Welcome to H2. H1 wasn’t exactly a barnstormer with the Dow making just 1.51%, the FTSE actually losing 0.08% and the DAX clocking a still relatively unremarkable 2.94%. Bonds certainly did a lot better with US Treasury yields 49bp lower over the period, Gilts 35bp lower and Bunds down 68bps. Better we don’t mention the peripherals. The problem with bonds, I suppose, was that they weren’t supposed to do that well. How can we look at that and conclude that the world has gone blind to risk?
Part of the answer is to be found in the performance of the credit indices. The iTraxx Xover, adjusted for the rolls between the S20 and the S21 and the revamping of the contract, is over 150bp tighter, year to date, and even at that level it is off the tights for the year which saw said S21 trade as low as 219 in early June.
There is a reason why crashes happen in the autumn and the next big correction, when it comes, will take place in the sort of liquidity vacuum we’ve never had to deal with before
One way or the other, whatever window dressing was done in terms of risk exposure into half-year end, I’d be hugely surprised if we don’t see money managers start to load the boat again in the next couple of weeks. On the monetary policy front, UK exempted, 2014 still looks like a risk-free zone. On that basis, ship ’em in.
Gold, the graveyard of petty retail in 2013, opened the year at around US$1,200 and despite having hit US$1,384 in March is still at US$1,326. That gives a 10.39% return year to date and nearly 22% annualised – a decent performance in anybody’s book although it also points towards risk aversion rather than accumulation.
So is the world as blithely long of risk as we confidently talk about? The answer has to be a clear “Yes!” but it has to be qualified that there is something of a risk barbell being constructed with a race to hold either risk-free assets or the ticking time bombs which contain the last bits of proper juice.
Boring and low yielding medium-risk assets are out of favour as the marginal pick-up over low risk – I avoid the term “risk-free” for obvious reasons – is barely worth getting up for.
On the whole, I’d feel comfortable to be long through the summer or maybe even through the whole of Q3, if you prefer. However, there is a reason why crashes happen in the autumn and the next big correction, when it comes, will take place in the sort of liquidity vacuum we’ve never had to deal with before. Lessons will be learnt and, in all likelihood, they’ll be a lot more painful than expected.
Many years back I coined the phrase that the door marked “Entrance” is many times larger than the door marked “Exit”. In the past five years, that proportional mismatch has only become more pronounced. I think it might be wise to begin to manage down a bit of credit risk for, cometh the day, cometh the “Sorry, we’re not axed to bid….” That’s my suggestion but, as noted above, I expect the broader investor community to be chasing markets tighter.
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I shall be packing up tonight and heading for Le Mans for the Classic to watch some fairly old, some very old and some fairly modern cars doing what they were built to do which is to thrash around the La Sarthe circuit as fast as their many hundreds of little horses will let them. No disrespect but you can keep your football. I prefer a fast driver to an elegant diver.
