Taking Some Profits, Cutting Risk Exposure
Moving Equities to Neutral, Adding to Cash and Gold Overweight, Fixed Income and Hedge Funds remain Underweight, Private Markets remain overweight.
KS Advisory - Monthly Letter, April 2024
Moving Equities to Neutral, Adding to Cash and Gold Overweight, Fixed Income and Hedge Funds remain Underweight, Private Markets remain overweight.
The Rationale for Adjustments:
Many factors indicate that it is time to cut risk exposure and reallocate funds to gold and cash ahead of the reporting season and summer holidays. In our base case scenario, risk assets are expected to reset, experience a decline over the next several months, rebase, and resume an upward trend in late Q3, unless the geopolitical outlook deteriorates further.
1. International Law and Order
Unprecedented fracturing and violations of international law and Vienna Convention on Diplomatic Relations - (Israel bombing of the Iranian Consulate, Ecuador policy storming of the Mexican embassy in Ecuador). These developments set the precedent for possible other such incidents across the planet, raising geopolitical uncertainty to levels which can disrupt further economic relations, business strategy, and the flow of goods and capital. Indeed, the major and alarming development has been the destruction of the Iranian embassy to which Iran is expected to respond. However, Iran has offered to not retaliate if a ceasefire is reached in Gaza. Currently, it seems no ceasefire is likely; thus, Iran is pressed to respond. These events put international law and order at risk, making it easier for other state and non-state actors to follow suit.
2. Geopolitical uncertainty is again climbing. Beyond the Middle East:
a. NATO – The most worrying development is the possible inclusion of Ukraine into NATO as stated by US Secretary of State Blinken on April 4. This will be a central topic at the next NATO Summit meetings to be held in Washington, D.C. on 9-11 July 2024. How will Russia respond?
b. Moscow Attack – The violent attack at a concert hall in Moscow should not be forgotten. An attack on the Russian capital is a huge event and one that will have massive repercussions, most likely of which will be to accelerate and reinvigorate the Russian activity in Ukraine. This attack and the growing likelihood of Ukraine joining NATO will only force Russia to double down on Ukraine before the NATO Summit in July.
c. Japan to join AUKUS and possible China reaction. Chinese foreign ministry has expressed concern “China is gravely concerned about the US, the UK and Australia sending signals of AUKUS expansion. We oppose exclusive groupings and bloc confrontation.” According to sources, the US already has 750 overseas military bases in more than 80 countries and a growing presence in the Pacific. Meanwhile, China has a military base in the Republic of Djibouti, in the Horn of Africa, bordered by Somalia to the south, Ethiopia to the southwest, Eritrea in the north, and the Red Sea and the Gulf of Aden to the east and a military post in Tajikistan. However, according to the US military, China is planning more such bases, possibly on the Atlantic coast of Africa. How will China respond to Japan joining this alliance?
d. US-China Relations – Relations remain rocky and the race between the two superpowers continues to broaden, from arms to critical minerals to technology, the two are in the grips of an unprecedented, historical power competition. US Treasury Secretary Yellen’s recent trip to China, the possible expansion of AUKUS and the expansion of the BRICs all point to continued tensions the spillover of which suggests an entrenchment of ideologically aligned trading blocks is indeed the new reality for the global economy.
e. Africa - Geopolitical changes taking place in Africa are another tectonic shift very few are talking about or considering implications on the global economy especially from the perspective of trade and prices of raw commodities and implications for global inflation.
3. Inflation and Policy
Inflation cyclical, secular and pricing of monetary policy expectations - The main concern is not the growth outlook, rather it is the inflation outlook. I have long held the belief that the world has entered an era of secular inflation driven by a list of factors including geopolitics, demographics, and the need to end strict inflation targeting. As such the focus on cyclical inflationary trends has been misleading markets and monetary policy officials. Since Q2 2023 the model portfolio is positioned for a bear steepening. While rate cuts may surface, they will be symbolic, and it is unlikely any major development market central bank will have the room to do more. Beyond a symbolic cut, the risk if to the upside for inflation and policy rates.
Conclusion
However, the growth outlook is constructive given reindustrialization and onshoring policies, the historic wealth transfer, Ai tailwinds and the possible resurgence of China, albeit slowly. As such stepping back into an overweight allocation on select risk assets later this year is possible. However, for now, taking some profits is a good thing given the rising geopolitical and monetary policy uncertainty.
Disclaimer: The information provided in this newsletter is for informational purposes only and does not constitute investment advice, financial analysis, or a recommendation regarding the purchase or sale of any securities or financial products. Readers are advised to consult with a qualified financial advisor or other appropriate professional before making any investment decisions. The content provided herein reflects personal opinions and views which may change without notice. Neither the author nor the publisher shall be liable for any errors or omissions in the content, nor for any actions taken in reliance thereon. All investments involve risk, and past performance is not indicative of future results.
