), and Overweight US dollar (supported by divergence

Fed policy from that of the ECB and BOJ).

� We summarize our views as follows �

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Our Top Bets for 2015

� For the coming months, we bet on the continuation of many of recent trends: lower government yields, wider credit spreads; stronger dollar and lower commodity prices. However, we don’t feel comfortable with the rally in equities. We still believe “Fed-levitated” equity markets are on borrowed time. The ECB will be the big factor for 2015's first half. We may change our view on equities if the 2075-2125 band on the S&P500 is breached to the upside.

� Our main convictions are:� US dollar strengthening: The divergence theme should continue to propel the dollar higher

against DM (Targets: EUR-USD at 1.15, then 1.10 in Q4-2015 and parity in early 2016, USD-JPY = 124)

� Lower oil prices: We target ‘08 lows (around $35 on WTI) as long as the OPEC doesn’t decide to stop the bleeding

� A significant flattening of the US yield curve: This dynamic is usual during Fed tightening cycles. The re-pricing of Fed expectations is likely to take place very soon in the short end of the curve. While US yields in the short end are expected to go higher, the medium to long end of the curve will be supported by abundant liquidity.

� Gold still heading down (or trading sideways, in the best case): As markets continue to price an exit from Fed’s ultra accommodative stance, as dollar strengthen and real rates go up, gold prices should continue to fall (target: $1000-980/ounce)

� Be long vol: We reiterate our preference for risk diversifiers (pure alpha generation strategies) over return enhancers. Gamma trades are back. We like Vol. Arb strategies (specially those that trade volatility globally - all assets / all regions) and CTAs (as a long vol strategy and a good diversifier).

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MACRO VIEW

� The Good� The recently reported U.S. Q3-GDP statistics showed growth accelerating to +5%, the highest

rate since 2003.� Rising wages and lower crude prices helped push consumer sentiment up to levels not seen

since before the financial crisis

� The Bad� Plunging oil prices appears to be unsettling for many investors and fueling much of the negative

sentiment.� Chinese manufacturing gauge points out the country's economy is slowing its growth� Greece is still a great concern for the Eurozone and even the world economy� U.S. manufacturing data slowed during December� Construction spending declined in November (0.3% instead of the projected +0.3% gain),

mostly because of the continued softness in the private sector. housing this year stands out as a contrary caution within the US economy.

� The Ugly � Main systemic risk resides in China : China’s economy is supported by approximately six

trillion dollars of 'shadow debt', which may eventually create major systemic issues. � We are building a boom-bust economy that is increasingly dependent on central bankers

inflating policies. The end game is clear even if the timing is anything but.

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The Big Four Economic Indicators

� The overall picture had been one of slow recovery, but there is no indication of a recession using the indicators monitored by the NBER.

� However the trend has accelerated over the past two months. This improvement is to some extent due to the impact of the decline in gasoline prices the deflator (PCE Price Index) used for inflation-adjusted metrics

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Personal Income

� Real Personal Income (excluding Transfer Receipts) rose 0.62%, its largest monthly gain in 22 months, and is up 2.84% year-over-year.

� Personal Income (excluding Transfer Receipts) per capita (adjusted using the Civilian Population Age 16 and Over) is close to its pre-crisis levels.

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Consumer Sentiment

� Rising wages and plunging oil prices helped push the consumer sentiment up to levels not seen since before the financial crisis.

� The University of Michigan’s Consumer Sentiment Index stands at 93.6 in December. The last time it exceeded the 90 level was 2007.

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ISM Manufacturing

� U.S. manufacturing data slowed during December. Manufacturing is still growing but shows slowing growth

� The ISM manufacturing index suggests a slower expansion in December (55.5) than in November (58.7). The employment index was at 56.8 (up from 54.9% in Nov), and the new orders index was at 57.3 (down from 66.0 in Nov.).

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GS – Global Leading Indicator (GLI)

� GLI is now in ‘Slowdown’ phase,defined by positive but decreasingmomentum.

� 7 of the 10 underlying componentsof the GLI worsened in November

� We’ve been thinking for a whilethat the current accelerationremains quite modest for atypical expansion phase.Available data is more indicative ofa stable macro environment ratherthan one with a growth pulse.

� More data are still needed toconfirm our fears about the currenteconomic situation.

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EQUITY

� The equity bull market remains intact. The prevailing bullish sentiment is in favor of further stock advances. But, with no significant selloffs to rebalance sentiment, greed is flourishing out of control.

� Between slowing growth, Fed's balance sheet and zeroed interest rates finally starting to normalize, falling oil, and the strength of the dollar, we still believe “Fed-levitated” equity markets are on borrowed time.

� 2015 will be the first time in about 9 years that the stock markets have to deal with rate hikes, right at the time they are the most vulnerable.

� At current valuation levels, the risk-return profile for equities appears less attractive and should imply some cautious. Rationally, the upside on stocks is exhausted by a limited multiple expansion and margins being at peak levels. But the current environment of unprecedented monetary stimulus across the globe is making rationality irrational.

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EQUITY

� We are still puzzled by the incredibly high correlation between Treasuries and the S&P 500, mainly explained by the belief that lower rates are good for stocks. We should keep in mind that lower rates could also be a translation of faltering growth and lower inflation expectations. And this is hardly good for equities.

� Another reason for cautiousness: Defensive sectors, Small Caps, Treasury yields, high yield, nearly all commodities are still not confirming the excitement in equity indices

� We see more disturbing signs in market internals as fewer stocks are participating to the upside momentum and as volatility is moving to a higher regime.

� The effects of declining oil prices and US dollar strengthening on equity markets are not obvious to assess.

� We don’t agree with those who continue to assert that lower oil prices are good for the US economy and the stock market, as the benefits to consumers is supposed to outweigh the decline in the energy sector (less than 10% of corporate earnings and market valuation). The sharp decline in oil prices is simply killing the growth from a sector that have generated a double-digit growth over the last years.

� We think that analysts underestimate the impact of a strong dollar on earnings growth for those Multinationals that generate a lot of earnings in foreign currencies;

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EQUITY

� Bottom line :� We remain Neutral equities. At this stage, expansionary monetary policies, low interest rates and

abundant liquidity are keeping us from moving to an underweight on equities. Even bad news for the economy (in Europe, Japan and China) appear as good news for stocks, as they allow for further stimulus.

� We may revise our view to OW after a clean break of the 2075-2125 range on the S&P500, and to UW below the trend from Nov. ‘12 lows

� We think it is wise to incrementally "de-risk" your portfolios by focusing on higher quality / more defensive / more favorably priced companies

� We remain Neutral on Europe vs. US, even if ECB eases further. We look for the ECB to introduce purchases of corporate and/or sovereign bonds in in Q1-2015. But, we think that markets are too reliant on the ECB. If the ECB loses the market’s confidence, European stocks would underperform severally.

� We remain OW on Japan (always on an FX hedged basis) on the back of an aggressive BoJintervention, a weaker yen and good earnings growth.

� We remain UW in US small caps vs large caps, and UW EM stocks vs US large caps

� The coming rate hikes (probably in Q2-2015) will depress all asset prices for at least part of next year, in our view

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Earnings

� the forward 4-quarter estimate is now at $126.80

� The PE ratio on the forward estimate is now 16(x).

� The estimated earnings growth rate for Q4 2014 is 2.6%, down from 8.4% on Sep 30. Downward revisions to earnings estimates impacted all 10 sectors, but specially the energy sector.

� For Q4 2014, 87 companies have issued negative EPS guidance and 21 companies have issued positive EPS guidance.

� Profit growth is still expected to accelerate to +9% in 2015, despite the recent drag from the energy sector.

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First Reason for Cautiousness: Volatility

� Volatility seems to have moved to higher regime.

� The death-cross seen in October indicates a reversal in the medium-term trend.

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Second Reason for Cautiousness: Junk Bonds

� Credit spread in the high-yield bond sector has been rising steadily since mid-2014.� The hidden fear in the junk bond market has been confirmed by the appearance of a death cross in

early December. � Is High Yield the canary in the coal mine?

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Third Reason for Cautiousness: Crude oil and other commodities

� The prices of nearly all commodities have fallen dramatically since mid-2014. The CRB index has overall declined by 30%.

� The plunge in oil prices is very intriguing as it appears to be anticipating the end of Fed’s QE (probably perceived as an effective tightening).

� The last time that stocks were up, and commodities (and bond yields) were down substantially was 1998..

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Large Specs Positioning

� Large speculators increased their net long position in S&P500 index to $17bn (as of Dec 31), the largest since July ‘13., suggesting near term caution.

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Equity Vol

� S&P500 long-dated volatility has been rising with the market hitting new all-time highs� The last time, we saw this phenomenon was in 2007

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S&P500 – A Short-Term Perspective

� Despite the recent consolidation, there is still no significant damage to the underlying bullish momentum.

� It will remain so as long as the uptrend line from Oct. ‘11 (currently at 1860) is preserved.

� The index appears to be capped by a rising ceiling line since early 2013. Each time the ceiling line was touched, the index went down towards its 26w-MA line (currently around 2000).

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S&P 500 – A Short-Term Perspective

� All exhaustion patterns have been ignored to date.

� Technically, the S&P500 seems to be forming a “mega-phone” pattern

� At this stage, we favor a top formation within the 2075-2125 range

� Our view will prove wrong if the uptrend going through the highs since mid-2013 (~2100) is clearly broken.

� A similar pattern is forming on the Dow.

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Trading Model – S&P500

� Our prop. Short-Term trading model went massively long on Jan. 6th at 2002.61 on the index.� The model targets 2021 and 2083 on the upside. Above 2083, it reverses its position and

becomes modestly short with 2061-2041 as targets.

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FIXED INCOME & CREDIT

� Nothing new compared to our previous reports. While we are neutral on German yields, we think US yields are too low for the current growth and inflation outlook. We still look for the bear market on USTs to resume but the timing looks more and more uncertain….

� Actually, since end of Sep. ‘14, we’ve been questioning our underweight positioning, as U.S. 10-year yields was ticking below the 2.40-2.30 range. We’ve decided then to move to Neutral each time the 10y yield goes below 2.25. As a result, we’ve been Neutral UST since end of Nov. ’14. The 10y UST yield continues its slide below 2.00

� Falling inflation expectations and disappointing growth largely explain the level of Eurozone yields. We expect the coming ECB QE in government bonds to keep German bond yields at very low levels.

� We have been OW Eurozone vs. US and UK over the whole year. We are aware that the ECB is probably planning to buy government bonds during Jan. ‘15. But given the record levels reached by yield gap between Treasuries and Bunds, we decided to change our position to Neutral.

� We expect the Fed to start tightening from Q2-2015 and will hike rates more than is currently priced in: The markets are still only pricing in about one hike from the Fed next year. Based on Fed’s speech, we expect 3 or 4 hikes instead. Thus, the re-pricing of Fed expectations is likely to take place very soon in the short end of the curve.

� While US yields in the short end are expected to go higher, the medium to long end of the curve will be supported by abundant liquidity. We expect a significant flattening of the US yield curve.


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� In 2H-2014, credit markets shifted into a higher volatility regime, led by the sell-off in oil and other commodities and the deterioration of market liquidity. We expect higher volatility to be the new normal for credit markets in 2015. Spreads widened considerably more in the US than in Europe.

� High Yield (specially US) has fared poorly relative to most other areas of the investable landscape. We see investors moving up the quality spectrum, selling high yield bonds and growth sectors and getting into investment grade bonds, govies and defensive sectors. This is probably a sign we are moving into the final stage of the bull market and economic expansion

� We remain UW on corporate credit, due to valuation, to position within the credit cycle, to the expected rise in government bond yields and given the weak total return forecast

� Within the credit pocket, and over the very short-term, we continue to prefer Eurozone corporates (especially IG and non-financials) to US corps, because of the coming ECB massive QE

� However, we are aware that markets are too reliant on the ECB. If the ECB loses the market’s confidence, European credit would underperform

� In the medium-term (6 months), we expect the pattern of European outperformance to reverse during 2015.

� We still prefer IG over HY on a risk-adjusted basis as we expect higher volatility on spreads

� We remain OW on HICP breakevens (through forward 1yx1y for example) given the potential for a sovereign bond QE


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� Bottom line : Neutral Govies, Neutral Eurozone vs. US Govies, Long flatteners on the US yield curve, UW credit, OW Eurozone vs US IG credit, Neutral TIPS and OW HICP Inflation, UW High Yield vs High Grade, Neutral on EM corporates


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Fed-ECB: Two Different Worlds

� The world seen by Yellen is fundamentally different from that seen by the Draghi.� 2 year US rates finished 2014 near their 52-week highs� 2 year Bunds established new 52-week lows (always in negative territory!)

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Long-term USTs

� USTs are still delivering the same bullish message for yields (but probably not for the economy)…� Long-term Treasuries (20+ years, represented by the TLT ETF) are about to break out to new all-time

highs � Is that a sign that risk appetite is getting shaky?

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Long-term USTs

� 30 year UST yields are heading to all-time lows

� The long-term downtrend on the 30 year UST yields is intact.

� The 30y yields have bounced against it in Jan. ’14 and they are now testing their all-time lows.

� The break of the Jun 2012 lows (~2.44) seems imminent.

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Eurozone Implied Inflation

� US Breakeven inflation rates at their lowest level since 2009.

� The plunge in oil prices is obviously dragging down inflation expectations in the Eurozone.

� We keep, however, our OW position on HICP breakevens (through forward 1yx1y) given the potential for a sovereign bond QE

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US & Euro Credit

� The yield gap between US and Euro IG credit has now reached its ‘06 highs (~200 bps), mainly driven by divergent central bank policies.

� As the ECB plan to buy corporate bonds directly (and even if not, its purchases of asset-backed securities and covered bonds may lead to investors adjusting portfolios towards this asset class) looks imminent, we keep our preference for Eurozone corporates (especially IG and non-financials) to US corps, because of the coming ECB massive QE

� However, we are aware that markets are too reliant on the ECB. If the ECB loses the market’s confidence, European credit would underperform severally.

� In the medium-term (6 months), we expect the pattern of European outperformance to reverse.

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Peripheral vs Core Euro Credit

� The peripheral credit premium prices a 100% ECB success in mitigating weaker-than-expected economic data in the Eurozone � We remain UW peripheral risk.

� Peripheral credits is very vulnerable to any stress due to a loss of confidence in the ECB backstop

� If growth and inflation continue to fall despite the ECB intervention, then markets will remember their old worries and peripheral credit will plunge…

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US & Euro Credit

� Barclays Research shows a high correlation between the European B/BB ratio and US high yield fund flows (probably due to the fact that US-based global high yield managers are exposed to many single-Bs cross-border issuers)

� We still prefer IG over HY on a risk-adjusted basis as we expect higher volatility on spreads and more outflows from US HY.

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EXCHANGE RATES

� Policy divergence between the US on one hand, and Japan and the Eurozone on the other, should continue to provide an environment supportive of the dollar

� We continue to expect the USD to strengthen against the major crosses, especially EUR and JPY� Things are going very fast. Our targets on EUR-USD (1.21-1.20) and USD-JPY (119.30) have been

already reached.

� The US Dollar Index (~91.5) has reached a post-Lehman high. The next important targets are 92.50 and 96.00. Our ultimate target stands at 101-102 over the medium-term.

� Inflation and manufacturing activity in the Eurozone remain suppressed. Government bond yields in the are pricing in further stimulus spending. The EUR-USD underlying structure still looks very heavy.

� we remain UW EUR-USD as long as the pivot stays below 1.21 and move Neutral above to play the correction towards 1.25-1.30

� Although a short-term consolidation is plausible (specially if the ECB deceives on its QE size), we still target 1.16-1.15 over the ST, 1.10 in Q3-2015 and parity early 2016

� BoJ intervention has weighed (more than expected) on JPY. We remain OW USD-JPY as far as the pivot stays above 119.30. Our ultimate target remains at 124-125 over the medium-term


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EUR-USD

� Our ST target of 1.21-1.20 was finally reached.

� We remain UW EUR-USD as long as the pivot stays below 1.21 and move Neutral above to play the correction towards 1.25-1.30

� Our ST target is now 1.16-1.15

� Our medium-term view remains biased towards a strengthening of USD (target ~ 1.12-1.10 then parity in early 2016)

� Fundamentally, Greek election is another reason to be short EUR/USD


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USD-JPY

� Things are going very fast. Our target of 119.30 was reached.

� After reaching a local high around 120.80, a consolidation towards 117-116 seems underway (as expected).

� Our medium-term target ~ 124-125.


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COMMODITY

� Over the short-term, the trend remains bearish. We watch for a bottoming process.� USD strengthening remains a big headwind to commodities� Our OW positioning on commodities (with a dispersion in views across the different sectors) has been

bearable as we favored commodity futures with steep backwardation (for positive carry).Unfortunately, roll returns have turned negative in most commos.

� We are now UW commodities. We continue, however, to like owning the GSCI index, and thinkthat commodities hold value as cross-asset portfolio diversifiers.

Bottom Line :

� In 2014, Aluminum, Zinc and Nickel prices moved to the upside. All other metals went down led byCopper. Copper continues to look very weak. It is currently breaking the trend across the lows sinceOct. ‘11 as well as the Jun. ‘10 lows. Going through these lows would give a very negative signal onbase metals as a whole.

� Demand for base metals globally eased significantly in 2H-2014 and has not yet recovered. Weexpect price weakness to continue in early 2015. Many factors are weighing on base metals: USDollar strengthening, the Chinese slowdown, weaknesses in construction / housing sectors in majoreconomies (mainly affecting Copper and Nickel) � We remain Neutral on base metals (but weprefer Aluminium, Zinc and Nickel to Copper)


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COMMODITY

� 2014 was a tough year for grain market bulls as grain prices plunged during Q3 (as crops were morethan perfect). Corn, wheat and soybeans recovered partially during Q4. Buying them on weaknessduring the winter could provide a good opportunity, depending on 2015 crops.

� At this stage, We remain UW on agriculture (except on Cocoa and Coffee), as we think supply willcontinue to grow relative to demand. We still anticipate that agriculture prices will revert to 2009levels. Within the Agri complex, we’ve been OW Cocoa and Coffee for a while now. We like Cocoa forits long-term underlying demand driven by consumption in Asia. The recent pullback in coffee pricesprovides a better entry opportunity into this market after the sharp surge we’ve seen in pricesbecause of the drought in Brazil. Sugar is headed back to its long-term lows, which may presentopportunities as Brazil (world's top sugar producer) may cut production in 2015.

� Precious metals are vulnerable to higher US real yields and stronger dollar � Our strategy on gold remains unchanged: We remain UW above 1150-1170 band. We will move

Neutral below 1150 and switch progressively to OW (accumulate) as the spot slides downtowards 1000-980, which is likely the final leg down.

� Our first target on silver (~17) has been reached. The spot has been very close to our second target at 14.70. We still think that Silver (like gold) is probably ready for its final leg down towards 12.50. At current levels, we move Neutral but, like for gold, we will switch progressively to OW (accumulate) as the spot breaks the first material resistance around 14.70 and slides down towards 12.50

� Although Gold/Silver ratio looks extremely high, we expect gold to continue outperforming silver over the short-term.


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COMMODITY

� We’ve decided to keep our OW bias on energy as long as the $80 support zone is not clearly brokenby the WTI. But it was. We’ve stopped our losses and moved to Neutral, waiting for a clean breakbelow $ 59.5-60 band to switch to UW. It’s done now. We are UW oil and target ‘08 lows (around$35) as long as the OPEC doesn’t decide to stop the bleeding


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Commodity Positioning

� Aggregate positioning on commodities(as implied from CFTC futures andoption positioning data) is close to itsJuly 2009 lows

� No signs for a base yet!

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Crude Oil - WTI

� Current oil price weakness may be explained (but only partially) by the supply pressure we’ve seenfor over a year. The excess supply has lifted global crude oil stocks by approximately 200-225 millionbarrels (or more than 0.6 million barrels per day) over the past twelve months. One of the biggestfactors in producing an excess supply has been the success of the U.S. shale oil production

� Although this global inventory build is similar to the one we’ve seen in 2012, the decline we arewitnessing (more than 50% over 6 moths) is much deeper than the 2012 correction (~30% peak-to-trough move over a 4-month period).

Source: EIA & Zeits Energy Analytics

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Crude Oil - WTI

� The lower demand for oil might account for about $20/barrel of the decline in prices since mid-2014,but hardly more…

� An another reason for the sharp decline in oil prices could be the large volume of productive capacitythat is currently off-line due to disruptions, and that could come back on the market at anytime

� As said before, the plunge in oil prices remains very intriguing as it appears to be anticipating the endof Fed’s QE (probably perceived as an effective tightening).

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Crude Oil - WTI

� At current prices, some of thehigher-cost producers will be forcedout.

� That is probably one of OPEC’s targetswhen they decide not to stop thebleeding by cutting production

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Crude Oil - WTI

� We expected the $59.50-$60.00band to slow the descent. But wewere wrong…

� As mentioned in our previous report, we moved UW as soon as the 59.5-60 band was breached down.

� Oil has broken the ultimate 76.4%retracement of the entire2008/2011 rally at 51.80, and isnow targeting ‘08 lows (around 35)!

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Base Metals

� The LME Index shows a similargloomy picture after the break ofthe trendline across the lows sinceJune 2010.

� Like for crude oil, the index isprobably headed down towards the‘08 lows. 2700 is the level to bewatched closely in order to confirmthe downside move.

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ALTERNATIVE STRATEGIES

� The HFRI Composite Index gained +3.6% for 2014. This is well below the long-term average performance of +10.7%, “as hedge fund managers maintained conservative exposures with equity markets near record highs”.

� We’ve been OW Equity Market Neutral, CTA, Global Macro over the whole year 2014, and OW VolArbitrage since Jun. ‘14� 2014 was the year of CTAs revival after years of underperformance. Macro strategies (represented

by HFRI Macro - Total Index) had posted a 6.4% gain for 2014. Macro strategies were led by Quantitative, Systematic Diversified CTA strategies (HFRI Macro: Systematic Diversified/CTA Index is up +11.2% for 2014) that took advantage from trending behavior in oil, commodities, currencies and Govies.

� HFRI Equity Market Neutral Index gained 3.9% in 2014. � Relative Value Arbitrage (RVA) gains in Dec. ‘14 were led by HFRI RV: Convertible Arbitrage Index

(+1.1% MoM, 2.5% YoY), and HFRI RV: Volatility Index (+0.6% MoM, 5.0% YoY). The recent spike in realized volatility boosted gamma trades.

� Global macro strategy was our (only) bad bet. The strategy experienced a difficult H2. It suffered (HFRI Macro: Discretionary Thematic Index ~ -0.8% YoY) on short duration trades and long Europe-US equity spread


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ALTERNATIVE STRATEGIES

� For 2015, we reiterate our preference for risk diversifiers (pure alpha generation strategies) over return enhancers.

� We maintain our previous positioning and remain OW on:� Equity Market Neutrals both for their “intelligent” beta and their alpha contribution. On several

occasions in 2014, our preference for variable bias and market neutral managers has proven to pay off (compared to long bias) on the back of adequate short positioning.

� CTA’s and Global Macro as a diversifier and tail hedge. � Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This strategy

has shown a great ability in terms of protecting capital during adverse periods, and a volatility that compares favorably with the hedge fund industry


Bottom Line: Global Asset Allocation

� As 2015 starts, the story remains one of continuing global weakness, but

positives in the US.

� The Fed is now faced with the challenge of finding a low-drama course to

higher rates

� Deflationary risk in the Eurozone is significantly higher than 6 months ago.

Inflation data should be supportive of expectations for ECB QE operations to

begin in January

� The divergence theme continues to propel the dollar higher

� The bull market remains intact. But, with no significant selloffs to rebalance

sentiment, greed is flourishing out of control.

� Between slowing growth, coming rate hikes, falling oil, and the strength of the

dollar, we still believe equity markets are on borrowed time.

� But expansionary monetary policies, low interest rates and abundant liquidity

are still keeping us from moving to an underweight on equities. We

remain neutral on global equities and think earnings growth should be the

only driver of markets from here.

� Volatility is finally back… This is for certain!

� We don’t agree with those who continue to assert that lower oil prices are

good for the US economy and the stock market, as the benefits to consumers

is supposed to outweigh the decline in the energy sector (less than 10% of

corporate earnings and market valuation).

� We remain underweight government bonds and corporate credit overall

(but with an intra-asset class preference for IG vs HY, and Eurozone non-

financials IG vs US IG), and Overweight US dollar (supported by divergence

Fed policy from that of the ECB and BOJ).

� We summarize our views as follows �

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Disclaimer


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.

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

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Provide assistance with asset

allocation and related risk control

and/or risk budgeting techniques

•Global Asset Allocation (GAA)

50


Finlight Research - Market perspectives - Jan 2015

Economy & Finance

Transcript of Finlight Research - Market perspectives - Jan 2015