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04.02.2019

Why does a fund of more than $ 1 trillion now buy assets throughout the market?

In January, global risky assets showed a powerful rally, which began after the worst year in history, when the share of unprofitable assets around the world was at its maximum. Why the fund, managing $ 1.1 trillion, sees the prospects for the continuation of this trend and which markets it considers more perspective, and which markets it advises to avoid.
The Fed recently published full transcripts of its Open Market Committee (FOMC) meetings for 2013, and it became clear from them that even then the current head of the American regulator, Jerome Powell, had one particular insight when he voiced the fact that the markets had known beginnings - the Fed is their hostage:

“I have a final question: what is the plan if the economy refuses to cooperate? Now we are expecting $ 4 trillion. This is where the Fed's balance sheet increase will stop in anticipation of further developments. If we have two bad employment reports, the markets are going to move this value. As already mentioned, in this case, we will aim at $ 5 trillion. And the idea that ... (voiced by several Fed officials - ed.) That we are now captives of the market - scares me a little, ”said the head of the Fed.

Perhaps this idea is indeed frightening, but unfortunately for the Fed it is absolutely accurate, and this is a fact that traders once again confirmed at the beginning of this year, when, after the market collapsed, Powell gave it up by changing its former hawk position that was manifested less than a month before.

The inability of the Fed to confront the market is also the only thesis for investment, which is needed this year, according to a fund manager of $ 1.1 trillion. The investment manager argues that the path to success in 2019 is “as simple as the bet that the Fed will change its tightening plan (monetary policy - ed.)”, That is, this is trading in a “bullish” market.

Expecting even greater softness from the US regulator, the trillionaire fund buys almost all risky assets, with the exception of Europe, where the ECB remains in the tightening phase, although this is given to it more and more difficult, given the weak economic statistics that are emerging recently in the eurozone.

Repeating what Jerome Powell realized for the first time in March 2013, Wouter Sturkenbum, chief investment strategist for Europe and Asia of Amsterdam-based Northern Trust Asset Management, said that the Fed “is dominated by markets, which is why we re-initiated the opening of risk instruments "on stocks in the US and in emerging markets at the expense of investment grade bonds. Naturally, the fund, which controls assets totaling $ 1.1 trillion, now clearly sees great prospects for the continuation of the rally.

What would make the Nothern Trust think again about its rather simplistic, but justifiable investment strategy? The fund is closely following the yield of 5-year US government bonds, which would have to "significantly increase" to give the Fed the green light to move ahead in terms of indicative monetary policy tightening, the fund's strategist notes.

Meanwhile, according to Eric Knutzen, CIO of multi-active strategies in the Neuberger Berman fund, managing assets for $ 300 billion, his fund invests in the same broad areas, adding stocks and bonds of developing countries, and at the same time reducing free cash and investment in public debt.

In other words, this is a repetition of what happened exactly a year ago, when everyone dumped defensive assets and threw all free money into risky instruments.

However, unlike the Northern Trust, the main thesis of Neuberger Berman is that the fall in the dollar should accelerate. "If the Fed pauses and inflation is moderate, then many of the extremely large differentials in interest rates and other monetary differences between the United States and the rest of the world will begin to shrink."

There is another difference between these two funds: as Bloomberg reports, after a surge in volatility in the US market last year, the main macro trend for Neuberger is the beginning of closing the gap between the US market and the rest of the world, helped by improved liquidity and signs of progress in US-China trade negotiations.

Indeed, the recent Bank of America chart shows that the US stock market has never been so overvalued compared to the rest of the world.

As a result of a powerful rally that occurred in January, the American stock market showed the best since the beginning of the year since 1987.

And yet, although both funds agree that, with or without the United States, emerging markets will shine, against this background, Europe may be one of the biggest losers. From Brexit and the strengthening of populism in the eurozone to a change of leadership in Germany and the ECB - the region is subject to economic and political risks. This encourages both the Neuberger and the Nothern Trust to look for other sources of profit.

“We will need higher confidence in growth prospects in order to increase investments in European stocks,” said the Chief Investment Strategist for the Nothern Trust.

Despite this, buy-and-hold strategies may lead investors this year, as the risks of a late economic growth cycle increase, Knutzen warns. “Growth will still be unsustainable. No matter how optimistic people feel about him, there is still good reason to be careful. ”