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Absolute Return Partners ponders looming US stock market reversion

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Absolute Return Partners recommends keeping a lid on equity beta positions as US stocks look set to mean-revert following their long bear run – with shipping and uranium being two investment themes arising out of the move. 

In ARP’s March note, founder and chief investment officer Niels Clemen Jensen observed how US equities remain relatively expensive, with corporate profits not as strong as the stock market would suggest, and S&P 500 operating profits out-of-sync with NIPA (National Income and Products accounts) profits.

In particular, corporate profits and stock market performance – which traditionally moved in the same direction – are no longer parallel.

“Just like central bankers are fighting tooth and nail to prevent the system from clearing, so do corporates, and that has led to a massive spread between US corporate profits and the performance of the S&P 500,” Jensen said.

“Listed equities react to surprises in reported earnings, particularly to surprises in operating earnings. When operating earnings are good, investors reward the company in question, but operating earnings can be manipulated. By making the numbers look better than they really are, the CFO of the company in question effectively pushes a snowball in front of him, and that system will also have to be cleared one day, just like central bankers cannot continue to avoid D-Day.”

As a result, Jensen – whose institutional investment consultant and multi-manager fund provider runs the ARP Diversified Futures Fund and ARP Energy Fund – believes the investment implications as “obviously quite dramatic”.

“US wealth is bound to mean-revert at some point. Total US wealth adding up to 520 per cent of GDP is not sustainable, and equity holdings account for a significant share of total US wealth,” he explained.

He added that the average American is more exposed to equities than the average European, but said any imminent bear market in the US would have “at least some impact” on other equity markets globally.

He said ARP recommends keeping equity beta to a minimum until further notice. Against that backdrop, he pinpointed shipping and uranium as two current investment opportunities.

“Both of those opportunities are big mean-reversion opportunities,” he noted. “The shipping industry is in its 13th bear market year, and uranium prices have struggled ever since the Fukushima disaster in 2011.”

London-based Absolute Return Partners runs the ARP Diversified Futures Fund, which invests solely in the USD8.8 billion Winton Fund, the flagship strategy of systematic managed futures hedge fund Winton Capital Management, launched by AHL co-founder David Harding.

The ARP Energy Fund, which launched in 2016 with USD1 billion in assets, offers investors multi-strategy exposure to energy markets through a concentrated portfolio of energy funds.

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