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Investing themes emerge as Andrew Scott crisscrosses North America

24/04/2019

For the past month, Societe Generale head of cross-asset strategy & solutions for the U.S. Andrew Scott has been visiting clients from Montreal through to LA. He had the privilege of being a guest speaker at the Capstone Global Volatility Summit and most recently moderated a lively debate at Societe Generale’s quarterly macro dinner hosted in New York, all of which gave him access to many of the brightest risk-takers in macro and derivative markets.

Here are a couple prevailing themes he took away from listening to them.

#1
THERE’S NO CONSENSUS ON WHICH TAIL RISK TO HEDGE

Across multiple strategies, hedge fund performance (on average) has been poor in recent history. However, real money asset managers have also struggled, generally predicated on the fact that North American investors at large are not entirely sure which tail risk they should hedge. For the first time in several years, there is no consensus whatsoever regarding which direction markets will travel. Having surveyed multiple investors in Q1, there are an equal number who seemingly believe that markets could fall, do nothing or rally.

Indeed, this is one of the most poorly participated rallies of recent history. Very much like the US Dollar’s current predicament, investors might be begrudgingly long U.S. equities, but they have failed to find a credible alternative just yet, hence the desire to reduce longs at every opportunity, but never add.

Geographically, macro-Asia feels too leveraged to a trade deal and forget about owning European risk, where investor apathy is now bordering on disdain. Such sentiment toward Europe is broadly shared, and in all my career I have never observed such anemic desire to allocate risk to Europe from investors outside of Europe. Perhaps this is why European risk may finally present an interesting investment opportunity, because the world has given up on it!


#2
POLITICAL & LIQUIDITY RISKS ARE UNDERPRICED

Abandoning the Trans-Pacific Partnership was widely regarded as a key policy objective of the Trump administration on entry but getting the S&P above 3,000 would appear now to be one of the most important and well accepted policy goals despite continually going unsaid. It is for this reason that the majority of our North American clients (in stark contrast to Asian clients) believe that a U.S.-China trade-deal resolution is a mere formality. Thus, if this is already baked in to the price, then any suggestion of a deal break, or even unpalatable delay, would be extremely problematic for markets, meaning trade wars have now become an asymmetric risk to the downside.

Another political overhang with increasing momentum is the growing bi-partisan support now to minimize or even outlaw corporate share buybacks. It is a well-defined dynamic that buybacks (in excess of $4tn post-crisis in the S&P) have been responsible for the most stable and sizeable liquidity provision in U.S. equity markets. Therefore, in a world where this support is increasingly at risk, half the S&P is owned by passive tracking funds, and volatility control/risk parity/CTA funds are all at record assets under management; it is no surprise at all that some Chief Investment Officers believe that liquidity is their funds’ single largest market fear. Throw in the fact that we have never seen a crisis without proprietary trading desks acting as liquidity providers leads me to think that this is why a small, but growing, community of clients (N.B. despite its present illegality) feel that the Fed may become a forced buyer of U.S. stocks in the next downturn.


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