Finlight Research - Market Perspectives - Apr 2015

Market Perspectives
April 2015
Apr. 1st, 2015

www.finlightresearch.com
Complacency reigns supreme
If something can't go on forever, it won't.
Old saying
Are we vulnerable in my personal opinion to a

significant equity market correction? I do believe we
are, and the reason for that is people have gotten
lazy. They've depended totally on the Fed.

Richard Fischer
2
FinLight Research | www.finlightresearch.com
Executive Summary: Global Asset Allocation

Growth data has been better than expected in Europe and Japan. Chinese
economy is slowing. In the US, macro data surprised to the downside. But US
macro surprise indices have already fallen to levels from which they typically
revert.

The world continues to be in yield-chasing mode across risky assets

But valuation levels in equity and credit are high enough to make us cautious
Trouble is brewing under the surface in the form of rapidly deteriorating US
corporate earnings growth.
Thus, we remain unconvinced that the markets exuberance will be
validated by economic outcomes.
We also think that the threat of a Fed tightening cycle will remain a
persistent risk for investors in the coming months.
The only question that matters: Are US earnings expectations going to improve
as we move forward (into H2-2015)?

We still see a solid case for further dollar strength, lower oil prices and
lower commodities.
The prospect of rising interest rates could also be a trigger for higher crossasset volatility.
Maintain UW government bonds and corporate credit overall (but with an

intra-asset class preference for IG vs HY, Eurozone vs US in HY, US vs
Eurozone in IG), OW US dollar and UW commodities (specially energy and
precious metals)
We summarize our views as follows
3
MACRO VIEW
The Good

European economies are getting better. Both manufacturing and services flash PMIs
surprised on the upside. Deflationary pressures are also easing.

The University of Michigan final Consumer Sentiment for March came in at 93.0 (compared to
95.4 in February and 98.1 in January).

US corporate profits are still very impressive
The Bad

US Q4-2014 GDP and durable goods were disappointing

Earnings forecasts have markedly deteriorated very rapidly in recent months. Earnings
growth is now expected to turn negative starting in Q2-2015

Chinese manufacturing PMI, exports and economic growth continue to slow

For the first time since 1980, Chinas steel consumption is projected to fall in 2015

In Japan, and despite the aggressive monetary stimulus, inflation is back to zero, and industrial
output has been negative on a YoY basis over 6 of the past 8 months
The Ugly

Geopolitical risk is getting worse, specially in the Middle-East (Iraq, Syria and now Yemen)

Greece remains the wild card in Europe

Main systemic risk resides in China : Chinas economy is supported by approximately six
trillion dollars of 'shadow debt', coupled with an unprecedented credit-fueled construction
madness Systemic risk is around the corner
4
The Big Four Economic Indicators

The overall picture had been one of a slow recovery, but there is no indication of a recession using the
indicators monitored by the NBER.
Retail Sales disappointed again in February, as the came at -0.8% in real terms.
The Big Four average shows signs of exhaustion
5
Retail Sales

Retail Sales declined for the third month in a row. In February, they came at -0.58% in nominal
terms, and -0.80% in real terms.
The decline is even more severe than last winters one.
6
Durable Goods
New orders were particularly weak.
Durable goods orders were down 1.4%

in February
When transportation equipment orders
are excluded, the fall stands at 0.4%
Core capital goods orders also fell
1.4%.

The fall in Feb. durable goods orders

and shipments echoes the decline in
Feb. manufacturing Industrial
Production.
The picture should be watched

closely from here...
Source: Thomson Reuters Eikon
7
US Inflation
Because of the contraction in food and

energy prices, inflation remains far from
the Fed target.
Source: Thomson Reuters Eikon
8
GS Global Leading Indicator (GLI)
Since Dec 14, GLI has been in

Contraction phase, defined by
negative
and
decreasing
momentum.
6 of the 10 underlying components

of the GLI worsened in March
Weve been thinking for a while

that the acceleration weve seen
last year was quite modest for a
typical expansion phase.
Our fears about the

economic
situation
concretizing
current
are
9
Eurozone Economy
Life is getting back to the Eurozone

economy
Retail sales and consumer confidence are

improving rapidly
Eurozone economic reports have been
surprising on the upside
The region is benefitting from a combination of
positive tailwinds : ECB stimulus, low oil prices,
a weak euro and financial releveraging

10
Eurozone Inflation

The ECBs QE has already succeeded in reversing the downtrend in inflation expectations
Although 5y5y inflation swaps remain below the ECBs 2% official target, they are 30bp above the
January lows
11
Chinese Economy
Chine
economy
has
lost
momentum despite two interest
rate cuts since November and
lower financing costs
China's
industrial
profit
declined by 4.2% YoY
In
March,
the
Manufacturing
PMI
contraction territory.
PMI figure came at 49.2, down

from Febs reading of 50.7
Reuters: "Activity in China's factory

sector dipped to an 11-month low
in March as new orders shrank, a
private survey showed, signaling
persistent weakness in the world's
second-largest economy that will
likely fuel calls for more policy
easing to support growth.
has
HSBC
entered
Source: HSBC
12
EQUITY
The uptrend on stocks remains intact. Optimism is extreme. But we still believe that equity markets
are living on borrowed time because
Trouble is brewing under the surface in the form of rapidly deteriorating US corporate earnings
growth.
Technicals suggest that the trend is already exhausted.
Stocks are arriving at the end of the seasonally favorable period. (Oct-Apr)
Valuations are too high: the median stock has a P/E and EV/EBITDA of 18.0x and 11.0x,
respectively. These valuations rank in the 99th percentile of both multiples since 1976.
Consensus 2015-16 earnings assumptions strike us as ambitious, given the net margin compression
we expect (because of labor cost increase and dollar strength)
Too little cash is left on the sidelines, as investors moved massively into equities and out of bonds
and cash. Excessive optimism makes the equity market more vulnerable, pushing the volatility to the
upside.
We are concerned about drawdown risk in the near-term because of rising rates and interest rate
volatility and current valuations
The coming rate hikes (probably in Jun. or Sep.) is not priced in yet. It will depress all asset
prices for at least part of next year, in our view
We are among the rare few who still think that current market cycle is simply a very very strong
cyclical bull within a secular bear market!
13
EQUITY
Bottom line :

Nothing new compared to our previous report. We remain Neutral equities. At this stage,
expansionary monetary policies, low interest rates and abundant liquidity are keeping us from
moving to an underweight on equities.
We may revise our view to OW after a clean break of the 2075-2125 range on the S&P500, and to
UW below the trend since Nov. 12 lows
We think it is wise to incrementally "de-risk" your portfolios by focusing on higher quality / more
defensive / more favorably priced companies
While we remain long-term OW on Japan (always on an FX hedged basis) as we see further

upside for Japanese stocks from the improvement in macro data and corporate earnings
momentum, weve tactically decided to move Neutral in the short-term. A correction should be
expected shortly.
A number of factors are helping European growth: lower oil prices, weaker Euro, and fading credit
headwinds. We remain Neutral on Europe vs. US despite the massive ECBs QE. According to
the 12 month forward P/E, Europe is now trading at 15 year highs, relative to the US
We remain UW in US small caps vs large caps, and UW EM stocks vs US large caps
14
Earnings

Not very long ago, at the start of the New Year,

corporate earnings were forecasted to increase on
a year-over-year basis. Since then, the earnings
forecast for the S&P 500 Index has deteriorated
a lot.
The 12-month EPS estimate is now at $122.11,
decreasing from $126.87 at Dec. 31st.
Based on Factset data, analysts predict YoY
earnings declines of 4.6% and 1.8%, for Q1 2015
and Q2 2015, respectively
For Q1 2015, 85 companies have issued negative

EPS guidance and 16 companies have issued
positive EPS guidance.
The forward 12-month P/E ratio for the S&P 500 now
stands at 16.7, well above historical averages: 5year (13.7), 10-year (14.1)
15
Earnings

Nevertheless, US corporate profits are still very impressive

Corporate profits are at or near record levels, both in nominal terms and relative to GDP.
16
Earnings & Relative Valuations
Earnings revisions have shifted in favor

of European / Japanese equities relative
to the US
Despite their outperformance, Japanese

equity valuations are still relatively cheap
But Europe is now trading at 15 year

highs, relative to the US.
17
Market Flows

Market flows tend to favor non-US equities and U.S. bonds

Using US ETF flows year-to-date, we see that :

US Domestically-focused equity ETFs saw $7.3B in outflows

Internationally-focused ETFs saw $36.6B in inflows (8.8% in assets) .

US Domestic bond ETFs have attracted $17.9B, or 25x the money the goes in internationallyfocused bond ETFs
Source: Bloomberg
18
Investors Sentiment
Mutual funds cash to asset ratio is very low,

implying that fund managers are all in!
Stock market major tops have occurred when cash

was near (or below) the 4% threshold.
Source: Elliot Wave
19
S&P500 A Fundamental Perspective
Williams
Market
Analytics
S&P500 model uses multivariate
regressions
to
reconstruct
(starting
in1960)
equity
performance based solely on
monthly
IP
and
corporate
earnings.
This 100%-fundamental index is

supposed to represent the trend
that the S&P should have been
following ex-Fed action.
Based on this approach, the

S&P500 seems 25% overvalued
at current levels
20
S&P500 A Long-Term Perspective
Equity markets appear at lofty valuations, whatever the valuation metric we use.

We see only a few quarters (during the dot.com bubble) with higher valuations
Valuation alone is very rarely a timing tool for a major market top
Nevertheless, all these indicators suggest a cautious long-term outlook and weak long-term return
expectations
21
S&P500 A Medium-Term Perspective
A snapshot of selloffs since the 2009 trough shows that S&P500 hasnt experienced a 10%
correction over more than 3 years.
22

S&P500 is currently on its 148th consecutive week above the 55-week MA. This is the third longest
period after 98 (190 weeks) and 87 (167 weeks)
The most important pivot to watch stands down around 1,913 (trendline through the lows since
2011)
23
Stocks are arriving at the end of the

seasonally favorable period
Historically, the market has made most

of its gains in the favorable season
between October and May
Substantial corrections took place during
the unfavorable season of May to
October.

This pattern has not worked out over

the last 3 years
The last time it worked well was in 2011
(with the end of QE) and the S&P500
plunged 21% from May to October.
24
S&P500 A Very Short-Term Perspective
Our first warning signal over the shortterm, is a combination of:

A clean break below 2038-2035.

Breaking this area will induce the
first lower low in a while, complete
a double top pattern, and open the
door to a further pullback (~1960)
A VIX that goes through its 17.2

ceiling
25
Trading Model S&P500

As of Apr 1st, our prop. Short-Term trading model becomes massively long at 2059.7 on the index.
The model targets 2062, 2083 and 2103 on the upside, but still expect a breach of the 2041 level
to the downside.
26
FIXED INCOME & CREDIT
The negative net issuance in the Euro area combined with the continuing duration withdrawal in Japan
provides a supportive backdrop for global fixed income markets

We still look for the bear market on USTs to resume. Patience should pay
Our medium-term outlook would stay neutral as far as the 10y UST yield remains below 2.25.
We remain neutral on German yields and peripheral debt, because:
Weve been Neutral UST since end of Nov. 14. US long-term rates are stuck in a range. 10-year
yield is poised to trade 1.85-2.05% (perhaps 1.75-2.25%) until we get closer to Fed hikes. Low yields
in the US will be supported by yield hungry investors in Japan and the Eurozone
The current record low rates are not enough justify an UW position. The ECBs QE program is
forecast to be more than 3x the size of the regions net issuance of government debt.
An OW position isnt justified either: How can we justify 10y Bund yields of 25bp if the ECBs
inflation projections are realized over a 2 year horizon? We do not expect the QE to drive
EUR/JPY yields much lower, as yields are already rock bottom (and even negative in some
cases). Yield hungry investors will look for higher yields elsewhere (in the US, for instance)
27

Market pricing of the timing of the first rate hike remains volatile.
At this stage, the market pricing of the projected pace of hiking is significantly below Fed guidance. We
expect the re-pricing of Fed expectations to take place very soon in the short end of the curve.
While US yields in the short end are expected to go higher driven by Fed expectations, the medium to
long end of the curve will be supported by abundant liquidity and by spillover effects from ECB and
BoJ QE as investors struggle for yield. We continue to bet on a significant flattening of the US
yield curve.
Despite the negative macro surprises in the US, we still expect the Fed to start tightening in June. The
US data surprises have fallen to levels from which they typically revert and the US macro picture may
change very quickly.
28
Credit markets have performed strongly since the ECB announced an expanded asset purchase
program at the end of January. Since then, the search for yield resumed and we saw investors
moving down the quality spectrum, buying high yield bonds and growth sectors.
We remain UW on corporate credit, due to valuation, to rising corporate leverage (specially in the
US), to rising volatility, to position within the credit cycle and given the weak total return forecast
Within the credit pocket, and over the very short-term, we stick with our preference for Eurozone HY
corps vs US HY corps, because of the ECB massive QE, more resilient macro in the Eurozone, and
the still elevated beta of US credit spreads to oil prices.
However, we shift to UW on Eurozone vs US IG (from OW) as :

more than 75% of European IG credits yielding less than 1%

we expect the pattern of European outperformance to reverse in IG (at least) because of market
flows going from Europe/Japan to the US

Credit spreads are expected to suffer from the increased rates volatility to come.
We still prefer IG over HY on a risk-adjusted basis as we expect higher volatility on spreads
Bottom line : Neutral Govies, Neutral Eurozone vs. US Govies, Long flatteners on the US yield curve,
UW credit, OW Eurozone vs US HY credit, UW Eurozone vs US IG credit, Neutral TIPS and OW HICP
Inflation, UW High Yield vs High Grade, Neutral on EM corporates
29
US Treasuries
Weve been Neutral UST since

end of Nov. 14.
US long-term rates are stuck in a

range. 10-year yield is poised to
trade 1.85-2.05% (perhaps 1.752.25%) until we get closer to Fed
hikes.
30
US Treasuries
Tactically, we stay Neutral on

USTs.
The T-note dollar weighted Put/Call

measure stands in neutral
territories. It almost reached
overbought territory before last
weeks backup
On a relative basis, and despite a

10-year yield differential at a 25year high, we stick to our Neutral
USTs vs Bunds position.
Reasons for that: ECBs QE
program + risk of Fed rate hikes
later this year
31
US Treasuries

Weve been targeting 40bps on the

5-10 year slope
But this slope has broken its
downtrend, threatening the initial
setup.
Nevertheless, we continue to bet
on a significant flattening of the
US yield curve, using shorter
maturities (2-10 year spread)
32
US Credit
US Treasury TIC and ECB data show:

big inflows into US domestic corporate bonds

Even bigger outflows from Euro area bonds.
We shift to UW on Eurozone vs US IG (from OW)
33
US Credit
We still prefer IG over HY on a risk-adjusted basis
Credit fundamentals are stable in IG, but still

deteriorating in HY (because of lower operating
income, more debt on balance sheets and rising
leverage).
The high beta of US HY credit spreads to oil prices

(coupled with our bearish view on oil) increases our
cautiousness towards HY
Merrill Lynch IG Corp. Bond Index
Merrill Lynch HY Master II Index
Source: BAML
34
$US-denominated Credit
For the first time since the crisis,

the amount of fallen angels debt
exceeds the rising stars
Its worthwhile noting that most of

the downgrade activity (in notional
amount) has come from emerging
markets issuers (Gazprom with
$18bn, Petrobras with $41.2bn).
35
European Credit
Rating drift is still heading up
Upside surprise to growth in the EZ is

clearly credit positive.
European HY Net Leverage
But credit fundamentals of European HY issuers

are deteriorating, with net leverage at the highest
level since the financial crisis (4.7x EBITDA) and
still climbing
Source: Bloomberg, Capital IQ
36
European vs US Credit
European credit has outperformed

as:

the ECB QE program has been
priced in, driving tighter EZ
spreads

USD spreads widened on
energy uncertainty. The energysector weighting in US HY is as
high as 14% (vs 1% for
European HY)
US vs European Credit Spread
37
EXCHANGE RATES
Policy divergence between the US on one hand, and Japan and the Eurozone on the other, should
continue to provide an environment supportive of the dollar.
Historically, USD cycles have been persistent, lasting 5-6 years in the appreciation phase. We thus see
further medium term USD gains against the major crosses, especially EUR and JPY
Equity inflows in the Eurozone may slow but not reverse the euro's decline.

The upside potential on EUR-USD remains limited. The bounce from 1.0462 was short lived. Our next
target 1.07. Breaking decisively below would open the door to our ultimate target at 1.0250-0.98. We
remain UW EUR-USD as long as the pivot stays below 1.11 - 1.13 and move Neutral above to play the
correction towards 1.17-1.18.
We remain OW USD-JPY as far as the pivot stays above 116 (lower bound of the consolidation triangle).
Our ultimate medium-term target remains at 124-125
38
EUR vs USD
The EUR-USD is clearly connected

to the relative size of the Fed and
ECB's balance sheet
At this stage, EUR-USD seems to

price an extremely lower Fed/ECB
balance sheet ratio.
39
US Dollar Index - DXY
We continue to expect the USD

to strengthen against the major
crosses
The spot has finally broken above

our first target of 96.00, and has
even been above 100 before
turning down.
Our ultimate target remains at

102.50
To feel more comfortable with

our bullish view, the 100
threshold should be
meaningfully breached
40
EUR-USD
Our medium-term view remains

biased towards a strengthening of
USD
The bounce from 1.0462 was short

lived. Our next target 1.0690.
Breaking decisively below would open
the door to our ultimate target at
1.0250-0.98
We remain UW EUR-USD as long as

the pivot stays below 1.11 - 1.13 and
move Neutral above to play the
correction towards 1.17-1.18.
41
USD-JPY
Breaking the 122.04 highs is the

sign to watch for a confirmation
of the uptrend on the USD-JPY
So far, the USDJPY held nicely

against its 100-days MA (118.86)
Our ultimate medium-term target

remains at ~ 124-125. We will take
a more neutral stance as soon as it
is reached.
We remain OW USD-JPY as far as

the pivot stays above 1.18 and
below the 124-125 area
42
COMMODITY

In the near term, the trend remains bearish. Volatility is going up and there is no indication of a
bottom formation yet.
USD strengthening remains a big headwind to commodities
Global commodity prices could stay suppressed as less demand from China leads to greater
oversupply
We remain UW commodities. We continue, however, to like owning the GSCI index, and think
that commodities hold value as cross-asset portfolio diversifiers.
However, with most commodities trading in contango, roll yields remain negative across the majority
of commodity sectors, making any buy-and-hold position very costly.
Bottom Line :
Base Metals: Many factors are weighing on base metals: US Dollar strengthening, the Chinese
slowdown, weaknesses in construction / housing sectors in major economies (mainly affecting
Copper and Nickel) We remain Neutral on base metals, but do not like holding Copper as it
appears highly overvalued relative to the dollar and the global growth. Particularly, China growth is
likely to weigh on its price.
Agri: We remain UW on agriculture because of excess supply and substantial stocks (built since
the 2012 drought). Absent a severe weather shock, it is unlikely that agriculture prices will spike this
year. We rather anticipate they will revert to 2009 levels.
43
COMMODITY
Within the Agri complex, weve been OW Cocoa and Coffee for a while now. We like Cocoa for its longterm underlying demand driven by consumption in Asia. Pullback in coffee prices provide a better entry
opportunity into this market after the sharp surge weve seen in prices because of the drought in Brazil.
Energy: It is too early to expect major upside for the price of oil as the US is sinking deeper in a
glut of excess oil. Supply is at all-time highs. Without a supply cutback, there is no reason for the
current oil price to go higher (except geopolitical risk).
We remain UW oil and target 08 lows (around $35-40) as long as the OPEC doesnt decide to stop
the bleeding and the excess supply remains. This bottom would be followed by a rebound towards the
marginal cost of production (around $65 for WTI) by H2-2016.
We move to Neutral each time the WTI breaks above $53-54/barrel

Precious Metals: We change nothing to our view on precious metals. The stimulus provided by the
ECB & BoJ is already factored in gold prices. Precious metals are vulnerable to higher US real
yields and stronger dollar
We remain UW above 1150-1170 band. We will move Neutral below 1150 and switch
progressively to OW (accumulate) as the spot slides down towards 1000-980, which is likely the
final leg down.
Our first target on silver stands at 14.70. We still think that Silver (like gold) is probably ready for its final
leg down towards 12.50. At current levels, we are UW. we will switch progressively to OW (accumulate)
as the spot breaks the first material resistance around 14.70 and slides down towards 12.50
44
Crude Oil
US production and inventories continue

to make record highs despite the
plunge in rig count
U.S. crude oil production edged up to 9.42

mmbbl/day, a new multi-decade high.
At 458.5 million barrels, crude oil

inventories are at their highest levels (for
this time of year) over the last 80 years.
But the US is not the only source of

oversupply. Saudi Arabia says it has
increased its oil production to 10 million
barrels per day. This isclose to a record
high.
Oil prices could plummet further if:

supply reaches storage capacity

Iranian oil finds its way back to the
market
45
Crude Oil
There are some LT signals of a

base forming. The trend across
the lows since 1998 (around 4546) is acting as an important
support.
For our bearish view to complete,

we need to break the Jan 15 lows
(43.6)
A weekly close above the 53-54

area will oblige us to witch to
Neutral (if not OW)
46
Gold

After the Gold broke below the

Nov. 14 uptrend (1189), we called
for a down move till 1132. Instead,
we saw a bounce on 1150.
Around 1200, we started to see
some weakness again, with the
100d-MA acting as a resistance.
Momentum should reverse to
target 1180-1172-1161
We change nothing to our
strategy: We move Neutral below
1150 and switch progressively to
OW (accumulate) as the spot
slides down towards 1000-980,
which is likely the final leg
down.
47
ALTERNATIVE STRATEGIES
Hedge funds ended March on a positive note (+0.33% MTD and +2.06% YTD on the HFRI Global HFI).
Best performers were CTAs (+1.30%), Equity Market-Neutral (+1.04%), Global Macro ( +0.71%) and
Merger Arb (+0.66%).

Increased volatility, driven by changes in expectations of growth rates and interest rates, was generally
helpful to relative value and global macro traders.
CTA made money on short commodity, long USD, long equities, and long fixed income positions.
Most of Global macro gains were posted on long European equities, long precious metals, long credit,
short EUR. Macro managers are still positioned for higher rates but with a very limited exposure at this
stage.
We stick to our preference for risk diversifiers (pure alpha generation strategies) over return
enhancers.
We maintain our previous positioning and remain OW on:

Equity Market Neutrals both for their intelligent beta and their alpha contribution.

CTAs and Global Macro as a diversifier and tail hedge.

Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This is our
way to position for a higher volatility regime.
48
Hedge Funds and the Long-$US Trade
USD momentum has generated

substantial gains for macro and
systematic funds, but not for currency
funds
49
Bottom Line: Global Asset Allocation

Growth data has been better than expected in Europe and Japan. Chinese
economy is slowing. In the US, macro data surprised to the downside. But US
macro surprise indices have already fallen to levels from which they typically
revert.

The world continues to be in yield-chasing mode across risky assets

But valuation levels in equity and credit are high enough to make us cautious
Trouble is brewing under the surface in the form of rapidly deteriorating US
corporate earnings growth.
Thus, we remain unconvinced that the markets exuberance will be
validated by economic outcomes.
We also think that the threat of a Fed tightening cycle will remain a
persistent risk for investors in the coming months.
The only question that matters: Are US earnings expectations going to improve
as we move forward (into H2-2015)?

We still see a solid case for further dollar strength, lower oil prices and
lower commodities.
The prospect of rising interest rates could also be a trigger for higher crossasset volatility.
Maintain UW government bonds and corporate credit overall (but with an

intra-asset class preference for IG vs HY, Eurozone vs US in HY, US vs
Eurozone in IG), OW US dollar and UW commodities (specially energy and
precious metals)
We summarize our views as follows
50
Disclaimer
This writing is for informational purposes only and does not constitute an
offer to sell, a solicitation to buy, or a recommendation regarding any
securities transaction, or as an offer to provide advisory or other services
by FinLight Research in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful under the securities laws of such
jurisdiction. The information contained in this writing should not be
construed as financial or investment advice on any subject matter.
FinLight Research expressly disclaims all liability in respect to actions
taken based on any or all of the information on this writing.
51
About Us
FinLight Research is a research-centric company focused on Asset Allocation from a top-down

perspective, on Portfolio Construction, and all related quantitative aspects and risk management issues.
Our expertise expands along 3 axes:
Asset Allocation with risk control and/or risk budgeting techniques
Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value,

carry, volatility), real assets (real estate, infrastructure, farmland, timberland and natural resources).
Private equity and venture capital should be the next step
Allocation with a factorial approach built on the understanding (profiling) of the risk/return drivers of
the different asset classes
FinLight Research is an innovation-oriented company. We target to fill the gap between the
academic research and the investment community, especially on real assets and alternatives. We survey
on a continuous basis the academic literature for interesting published and working papers related to
quantitative investing, non-linear profiling, asset allocation, real assets...
52
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Provide assistance
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allocation and
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(GAA)
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Market Perspectives

Apr. 1st, 2015

Complacency reigns supreme

If something can't go on forever, it won't.

Are we vulnerable in my personal opinion to a

lazy. They've depended totally on the Fed.

Executive Summary: Global Asset Allocation

The world continues to be in yield-chasing mode across risky assets

Maintain UW government bonds and corporate credit overall (but with an

We summarize our views as follows

The Big Four Economic Indicators

New orders were particularly weak.

Durable goods orders were down 1.4%

The fall in Feb. durable goods orders

The picture should be watched

Source: Thomson Reuters Eikon

Because of the contraction in food and

Source: Thomson Reuters Eikon

GS Global Leading Indicator (GLI)

Since Dec 14, GLI has been in

6 of the 10 underlying components

Weve been thinking for a while

Our fears about the

Life is getting back to the Eurozone

Retail sales and consumer confidence are

PMI figure came at 49.2, down

Reuters: "Activity in China's factory

While we remain long-term OW on Japan (always on an FX hedged basis) as we see further

We remain UW in US small caps vs large caps, and UW EM stocks vs US large caps

Not very long ago, at the start of the New Year,

For Q1 2015, 85 companies have issued negative

Nevertheless, US corporate profits are still very impressive

Earnings & Relative Valuations

Earnings revisions have shifted in favor

Despite their outperformance, Japanese

But Europe is now trading at 15 year

Market flows tend to favor non-US equities and U.S. bonds

Mutual funds cash to asset ratio is very low,

Stock market major tops have occurred when cash

Source: Elliot Wave

S&P500 A Fundamental Perspective

This 100%-fundamental index is

Based on this approach, the

S&P500 A Long-Term Perspective

S&P500 A Medium-Term Perspective

S&P500 A Medium-Term Perspective

S&P500 A Medium-Term Perspective

Stocks are arriving at the end of the

Historically, the market has made most

This pattern has not worked out over

S&P500 A Very Short-Term Perspective

Our first warning signal over the shortterm, is a combination of:

A clean break below 2038-2035.

A VIX that goes through its 17.2

Trading Model S&P500

FIXED INCOME & CREDIT

We remain neutral on German yields and peripheral debt, because:

FIXED INCOME & CREDIT

FIXED INCOME & CREDIT

However, we shift to UW on Eurozone vs US IG (from OW) as :

We still prefer IG over HY on a risk-adjusted basis as we expect higher volatility on spreads

Weve been Neutral UST since

US long-term rates are stuck in a