The Search For Alpha...
Where to generate alpha?
Alpha in the markets as we know it is the ability to beat the market, to gain excess return, and find that ‘edge’. Well, in today’s market it has been very difficult for investors to navigate markets with the only clear winner year-to-date being energy companies which have outperformed due to supply constraints globally. The consumer defensive sector has fared well when compared to the broader market where Tech has taken the majority of the pain due to higher borrowing costs.
Looking out to public markets the ability to generate alpha in one’s portfolio has only gotten harder, but that depends solely on your time horizon. For the portfolio manager that needs to perform on an absolute return basis, he or she would really need to evaluate what their strategy would be to outperform. However, for the upcoming investor/trader, although it sounds boring, time and patience, beats the test.
Currency markets
Switching over to FX, the pound and euro have faced a tonne of heat as the U.S Fed has begun tightening liquidity and raising rates. This not only applies to the euro and cable but even the likes of EM currencies such as the Renminbi and Rupee. Higher interest rates in America make emerging markets less attractive for investors causing a rush to the dollar.
The pound fell sharply on Monday to 1.23200 levels not seen since the July of the 2020 pandemic. With growth set to stall in the Uk and the BoE set to slow down with interest rate due to an already weakened economy the pound can only trade lower as we journey through the storm.
Analysts see the euro dropping to parity against the dollar in the near term as Putin prolongs his attack on Ukraine. The Eurozone has been on the edge of banning Russian oil, however, the reliance on Russian oil in Hungary has added a sour twist if they were to proceed with the ban which would further weaken the euro.
China’s PMI fears
The most recent reading of Services and Manufacturing PMI data from China added deeper worries about a global slowdown. As we know China’s economy drives global synchronised growth and is a great indicator of where the U.S will follow so a contraction in Services PMI which accounts for 53.3% of GDP and manufacturing respectively 39% of GDP paints a bleak outlook for the global economy.
As Rebecca Patterson of Bridgewater Associates said:
if china slows down that has implications on Germany, Italy and wider. You already have China within your portfolio even if you only own U.S stocks, everything is integrated."
2nd order thinking.
I’ve been away for a few days sorting out a few things for our newsletter but I’m back now with more in-depth insights!
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