In its latest Investment Outlook to investors, London-based hedge fund Fasanara Capital explains how liquidity-induced markets are prone to asset bubbles and how VaR shocks are now inevitable.
According to Fasanara, such causes have to be found on the markets’ thin liquidity, low inventories, abundant leverage, crowded consensus trades and stretched valuations.
Fasanara maintains a bearish view on the global economy and it believes that a strenuous battle against deflation will eventually force Central Banks into more monetary printing activities. As a result, Fasanara expects both, bond and equity prices, to rise from current levels.
Specifically, Fasanara expects the Bund weakness to last for another couple of months, but ultimately such weakness will fade away and yields will eventually test new lows. The same applies for the spreads between European government bonds which Fasanara believes will tighten back to pre-ECB’s QE levels and beyond. Fasanara also maintains its views that spread cross-market will compress, interest rates curves will flatten and European equities will move to new highs.
According to Fasanara’s analysis, there will be no normalisation of growth rates, but just a sluggish GDP growth. Structural deflation is the backbone of Fasanara’s main macro outlook. Deflationary trends may prevail, over-indebtedness may go uncured and unemployment to remain high across Europe.
Finally on Greece, Fasanara depicts three scenarios: (i) Technical default, alone, (ii) Technical default leading to ‘Grexit’, alone, (iii) Technical default leading to ‘Grexit’, leading to panic/contagion across global markets. The first scenario of a technical default is potentially a favourable one, and preferable to a muddle-through situation: a technical default (where not only debt but also wages/pensions go unpaid in Euros) could potentially tip over the current government in Greece and can therefore lead to a best-case scenario.
