EM PM, Ecstrat

Emad Mostaque

EM PM

Ecstrat

Ecstrat is a consultancy advising on asset allocation between global equity markets, with a focus on the intersection of governments, geopolitics, governance and markets.
 
Over the past few years and more especially since the Great Financial Crisis (GFC), investors have become more focused on short-term market movements and real-time returns and have consequently neglected the analysis of the underlying structural themes that underpin longer term performance.
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More specifically we believe that the evolution of governance-based relationships between investors, controlling shareholders, labour and the state is one of the primary determinants of both relative and absolute performance between individual equity markets.
 
We will endeavour to provide investors with some of the context surrounding governance-related issues which encompass many different disciplines including history, economics and political science, as well as the financial metrics which are the most obvious manifestation of the structural characteristics of each market.
 
We will pay particular attention to the shifts and potential inflection points for governance in individual markets as these are often the best lead indicators for both economic and market performance.

Thematic (Sector/Industry)

<div>Below are some thoughts on the current situation in Turkey re: the Kurdish flare up, the likely outcome of which will be an AKP majority government. Not all kurds are the same and ISIS is succeeding in its tactics of neutering one of the more effective forces against it, although the YPG &amp; Peshmerga will remain.</div><div>&nbsp;</div><div>Egypt is now at a crucial point in its development, with real risks of repeating the mistakes of Algeria in the 90s civil war.&nbsp;</div><div>&nbsp;</div><div>Further escalation may well mark a great opportunity for investment however as the underlying economy, ex-tourism, will continue to hum along with the real victim of all this being civil society.&nbsp;</div>

Below are some thoughts on the current situation in Turkey re: the Kurdish flare up, the likely outcome of which will be an AKP majority government. Not all kurds are the same and ISIS is succeeding in its tactics of neutering one of the more effective forces against it, although the YPG &amp; Peshmerga will remain.&nbsp;Egypt is now at a crucial point in its development, with real risks of repeating the mistakes of Algeria in the 90s civil war.&nbsp;&nbsp;Further escalation may well mark a great opportunity for investment however as the underlying economy, ex-tourism, will continue to hum along with the real victim of all this being civil society.&nbsp;

A Kurdish conundrum & Egypt faces the ghosts of Algeria

Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Macroeconomics

<p>Concerns about deflation - the phenomenon of falling prices&nbsp;of goods and services - in the wake of the financial crisis, have provided the intellectual cornerstone for central banks around the world - led by the Federal Reserve - to embrace unconventional policy measures, notably forward guidance and large scale asset purchases or quantitative easing. A recently published study by the Bank of International Settlements takes aim at deflation aversion and shows that episodes of goods &amp; services deflation over the past 150 years have been associated with surprisingly small output losses, but asset price deflations &ndash; notably declining property prices &ndash; have led to significantly lower GDP growth. I show that a simple demand-supply framework can be used to discriminate between good and bad deflations, and argue that the synchronized policy easings by many of the world&rsquo;s central banks in January and February were designed to address the Great Disinflation associated with a persistent shortfall in aggregate demand globally. Even if the equilibrium global interest rate has declined &ndash; as argued by Ben Bernanke recently - monetary policy still has an important role to play in boosting the psychology of risk taking in the corporate and household sectors.</p>

Concerns about deflation - the phenomenon of falling prices&nbsp;of goods and services - in the wake of the financial crisis, have provided the intellectual cornerstone for central banks around the world - led by the Federal Reserve - to embrace unconventional policy measures, notably forward guidance and large scale asset purchases or quantitative easing. A recently published study by the Bank of International Settlements takes aim at deflation aversion and shows that episodes of goods &amp; services deflation over the past 150 years have been associated with surprisingly small output losses, but asset price deflations &ndash; notably declining property prices &ndash; have led to significantly lower GDP growth. I show that a simple demand-supply framework can be used to discriminate between good and bad deflations, and argue that the synchronized policy easings by many of the world&rsquo;s central banks in January and February were designed to address the Great Disinflation associated with a persistent shortfall in aggregate demand globally. Even if the equilibrium global interest rate has declined &ndash; as argued by Ben Bernanke recently - monetary policy still has an important role to play in boosting the psychology of risk taking in the corporate and household sectors.

<ol><li>Align yourself with the Qatar government, $200bn in GDP, $200bn in assets for 200,000 civilians&nbsp;who own 96% of the stock market. Qatar Investment Fund, a $200m closed end fund listed in&nbsp;London run by Qatar Insurance giving you exposure to the Qatar index at a discount to NAV.&nbsp;Returned over 20% last year (dollar pegged) despite oil prices halving, will likely return double&nbsp;digits over the next 7-10 years annually.</li><li>Buy Iran as soon as it opens, currently under 6x PE with double digit dividends. I believe an Iran&nbsp;deal is likely in the next few months. One of the funds I advise hopes to have an easy to access&nbsp;listed fund to make things easier once SWIFT sanctions are removed</li><li>Buy oil for delivery in 2 years either direct or through options. You may not make as much as&nbsp;spot, but if I (and more importantly T Boone Pickens) are right, it should offer 20%+ return at the&nbsp;least with minimal downside risk unless someone decides to spend hundreds of billions in&nbsp;exploration or the world economy completely collapses. Buy Brent as the Brent-WTI spread will&nbsp;gap out into the middle of the year on Cushing inventory build due to the contango in the curve.</li></ol>

Align yourself with the Qatar government, $200bn in GDP, $200bn in assets for 200,000 civilians&nbsp;who own 96% of the stock market. Qatar Investment Fund, a $200m closed end fund listed in&nbsp;London run by Qatar Insurance giving you exposure to the Qatar index at a discount to NAV.&nbsp;Returned over 20% last year (dollar pegged) despite oil prices halving, will likely return double&nbsp;digits over the next 7-10 years annually.Buy Iran as soon as it opens, currently under 6x PE with double digit dividends. I believe an Iran&nbsp;deal is likely in the next few months. One of the funds I advise hopes to have an easy to access&nbsp;listed fund to make things easier once SWIFT sanctions are removedBuy oil for delivery in 2 years either direct or through options. You may not make as much as&nbsp;spot, but if I (and more importantly T Boone Pickens) are right, it should offer 20%+ return at the&nbsp;least with minimal downside risk unless someone decides to spend hundreds of billions in&nbsp;exploration or the world economy completely collapses. Buy Brent as the Brent-WTI spread will&nbsp;gap out into the middle of the year on Cushing inventory build due to the contango in the curve.

Macro Strategist, Saxo Capital Markets

Kay Van-Petersen

Macro Strategist

Saxo Capital Markets

<p><ul><li><span style="font-size: 0.95em; line-height: 2;">With CHF last at 0.9033, we are +5% (unlevered) on the cross since the Fri Jan 16th call where it closed at 0.8587. I continue to believe and feel this is a big trade for the year, I am a lot more relaxed now that we are on the other side of the ECB and Greek election and think we are north of 1.02-1.05 in the 2nd half of the year</span><br></li><li><span style="font-size: 0.95em; line-height: 2;">The size of ECB QE is not priced in – There is massive European Equities Upside!&nbsp;</span><span style="font-size: 0.95em; line-height: 2;">The case here is simple, we’ve just come out of a greater than anticipated QE from the ECB, that is open ended and set to run until Sep 2016.&nbsp;</span><span style="font-size: 0.95em; line-height: 2;">Whilst the market was more likely thinking we’d get a Euros 500-700bn handle, we got over a trillion euros worth, with a lot fewer parameters or caps than would have been expected by those pesky conservative Bundesbankers – who keep wanting to turn off the taps (I know I know, how dare they).</span><br></li></ul></p>

With CHF last at 0.9033, we are +5% (unlevered) on the cross since the Fri Jan 16th call where it closed at 0.8587. I continue to believe and feel this is a big trade for the year, I am a lot more relaxed now that we are on the other side of the ECB and Greek election and think we are north of 1.02-1.05 in the 2nd half of the year The size of ECB QE is not priced in – There is massive European Equities Upside!&nbsp;The case here is simple, we’ve just come out of a greater than anticipated QE from the ECB, that is open ended and set to run until Sep 2016.&nbsp;Whilst the market was more likely thinking we’d get a Euros 500-700bn handle, we got over a trillion euros worth, with a lot fewer parameters or caps than would have been expected by those pesky conservative Bundesbankers – who keep wanting to turn off the taps (I know I know, how dare they). 

The size of ECB QE is not priced in – Massive European Equities Upside

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<p><strong>Executive Summary:</strong> A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. </p><p>The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.</p><p>Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.</p><p>While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.</p><p>Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  </p><p>We elaborate on these themes within.</p><p><strong>Market Outlook:</strong> The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.</p>

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

United States

CIT Group Inc. operates as a holding company. The Company, through its subsidiaries, provides lending, advisory, commercial banking, vendor finance, and leasing services to small and middle market businesses. CIT Group operates globally.

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Cit Group Inc (CIT US)

A Kurdish conundrum & Egypt faces the ghosts of Algeria

Below are some thoughts on the current situation in Turkey re: the Kurdish flare up, the likely outcome of which will be an AKP majority...

Emad Mostaque

Who's Afraid of Deflation?

Concerns about deflation - the phenomenon of falling prices of goods and services - in the wake of the financial crisis, have provided the...

Sam Ferraro

Islam, Terror, Politics and Oil - Part 2

Align yourself with the Qatar government, $200bn in GDP, $200bn in assets for 200,000 civilians who own 96% of the stock market. Qatar Investment...

Emad Mostaque

The size of ECB QE is not priced in – Massive European Equities Upside

With CHF last at 0.9033, we are +5% (unlevered) on the cross since the Fri Jan 16th call where it closed at 0.8587. I continue to believe and...

Kay Van-Petersen

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

Short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm...

Hank Calenti, CFA

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