Finlight Research - Market Perspectives - Apr 2016

Market Perspectives
April 2016
Apr. 11th, 2016
www.finlightresearch.com
Who will win the tug-of-war?

“Pronounced fluctuations within the trading
range reflect primarily the tug of war between
a weakening global economy and continuing
liquidity injections from central banks and
corporate balance sheets”
– Mohamed El-Erian
2
FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation
The more dovish than expected FOMC tone offered equities another leg
up, pushed bond yields lower and a put a downward pressure on the dollar
which supported oil prices, commodities and EM assets. BCE new round
of QE helped Euro credit to recover from its mid-February drawdown, and
offered risk assets some respite.
Nevertheless, our perception is that monetary policy is having less
impact on markets and the real economy.
We still see rising signs of stress in the financial system globally, with
drivers including a worse growth/inflation mix, the maturing US credit
cycle, and the risks of a Yuan devaluation and Brexit. We expect
macroeconomic volatility to remain high, other risk-off episodes during
the year, and thus, stick to our long volatility positioning into 2Q
We make minor adjustments to our asset allocation this month.
Given the high equity valuations and the poor growth outlook factored in
credit (specially US), we now prefer the latter (mainly IG).
We reiterate our view that a perfect storm is building… It combines
historically overvalued stocks with stretched government bonds. Unlike
previous storms (2000, 2008), investors would be left with almost no
place to hide
We reiterate our view that we are sailing a cyclical bull within a secular
bear. The current cyclical bull may go higher for longer. But, rising
volatility and stalling earnings growth may indicate we are in the late stage
of the cycle.
We summarize our views as follows
3

MACRO VIEW
The Good
Q4-2015 GDP was revised upward on Friday (1.4% up from the 1.0%). Consumers were the big
reason
US employment data show strength on every measure (labor participation higher, full-time
employment versus part-time improving, and wages increasing). More individuals are getting off
the sidelines and trying to find a job again.
US manufacturing PMI data has finally steadied. The ISM Manufacturing index perked up to
close back above the 50.0 level
Manufacturing production in China increased for the first time in a year
The Bad
US Consumer spending disappointed in Jan and Feb. Durable goods orders declined.
Consumer confidence seems in a downtrend since mid-2015
In Q4-2015, corporate profits declined by 15% YoY
The Ugly
Main systemic risk resides in China: The credit bubble is unsustainable. Country’s debt-to-
GDP ratio exceeds that of Japan at the time it entered into crisis in 1989. Chinese equities
seem on the cusp of another impulsive sell-off. Further US dollar strengthening would oblige
China to devalue its pegged yuan and accelerate foreign capital outflows.
We still feel concerned about the credit market liquidity as turnover ratios are well below
pre-crisis levels and the bid-ask spreads are much wider.
4

5
The Big Four Economic Indicators
Industrial Production has been the weakest link in the economic recovery since the GFC
The current picture is characterized by relatively strong Employment and Income, a weak Industrial
Production (down in 9 of the last 12 months) and Real Retail Sales hovering around a flat line.
The average of these indicators has been trending lower since Nov. ‘14, suggesting that the economy is
still moving sideways.

6
Industrial Production
The Industrial
Production indicator
has been revised to the
downside, mainly since
mid-2014.
Its post-recession
recovery peak stands
now in Nov. ’14
On a YoY basis, the IP
indicator is now lower
than at the beginning of
all ten recessions since
1950.

7
GS – Global Leading Indicator (GLI)
The March Final GLI came in
at 1.6%yoy. Its MoM
momentum came at 0.23% (up
from 0.20% last month)
GLI has been in expansionary
territory since September
2015, according to last
estimates
Seven of the ten underlying
components of the GLI
improved in March
This month’s data show a
substantive shift in the GLI
We continue, however, to
think that the acceleration
we’ve been witnessing since
Jan. ‘15 is quite modest for
a typical expansion phase

8
US GDP
The Atlanta Fed's GDPNow
measure of current growth,
shows a sharp decline over
the last month
As of Apr. 5th, their model
forecast for Q1-2016 real GDP
growth (seasonally adjusted
annual rate) stands at 0.4%
(down from the already
sluggish 0.7% on Apr. 1st)

9
US and Global Manufacturing
The US Manufacturing sector (20% of the US economy) continues to endure its worst spell since
mid-2012, according to Markit US PMI (51.4 in March)
The JPM Global manufacturing PMI continued its move down, touching 50, a level last seen during
the Euro crisis in 2012

10
ISM Manufacturing & Services
However, the ISM index for the
manufacturing sector has finally
moved up to close back above the
critical 50.0 level, following regional
manufacturing surveys
The ISM Services Index should move
a little higher, as well…
Source: Thomson Reuters

11
US Employment
US employment data show
strength on almost every
measure
Labor-Force Participation and
Employment/Population Ratio
are now not only heading up,
but seem to be accelerating…

12
US Employment
Job growth shows a solid
trend.
But the Conference Board
Employment Trends Index
(ETI) continues to show
signs of weakening
According to this index, a
slower growth should be
expected in the US labor
market, over the next quarters

13
Consumer Confidence
Both the Conference Board's
consumer confidence and , the
Michigan Consumer Sentiment
Index continue to trend lower,
prolonging a downtrend that
actually began a year
ago.

14
Chinese Economy
DB China Real activity index (average of 3ma growth rates in rail traffic, electricity output and steel
output) stands at a level barely higher than during the GFC. Is it stabilizing? Probably…
Industrial production growth would follow the same route.

15
Chinese Economy
The private sector debt is skyrocketing. The current accommodative monetary policy should be
maintained in order to avoid a bubble burst.
Yuan devaluation seems unavoidable and should lead to more capital outflows and lower FX
reserves.

16
EQUITY
In our February report, we argued that the sell-off of the beginning of the year was a correction in an
exhausted bull market, rather than the beginning of the next major global bear market, and that the
market was poised to bounce, as many indicators were pointing to oversold conditions.
We see this bull market as tired and old, but not finished. Our target implies limited upside from here,
but the S&P 500 may challenge its old highs before crashing.
It’s worth noting that the rally since the lows of mid-February has been accompanied by strong breadth
readings in the S&P 50: 93% of its stocks were above their respective 50 dma
Nevertheless, we believe that this bounce will soon become an opportunity to sell into
The stock market has been stuck in the same trading range for a while. Only earnings may spark a break
in it.
US earnings recession continues. For Q1-2016, earnings may have their worst growth since 2009 (-
8.5% YoY). Analysts expect the Q1 to mark the bottom for earnings, and earnings growth to turn positive
by Q3
Stocks seem more vulnerable than ever to any external choc (Central Banks action, China, Crude
oil…)
Several signs may be interpreted as a reminiscence of what happened in the late-stage of previous
economic expansions:
Large amounts involved in M&A activity and buybacks
Elevated levels reached on Debt/EBITDA for non-financial companies

17
EQUITY
Our main scenario from here (80% chance) : A massive top forming around 2135 – 2170 :
US profit margins are showing increasing evidence of peaking. On Price/Sales metric, equities
are trading at the top of the historical range.
A resumption of earnings growth going into 2016 will be necessary for equities to move higher.
Recent data shows more evidence of lower productivity, lower potential GDP growth and (later)
higher inflation risk. This is a bad scenario for stocks
Our alternative scenario (20% chance) : The S&P500 breaks the 2135-2170 resistance, opening
the way to 2225.

18
EQUITY
Bottom line :
De-risking should continue. A higher allocation to cash is sensible in this late-stage stock bull.
We adjust our positioning rules on the S&P 500 as follows:
We remain OW (as we did since the index broke above 1903) as long as the 2028 level
is preserved. We still target 2110 and probably a new high around 2150-2170
Below 2028, we’ll turn Neutral and stay so as far as the ‘09 trend (1800-1850) is preserved
Any clean break below the ‘09 trend would make us move massively to UW
We like the low US beta. We remain Neutral on Europe and Japan vs. US despite the policy
divergence between the Fed and the ECB/BoJ:
Given the significant yen strengthening (despite the BoJ’s move to negative rates in late
January), we have turned cautious on the EPS outlook for Japanese stocks
Brexit/migration concerns are expected to weigh on Eurozone
Weak demand from China is expected to continue to weigh on Japan's production and
exporters in Eurozone.
We remain UW in US small caps vs large caps.
We remain OW defensive vs. cyclical stocks, given the low and/or falling bond yields
We remain UW EMs vs DMs despite the recent EM outperformance. We expect another (alst
leg of USD strengthening. Negative spillovers from China (and RMB one-off devaluation) and
Brazil will also likely have a strong impact on other Ems.

19
US Earnings
The S&P500 stands within an earnings
recession. For Q1 2016, the estimated
earnings decline is -8.5% YoY (-3.7% if
energy is excluded).
If the index reports a decline in Q1
earnings, it will mark the first time the
index has seen four consecutive
quarters of YoY declines since
2008/2009
For Q1 2016, 94 companies have issued
negative EPS guidance and 27
companies have issued positive EPS
guidance.
For all of 2016, the estimated S&P 500
growth rate is now projected at 2.2%
for earnings and 1.6% for revenues.
But, Q1 earnings may surprise to the
upside

20
US Corporate Profits
Corporate profits are sliding. If this
move is confirmed, the prospects for
capex and employment will come
under pressure
US productivity is struggling. Q4-
2015 productivity rose at a sluggish
0.5%.
Productivity gains and higher prices
are needed to absorb the ongoing
higher labor costs. In Q4 2015,
employee compensation reached
53.6% of GDP, as unemployment rate
dropped to a level consistent with full
employment
The current turning point in NIPA
Profits is pointing to a top
formation in the S&P 500 Index
within the near future

21
US Equities
Since early 2015, US equities
have been driven by (forward)
P/E multiple movement, when
forward earnings have been
plateauing…
A resumption of earnings growth
going into 2016 will be necessary
for equities to move substantially
higher.
Source: Factset & Neuberger Berman

22
US Equities
Equities have “gone nowhere” since early 2015. The beginning of the range has coincided with the
beginning of the earnings recession
It will require major news (on earnings, for example) to break this trading range
But, at this stage, no earnings/revenue growth is projected (by analysts) before Q3-2016

23
US Equities
The moves in the S&P 500 since last year
have been closely related to US data
surprises (as summarized by the
Citigroup’s US CESI Index)
US CESI Index currently points to 2100
Only a period (few months) of positive data
surprises seems able to help the S&P 500
making new highs in 2016.

24
US Equities
Large amounts have been involved in
M&A activity and buybacks, since 2010
Since then, stock buybacks have
been pulling the S&P500 higher
But now, the buybacks trend seems to
be exhausted…

25
Investors’ Sentiment
We see this bull market as tired
and old, but not finished…
Despite the recent rally,
investors’ sentiment is still not
really bullish.
On a contrarian basis and from
a short-term perspective, this
bullishness level points to
further upside on US
equities…
Source: Bespoke

26
S&P500 – A Long-Term Perspective
Equity markets still appear at lofty valuations, whatever the valuation metric we use.
We see only a few quarters (during the dot.com bubble) with higher valuations
Valuation alone is very rarely a timing tool for a major market top
Nevertheless, all these indicators suggest a cautious long-term outlook and weak long-term return
expectations These measures are consistent with flat (0%) 12 year S&P 500 nominal total returns

27
S&P 500 – A Medium-Term Perspective
Last month, we’ve mentioned a topping
pattern on the S&P500 (around its top of
mid-2015 ~2135) that is similar to the one
already formed in 2008.
We’ve also said that for this topping
pattern to be validated, the 2028 level
must be preserved.
Actually, the 2028 level was broken to the
upside but the index is now heading to it
again.
We adjust our positioning rules as follows:
We remain OW as long as the 2028
level is preserved. We still target
2110 and probably a new high
around 2150-2170
Below 2028, we’ll turn Neutral and
stay so as far as the ‘09 trend (1800-
1850) is preserved
Any clean break below the ‘09 trend
would make us move massively to
UW

28
S&P 500 – A Short-Term Perspective
Reminder: we’ve turned
from Neutral to OW on the
S&P500 as the index broke
above the 1903 level
For now, we stay OW. But,
we keep a cautious eye on
the 2020 – 2035 range
We will switch to a Neutral
stance as soon as this
range is broken to the
downside .
It’s worth noting that
oscillators are moving down
which provides an additional
reason to be cautious.

29
S&P500 – A Short-Term Perspective
Our prop. Short-Term trading model has switched to massively short on Mar. 1st S&P500 close
(@1978.35), but stopped its short position (and thus its losses) on Mar 11 (@ 2022)
The model is now completely Neutral.

30
FIXED INCOME & CREDIT
Government bonds continued to move higher, but valuations are so stretched that it seems
reasonable to keep away from the asset class.
We expect 2 or 3 Fed hikes this year, when the market prices only one. We see US inflation higher
over 6-12 months horizon, and see little reason for US 10-year yields to trade below current levels for
long. Over the medium-term, we maintain our bearish directional view on duration in the US
Tactically, however, we remain Neutral on 10y USTs as long as the 1.97 level is preserved. Above,
we’ll move to UW again. Our ultimate target on US 10y yields was revised down to 2.45 by H2-2016
We expect realized rates volatility to remain elevated given the uncertainties surrounding the pace of
Fed’s hikes, the easing interventions of the ECB, global growth data and the trend in inflation.
We maintain our relative view of US Treasuries underperforming Bunds and JGBs
Inflation data start to show some signs of revival in the US (but not in Europe). Breakeven may
have structurally bottomed here. Reflation should gain the upper hand in H2-2016
Thus, in the US, we expect an increase in the market pricing of long-term inflation. Inflationary signs
should be watched closely as they will foreshadow a steepening decline in Govies.
Inflows into TIPS-related ETFs have been very strong in recent weeks, suggesting that
breakevens have further room to widen
We remain Neutral HICP Inflation as we expect breakevens to trade sideways in the Eurozone
We remain OW on 10y-TIPS breakevens

31
More signs tend to show that the US credit market is already in the late-cycle stage. Credit quality
is deteriorating, but at a measured pace. Financing gap has turned strongly negative, making
corporates more and more dependent on external sources of liquidity.
But low cost of funding and continued investor demand have kept the asset class afloat…
We still expect more pressure on corporate ratings (particularly in troubled sectors like energy and
materials) given the uncertain macro, revenues / earnings weaknesses, the deteriorating credit cycle,
the rising idiosyncratic risk and the increasing net leverage.
The rally in high-yield bonds has extended alongside a climb in oil and stocks, higher inflows, a drop in
market volatility and an attenuation of global fears (global growth, CNY devaluation, equity earnings…).
We remain concerned about the outlook for the US HY market, where default rates continue
moving up and balance sheets are deteriorating. Renewed weakness in oil prices will bring this issue
under the spotlights again.
We expect volatility to stay elevated and think that an additional liquidity premium is needed to make
HY attractive. A high volatility justifies wider spreads, in our view, even if default risk remains benign.
We expect the focus on liquidity to remain. As said in previous reports, we feel concerned about the
credit market liquidity as the rate of turnover in corporate bonds has steadily declined since 2009,
despite the huge inflows.

32
In our previous report, we’ve considered that the probability of an ECB corporate QE was relatively low
(for technical reasons). We were proven wrong. The ECB expanded its policy of QE in size, and by the
inclusion of corporate debt, as well.
As a consequence, we missed the substantial move tighter in European credit but would not
chase it here. With central bank easing shifting from bonds towards credit, credit spreads should be
more anchored. But, the ECB effect is already priced in and would be balanced by an increased
corporate supply.
With spreads already at past recession levels and already pricing a worse growth environment, we
may see a better value in corporate debt (specially IG) than in equities.
We prefer to trade up in quality. We still prefer IG over HY on a risk-adjusted basis as we expect
volatility on spreads to remain elevated and we believe IG corporates better positioned to absorb the
impact of rising rates and bad news from China
We remain UW on HY and Neutral on IG, due to valuation, to rising volatility, to position within the
credit cycle and given the weak total return forecast for credit as a whole.

33
Within the credit pocket, we remain Neutral on USD vs. EUR HY spreads, but we prefer USD on a
total return basis, despite its higher beta to energy sector.
Within the HY pocket, we see a more favorable risk/reward tradeoff in the BB and B rating buckets
We stick with our preference for US IG over Eurozone.IG, as we missed the recent ECB QE effect
and think that more attractive spread valuations and higher carry should fuel a stronger bid for US
credit.
The rally in EM fixed income has gained momentum over the month, across both EM hard and local
currency
For long-term investors, EM bonds denominated in local currencies offer the most value,
especially for currencies that suffered the most against USD
Bottom line : Neutral Govies, UW US vs Eurozone Govies, remain long flatteners on the US yield
curve and short duration in 2y USTs, UW credit mainly through HY and Neutral on IG, Neutral
Eurozone vs US HY credit, UW Eurozone vs US IG credit, OW 10y-TIPS and Neutral HICP Inflation,
UW High Yield vs High Grade, Neutral on EM sovereigns with a little preference for local bonds

34
US Govies & Inflation
Despite the dovish tone from the Fed, we
still expect 2 to 3 Fed hikes this year,
(nominal) Us 10-year yields to go higher
from their current level (~1.70) and inflation
to rise over the coming months.
Since mid-February bottom, nominal yields
moves were mainly driven by inflation
expectations.
Real yields may continue to decline (as
they did year-to-date) due to further CB
easing and weak global growth
perspectives.
But we remain OW on 10y-TIPS
breakevens as we think that current pricing
is too pessimistic and we see strong inflows
into TIPS-related ETFs

35
US Govies – 10y-UST
Tactically, we remain
Neutral on 10y USTs as
long as the 1.97 level is
preserved. Above, we’ll
move to UW again.
Our ultimate target on US
10y yields was revised
down to 2.45 by H2-2016
A base may develop
anywhere inside the 1.60-
1.77 range.
Only a retracement back
above 1.77 may confirm
that a base is already in
place.

36
Credit – The Liquidity Issue
We’ve seen signs of deterioration in some measures of liquidity since the GFC
Average trade size for US credit, German bunds has declined 30% to 40% from pre-crisis. Is that
a sign that the ability to execute trades in size (without affecting prices) is reduced?
Actually, the daily average trading volume for US corporate bonds has increased by 40%, but the
number of daily trades has doubled in the same time (because of electronic trading, among others)
A more scaring signal: Trading volumes as a % of market size (market turnover) have fallen for most
assets, except US equities: -50%-60% on US credit versus 2005.
Average trade size

37
US High Yield
The rally in high-yield bonds has
extended alongside a climb in oil
and stocks, higher inflows, a drop in
market volatility and an attenuation
of global fears (global growth, CNY
devaluation, equity earnings…).
We remain concerned about the
outlook for the US HY market,
where default rates continue moving
up and balance sheets are
deteriorating.
Renewed weakness in oil prices
will bring this issue under the
spotlights again.

38
EXCHANGE RATES
We moderate our view for the dollar based on a more dovish FOMC rate path and tone.
But, the dollar rally is not over. We continue to believe the USD should rally from current levels as
the Fed normalizes its policy and the ECB / BoJ both move the other way.
Historically, USD cycles have been persistent, lasting 5-6 years in the appreciation phase. We thus
see further medium term USD gains against the major crosses (especially EUR) and expect a
cyclical low in EUR/USD somewhere in H2-2016 (before the ECB tapering)
Besides the Fed being in hiking mode, we expect the US dollar to be supported by the fears of a global
recession, weaker-than-expected inflation dynamics and “Brexit” risks in Europe. The risks to our
view reside in delayed Fed action and disappointing ECB action. But we think that most of that is
already priced in.
During March, and according to our positioning rules on EUR-USD, we’ve moved from Neutral to OW
as the spot broke above the 1.1060 resistance, and then to Neutral again above 1.1250
Our positioning on EUR-USD remains driven by (almost) the same trading rules:
Remain Neutral within the 1.08 - 1.15 range
Move to OW if the spot breaks above the 1.15 resistance to target 1.165-1.17
Move to UW after a clean break below 1.08. Target = 1.0725 and then 1.04 to parity over 2H

39
EXCHANGE RATES
On USD-JPY, we turned from Neutral to UW in February, as the spot broke below the 113.50-
114 area.
In our previous reports, we said “We think that this break below 114-113.50 may open the way for
a much more impulsive decline towards 109.00”
Now that our target has been reached and exceed, we turn to Neutral again and watch for
signs of near-term stability or basement somewhere between current levels (~108) and 106
Only a clean break above 111 could make us turn to OW
The more dovish tone from the Fed has certainly halted the USD’s rapid rise, giving EM currencies
some respite (3 to 8% Ytd)
We anticipate that pressure on EM currencies will resume and continue until we see a more
constructive / fundamental improvement for global growth and commodities supply/demand
imbalances.
We remain UW EM and Commodity FX

40
US Dollar Index
After rising at the fastest pace on
record in 2014, the US dollar has
been in a range over the last year
We expect the DXY Index to
remain rangy, and a bottom to
form in the area between 92.5
and 93.5.
Our primary scenario remains a
reversal formation in the 92.5-
93.5 area.
Breaking this area to the
downside will open the door to a
much more substantial
correction.

41
EUR-USD
Technically, the next area to
watch closely is 1.145-1.15.
Above, the spot may target 1.17-
1.18.
Over the short-term, we expect a
local correction towards 1.12
before moving higher.
Over the medium-term (2H-
2016), we maintain our downside
projections towards 1.04-parity.

42
USD-JPY
Last month, we turned from
Neutral to UW, as the spot broke
below the 113.50-114 area,
expecting a much more impulsive
decline towards 109.00.
Our target has been reached
and exceed. We turn to Neutral
again and watch for signs of
near-term stability or basement
somewhere between current
levels (~108) and 106.
Only a clean break above 111
could make us turn to OW

43
COMMODITY
Commodity prices finally posted gains in Q1-2016, mainly driven by the fall in the US Dollar (due
to the more dovish tone from the Fed), Chinese stimulus and the rebound of precious metals and oil.
During the quarter, energy and metals show some revival, but agricultural and soft commodities were
losers.
We remain UW commodities over 3-6 months as we believe the recent rally might be short-lived
The supply side has adjusted but still has a way to go in many commodities before erasing
current imbalances. In order to get more cuts in supply, we think there needs another leg
down in prices to force capitulation
With contango structures, negative roll yields will continue to weigh on returns
US dollar strengthening should resume. Dollar will dictate both direction and velocity in commos
Despite the dovish tone from the Fed, the tightening cycle will continue in the US (with 2 or 3
hikes over 2016). Higher rates are usually bearish for commos as they put a higher cost on
carrying them in inventories
China’s investment slowdown continues
We don’t see any sustainable recovery without a pick-up in global growth or a substantial
shrinkage in supply. It is likely that supply destruction will be the main catalyst for the next recovery
in prices.
The downtrend in commodities looks about to bottom out. We see one last leg down in energy
and metals.

44
COMMODITY
Bottom Line :
Energy:
Oil remains a wild card but a bottom may be forming with supply/demand imbalances coming to
an end by mid-2017
Oil prices rallied, in large part due to a weaker US dollar (due to the dovish Fed tone) and some
relief in Chinese economy
Fundamentals (oversupply, global inventories, mild growth and demand, OPEC failure to reach any
binding production cuts, Iran return to markets) continue to put pressure on prices.
We think that the bottom is in for oil, but we don’t expect a significant rally from current
levels (~$40 for WTI). We expect the spot to test again the 25-30 area before putting in a
permanent rebound
We expect oil to remain within the US$25-45 range for a while, and volatility to persist.
According to our positioning rules, we’ve switched from OW to Neutral as WTI broke above 39
We’ve adjusted our tactical rules accordingly:
Remain Neutral if the spot stays between 35 and 48
Turn UW below 35
Move to OW if the WTI breaks above 48 or below 29.

45
COMMODITY
Precious Metals:
Gold just finished the best quarter in three decades with 16.41% in Q1
The rally was mainly due to mild US growth perspectives, a weaker USD dollar, lower US real yields and
higher perceived risks in the global financial system
Outlook for precious metals continues to be dominated by the potential hiking pace of the Fed
and the subsequent impacts on US dollar and real yields.
Stronger US dollar and higher real rates should drive gold prices lower
At this stage, we think that gold / silver are still due for a final leg down. Our ultimate target was
raised to 1000 – 1040 on gold and 12.5-13 on silver.
The gold-to-silver ratio moved higher to near 80 (close to its highs over 15 years), increasing the
divergence between the two metals. As an industrial precious metal, silver continues to be
disadvantaged by current concerns about global growth.
We’ve been OW gold since the spot broke above the 1070-1120 range. Our view was confirmed
when the 1200 threshold was broken.
Tactically and given the impulsive move we’ve seen over the last 2 months, it seems reasonable to
turn Neutral here and watch for a clean break above 1270 to become OW again
Our positioning rules are adjusted as follows:
Remain Neutral between 1180 and 1270
Turn UW if the spot breaks below 1180
Go OW below 1070 and above 1270 (to target 1380 – 1420)
We will wait for 1050 to progressively start accumulating Gold.

46
COMMODITY
Base Metals:
We continue to expect industrial metals price weakness due to a combination of excess supply and
weak demand
The developments surrounding Chinese economy will continue to dictate prices in 2016
Metals prices have rebounded even as fundamental conditions have not improved. The recent price
increases are more a technically-driven move, mainly linked to the last round of Chinese easing.
From our point of view, lower prices are still needed to oblige producers to cut production and to
rebalance oversupplied markets.
We forecast one last leg down in metals prices and decide to move to UW on base metals.
Agriculture:
We think that weak grain prices are here to stay. There are no fundamental reasons for cereals price
levels to change, given the given large inventories in place and the fact that El Niño effect on markets is
already incorporated in price expectations.
The risk to our view is some new major weather events weighing on grain harvests
We continue to believe in a limited downside to grain prices from here when upside seems very
interesting, especially for a medium-to-long-term investor.
At this stage, we choose to remain Neutral

47
Crude – Supply-Demand Imbalances
Oil production still shows a
substantial surplus. According
to EIA data, the supply-demand
gap still stands around 2 million
barrels a day
US production has declined from
its peak last summer, but this
decrease was more than offset
by production increases from
OPEC and Russia.
The EIA expects the imbalance
to narrow down substantially
in H2-2017. In the meanwhile,
oil prices should remain rangy.
The Russia-OPEC freeze is not
supposed to change the picture,
as they just agreed to freeze
production at record highs

48
Crude – Tech. Perspective
According to our positioning
rules, we’ve been OW on crude
since Jan. 19th, before
switching to Neutral as the
WTI broke above 39 mid-
March.
Key support levels to watch
stand at 35.98-36.17. We need
to break below to call for another
test of the 25-29 range.
We’ve adjusted our tactical rules
accordingly:
Remain Neutral if the spot
stays between 35 and 48
Turn UW below 35
Move to OW if the WTI
breaks above 48 or below
29.

49
Precious Metals - Gold
Gold prices have continued to
move with real rates
The recent dovish tone from the
Fed, the continued central bank
easing (BCE, BoJ, PBOC), and
slowing growth expectations are
all positives for gold.

50
Precious Metals - Gold
On gold, the commitment of
traders shows 2 things:
Commercial traders (who
tend to be correct) kept /
increased their high short
interest, pointing to a future
price drop.
Speculators (small and
large) are heavily on the
long side.

51
Gold – Tech. Perspective
We’ve been OW gold since
the spot broke above the
1070-1120 range. Our view
was confirmed when the 1200
threshold was broken.
Tactically and given the
impulsive move we’ve seen
over the last 2 months, it
seems reasonable to turn
Neutral here and watch for a
clean break above 1270 to
become OW again
Our positioning rules are
adjusted as follows:
Neutral between 1180
and 1270
Turn UW if the spot breaks
below 1180
Go OW below 1070 and
above 1270 (to target 1380
– 1420)

52
Base Metals
Base Metals index has been
moving in line with China
Industrial Production

53
ALTERNATIVE STRATEGIES
The HFRI Fund Weighted Composite Index posted gains of 1.8% in March. Gains were led by
Equity Hedge (as equities reversed steep losses from the first half of Q1), EM strategies, Event Driven
and Relative Value strategies (supported by dovish central banks)
CTAs bad performance (-2.8% in March, +2.2% Ytd) was mainly driven by their defensive positioning
(long fixed income, neutral equities, short energy and long JPY) that suffered during the market
rebound. Year to date, CTAs are still leading the way.
We expect Global Macro funds to be the prime beneficiaries from a change in the Fed’s stance (to
hawkish) as they remain long USD and short on commodities.
In a world where most assets seem highly correlated, the potential for diversification has been limited.
We believe that diversifying portfolios with an increased allocation to alternatives is particularly
attractive at this stage of the cycle, given the current macroeconomic and interest rate uncertainties.
The volatile current market environment, mixing powerful trends and sharp reversals, clearly favors
CTAs
We stick to our preference for risk diversifiers (pure alpha generation strategies) over return
enhancers.
These strategies offer an interesting risk/return tradeoff, help buffer market shocks and offer
decent returns in rangy markets
We think that the divergence between the Fed and ECB monetary policies (and its subsequent
impacts on US dollar, commodities and Govies) is supportive for CTAs and Global Macros on
which we remain overweight

54
ALTERNATIVE STRATEGIES
We are not changing our recommendations on alternatives which we consider to be suited to current
market conditions / dislocations .
We maintain our OW positioning on:
Equity Market Neutrals both for their “intelligent” beta and their alpha contribution.
CTA’s and Global Macro as a diversifier and tail hedge.
Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This is our
way to take advantage from the higher volatility regime.

55
Volatility
The number of spikes in implied volatility for US, European equities and FX has trended up,
reaching a top since the GFC
This is an additional proof of the volatility regime change we pointed in early 2015.

56
HF Exposure to Risky Assets
Hedge fund strategies remain cautiously positioned on risky assets: The median equity
beta on the Lyxor platform has recovered since its lows in mid-February , but is still well below its
long-term average (~23%)
In the current (volatile) context, hedge funds try to capture directionality through dynamic
positioning and relative-value trades

Bottom Line: Global Asset Allocation
The more dovish than expected FOMC tone offered equities another leg
up, pushed bond yields lower and a put a downward pressure on the dollar
which supported oil prices, commodities and EM assets. BCE new round
of QE helped Euro credit to recover from its mid-February drawdown, and
offered risk assets some respite.
Nevertheless, our perception is that monetary policy is having less
impact on markets and the real economy.
We still see rising signs of stress in the financial system globally, with
drivers including a worse growth/inflation mix, the maturing US credit
cycle, and the risks of a Yuan devaluation and Brexit. We expect
macroeconomic volatility to remain high, other risk-off episodes during
the year, and thus, stick to our long volatility positioning into 2Q
We make minor adjustments to our asset allocation this month.
Given the high equity valuations and the poor growth outlook factored in
credit (specially US), we now prefer the latter (mainly IG).
We reiterate our view that a perfect storm is building… It combines
historically overvalued stocks with stretched government bonds. Unlike
previous storms (2000, 2008), investors would be left with almost no
place to hide
We reiterate our view that we are sailing a cyclical bull within a secular
bear. The current cyclical bull may go higher for longer. But, rising
volatility and stalling earnings growth may indicate we are in the late stage
of the cycle.
We summarize our views as follows
57

58
Disclaimer
This writing is for informational purposes only and does not constitute an
offer to sell, a solicitation to buy, or a recommendation regarding any
securities transaction, or as an offer to provide advisory or other services
by FinLight Research in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful under the securities laws of such
jurisdiction. The information contained in this writing should not be
construed as financial or investment advice on any subject matter.
FinLight Research expressly disclaims all liability in respect to actions
taken based on any or all of the information on this writing.

About Us…
FinLight Research is a research-centric company focused on Asset Allocation from a top-down
perspective, on Portfolio Construction, and all related quantitative aspects and risk management issues.
Our expertise expands along 3 axes:
Asset Allocation with risk control and/or risk budgeting techniques
Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value,
carry, volatility), real assets (real estate, infrastructure, farmland, timberland and natural resources).
Private equity and venture capital should be the next step…
Allocation with a factorial approach built on the understanding (profiling) of the risk/return drivers of
the different asset classes
FinLight Research is an innovation-oriented company. We target to fill the gap between the
academic research and the investment community, especially on real assets and alternatives. We survey
on a continuous basis the academic literature for interesting published and working papers related to
quantitative investing, non-linear profiling, asset allocation, real assets...
59

Our Standard Offer
Provide tailor-
made quantitative
analysis of your
portfolios in terms
of asset allocation,
risk profiling and
risk contribution
Provide tailor-
made quantitative
analysis of your
portfolios in terms
of asset allocation,
risk profiling and
risk contribution
•Risk Profiling
Offer a turnkey 3-
step factor-based
process in GAA
with factor
selection, risk
budgeting and
dynamic portfolio
protection
Offer a turnkey 3-
step factor-based
process in GAA
with factor
selection, risk
budgeting and
dynamic portfolio
protection
•Factor-based GAA Process
Provide assistance
with alternative
investments
(including real
assets) in terms of
profiling, and
integration in a
GAA
Provide assistance
with alternative
investments
(including real
assets) in terms of
profiling, and
integration in a
GAA
•Alternative Investments
Provide assistance
with asset
allocation and
related risk control
and/or risk
budgeting
techniques
Provide assistance
with asset
allocation and
related risk control
and/or risk
budgeting
techniques
•Global Asset Allocation
(GAA)
60

Finlight Research - Market Perspectives - Apr 2016

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (9)

Similar to Finlight Research - Market Perspectives - Apr 2016

Similar to Finlight Research - Market Perspectives - Apr 2016 (14)

Recently uploaded

Recently uploaded (20)

Finlight Research - Market Perspectives - Apr 2016