Investment Thoughts – Summary Jan 31, 2017

Signet’s Global Multi-Strategy Fund

  • Signet Global Multi-Strategy Loan position is supported by its floating rates, limited duration and positioning at the top of the capital structure. This, and supportive growth, should continue to draw investors to loans in 2017.
  • US and European short duration CCC bonds offers value and rate protection, with proper credit work.

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HY Jan 2017

  • Our event driven arbitrage and cap structure strategies should remain in the sweet spot and protected.
  • We are looking at adding macro managers who prove themselves capable of extracting value from expected heightened volatility and change in rates and currencies in 2017 (and more esoteric equity and commodity markets).

Economies should be stronger in 2017

  • The “International Monetary Fund” (or IMF) raised its forecast for the U.S. economy over the next two years, saying President Trump’s policies should boost economic growth.
  • The IMF also increased 2017 growth projections for a number of other countries including China, Germany, Japan and Britain.
  • The World Bank estimates that President Trump’s proposals to slash corporate and personal income taxes could add up to 0.3% to U.S. economic growth in 2017, and up to 0.8% in 2018. That could drive the U.S. growth rate higher to 2.5% in 2017 and 2.9% in 2018.
    Finally, and according to the World Bank, President Trump’s policies could add 0.3% to the Global Economic Growth in 2018.
  • But, the fly in the ointment could be peripheral Europe; Greek, Italian and French bond yields have broken up…

Markets

The stock markets are the “mirror” of the Global Economy. When the global economy is doing well, equity markets and positive event driven strategies should do well. Recessions are the main cause of bear markets. The global economy is doing better than it has in years, and the outlook is improving.

Risks

Risks of a recession appear virtually non-existent for 2017. Usually, when this happens, it is supportive for the stock markets and credit.

BUT, this means that Quantitative Easing (QE) is being, or we can expect it to be, withdrawn starting in 2017; thus interest rates should be rising and the monetary easing cycle nearing its end. If so, markets will price in a further steepening of the yield curve at the long end. So, we may expect the ECB to soon start to wind down its €2.3 trillion bond-purchase program, a move that may trigger volatility in financial markets, particularly in the periphery. The ECB can be expected to maintain QE until after German elections in late September or if the periphery is in trouble.

Inflation is picking up; commodity prices are recovering; manufacturing and consumer confidence surveys are improving across Europe; estimates of economic growth are being revised up.

Watch the USD and 10 year yields for a warning. If the US economy strengthens, then government bond yields should rise. If US 10-Year bond yields break above 3% this year, the 30-year bond market will be over. Above 3% the tailwind of low rates will gradually turn into a headwind for the stock market as bonds regain some of their competitiveness.

In the good news column, re money growth, look at the money multiplier. My entire career it was around 8. It seems to be coming back and that is a positive sign.

Short-term outlook

The facts right now are that the markets have already priced in many of the positive aspects of the new administration’s policy proposals. This all calls for some caution, particularly with Trumps first pronouncements not being well met.

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