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Elkstone Private Monthly Bulletin

Elkstone Private Article

‘Buy the Dip’ Takes Hold at Allianz to JPMorgan as Rout Deepens


Big money managers are surveying the wreckage in global stocks, and many like what they see.

Even as the rout claimed more markets in Europe and Asia after the Dow Jones Industrial Average posted its worst points loss ever, investors at Barclays Plc, Credit Suisse Group AG and Allianz Global Investors sought buying opportunities in cheaper stocks underpinned by rebounding global growth.

Many fund managers said a reality check for elevated valuations was overdue — even as optimism for expanding profits and economic growth prevails. Mindful those tailwinds remain, here are some money managers ready to ‘buy the dip.’

JPMorgan Chase & Co., Emmanuel Cau

“Global equities did not experience any material weakness for nearly two years, valuations have become stretched and technical, positioning and sentiment indicators all flashed red in recent weeks. ”

“The unwinding of this extreme bullishness could have a bit more to go in the near term, but our view is that the medium term fundamental backdrop remains supportive and that one should indeed use the recent dip as buying opportunity. We think Eurozone and Japan offer the best risk reward, given their more attractive valuations and positive operating leverage.”

Allianz Global Investors, Marcus Morris-Eyton

“The recent move has undoubtedly shaken investors, after a prolonged period of rising markets and unusually low volatility. Our expectation is for volatility to remain high, as we approach peak liquidity, and monetary policy gradually begins to tighten.

This, combined with highly correlated selloffs like we saw yesterday, which showed little differentiation between the winners and losers, will create interesting opportunities for bottom up stock pickers who are able to hold their nerve and pick up the attractive names, where valuation had become harder to justify after six years of constantly rising equity markets in Europe. We view short term moves such as this as attractive opportunities to exploit any over reactions in the market.”

“Unusually for such a large downward move, the wider economic environment in Europe remains in good shape, as demonstrated by the continued recovery in European corporate earnings.”

Credit Suisse, Michael Strobaek

“We still consider the equity bull market to be intact and to have the potential to go further. Yet, as we have said on numerous occasions, the bull market is not going to be as good as what we saw in 2017, and it will be associated with high levels of volatility, as short rates and now yields have left their bottoms and are moving higher.’’

“Recent risk-off moves in equities do not shake our equities conviction. We see the latest developments as a healthy correction that offers a buying opportunity for clients who wish to deploy cash.”

Seven Investment Management, Ben Kumar

“Going into the year, participants in the market we saying that everything is reasonably well-primed, the only thing you might want to see is a little bit of a market correction to shake out some of the valuations. Now you’ve got it. In many ways this is what investors have been waiting for.

There is a sense out there that this is, in a way, a release of some of the pent-up low volatility we’ve seen over the past year. We’ve been underweight risk going through the whole of last year on the basis that something like this can happen from time to time, and when markets are really, really, really good you don’t need to squeeze out every drop of return out of them.

When you see something like this it’s handy to have some cash to invest. We have been sitting on quite a large cash pile for some time and at some point, we will look to invest that. There may be a bit more pain to come before we start seeing a real dip to buy.”

Barclays Plc’s Wealth Management, William Hobbs

“Few expected the unnatural market calm of the last year to persist. Many, like us, even pinpointed the likely source of that volatility as a less friendly bond market. However, expecting and experiencing are very different things, of course.”

“Markets still look mostly orderly and it is notable that emerging market risk assets seem to be mostly pacing the U.S. markets decline rather than acting in accordance with their traditional beta to U.S. stocks. We shall see whether this remains the case, but we have been reordering our risk asset exposure in portfolios over the last few months to go where fundamentals better support the outlook. This means we have been reducing our overweight to the U.S. a little and focusing on Continental Europe and emerging-market Asia — this is where the cyclical earnings prospects look strongest to us now.”

“The world economy still looks fit and ready, the next recession still looks distant — unless some exogenous factor comes along to spoil the party. So far this pullback looks like a fat-tailed reminder for those short vol, but nothing else too sinister so far.”

R&A Group Research & Asset Management, Otto Waser

“This type of drop usually brings back buyers. Whether it’s today and whether it’s for good, we don’t know. If you have some cash left, you would certainly think it’s attractive. I would be surprised if we have another 4 percent drop in the U.S. today. We thought a correction was overdue, and this correction was emanating from the U.S. — Europe is just following. ”

MPPM EK, Guillermo Hernandez Sampere

“Mister Robot did his job, unwinding the VIX Short and some CTA covering or selling their hedges. This will last until the last margin call has been closed. How long? Not possible to answer because panic may cause more selling pressure. What makes me angry is: we spend so much time to deal with new market regulation about transaction reporting (MiFID II) and the real bombshells may be traded without any regulation at all!”

“You will see some black feathers over various trading desks… the revenge of the cheap money. We will wait for redemption and try to keep our minds straight, and hopefully this will be over in a reasonable time.”

“Once the dust has settled, there is further for European corporate earnings to catch up. Return on equities remains depressed relative to where it belongs in this backdrop — declining slack in the domestic economy is usually consistent with increasing pricing power for domestic European companies.”

Investec Bank Plc, Julian Rimmer

“It’s Guernica out there.”

“The adjustment to higher U.S. Treasury yields was, and always is, disorderly – especially when exacerbated by harmonized selling from quants and algo-driven momentum selling – but while bonds look bearish owing to global growth and the looming inevitability of inflationary pressures, this militates for optimism towards emerging-market equities. They are an inflationary hedge and central banks are likely to be behind the curve when it comes to raising rates but developed-market consumers and householders are now hopelessly addicted to artificially depressed rates. ”

— With assistance by Yousef Gamal El-Din, Beth Mellor, and Filipe Pacheco

Source: Bloomberg 6th February 2018