January has shown to the world that seismic activities are on the rise. In fact, when policy shifts increase in frequency the likelihood of policy mistakes rises with it. In 2015, Fasanara Capital expects global markets to be erratic, volatile and characterised by surprising policy shifts.
Today global markets carry visible risks as well as opportunities which are characterised by very substantial upside. As a result, Fasanara does not believe that a defensive portfolio behaviour will pay off in the current environment as safe spots are inexistent. On such basis, the firm has elected to temporarily stomach more portfolio volatility than usual in order to participate to the significant upside offered by targeted markets and securities.
In addition, Fasanara believes that unconventional monetary policies call for an even more unconventional approach to money management. To us, this translates into the implementation of portfolio cheap optionality, convexity and heavily-asymmetric profiles whenever they are available and in line with the macro backdrop that we project from time to time. In fact, despite an increasing seismic activity in the markets, the Central Banks’ activism has significantly depressed volatility. There is little doubt that we live in an environment still characterised by low implied volatility and high cross-asset correlation (especially to the downside). Low vol and high cross-asset correlation allows to build asymmetric profiles in optional format. Such asymmetry provides the necessary convexity to navigate uncertain, unstable markets and participate to the full upside potential on volatility shocks.
Finally, Fasanara believes that deflation represents a process rather than a data point. In absence of a shock it takes years to reverse deflationary trends. Deflation in Europe is just beginning. The ECB is behind the curve, late in the game, facing global deflationary trends and therefore unable to anchor inflation expectations. Inflation expectations are indeed falling and the firm expects them to reach new lows. Therefore, in line with Fasanara’s past Investment Outlooks, the firm maintains its views and remaind positioned for Deflation Trades within its portfolio. Specifically, the firm expects:
Rates to reach new lows, turning negative on some core Europe up to 10yr maturities (at present 20% of government bonds in Europe is already in negative territory, for a total of EUR1.4 tn worth of securities)
Spreads cross-markets to compress to shallow levels
Interest rate curves to flatten further
Equity to melt up (at least at first)
True, rates are already very low. And it feels like picking up dimes in front of a steamroller. However, government bonds in Europe, for example, are less in bubble territory now than they were in 2012. At the time, inflation had peaked at 2.6%, and GDP was low but somehow meaningful. Now both of them stand at periodic zero.