Turning neutral oncommodities
Most alternative investments suffered less than equities last year, but were down nonetheless. We neutralize our previously positive commodities view, but retain our preference for oil. Aggregate hedge fund indices slipped further in December, ending 2018 in negative territory amid deteriorating financial market conditions. Yet declines were less pronounced than on the broad equity markets. Strategies with lower beta exposure to growth-sensitive assets such as merger arbitrage and equity-market neutral outperformed, while most fundamental strategies, which tend to have a higher sensitivity to the market, suffered the most. Higher credit volatility had a negative impact on several relative value strategies, while macro styles proved more resilient in December. The performance of the latter was helped by increased downward price momentum across several financial assets. Our Hedge Fund Barometer continues to indicate adverse market conditions considering falling business activity, higher financial market risk as well as deteriorating and now below average liquidity.
Commodities: Prospects remain challenging Commodities had a difficult end to the year, with benchmark indices slumping further. Energy suffered the most, while precious metals outperformed, in line with broad risk aversion. While pressure appeared to ease at the start of 2019, growth concerns have intensified and might persist, prompting us to neutralize our previously positive commodities view. That said, we maintain our positive stance on oil. We still expect some tactical upside, as the November/December sell-off continues to look excessive should OPEC and Russia implement the promised supply cuts starting in Feb... However, we have reduced our oil price targets to account for weaker starting levels and larger-than-expected inventories at year-end. We now see scope for a rebound into the mid-USD 60s (Brent) and mid-USD 50s (WTI). Precious metals have outperformed lately amid elevated risk aversion and lower US yields. While we like gold as a portfolio diversifier, we stay neutral as tactical long positions have returned quickly. Lastly, base metals appear fragile as Chinese activity continues to slow and the seasonally weak Chinese New Year holiday nears.
Real estate: View stays negativeListed real estate corrected sharply in December amid global growth concerns. Lower bond yields failed to offset the correction. The sell-off was led by the USA and Eurozone, while Asian and emerging markets fared better. We maintain a negative view on global listed real estate due to limited fundamental support and continued earnings downgrades in light of persistent growth concerns. That said, the outlook for US real estate has improved as valuations now look more attractive and lower yields should eventually support the underlying market. Negative earnings revisions have slowed and current bond yield levels no longer suggest a significant mispricing. Similarly, relative valuations of Eurozone real estate equities have declined to levels last seen during the European sovereign debt crisis in 2012, and the recent uptick in earnings revisions has not been reflected in performance. Solid underlying markets support the positive regional outlook.
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This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.
