Perhaps Paula Cole should consider a rewrite of her song “Where have all the cowboys gone?” to “Where have all the traders gone?” to address the issue facing the markets currently. Since 2009, post the financial crisis, the European markets (Eurostoxx) have mean reverted around a level of 2500, ranging from sub 2000 to a high of 3000. Certainly long only funds may not have done much given these have not been investable markets, but for traders, there have been some tremendous opportunities to capture +-20% moves depending on the theme prevalent at the time. Certainly cycles have become shorter and debates such as deflation, inflation, recession, and growth are being argued on a much shorter-term horizon whereas these themes typically take years to materialise. Both Macro and Micro factors are dominating stock price behaviour and one has to invest dynamically taking all factors into consideration to capture alpha for one’s portfolio.
Long/Short relative value funds typically hedge market risk and capitalise on stock specific risk outperforming their benchmarks if a fund manager can truly identify a stocks earnings. However, lets not be too harsh on the fund manager as correlation has been close to 1 whereby all stocks and asset classes have been moving in tandem making it hard to outperform purely on fundamentals. What has brought about this high correlation? European Sovereign risks during the summer and concerns of Greek exit. Now that central banks have come to the rescue, those tails risks have been minimised helping the markets focus on fundamental factors like earnings. It is time to dust off those fundamental models and focus on stock picking. However, this may work temporarily but once we are out of q3 reporting season, debates such the US fiscal Cliff and Spanish bailout issues loom upon us, so am sorry to say this PM’s, it will be back to macro again!
This year like last has been about testing extreme cases in positioning. When investors get complacent with one view, the market has quickly unwound that view causing extreme moves and hurting portfolios. Back in June, at the height of the European sovereign risk crisis which was evident in the way investors were positioned defensively across all asset classes, the markets faced the biggest rally ~ 20%+. But worst of it all was that no one had it. No one managed to be positioned for the rally and profit from it, hence this year most funds are massively underperforming the broader markets. Now there is a decent amount of optimism built in the markets about a q4 recovery and US/China GDP growth going forward. This view point is perhaps self enforced as investors have alot of cash sitting on the sidelines and seeing how well the markets have performed. But I fear the timing just isn’t right. Make no mistakes, central banks across the globe (Fed, ECB, BoJ, and BoE) may be printing money to stimulate their respective economies, which can cause massive liquidity rallies in asset prices, but the bigger issues still loom upon us and will reappear as skeletons in the closet upsetting the norm and consensus positioning.
These are not investable markets yet. It is a time for traders to be proactive and monetize on the volatility. So where have all the traders gone really?
