Wednesday, July 6, 2016

Its time for cash its time for safer assets.

Investors are moving into cautious zone and this is quite evident from the current economic growth and problems of the Euro-zone and global currency volatility. Investors are moving away from risky assets and this time they are more cautious since they have already burnt their fingers several times from 2008 onwards.  Fund Managers are very cautious about their clients and hence their bets are shifting from equities to safe asset class. Liquid holdings have also increased at the same time due to the same risk levels. Its time for cash its time for safer assets.

Equities are becoming less of value of investments currently owing to the global markets. Also at the same time it indicates that inflows into equities are getting low the probability of getting the same back is also very weak. Now lest gets into how much inflows are getting into ETF. Yes ETF is the safest investment avenue currently.
  • SPDR Gold Trust saw biggest inflows in the tune of $1.41 billion, which can be seen as a sign of risk aversion.
  • iShares iBoxx $ High Yield Corporate Bond ETF received inflows of $1.18 billion. This in contrast to the above is a sign of risk affinity.
  • Vanguard S&P 500 index fund received $695.2 million, showing a relatively small preference for equities.
  • VelocityShares Daily Inverse VIX Short-Term ETN saw inflows of $397.3 million, which is a sign of risk affinity.
  • iShares Edge MSCI Min Vol USA ETF received inflows of $372.6 million and it’s a sign of greater risk preference.
Hence its well clear indication that equity inflows are getting down which means redemption pressure at different ends and switch over investments from equities to other asset class is growing up which indicates that Fund managers are busy in protecting the best interest of their clients. It’s beyond hedge and more outflows from equities are going to begin.
Apart from this there are also certain risk which will keep the markets under volatile ride. The European Central Bank and the European Banking Authority will announce the results of its stress test on banks on July 29. The depth of the pain is very clear when we get into the numbers. The market cap of Italy's five largest banks is about 60 bln euros. The un-provisioned nonperforming loans was nearly 120 bn euros at the end of March. Monte Paschi has an estimated 47.2 bln gross NPLs. Reports indicate the ECB wants 14 bln euro reduction in those bad loans over three years. Italian banks are on the highest risk levels.

Further the  150 bln euro liquidity guarantee that the EU allowed Italy last week is only a stopgap measure. The reality is many of the subordinated bank bonds have been bought by retail investors, many of whom of course are taxpayers too. How their taxpayers money will be thrown into the open fire of liquidating them. Real Estate prices are also coming down in EU which will spook another crunch for liquidity in the coming days for the EU Banks. The crisis has erupted from popular commercial property funds, which tens of thousands of savers invest their Isa and pension cash, are at the centre of a market crisis. The collapsing prices of the EU real estate are risk for the fund and for the investments and redemption pressure would take big toll. The problem is with pension funds which have been invested in property related funds.

Hence safe assets like gold and cash are the best to stay. 


Speculation that Brexit will not create any impact on the global economy was a completely wrong. Market swelled up as short positions got winded up that pushed the markets up. The problem of Brexit will be hard to measure as there is hardly any way to get into the depth. The biggest problem is with EU and not with Britain which is being shadowed. Many countries will be asked to use their own currency and will be given forgiven for their debt pile provided they live with EU. This is going to be big thing if EU gets more threat from its member states to leave the EU. That’s why I Think EU is in more problems for the long term.

In between all the markets across the globe have reached to a level where investors will be reluctant to invest and further there is wide gap between technicals, price and fundamentals. History repeats and hence markets are cautious now. Overall, just 53 percent of the stocks in the S&P 500 are in uptrend vs. 74 percent in early June and nearly 80 percent back in April (when the Dow was trading 250 points lower). More than that I find markets are entering into a real worry as many Euro countries will be getting into serious problems with GDP growth and rising Debt levels. Further story of more stimulus and QE which have been expected was blindly taken as Brexit leads to fewer buyers of Bond and QE. Britain knows that it will get help from many nations in terms of economic recovery and hence QE is not required. Interest rates and pound needs to be made attractive promoting export. Further Brexit leads to end of EU stringent rules and regulation for trade and Investments. Hence QE is not the topic of the time. Political uncertainty cannot be recouped by QE. I am more concerned about the political games being played by the EU leaders despite of Brexit lessons.

 U.S and India and many countries will be coming up with their Quarterly results which will be keenly watched and in US it’s expected that this time also quarterly results will remain weak as compared to the previous quarters. Furthermore focus will be towards how the companies will give their outlook on the financials and earnings after Brexit. Same will be with Euro-zone companies when they will give their outlook on the earnings after Brexit.

Now lest come to another broader outlook is from the Bond market where individual countries have taken mixed stakes of decision on the same. Spain plans to issue bonds due in 2021, 2024, 2025 and 2030. Austria will sell 1.1 billion euros of bonds on Tuesday, Germany holds a 2-year bond sale on Wednesday and France will sell 9 to 10 billion of fixed-rate, long-term bonds on Thursday.  Further it’s not a problem to get worried about Britain. Its tension for Euro-zone leaders since next year in 2017 electoral openings in Austria, Italy and France will happen. Hence its now the biggest responsibility to for the Euro-zone to favor these countries who are highly indebted countries of the euro-zone.  So the question of QE will for EU will be limited.  They will focus towards other policy reforms where they could save these countries from exiting EU. The problem is within EU leaders and its evident from this that when Matteo Renzi, the prime minister, of Italy decided to inject €40bn into the country’s heroically undercapitalized banking system, he was stopped by  EU leaders led by Angela Merkel. 

Every one for the time being will be focusing on all the skeletons of Britain through its macro economic data. Well all these skeleton were drawn when the EU was there and not on an overnight basis. I find EU is in more problem and they will rattle the market across the globe. Biggest challenge for EU is that they will relax many rules as independent Britain will soon get strong growth support and investments opportunities after the EU rules got abolished. Hence EU will have to fight for keeping its remaining countries intact under the EU. 

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