The flexibility of the Global Macro makes it the ideal core strategy for investors. Unfortunately, too many Macro managers have produced inadequate returns over the past several years.
Learn why Iron Harbor has outperformed 97% of its peers in our latest podcast “Making Global Macro Work”.
A hardcopy of the presentation is available here: Making Global Macro Work
A broad set of activity indicators substantiates our view that the Eurozone is in the Initial Recovery phase of the business cycle. We expect that activity will continue to improve, but the recovery will be slow and uneven. Importantly, the ECB will likely adjust monetary policy to protect against growing downside risks for prices which will provide support for the economy.
Despite slow economic growth, we continue to believe that European equity markets will outperform over the next 6-12 months. Further, we expect greater yield convergence across sovereign debt markets and a lower trending euro and have positioned our portfolio accordingly.
Please review On Deck – Eurozone in which we analyze the recent economic trends in Europe and their impact on broader activity: On Deck – Eurozone (Fall 2013)
Investors were flush with optimism for Mexico even before Enrique Pena Nieto was elected as president in July of last year. The promise of economic reforms to accelerate growth simply amplified the volume of capital that had already been pouring into Mexico in search of higher yields. Market observers (and economists) were also part of that Mexico euphoria. From November to April, there were very few audible notes of caution regarding Mexico’s immediate economic outlook or the fully valued equities market (at the time, we took particular interest in article 1).
Mexico will undoubtedly benefit from several key structural advantages over the medium term, such as:
- A wage-adjusted highly productive labor-force
- Close proximity to both the US and ‘fast’ growing South America
- Sound macro policies, the absence of capital account controls and highly liquid FX and sovereign debt markets.
There are other factors, however, which introduce risks to stability:
- The amount of foreign portfolio inflows (particularly in sovereign debt due to both the 2010 WGBI inclusion and investor search-for-yield) over recent years has been massive: foreign portfolio investment increased by almost 80% during the last three years, from $200 billion at end-2009 to $355 billion in mid-2012 (p. 38/39).
- Financial markets have nearly fully anticipated passage of key legislation such as energy and tax reform which are both likely and necessary, but not guaranteed (1, 2).
- Although Mexico has 12 free trade agreements involving 44 countries (more than any country in the world), it is still primarily reliant on its US links.
- Mexico’s productive capacity is heavily weighted toward auto manufacturing—one of the most cyclical industries on the planet.
Please review Dashboard – Mexico in which we analyze the recent economic trends in Mexico and their impact on broader activity: Dashboard – Mexico (Fall 2013)
In May of this year, we correctly noted the strong possibility of downside risk to payrolls growth in 3Q2013. In looking ahead to 4Q, we expect that the recent bounce in industrial activity in both the US and Europe presents definite upside risk to payrolls though underlying momentum should remain fairly constant. A big monthly NFP print between now and December will very likely lead to more consternation regarding the pace of ongoing Fed bond purchases.
As we discussed earlier in On Deck – US Inflation, significant excess capacity will continue to weigh on prices in the US and in several leading developed economies. This is typical during the early stages of the business cycle. So, while the market remains distracted by the issue of Fed taper, investors should remain focused and make their allocation decisions knowing that 1) policy rates in the US will stay low for longer than the market currently anticipates and 2) the tepid pace of US economic activity does not justify a further meaningful increase in US sovereign rates.
In On Deck – US Employment we provide a first-draft summary of the recent trend among several employment growth indicators: On Deck – US Employment (Fall 2013)
A close look at the underlying trend in US inflation reveals that price pressures will continue to be contained for multiple upcoming quarters. This, however, should be no surprise–low inflation is a symptom of the slow pace at which the economy is moving through the early stages of the business cycle.
What is being characterized in the marketplace as ‘Fed uncertainty’ is more appropriately defined as data uncertainty. And while the market thrashes about focusing on individual pieces of economic data, we are strongly confident that persistent excess capacity means employment growth, inflation, and overall economic activity in the US will continue to be tepid. Monetary policy normalization, as a result, will most certainly begin later than the market anticipates.
In On Deck – US Inflation, we provide a first-draft summary of the recent trend among several leading price indicators: On Deck – US Inflation (Fall 2013)
Risk management is a critical function of overall asset management. A robust risk process provides important safeguards against both market risk and operational risk. Below, we review Iron Harbor’s approach.
Second quarter GDP in Canada was weaker than expected and highlights the challenges Canada faces now that the key drivers of the recovery are turning lower.
We expect meaningful adjustments in Canadian currency and bond valuations over upcoming quarters and have positioned our portfolio accordingly. The August employment number (a very volatile number) does little to change our outlook.
Please review the update to our Canada research which we first published in mid-July: Dashboard – Canada Update