Last updated: 16:08 / Wednesday, 16 October 2013
Strategy by BigSur Partners

The Washington Theatre Could Lead to a Rotation from the US into Europe and Emerging Markets

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The Washington Theatre Could Lead to a Rotation from the US into Europe and Emerging Markets

In the short term, the market seems to be just focusing on what’s going on in the Washington theatre.  But what consequences will it have in the following weeks? Ignacio Pakciarz, CEO of BigSur Partners, a multi family office based in Miami, speaks with Funds Society about their views on this issue from an investment strategy point of view.

“We are concerned that holidays retail sales might be soft, as these should occur right before another potential government shut-down”

“The deal most probably to be finally passed will no doubt be a game of deadlines, with no real long-term structural solution tackling”, affirms Mr. Pakciarz, highlighting that “in 2-3 months from now, we will have another similar Washington horror show”.

BigSur Partners’ CEO lists some of the clear consequences of this political uncertainty: a lower level of consumer confidence, a rise in volatility to reflect a more normal environment and a lower level of investor sentiment in the US. “We are concerned that holidays retail sales might be soft, as these should occur right before another potential government shut-down”, he expresses, pointing out that the market is also starting to see some rotation outside of US Equities vs. International Equities, “mainly Europe, as German’s IFO survey at best level since the European crisis started”.

"The S&P 500 needs good fundamental news to move sensibly higher"

On the other hand, earnings revisions are pointing down. BigSur Partners sees a 3Q2013 earnings report that is mainly weak with S&P500 earnings expected to grow only 1%, and “revisions that at this point are coming down as we have a mixed picture, with a few large cap companies like Pepsi or Johnson & Johnson over-performing while others like Citigroup, Coca-Cola, JPMorgan Chase and Alcoa have underperformed.” Mr. Pakciarz asks himself the following question:  Can the market continue to trade higher on market multiple expansion?

Regarding the delay of tapering Mr. Pakciarz considers that the Fed already made a big mistake in its communications with the market in May, provoking a sharp spike in market and mortgage rates, that it does not want to repeat.  “We think Yellen’s Fed will ensure easy monetary policy continuation and delay tapering.  However, after a great 2013, a great 3rd quarter and a great October, the S&P 500 needs good fundamental news to move sensibly higher."

As a conclusion, BigSur Partners offers some advise for the following weeks: “From a strategic point of view, we maintain a portfolio positioning for a “reflationary” environment (long stocks, real estate, real assets and credit).  From a tactical point of view, if the market trades up to a 1725 level and is unable to break that level, we think that the 4Q2013 could be disappointing on a fundamental level.  We consider reducing our “Overweight” position in US Equities and rotating into lower valuation European and Emerging Markets stocks.”

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