I have certainly moved to a more defensive stance, prompted by a combination of the major dislocation between equities and risk assets, plus the fact that there have been a number of potentially market-moving items on the slate (Greek and French elections etc.). Events have clearly gathered pace somewhat since the beginning of this month.
I’m not bracing for the end of the world, but certainly for the possibility of a disorderly Greek exit from the eurozone and the potential additional monetisation and socialisation of losses thereafter (much of which would be borne by Germany).
Essentially it’s a balancing act at the moment to try to capture some of the downside, keep volatility within tolerance, own an appropriate level of crash protection yet be ready for the central banks aggressively stepping back into the market. Obviously we won’t get it exactly right, but liquid and nimble certainly feels like the right place to be for now.
Move out of cash
I have moved the cash balances held at the end of April into German, UK, Norwegian and New Zealand government bills – currently circa 40% of NAV. Last week I sold out of my long-dated German exposure (I think that trade has run its course for now, and I suspect that long-dated Germany could see a shock in the fall out – risk/reward is now heavily skewed towards the short end). In turn I increased my exposure to precious metals.
I’m also holding slightly longer-dated positions in Canada, Finland, Qatar, Turkey and South Africa where there is at least a fundamental argument to be made for further compression.
I continue to hold about 10% in non-EU/US investment grade, and about 20% in high yield names which I think have ample liquidity to weather a sustained shock or limited market beta with positive event risk. Against this I’m holding both credit and equity index protection.
I continue to refuse to touch EU/US financials and sold my only true PIIGS exposure (Catalonia) last month. I’m also long the US and Canadian dollars and the Swedish krona.
