Barring a disaster in the final trading sessions of the year, the portfolio will return about 5%—excluding fees and dividends—in 2017. This is a far cry from the nearly 20% of the MSCI World, but better than a hole in the head. The good news was concentrated in the first half of the year. Profit-taking trades in Wells Fargo, Sabadell and Japanese equities added to the strong performance. From spring onwards, however, performance hit the skids, and only recently have returns started to improve. Slumps in General Electric, Xper have been the primary drags, but the dumpster fire has been more broad-based than that. A 15% allocation to gold and commodities—industrial and soft—for example, haven’t done me any favours either. Neither have exposure to producers of generic medicines and other small-cap pharma firms. Finally, various attempts to hedge out impending, but ultimately non-existing, sell-offs in the market as a whole also have hurt. Syntel and Urban Outfitters have been rising from the ashes in recent months, and I am hoping that further mean reversion will reach the rest of the portfolio next year. Given where we are in the cycle, the risk of a balanced equity portfolio losing money is rising. But let’s see whether I can’t come up with some ideas.
Read MoreOne of the main tenets at this space has been to cut away the extremes in your [equity] investing strategy. There are those who see market tops and imminent crashes everywhere, and then there are those who believe debt-financed share buybacks and dividend payments can continue to propel the market higher forever. They are both wrong, but the persistence of these two narratives and their interaction has been a key story in this cycle. It is my firm belief that the oscillations between these two positions have created a huge middle ground, which allows investors to make money. In the peanut gallery we talk about "sector rotation," but it's more than that. It's also about different themes which cut across traditional equity sectors and allow for price movements of key industries—even country indices— in opposite directions. I suspect most market geeks would be able to agree on this over a pint in the pub. But can we quantify it?
Read MoreWe have had the first proper summer days in the north east of England this weekend, and they've been delivered just in time for the Hoppings. For those uninitiated in the folklore of Newcastle living, it does not get much better than that. It is tempting to extrapolate this state of affairs to the coming months, and hope for a warm summer lull. But experience suggests that would be complacent. Rain is forecast for next week. We should enjoy it while it lasts.
In markets, last week offered up another pinch of curve flattening across the pond. The Fed raised rates, as expected, and also signalled one more hike this year. The hawkish bias surprised some punters which had been looking for the Fed to climb down in light of recent underwhelming inflation prints. As far as I can see, though, the Fed didn't really veer off course. Central banks are like super tankers; they move slowly and persistently. The FOMC reiterated that it is in a three-hikes-a-year mode and that it continues to expect the labour market to tighten. If this is a traditional cycle, the Fed will stay the course until something breaks somewhere.
Read MoreLet's assume that you think the Fed will raise rates two more times this year, and for the sake of argument three times in 2018. It stands to reason that your forecast for two-year yields at the end of next year has to be about 2.5%-to-3.0%. The argument for this sequence of events seems fairly straightforward. The U.S. economy is growing—albeit not spectacularly—, unemployment is sub-5%, and the FOMC is anxious to put the era of super-loose monetary policy behind it. The key question, though, is what your corresponding forecasts for 5-year and 10-year yields are, because we're closer to a do-or-die moment for bonds and the Fed's "hiking cycle."
I think we're looking at a four-scenario outlook.
Read More