Market Overview (as of January 31, 2013) Here is basically what happened in 2012: Our fundamental strategy, based on the evolution and forecast of economic cycles, did not really serve us well in 2012 contrary to previous years. Economic data relating to China, Europe and the U.S. deteriorated during the year, but the extremely expansionary monetary policies adopted by the central banks of the world as well as certain statements made by politicians clearly dictated market momentum. Thus, while Europe sank deeper into recession, its stock markets soared. While the euro struggled to survive, it regained strength. As the U.S. economy was showing signs of weakness, the S&P 500 was appreciating. In short, bad news became good news. Expectations as to a third round of quantitative easing (QE3) on a global basis turned out to be the major force driving market movements rather than economic data. From January to May 2012, we were long on the major global stock indices (see Graph 1) since the U.S. economy was in the midst of an expansion phase. We posted a return of 9.24% for the first quarter of 2012. However, uncertainties in Europe (the banking crisis in Spain, the debt crisis in Greece, the precarious situation in Italy) gradually took over. We remained optimistic about the U.S. (simply a soft patch), but deteriorating economic growth in China and the possible demise of the euro convinced us that the global economy would falter. In fact, a contagious reaction occurred with regard to global economic data (Graphs 2, 3 and 4). The risk of a hard landing in China, the ongoing and worsening recession in Europe and the risk that the U.S. would quickly plunge into a new recession near the end of 2012 were just too many negative factors for Sigma Alpha to remain optimistic about financial markets. At that point, our short positions, especially in Europe, cost us dearly. These positions largely contributed to the shrinking of our positive returns of the first quarter and we ended the year on a negative note (-12.36% for 2012). We believed that announcements concerning a possible quantitative easing (QE) on the U.S. side would not be sufficient to solve the weakness of economic data. However,
investors made a bet that the QE (coupled with new interventions by other central banks of the world) would support financial markets (artificially?). Although there is no perfect synchronism between economic indicators and the evolution of financial markets, it was difficult for us to adopt long positions while economic growth was becoming precarious. However, during a few quarters, investors mostly anticipated the positive effects of future monetary conditions to justify an upswing on the stock market. At the end of October, we increased the importance, within our system of analysis, of massive monetary easing in many countries, a predominant variable. Since that time, we have posted three successive months of positive returns. January 2013 is part of this sequence with a return of +3.46%: January has been a very positive month for stock markets as a whole. Our long positions on U.S. and Asian stock markets were profitable. It should be noted that our strategy on Japan consisting of a long position on the Nikkei coupled with a short position on the yen was one of the highlights of 2012 and still is at the beginning of 2013. These positions anticipated the consequences of the election of a government bent on imposing its extremely expansionary views on the Bank of Japan. As an immediate consequence, the Nikkei appreciated by more than 20% while the yen depreciated by more than 10% within a few weeks. This is a concrete example of the importance of the massive monetary easing variable for our system of analysis. A similar system led to our taking a long position on the euro which turned out to be positive. We have also taken advantage of the rebound in metals (copper and silver). However, our position in government bonds has underperformed due to the increase in rates over the past weeks. This has nevertheless served to reduce risk for the portfolio as a whole.
Our views on the markets for the coming months: We are beginning to adopt a much more defensive position, especially with regard to Europe. In fact, we have liquidated our long position on the euro and taken a short position on the stock market in Italy. We believe that the austerity measures adopted in this country have been far too extensive and that its real economy has weakened as a result. Moreover, Italy is now going through periods of extreme political uncertainty (elections on February 24-25) and is deep into a recession that continues to deteriorate. We continue to believe in the strength of Asian stock markets, mainly because of a faster than expected recovery in China and because of new expansionary policies in Japan. This is very positive for Asian stock markets and it exerts a downward pressure on the yen. (The Bank of England s successive QEs have encouraged us to adopt a short position on the British pound). In the short term, we are relatively optimistic with regard to U.S. stock markets, but we are wary of the constant bickering in Washington, a factor that could hamper the stock market s revival. We are however much more optimistic for the mid and long term. Since the major central banks are printing huge quantities of money thus imposing a heavy burden on their balance sheets (the Fed s balance sheet is expected to increase by more than $1000 G in 2013), we believe that it is important to hold tangible assets such as raw materials. We continue to think that gold and silver could perform well in the mid and long term. However, U.S. oil production continues to increase and infrastructures required to transport oil are inadequate in the United States. This means that WTI crude oil (a significant benchmark for U.S. crude oil) is under pressure, especially since bilateral discussions between Iran and the U.S. could be held later this month.
2012 in retrospect with supporting graphs: Graph 1 130 Astra MG+ Funds : Year 2012 with a Stock Market Viewpoint 60% 125 Evolution of the equity indices and of the funds 120 115 110 105 100 95 90 85 Net equity weight in the MG+ S&P500 (Dec 31 2011 = 100) Astra Sigma Alpha Global Macro Fund (Dec 31 2011 = 100) Dax (Dec 31 2011 = 100) 40% 20% 0% -20% -40% Equity weighting in the funds 80 30-12-11 06-01-12 13-01-12 20-01-12 27-01-12 03-02-12 10-02-12 17-02-12 24-02-12 02-03-12 09-03-12 16-03-12 23-03-12 30-03-12 06-04-12 13-04-12 20-04-12 27-04-12 04-05-12 11-05-12 18-05-12 25-05-12 01-06-12 08-06-12 15-06-12 22-06-12 29-06-12 06-07-12 13-07-12 20-07-12 27-07-12 03-08-12 10-08-12 17-08-12 24-08-12 31-08-12 07-09-12 14-09-12 21-09-12 28-09-12 05-10-12 12-10-12 19-10-12 26-10-12 02-11-12 09-11-12 16-11-12 23-11-12 30-11-12 07-12-12 14-12-12 21-12-12 28-12-12-60%
Graph 2 European PMI in contraction mode Sources: Markit, Oxford Economics Graph 3 Europe drags down total export numbers from China Sources: CEIC, HSBC
Graph 4