"This crisis is new. Many of the large fund management companies talk about the "new normal" and, unfortunately, it is very difficult to extrapolate past experience and project it in order to resolve the current situation. Looking in retrospect no longer helps. We are charting a new path along the way, and the prudence partly stems from there: that the path is new". That’s how Dario Epstein summarizes the current environment and the wait-and-see attitude of investors, with cash at the ready. But, just as in life, in the markets, it’s nothing ventured, nothing gained, he reflects. Epstein is Director at Research for Traders and recently joined the Advisory Board which Biscayne Capital created earlier this year.
When asked about the purpose for his joining the company, Epstein explains that private banking is currently going through a very dynamic phase driven by several factors, the most important of which is the regulatory factor. As a result, in recent months, the compliance department of the institutions has been strengthened significantly. Secondly, there’s the fiscal or tax issue, which has caused the United States, through FATCA, as well as other countries, to focus on trying to eliminate the loop holes, or tax havens, which facilitate tax evasion. In this context, the commercial development of wealth management networks poses a challenge to which the industry is responding. His experience as a former regulator, as well as in market analysis, allows the organization to be focused in these new aspects, and he contributes both his own personal input, as well as that of his company, in order to work more efficiently in the management of portfolios and investment recommendation.
Which products are the most interesting for the Biscayne Capital type of client in the current market environment?
Against this backdrop (China slowing, high probability of rising rates in the US, falling commodity prices, devaluation by China), we are currently adding coverage and protection for long positions and maintaining liquid reserves, although each profile, objectives, and risk appetite has its specific recommendation.
Indeed, in the past few days we have awakened to several consecutive devaluations of the renminbi, and commodity prices at historic lows, how far could this go?
China upset the apple cart and surprised everyone. While devaluation is not important, the impact it later had on all the variables was, deepening the crisis in the currency and equity markets of emerging countries in particular, which are currently less competitive at exporting to China. Even the People's Bank of China could not stop the trend, indicating on the third day that there is no basis for further depreciation of the yuan (at around 6.40 USDCNY) due to the strong economic fundamentals of the country. That is precisely what is being questioned in the markets. Thursday’s close saw three straight days of devaluation. It is true that the strong fiscal and international reserves position provide good support for the exchange rate, but the slowdown is greater than expected and devaluation was a last resort.
I worry that China may abandon the development of the domestic market, which is its point of inflection in order to grow internally, and devalue its currency for the purpose of increasing competitiveness of its external sector and exports. There are two references (yen and euro)which have devalued strongly in recent years, and with the currencies of emerging countries in sharp depreciation against the dollar, it was to be expected that China take some compensatory measures.
With regard to the prices of commodities, they are very low, my opinion is that they are finding their footing and we expect some insignificant technical rebound. What we do see is that the shares of emerging countries, net exporters of commodities, still have a wide margin of decline, measured in terms of multiples, and may yet fall another 15% -20%.
The Shangay Composite has lost 3.4 trillion dollars and received injections of 900 billion renminbi, according to Goldman Sachs, who says that the regulator still has more than 160 billion dollars: will they have to use them?
It Depends. China is investing money in the market to avoid losses through purchases or provisions to short selling. Obviously the Chinese market has been impacted by two factors: firstly, the monthly addition of millions of new accounts of the country’s residents and, secondly, some slippage in the margin lending which led stock prices to a bubble, contrary to what was going on in the real economy. According to some Chinese market experts this market is extremely trend follower. In this case, the losses were not greater because many companies have suspended their stock exchange and it is now in the hands of the regulator to calm the markets. As I published a few days ago, the Chinese have discovered that capitalism is not easy.
Goldman analysts also believe that the index will range between 3,000 and 4,000 in the short term. Is that possible?
Yes it is, but only if the regulator continues to participate in the process. If it breaks 3,400 there is no significant resistance until 2,800. If the regulator is not involved, the 3,000 barrier will be broken. Although there may be an abrupt change following a more aggressive devaluation; if the currency starts to devalue, the market trend may change.
What does the supposed beginning of rate hikes by the FED add to this situation?
If the FED starts to eliminate all incentives, there will be a negative impact on global growth and the strength of the dollar will increase. The impact of a rise of a quarter point will be liquefied in the first two months. If the market goes up, you run the risk that more investors follow the trend and that we enter into a period of more complex markets in mid-2016.
How will this affect the stock markets in the American continent?
The effect will spread. Brazil is being very badly affected. Its neighbors (Colombia, Peru) will notice the impact on the region, and in Venezuela, where oil is the strong point, it will have great effect. It is very difficult to find countries in the region that are isolated. In terms of currencies and commodity prices we have seen the worst. While there is room for depreciation, we will stabilize in this situation. Some currencies have already devalued; we could be finding a point of balance of the Real at around 3.50. Same with commodities. Not so with the shares, they could still fall.
Which LatAm markets and sectors offer the lowest risk?
Right now our position is more conservative in Latin America.
Brazil is in a very complicated process, entering a recession with negative growth projected in 2015 and 2016. Venezuela is being hit hard, Ecuador going through a difficult process. Basically, after 10 years of very favorable terms for the region, the countries which had the vision to invest in infrastructure and to generate twin surplus (balance of payments and foreign trade), and those who managed to create reserves and countercyclical funds to weather this situation will mark the difference. Brazil has 300 billion dollars in reserves; Peru, Colombia, and Chile also have good reserves.
With respect to Argentina, the markets discern that any of the presidential candidates will have a much more pro-market and international integration rationale. In this backdrop, Argentine assets, which have been underweight in the past, may have an interesting evolution, as so far as other emerging markets do not derail.
Then, where should one be right now?
Cash. The wealthiest families have a high dose of cash and are very expectant. There is much awareness that part of the growth of real estate prices, stocks, and bonds are a result of monetary stimulus, and not of market fundamentals. And at certain prices investors prefer to continue in cash, AAA short-term bonds, banks ... the scenario can change within 10 days. In this environment, the strategy is very short-term, waiting on opportunities that may result from the FOMC meeting of the FED, from an acceleration of devaluation in China, or from other macro scenarios.
Is Greece a closed issue?
Today it’s a closed issue, within a year we will have to discuss Greece again because with the current austerity plan, Greece cannot grow. Spain, Italy, and Portugal are facing similar situations: high youth unemployment and austerity. While it is true that a country can’t live in permanent deficit, there are times that countercyclical policies are necessary, and the orthodox prescription of the IMF and Germany is not helping the peripheral economies in Europe to takeoff.
This year we have elections in Spain, Portugal and Ireland. The poor performance by the political left in Greece has weakened the chances for similar groups to gain power in other countries where there is a social demand which must be addressed. Let’s say that the Greek issue is now concealed for a while.