Jane said that with troubles including China’s trade data falling and deflation in the UK a defensive stance is necessary, until improvements in central bank policy or company earnings emerge.
“The past few months have seen a period of heightened volatility and deteriorating data around economies and markets. We consider markets through the lenses of data, narrative and affirmation; DNA,” Jane said. “Data for us is the hard facts such as economic releases, company earnings, valuations and real world events. Clearly, there has been a period where the vast majority of such information has been deteriorating, most recently Chinese trade data falling and the return to deflation in the UK.”
“The narrative by contrast is how the market looks at the world and often it sees things through a different lens,” Jane continued. “Where we have a clear divergence between how the market looks at the world and what the data tells us, there can be an opportunity. In the current environment, market sentiment collapsed in lock-step with the deteriorating fundamentals and so we haven’t seen a great opportunity to participate. The final leg of our process considers affirmation, which is where we look for markets to be responding to a gap between the data and the narrative before getting involved.”
Jane warned that ‘a classic bear squeeze’ can occur under current conditions where all market participants have the same view and are short of a sector. This can make leverage ‘very painful’ even in the slightest rally, with investors forced to close their short positions, leading to a dramatic and self-fulfilling rise.
In response he has gone ‘very defensive’, particularly avoiding areas which are exposed to deteriorating parts of the economy.
