David Fuller and Eoin Treacy's Comment of the Day
Category - General

    (Un)Steady as She Goes

    Thanks to a subscriber for this report from Goldman Sachs which may be of interest. Here is a section:

    In weighing the two sets of forces that bear upon our clients’ portfolios, we draw the same conclusion now that we have since November 2013when US equities entered the ninth decile of valuations: that clients should remain fully invested in equities and beta-driven assets despite high valuations. We show why we believe US equities are not yet in bubble territory, and are driven instead by underlying earnings and continued economic growth. We also analyze the current low level of inflation volatility and its impact on equity valuation metrics. Finally, we provide our expected returns for 2018 and the next five years, including our tactical asset allocation recommendations, and dispel the persistent myth of mean reversion in equities and fixed income yield levels. We conclude with our key takeaways.

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    Doubling of U.S. Bond Supply Seen as a Threat to Global Rally

    This article by Sid Verma for Bloomberg may be of interest to subscribers. Here is a section:

    A “dramatic” increase in U.S. bond supply over the next year risks unhinging global markets from their bullish foundations, warns Torsten Slok at Deutsche Bank AG.

    The supply of U.S. government debt will almost double to $1 trillion this year to finance a widening budget deficit as the Federal Reserve whittles down its holdings. Unless new buyers emerge, the overhang could be far-reaching.

    “If demand for U.S. fixed income doesn’t double over the coming years then U.S. long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating U.S. assets,” the chief international economist at the German lender wrote in a note Tuesday. “And this could happen even in a situation where U.S. economic fundamentals remain solid.”

    Those fears aren’t shared widely on Wall Street, where spreads on corporate bonds have sunk to 2007 lows and bullish indicators abound. The rally in credit appears relentless, retail demand for bonds is insatiable and tax cuts may reduce corporate borrowing.

    Commercial banks, emerging-market reserve managers and pension funds are all set to plug the $1.1 trillion hole in global bond demand left by central banks this year, according to JPMorgan Chase & Co.

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    Email of the day on India and governance

    I'm not sure whether you include 'The Economist' in your regular reading material. If so, you will have noticed that they have recently published several articles critical of India and in particular, critical of the BJP and of Modi. In last week's edition, a lead article plus a 'Briefing' suggested that wealth in India was confined to very few people and to get into the top 1% of earners you only needed an income US$20,000 a year. The articles were critical of infrastructure, of education, of the bureaucracy and of both the pace and direction of reform. They concluded that the Indian economy may be running out of puff and wondered from where it might get its second wind. As a consequence of an Asian-centric background, I have reasonably large weightings in China, India and Japan. I have no intention of reducing exposure to India (nor to China or Japan) but I would be interested in your views on The Economist's assertions particularly given your high regard for Modi and his government. All best.

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    Email of the day on long-term themes and investment vehicles

    Well done on all the recent market analysis and continuing your thoughtful and insightful analysis as ever. I was wondering if you might be able to provide some thoughts and ideas regarding how to invest is some of the longer-term themes you are running with?

    Markets seem to be entering some really interesting phases that you are highlighting, such as the end of QE, coordinated economic expansion which must spell the end of the long-term bond boom that we have seen. Whilst I know you watch and play the markets daily with your futures plays, those of us with non-related "day" jobs need slightly less volatile longer-term ways to play these trends, e.g. perhaps through some ETFs or appropriate equity investments.

    Given your knowledge of the markets, I was wondering if you might be able to

    1) summarise your key themes right now and

    2) propose some suggested means to back these ideas. I think the regular summaries help as not all of us have time to listen to your broadcasts or even read the bulletin every day.

    Perhaps this could be a weekly update?

    Whilst I like your own personal portfolio updates, your trades tend to be futures so need much more regular management than the type of trades myself and I suspect many other readers may feel more comfortable with.

    Hope this makes sense and thanks very much for your consideration.

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    Email of the day on Eurozone underperformance

    It looks to me that European shares are lagging more and more the US and Far east shares. with this euro/usd head storm instead of headwind Europe will follow the USA a little on the way up but I fear will probably follow the USA every step of the way down when this market eventually starts to correct. I fail to see the reasons for this strong euro. could you please give your expert opinion?

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