Finlight Research - Market Perspectives - Jan 2016

Market Perspectives

January 2016

Jan. 8th, 2016

www.finlightresearch.com

The Sun Can't Shine Every Day

“The current global equity run, by contrast, is

based on the assumption that a bunch of

second-rate economists (but first-rate

bureaucrats) running monetary policy using

third-rate Gaussian models have our backs

covered. And get this: they are going to help

us with controlled demolition of our currencies

because . . . wait for it . . . inflation is good,

and they know exactly how much is optimal

because they are omnipotent.”

– David Collum

2FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation

� US dollar strength, commodities weakness (specially crude oil) and

China’s ongoing economic woes have been the biggest stories of 2015.

China and the Fed will be the main drivers of 2016.

� The combination of a stronger Dollar, weaker crude, pressures in

commodities markets, and lower global economic growth was grossly

underestimated. This combination is probably kicking us out of the

‘Goldilocks’ scenario of loose financial conditions, steady (although

unspectacular) growth and inflated asset prices.

� market valuation (P/E) remained elevated, volatility increased, and

earnings declined

� Fed is back to "tightening" mode, and the global manufacturing recession

continues.

� We remain cautious on risky assets and expect lower asset returns and

higher volatility to make the essence of next year. More risk-off episodes

should be expected in 2016.

� The new year has opened with Shanghai crashing 7% and global equity

markets selling off.

� We reiterate our view that we are sailing a cyclical bull within a

secular bear. The current cyclical bull may go higher for longer. But,

rising volatility and stalling earnings growth may indicate we are in the

late stage of the cycle.

� The perfect storm is building…

� We summarize our views as follows�


MACRO VIEW

� The Good� US employment remains one of the big positive stories of the year� Consumer confidence improved in December� US consumer spending and income post solid gains in November.� US ISM non-manufacturing remained strong

� The Bad� US corporate profits and durable goods data continue to disappoint.� Capacity utilization and industrial production data has been weakening � The Industrial complex remains in contraction, with the ISM Manufacturing Index below 50 for

the second month, the Caixin Manufacturing PMI at 48.2 and the necessary unwind of China’s over-investment cycle

� Existing home sales dropped 10.5% YoY, to 3.76 million units. This was the sharpest decline in over five years.

� The Ugly � Main systemic risk resides in China: The credit bubble is unsustainable. The Chinese debt

burden is extremely high (debt to GDP ratio is around 300%) and the credit cycle is probably starting to turn. We are probably in the early stages of a bursting credit bubble.

� We feel concerned about the credit market liquidity as turnover ratios are well below pre-crisis levels and the bid-ask spreads are much wider.



The Big Four Economic Indicators

� The current picture is characterized by relatively strong Employment and Income, a weak Industrial Production (down in 9 of the last 12 months) and uncertain to weak Real Sales (down in 6 of the last 12 months).

� 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.


Employment

� Employment has been the big positive story of 2015

� Part-Time Workers for Economic Reasons (expressed as a percentage of the labor force) has decreased by 0.6% (900K pers.) over the last 10 months

� Still, if current trend continues, we would need about 2 years to achieve full employment like in 1999 and 2007


Industrial Production

� Both capacity utilization and industrial production are heading south…

� The Industrial complex remains in contraction in US, like in China !


New Orders

� New orders for durable goods have been moving sideways since 2012� Both ISM index for new orders and new export orders have fell in contraction territories.

� Probable reasons behind this decline in new orders: US dollar strengthening, Emerging Markets weaknesses and crude oil crunch


Consumer Confidence

� Consumer confidence and small business sentiment (NFIB Small Business Optimism Index) have been tracking each other since the last crisis.

� But a notable divergence appeared 9 to 12 months ago…


GS – Global Leading Indicator (GLI)

� The Dec. Final GLI came in at1.4%yoy. Its MoM momentumcame at 0.12% (down from 0.13%last month)

� GLI is back again in Slowdownphase.

� Only three of the ten underlyingcomponents of the GLI improved inNovember.

� We continue to think that theacceleration we’ve beenwitnessing since Jan. ‘15 is quitemodest for a typical expansionphase


China’s Foreign Reserves

� The fixed-income / credit edificeis highly vulnerable to China’sneed to liquidate Treasury reservesin order to maintain its currencypeg, as capital outflows increaseand market widely expects furtherdevaluation in the USD-CNY

� China’s foreign exchange reserveshave been falling since end of 2014(down $513 Bln over 2015)

� In Dec ‘15, they fell 3% (to$3.33Trn), the highest monthlydrop since 2003!

� As capital outflows persist,pressure on the PBC to let theyuan depreciate further willintensify…


China’s Renminbi

� China is simply adjusting the yuanforex in an attempt to bring it morein line with offshore rate (trading inHK)

� The spread between the onshoreand offshore rates is at itswidest level in years.


EQUITY

� We change nothing to our previous positioning. � We think that the equity bull market is aging, that market valuation is elevated, volatility is

heading up, and earnings are declining.

� Stocks appear rich to corporate profits, when corporate profits themselves appear to be at extreme levels as a share of GDP.

� S&P 500 earnings have now declined for four straight quarters while revenues have declined for three consecutive quarters

� Stock market breadth doesn’t look healthy as most of the index performance is driven by very few companies and masks broader weakness across the market. The break of the 2011 bull trend in the Russell 2000 is another ugly medium-term signal for stocks.

� Stock buybacks are at a record level but the stock buybacks engine seems exhausted. The S&P 500 buyback index has been underperforming the S&P 500 since Q3 2015.

� Market strategists in top 14 investment banks seem overconfident. They see the S&P500 going up in 2016 with an average return of 6.5%. No one see the market going down

� Our main scenario from here (80% chance) : A massive top forming around 2135 :� US profit margins are showing increasing evidence of peaking. On Price/Sales metric, equities are

trading at the top of the historical range. � A resumption of earnings growth going into 2016 will be necessary for equities to move higher.� 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


EQUITY

� Our alternative scenario (20% chance) : The S&P500 breaks the 2135-2140 resistance, opening the way to 2225.

� Stocks seem more vulnerable than ever to any external choc (Central Banks action, China, Crude oil…)

� Bottom line :

� De-risking should continue. A higher allocation to cash is sensible in this late-stage stock bull.

� As expressed in our previous report, we moved tactically UW on equities as the S&P500 broke below the 2020 support. We will switch back to Neutral if the S&P 500 reintegrate its 2020-20140 range or reach the 1885-1903 zone.

� 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 and exporters in Eurozone.

� We remain UW in US small caps vs large caps.� We remain UW EMs vs DMs, given the Fed hawkish stance and USD strengthening. Negative

spillovers from China will also likely have a strong impact on other EMs.


US Earnings

� The S&P500 stands within an earnings recession with -0.4% YoY in Q2 and -1.3% YoY in Q3

� FactSet's data shows a current forecast of a 4.7% decline (YoY) for Q4-2015 earnings and a 3.2% decline in revenues.

� If this earnings decline becomes effective, it will mark the first time the index has seen 3 consecutive quarters of year-over-year declines since Q1/Q3-2009.

� No earnings/revenue growth is projected before Q1-2016

� For Q4 2015, 85 companies have issued negative EPS guidance and 26 companies have issued positive EPS guidance


US Earnings

� On top of that the S&P500 is significantly over priced relative to the currently falling forward 12 month PE

� The 12-month forward P/E ratio for the S&P 500 now stands at 16.2, well above historical averages: 5-year (14.3), 10-year (14.2)


S&P500 – A Long-Term Perspective

� Equity markets still appear at lofty valuations, whatever the valuation metric we use.

� We see only a few quarters (during the dot.com bubble) with higher valuations� Valuation alone is very rarely a timing tool for a major market top� Nevertheless, all these indicators suggest a cautious long-term outlook and weak long-term return

expectations


S&P500 – A Medium-Term Perspective

� Stock market breadth is hardly healthy

� The market is propped up by the performance of a few stocks (most of theme are Techs) that masks broader weaknesses in smaller caps

� An equally-weighted S&P500 underperforms the (cap-weighted) S&P 500 by around 4% over the year.


S&P500 – A Short-Term Perspective

� Since mid-2015, the S&P500 index has switched to defensive mode

� Over 2015, low volatility portfolio (+5.1% YoY) has outperformed the high beta portfolio (-12.5% YoY).

� This outperformance started during the summer and accelerated at the end of the year.


S&P500 – Tech (Long-Term) Perspective

� Despite the last correction phase, the uptrend on the S&P500 is not damaged yet.

� Given the long-term wave count, the market will probably turn up somewhere between 1900 and 1885, to enter a period of range-bound trading.

� Any break lower than 1885 would open scope to a deeper correction towards 1850, without invalidating the uptrend

� Only a material break lower than 1850 would be able to damage the current trend. Below, things could get ugly for the index.

?


S&P500 – A Short-Term Perspective

� Our prop. Short-Term trading model has switched to substantially long on Jan. 8th S&P500 close (@1922.03) � Is that a signal to “buy the dip”?

� The drawdown entered on Aug 20th has been recovered.� The model targets 1941 – 1961 then 2041 – 2061. Its first stops stand at 1903 and 1865


S&P500 – Investors Sentiment

� According to the weekly sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment reached its 5 month low

Source: Bespoke

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FIXED INCOME & CREDIT

� Fed has finally moved to hiking mode. But its securities portfolio has changed only modestly since the end of QE

� At this stage, the Fed refrains from reducing the amount of USTs ($2 462 Bln vs $1 758 Bln in MBS) hold on its balance sheet and continues to replace the volume of maturing securities

� The real test for bond markets would be the moment when:� Other Central Banks start getting away from QE-easing, putting all the rates on a upside track� The Fed decides (sooner or later) to replace the use of its "temporary" tools (reverse repo among

others) with the an outright reduction in its securities portfolio to reduce reserve balances.

� 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 2.60 by H1-2016 and 2.75 by H2-2016� 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

FinLight Research | www.finlightresearch.com

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� While we think the risk of high inflation is low, we expect an increase in the market pricing of long-terminflation in the US. Inflationary signs should be watched closely as they will foreshadow a steepeningdecline in Govies.

� We remain Neutral HICP Inflation as we expect breakevens to trade sideways in the Eurozone � We remain OW on 10y-TIPS breakevens given their historically-low levels. While we see no

immediate catalyst for a move higher in breakevens, we view US 10y breakevens as structurally cheap (1.6%) and having limited downside


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� 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.

� We expect volatility to stay elevated and think that an additional liquidity premium is needed to make HY attractive

� 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 and bad news from China.

� 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…� Nevertheless, the current HY spreads are implying default rates consistent with a recessionary

environment

� We expect the focus on liquidity to remain. 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.


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� US High Yield is the only segment where we see some potential for spreads tightening. But we expect this tightening to be more then offset by the rise in UST yields

� 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. We see Euro HY trending wider over 2016.

� 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 position our credit portfolios into higher quality names across sectors

� 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, UW 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 10y-TIPS and Neutral HICP Inflation, UW High Yield vs High Grade, Neutral on EM sovereigns


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Don’t Fear Rising Rates…

� Rising rates imply two oppositeeffects:� Immediate pain with MtM

losses over the short-term� Brighter future with better

reinvestment opportunities over longer periods

� A Pension Partners study showsthat the second effect more thanabsorbs the first one.

� Rational investors shouldn’t fearrising rates, but a persistence ofthe current low-yield environment



Inflation Expectation

� EU and US long-term inflation expectations have been underperforming

� Despite the ECB continuous easing, we don’t feel comfortable with being long EU inflation

� We are more bullish on 5y5y inflation in US as a cheap hedge for any positive surprise over H1-2016

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US High Yield

� High Yield credit spreads are widening with repeated sharp spikes and increased contagionacross sectors

� And this is not just about energy worries and commodity stress as HY spreads are widening acrossall sectors of the economy, even those which benefit fundamentally from falling oil prices

� We do not think that the sell-off is overdone. For us, it reflects higher liquidity / macro risks, large outflows, and persistent price volatility


100+ Bps

spikes

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US High Yield

� Bank lending standards start to tighten

� � We should expect an increase indefaults over the next 12 months (target= 5% in US HY)


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US vs Euro 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

� The lack of energy companies in Euro HY remains the main contributor to the underperformance of US HY vs Euro HY.

� We still see Euro HY trending wider over 2016.� US High Yield is the only segment where we see some potential for spreads tightening. But we

expect this tightening to be more then offset by the rise in UST yields


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Liquidity and Negative CDS Basis

� CDS-Cash basis, especially on HY, is reaching very negative levels because of increasing useof CDS indices by long-only investors to get (through protection selling) exposed to the creditmarket with a better liquidity.

� In exchange for this additional liquidity, investors are giving up some of the spread available on cashmarkets

� DTCC data shows that clients are holding record long (risk, so short protection) positions in CDX IG aniTraxx Main


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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 H2-2016 (probably before the ECB tapering)

� Besides the Fed’s hiking mode, US dollar continues to be supported by the fears of a global growth recession

� Despite the sharp correction of Dec. ‘15, we continue to think that the picture is still bullish aslong as the 98.3 support is preserved. Ultimate target ~ 102

� The continued monetary divergence between the Fed and ECB, and the shallow growth outlook for China, should lead to further downside in EURUSD throughout at least the first half of 2016. Ultimate target ~ parity.

� Our positioning on EUR-USD remains driven by (almost) the same trading rules:� We remain Neutral as far as the pair stays between 1.08 and 1.1088.� From here, we’ll move to UW again after a clean break below 1.08. Next target = 1.0440 and then

1.02-1.03� We will move to OW if the uptrend from March is reintegrated and/or there is a clean break above

the 1.1088 resistance


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EXCHANGE RATES

� We change nothing to our positioning on USD-JPY� 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 a peak in 2015 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 (114-125). Below, we move UW. Above, we switch to OW.

� We remain UW EM and Commodity FX, given the Fed’s hiking stance and bad news coming from China.


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US Dollar Index

� DXY index has been confined to a range since Mar. ‘15� After a range consolidation, and given the policy divergence between the Fed and other Central Banks,

we expect the US Dollar to move higher with a target at 102

� We continue to think that the picture would remain clearly bullish as long as the 98.3 support ispreserved.

� We’ll move to UW if the index breaks out of the range to the downside.� Between 98 and the bottom of the range (~93), we switch to Neutral.


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EUR-USD

� The key level which the EUR-USD must stay under is1.1088. A close above wouldlikely lead to much more EURupside with even a squeezetowards 1.17

� Our main scenario : headingdown to 1.0440. The ultimatetarget for this scenario wouldbe around the 1.02-1.03 level atminimumb.

� Breaking below 1.08 is neededfor confirmation


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USD-JPY

� As expected, and given thelack of any bullish catalyst, theUSD-JPY continued to remainweak

� This weakness has concretizedwith the pair breaking through theascending support at 120.50

� We expect the first target at 118to induce a limited correctionbefore the downtrend resumestoward 114.


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COMMODITY

� In 2015, commodities experienced their worst losses since the Financial Crisis� The steady rise in the Dollar, slowdown in global growth and Chinese demand, and increased supply

all contributed to the third consecutive down year for commodities

� Prospects for commodities are still looking shaky:� China’s investment slowdown poses a clear downside risk for commodity prices� US dollar strengthening is expected to persist over the coming 6 months, weighing on commos� The tightening cycle has started in the US. Higher rates are usually bearish for commos as they

put a higher cost on carrying them in inventories

� The downtrend in commodities looks about to bottom out. But the prospects for a rapid recovery arevery slim. In previous cycles, oil and copper have spent a much longer time trading at depressedlevels

� We don’t see any sustainable recovery without a pick-up in global growth or a substantialshrinkage in supply

� 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 oftheir structural low correlations to other assets and strong inflation hedging abilities,


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COMMODITY

� Bottom Line :

� Energy: Rough year for the energy markets in 2015!� Fundamentals still indicate downward pressure on crude prices. High levels of global inventories

and a continuation of output from OPEC, Russia and the United States continues to weigh on price� The world oil market is estimated to be oversupplied by 1.5M B/d, yet Saudi Arabia and OPEC

keep pumping…

� Crude oil is now at a level where it is likely to test 2008 lows of $32.48 per barrel. Below there,things could get ugly for the price of oil.

� Following our positioning rule, we moved from Neutral to UW as the spot breached the Augustlow (~38), with targets at 35 (already reached), and 28-30

� From here, we keep exactly the same tactical rules:� Move to OW within the bottoming zone of 29-25� Move back to Neutral if the spot breaks above 38� 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


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COMMODITY

� Precious Metals: � Outlook for precious metals continues to be dominated by the potential timing and pace of Fed’s rate

hikes and the 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.

� In December, a rebound occurred close to our “accumulation zone” at 1050 on gold. � During the month, we switched from Neutral to OW as the spot broke below 1070, and again to Neutral

after the rebound.

� Our positioning rules remain unchanged:� Neutral between 1120 and 1070.� OW below and above.� We will wait for 1050 to progressively start accumulating Gold.


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COMMODITY

� Base Metals:� Base metals are the second worst performing commodity sector of 2015. China and deflationary

pressures caused industrial metals to lose almost 25% of their value� But lower prices are still needed to oblige producers to cut production and to rebalance

oversupplied markets.

� The main reasons (growth disappointments in China and broader EM) behind the bear trend we’ve seen since 2011 are still alive… The developments surrounding Chinese economy will continue to dictate prices in 2016

� We remain Neutral on base metals, but continue to avoid holding Copper and Iron ore

� Agriculture: GSCI Agri was down -2.8% in December, ending 2015 at -12.9% YoY.� Grain prices continued lower in Q4 and 2015 ended with losses across the board : -15% for Soybeans,

-10% for Corn, -20% for Wheat

� We continue to believe in a limited downside to grain prices from here when upside seems veryinteresting (on medium-term).

� Weather issues linked to El Nino could induce huge price volatility over coming months.� We expect perfect growing conditions to be hurt in the coming months. For Soybeans, the

Brazilian production seems to be hit harder than expected from the recent heat and dryness. But, on theother hand, forecasts for the wheat crop in Argentina were recently revised twice to the upside

� At this stage, we choose to remain Neutral because of excess supply.


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Crude Oil

� Although rig counts in the UShave fallen to to 536 on Dec 31st,2015 (from its peak at 1609), U.S.production remained steady.

� We currently stand at or close toall-time storage capacity utilizationin the US


Rigs Count

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Crude Oil

� Gross shorts continue to riseand are close to all-time highs.

� Similar levels were reached inMar. ‘15 and followed by a shortsqueeze that sent oil prices 30%higher.

� Crude futures structure hasshifted to contango (as a sign ofample supply) since end of 2014

� The cost of storing oil hasincreased because of cash &carry trades: buying nearby oil,putting it in storage and financing,and making profit as far as thetotal financing costs stay belowthe contango.


Source: Barclays

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Crude – Tech. (Long-Term) Perspective

� For oil, we have had nothingbut bad news from both thesupply and demand side over2015.

� The WTI has broken the trendacross the lows since Dec’98, and the important supportat 41.6

� Next step would be to breakbelow the lows of 2008(32.4) and slide to the 28-29area.

� In our view, this area is thestart of the bottoming zone,with the lower end of the zonearound 25.


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Crude – Tech. (Medium-term) Perspective

� Last month, we moved toNeutral as the WTI broke below42.

� And according to ourpositioning rule, we movedduring December to UWwhen the spot breached theAugust low (~38). Targets : 35(already reached), then 28-30

� From here, we keep exactly thesame strategy :� Move to OW within the

bottoming zone of 29-25� Move back to Neutral if the

spot breaks above 38� 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


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Copper

� For Copper, like for most othercommodities, a large supplyadjustment is required in order torestore a better balance to the physicalmarket

� … And for that, prices need to golower on the cash cost curve

� Despite our neutral stance on industrialmetals, we’ve avoided holding Copperand we’ve proved to be right

� This time, we think that $ 4000/t (90th

percentile) is probably the level weshould reach before any pricestabilization becomes possible

� .


47

Iron Ore

� Iron Ore is probably thecommodity that suffered the mostfrom China’s investmentslowdown

� China’s real estate fixed assetinvestment continuous plungestill poses downside risk forIron Ore

� Keep away from Iron Ore!


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ALTERNATIVE STRATEGIES

� The HFRI Fund Weighted Composite Index posted a decline of -0.85% (-0.85% YTD) in December, concluding the fourth calendar year decline in hedge fund performance since 1990. Losses were led by CTAs (-2.35% MoM) and Energy/Basic Materials (-2.36% MoM)

� The HFRI Equity Market Neutral Index led Equity Hedge strategies in December with a gain of +0.7% Among Relative Value strategies, Volatility Arbitrage is the only strategy with positive performance in December: +0.5% (+7.0% YoY)

� Global Macro/Discretionary strategy was flat over 2015

� We stick to our preference for risk diversifiers (pure alpha generation strategies) over return enhancers. Our choice has been rewarding on Market Neutral Equity (+5.0% YoY) and Volatility Arbitrage (+7.0% YoY), but mixed on Global Macro (-0.1% YoY) and CTAs (-2.3% YoY)

� 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


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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.


Bottom Line: Global Asset Allocation

� US dollar strength, commodities weakness (specially crude oil) and

China’s ongoing economic woes have been the biggest stories of 2015.

China and the Fed will be the main drivers of 2016.

� The combination of a stronger Dollar, weaker crude, pressures in

commodities markets, and lower global economic growth was grossly

underestimated. This combination is probably kicking us out of the

‘Goldilocks’ scenario of loose financial conditions, steady (although

unspectacular) growth and inflated asset prices.

� market valuation (P/E) remained elevated, volatility increased, and

earnings declined

� Fed is back to "tightening" mode, and the global manufacturing recession

continues.

� We remain cautious on risky assets and expect lower asset returns and

higher volatility to make the essence of next year. More risk-off episodes

should be expected in 2016.

� The new year has opened with Shanghai crashing 7% and global equity

markets selling off.

� We reiterate our view that we are sailing a cyclical bull within a

secular bear. The current cyclical bull may go higher for longer. But,

rising volatility and stalling earnings growth may indicate we are in the

late stage of the cycle.

� 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

� 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...


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)


Finlight Research - Market Perspectives - Jan 2016

Economy & Finance

Transcript of Finlight Research - Market Perspectives - Jan 2016