Market commentary - August 2021
· The equity market (+2.4%) ascent continued, and the bears have headed for an early hibernation (usually occurs between October and December) – the market shook off taper concerns as a dovish Jay Powell gave reassurance of measured stimulus withdrawal at the virtual Jackson Hole symposium.
- The reflation trade retracement found a floor mid-August, as China returned to commodity markets and Delta fears were digested.
- Copper, uranium, and oversold cyclicals look like the best risk/reward value trade at this stage of the economic cycle. We not collapsing, JayP has our backs.
- We recommend monitoring the pace of global stimulus withdrawal and the liquidity impact on markets – Markets are fluffed up any way you look at it. The last time the Fed undertook a tightening policy it took 30 months until Q4’18 for markets to collapse, the point when the Fed Fund rate was hiked (to 2.5%) to a level that exceeded (>) the real long-term GDP potential of the US. Watch for that inflection point (NB) – based on the Fed dot plot it seems like a 2024 event – but the markets are a lot more pumped up and reliant on the juice now, leaving it vulnerable to any speed bump along the way.
· The Fund (+2.9%) outperformed equity markets by 53bps for August and is up around 20% year to date – positioning remains heavily concentrated in a few special situation ideas (deal spread & benefactor plays).
- Net equity allocation rose to all-time highs (86.9%) – with no hedging positions in place.
- Commodity exposure (11.9%), gold & uranium, was rotated into more attractive equity plays.
- The Fund took advantage of the China collapse to pick up exposure in Sands China & Baidu (10% in each) – although we believe China hasn’t finished its regulatory crackdown. These stocks were too oversold and too cheap to ignore.
- Peak pessimism usually a great place to buy – China has underperformed the US by more than 50% since the Feb21 highs. This is the deepest, sharpest relative drawdown over the past decade – and historically China has rebounded by > 30% (on avg.) in relative terms over the following 6 months following a > 35% relative drawdown.
· We outlined our investment case for the funds 2nd largest position Sohu.com during the month – see link Sohu.com (SOHU) - A potential 3x (stellarjames.com)
· Keep it simple, stick to what you know, and Buy or Sell at sentiment extremes.
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