Finlight Research - Market Perspectives - Mar 2016

Market Perspectives
March 2016
Mar. 7th, 2016
www.finlightresearch.com
Heading into the year of the Red Monkey...

“There are going to be a lot of ups and downs.
The monkey is a creature who is tricky and
cunning (…) There will be a transfer of wealth
(in February and August)... money will be lost”
– CLSA’s feng shui team
“Investors like things that appear certain. My
view is that everything is uncertain, you're just
trading one type of uncertainty for another.”
– Seth Klarman
2
FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation
The tone in risky assets has improved, helped mainly by stronger U.S.
economic data, expectations for more ECB stimulus, a new round of
easing in China and some stabilization in oil prices
But, the market tectonic remains unstable, the trend in the economy
still looks shaky (just look at PMIs), and earnings recession is ongoing.
There is plenty of uncertainty and global worries in the market. We remain
cautious on risky assets and expect lower asset returns and higher
volatility to make the essence of the new year. More risk-off episodes
and downwaves should be expected in the course of the year..
We expect equity volatility to drift higher through 2016 as a result of
all these macroeconomic uncertainties
Equities, credit and commodities have bounced, in what seems very
much a technically-driven move. We will use the current rebound to
turn Underweight on equities (on which we are tactically OW, for now)
We reiterate our view that a perfect storm is building… It combines
historically overvalued stocks with stretched government bonds and
corporate credits. 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
US Retail sales made another new high
Recent reports show strong personal income and spending, and a rebound in durable
goods orders (+4.9% overall and +1.8% ex-transportation).
US unemployment rate remained below 5% and labor participation increased
The Bad
Eurozone, US and China PMI reports disappointed.
In the US, services PMI followed manufacturing PMI downwards
German business sentiment slumped sharply on global economy concerns
The earnings environment remains weak. The weakness in PMIs points to further EPS
downgrades ahead. Another cautious signal on earnings momentum is launched by the latest
drop in IFO
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.
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
The current picture is characterized by relatively strong Employment and Income, a weak Industrial
Production (down in 9 of the last 12 months) and uncertain to weak Real Sales.
The average of these indicators suggests that the economy is still trending sideways. Industrial
Production and Retail Sales are pulling the trend lower. But setting a new high still seems possible over
the short term.

6
GS – Global Leading Indicator (GLI)
The Feb. Final GLI came in at
1.2%yoy. Its MoM momentum
came at 0.07% (up from
0.06% last month)
GLI remains at the frontier
between Slowdown and
Expansion phases.
Five of the ten underlying
components of the GLI
improved in February.
We continue to think that the
acceleration we’ve been
witnessing since Jan. ‘15 is
quite modest for a typical
expansion phase

7
US Growth
US GDP grew at an annualized rate of 1.0% in Q4-2015, up from a previous estimate of 0.7%, but well
below previous quarters expansion (3.9% in Q2 and 2.0% in Q3)
The Q4-GDP upward revision was mainly due to a build-up in inventories.
We expect the slowdown to spread into Q1-2016 because of inventory liquidation and CapEx
collapse (especially in the energy sector).

8
US PMI
In Feb., Markit's flash PMI fell sharply in both
manufacturing and services, pointing to further
slowdown in the economy
Feb’s PMI showed weakening in new orders,
output and employment, which stand close to
their worst readings in multiple years
Even Services PMI was sharply down at 49.8
(from 52.3 in Jan.).
PMIs seem to suggest that economic
deterioration is spreading outside of the
manufacturing / energy sectors

9
Consumer Confidence
The latest Conference Board Consumer Confidence Index was released this morning based on data
collected through February 11. The headline number of 92.2, was a decrease from the January final
reading of 97.8, which is an upward revision from 96.3
Since mid-2015, the National Federation of Independent Business Small Business Optimism Index has
been showing a more pessimistic mood than the one we see through the Consumer Confidence Index.

10
US Retail Sales
Real Retail Sales made another new high, but are still rising below trend
Typical pre-recession plateauing behavior is not visible yet in real sales

11
US Inflation
Are we entering a stagflationary macroeconomic
environment?
Global inflation is rising except in Europe.
US CPI and core PCE jumped to 1.4% and
1.7% YoY respectively, in January.
When we combine rising inflation with the
growth slowdown visible in PMIs, we see
stagflationary risks moving higher

12
Market Liquidity
According to a recent Deutsche Bank study, ”the picture from liquidity metrics across asset classes is
mixed, but liquidity has deteriorated in many cases”
Source: http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/10337-599A/85959108/DB_TheHouseView_2016-03-02.pdf

13
EQUITY
In our previous report, we argued that the sell-off 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 believe that this bounce will soon become an opportunity to sell into
US earnings recession continues. US profits should come under more pressure as profit margins
(boosted by weak wage growth and low interest rates) reach a top, with wage / interest rates rising from
here. This peaking in profit margins puts a cap on any upside in equities
We keep our strategic positioning unchanged. We think that the equity bull market is aging, that
market valuation is elevated, volatility is heading up, and earnings and margins are declining
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
Stocks seem more vulnerable than ever to any external choc (Central Banks action, China, Crude
oil…)

14
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.

15
EQUITY
Bottom line :
De-risking should continue. A higher allocation to cash is sensible in this late-stage stock bull.
According to our positioning rules (Feb 15), we’ve turned from Neutral to OW on the S&P500
as the index broke above the 1903 level. We will stay so as far as the spot remains above
1975.
Between 1975 and 1850, we’ll turn Neutral
Between 1800 and 1850, we may move to OW to play another rebound.
Any break below 1770-1800 would make us move massively to UW
We remain Neutral on Europe and Japan vs. US despite the policy divergence between the
Fed and the ECB/BoJ:
The Topix earnings momentum has shown some signs of stalling over the last quarter
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, given the Fed hawkish stance and USD strengthening. We stay
so despite the recent EM outperformance. Negative spillovers from China will also likely have a
strong impact on other EMs.

16
US Earnings
The S&P500 stands within an earnings
recession with -0.4% YoY in Q2 and -1.3%
YoY in Q3
The blended earnings decline for Q4 2015
is -3.4%, according to FactSet’s report. The
blended revenue decline for Q4 2015 is
now -4.0%.
For Q1 2016, the estimated earnings
decline is -8.0%, and -3.3% when the
energy sector is excluded.
For Q1 2016, 91 companies have issued
negative EPS guidance and 24 companies
have issued positive EPS guidance.
No earnings/revenue growth is
projected before Q3-2016
For all of 2016, the estimated S&P 500
growth rate is now projected at 2.9% for
earnings and 1.8% for revenues.

17
US Earnings
With 99% of the companies in the S&P 500
reporting earnings to date for Q4 2015,
74% have reported earnings above the
mean estimate and 47% have reported
sales above the mean estimate
The proportion of S&P500 companies
beating EPS is in line with the historical
median. However, sales beats are well
below the historical norms.

18
Global Earnings
In Europe, the earnings season has seen
marginally more beats than misses so far,
but the misses have been large
The Euro Stoxx median blended Q4-2015
EPS growth is flat YoY now…
Consensus 2016 EPS growth for the MSCI
World have dropped from 6.1% to 3.2%
over the past few weeks (down from 12% a
year ago).
According to IBES data, the same
gloomy EPS picture is visible on other
major indices.

19
S&P500 – A Long-Term Perspective
It’s worth noting that the pattern seen around the top of mid-2015 (~2135) is similar to the topping
pattern already formed in 2008. The current configuration seems to suggest that the bull market is
approaching its conclusion.
For this scenario to be confirmed, the level of 2028 should be preserved.

20
All long-term technical indicators point to a market deterioration similar to the one already experienced
around previous tops.
Source: StockCharts.com

21
From our previous report : “The
current sell-off represents a
correction in an exhausted bull
market, rather than the beginning of
the next major global bear market.
We still wait for a final leg up with a
massive top forming around 2135 –
2170 on the S&P500”
During the last correction, the
underlying bull structure hasn’t
suffered any material damage, as
both the 200-wma (~1788) and the
trendline from 2009 lows (~1758)
have been preserved.
As the index broke above 1903, we
switched from Neutral to OW to play
the rebound we’ve been expecting.
From a shorter-term view (please
see below), the next level to watch
stands at 2028.

22
S&P500 – A Short-Term Perspective
As expected in our previous report,
the S&P500 has broken through the
main resistances at 1947 and 1975.
We still expect an extension to 2028.
There, a pullback becomes possible.
Scenario 1 (50% probability,
compatible with the topping pattern I
discussed above): The pullback
occurs and we see a top forming
around 2028. In that case, a broader
recovery would become highly
questionable. We would bet on the
end of the correction and the
downtrend should resume.
Scenario 2 (50% probability): A
breakout above the 2028 level should
open the way to 2110 and probably a
new high around 2150-2170

23
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).
The model targets 1942 - 1903 and reduces its shorts above 2021.

24
EM Equity
Emerging Market stocks have
underperformed their developed
market peers.
In Jan. ‘16, the Shiller P/E ratio on
EM stocks fell to 10, making EM
valuation very attractive for a
long-term investor.
S&P500
DM ex-US
EM

25
Chinese Stocks
From a long-term perspective,
Shanghai Composite still
seems very vulnerable.
Over the short-term, and as
far as the 2936 resistance is
not cleared, the index would
remain on the cusp of
another impulsive sell-off
The next level to watch is
2635. A break lower will open
the way towards 1888!

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FIXED INCOME & CREDIT
We feel completely disoriented by government yields (especially in the Bund). We have revised
our views on US/Eurozone Govies to take into account more persistent risk aversion and reduced
growth expectations.
Like in December, the market is expecting the ECB to announce a highly dovish package of measures
beating expectations. The risk of another disappointment is real.
.
We maintain, however, our bearish directional view on duration, expect higher nominal rates and
We expect realized rates volatility to remain elevated given the uncertainties surrounding the pace of
Fed’s hikes, the trend in inflation and the easing amplitude of the ECB.
Last month, we moved tactically from Neutral to UW on USTs as the 10-year yield broke below 2.00.
But, we were obliged to turn Neutral again as the critical support of 1.78 was broken to the
downside. We keep our Neutral view 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
On German Bund, we also moved from Neutral to UW as the 10-year yield dived below the 0.40 – 0.45
area. It was a very bad idea and we stopped it around 0.23! We have no views on the Bund.
We maintain our relative view of US Treasuries underperforming Bunds and JGBs

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Inflation data start to show some signs of revival in the US (but not in Europe). Breakeven may
have structurally bottomed there.
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

28
2016’s credit losses have been recovered over the past few weeks
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…).
With spreads already at past recession levels, we may see a better value in corporate debt
Nevertheless, 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.
Higher vs lower quality bonds outperformance seems to confirm our fears.
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.
We remain UW on corporate credit (mainly HY, but turn Neutral on IG), due to valuation, to rising
volatility, to position within the credit cycle and given the weak total return forecast.
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.

29
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…
US High Yield is the only segment where we see some potential for spreads tightening. But we
expect this tightening to be more then offset by the rise in UST yields
European credit may appear more attractive than its US counterpart given lower default rates,
“younger” business cycle, BCE loose monetary policy, a cheaper valuation and, above all, the
possibility of corporate bond purchases by the ECB.
But, in our view, the difference in valuation is not enough to absorb the lower liquidity of
European credit, and the probability of an ECB corporate QE is relatively low (for technical
reasons).
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. We position our credit portfolios into
higher quality names across sectors
Within the HY pocket, we see a more favorable risk/reward tradeoff in the BB and B rating buckets
We still prefer US IG over Eurozone.IG, as we think that more attractive spread valuations and
higher carry should fuel a stronger bid for US credit.

30
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 turn 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

31
US Govies – 10y USTs
Tactically, and according to our
positioning rules, we’ve decided to
move from UW to Neutral as the the
critical support of 1.78 was broken
to the downside.
The next level to watch is 1.90
A break higher will open the way to
1.97. Only a clean break above this
level will ensure that a base is
already in place.
We keep our Neutral view as long
as the 1.97 level is preserved.
Above, we’ll move to UW again.

32
Credit – Distressed Debt
S&P US Distress Ratio for junk bonds reached 33.9 in Feb. ‘16, 3x its levels a year ago.
Distressed debt soared to $327.8 Bln, a level last seen end of 2008

33
As expected, of the 607 distressed bond
issues in the ratio, 41% are related to Oil
and Mining sectors.
But, this is not just an Oil story..
The remaining 59% are spread across the
other sectors…

34
For European Distressed debt, the picture is slightly better
The HY Distressed Ratio soared to 13%, but is still far from it 2011 highs around 30% of
outstanding debt.

35
Credit – The Fallen Angels Flag
DM Fallen Angel volume of $69Bln
YTD is already a post crisis high
Like in 2002 – 2005 and 2009, this large
pick-up in fallen angel volumes seems to
coincide with weak markets, reduced
new issuance (USD issuance in HY is
merely 75% below 2015 levels at the
same period) and high volatility.

36
Credit – The Rating Drift Flag
The Last 12 month upgrade-to-downgrade
ratio has reached levels last seen in H2-
2008.
And this not just an oil/energy story.

37
Credit Fundamentals – Net Leverage
European IG net leverage has increased
at a sustained pace since 2012, reaching
(and probably exceeding) levels last seen
during the financial crisis.
The same is true in the US where the
leverage trend doesn’t look really better
when excluding the distressed energy sector
The good news is that interest coverage is
still comfortable as corporates locked in
record-low yields for the long term
The bad news is that this accumulated debt
hasn’t been deployed in building new
capacities (capex), but in M&A and financial
engineering (stock buybacks, short-term
debt replacement)
European Investment Grade Net Leverage
US Investment Grade Net Leverage

38
EUR vs USD Credit
European credit may appear more
attractive than its US counterpart given
lower default rates, “younger” business
cycle, BCE loose monetary policy, a
cheaper valuation and, above all, the
possibility of corporate bond purchases by
the ECB.
In fact, after removing commodity-related
credits, euro HY trades wide to USD across
most rating buckets.
But, in our view, the difference in
valuation is not enough to absorb the
lower liquidity of European credit, and
the probability of an ECB corporate QE is
relatively low (for technical reasons).

39
EXCHANGE RATES
The dollar rally is not over. We reiterate our bullish view on USD over the medium-term and expect a
revival of the appreciation cycle of the '90s
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, deflation 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.
The continued monetary divergence between the Fed and ECB, and the shallow growth outlook for
China, should lead to further downside in EURUSD throughout at least the first half of 2016.
Ultimate target ~ parity.
Last month we’ve moved from Neutral to OW as the spot broke above the 1.1088 resistance. Than
we turned Neutral as it reintegrated the 1.08 – 1.1060 range. The pair appears to be highly fragile
and ready to resume its downtrend any moment
Our positioning on EUR-USD remains driven by (almost) the same trading rules:
Remain Neutral within the 1.08 - 1.1060.range
Move to OW if the spot breaks above the 1.1060 resistance, then to to Neutral near 1.1250, and
to UW above 1.1460
Move to UW after a clean break below 1.08. Target = 1.0725

40
EXCHANGE RATES
On USD-JPY, we turned from Neutral to UW, as the spot broke below the 113.50-114 area.
In our previous reports, we said “We think the pair has already reached a peak in 2015 and is
likely to see a downward trend in 2016 (target ~114). Main reason for that: increasing current
account surplus and expected unwinds of foreign assets by Japanese investors.”. Our 114 target
has been reached and even exceeded.
We think that this break below 114-113.50 may open the way for a much more impulsive decline
towards 109.00.
We’ll move to Neutral again if the spot returns to its previous consolidation range (114-125), and
switch to OW above.
We remain UW EM and Commodity FX, given the Fed’s hiking stance and bad news coming from
China.

41
USD-JPY
Our target of 114 was reached
and even exceeded.
According to our positioning rule,
we turned from Neutral to UW,
as the spot broke below the
113.50-114 area.
This break open the way for a
much more impulsive decline
towards 109.00.
We’ll move to Neutral again if the
spot returns to its previous
consolidation range (114-125),
and switch to OW above.

42
COMMODITY
Prospects for commodities are still looking shaky:
China’s investment slowdown poses a clear downside risk for commodity prices
US dollar strengthening is expected to persist over the coming 6 months, weighing on commos
The tightening cycle has started in the US. Higher rates are usually bearish for commos as they
put a higher cost on carrying them in inventories
Excess supply hasn’t been solved yet
The downtrend in commodities looks about to bottom out. But the prospects for a rapid recovery are
very slim. In previous cycles, oil and copper have spent a much longer time trading at depressed
levels
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.
Over 6 to 12 months, return forecasts are negative for commodities as a whole. We remain
underweight commodities overall .
From a longer-term perspective, owning commodities makes sense in an asset allocation because of
their structural low correlations to other assets and strong inflation hedging abilities,

43
COMMODITY
Bottom Line :
Energy:
Saudi Arabia, Venezuela, Qatar, and Russia reached an historic agreement to cap oil production at
mid-January levels. It was a decision to freeze rather than cut production
Fundamentals still indicate downward pressure on crude prices. High levels of global inventories
and continuous oversupply continues to weigh on price
We think that the bottom is in for oil, but we expect multiple tests of the $25-29 area before a
permanent rebound, and high volatility to persist.
According to our positioning rules, we’ve been OW on crude since Jan. 19th.
It’s not clear if the market is still in its corrective phase, or in the early stages of a reversal
A clean break above the 36 – 36.50 area would be needed to confirm that the bottom is
already in place.
We remain OW and will move back to Neutral if the WTI breaks above 39 or below 25
We’ve adjusted our tactical rules accordingly:
Stay OW as far as the WTI stays between 25 and 39.
Move back to Neutral if the spot breaks above 39 or below 25
Move to OW above 42 and trade the 42-52 range
Go Neutral again if the WTI goes above 56.5
Go OW if the it breaks above 63

44
COMMODITY
Precious Metals:
Outlook for precious metals continues to be dominated by the potential timing and pace of Fed’s rate
hikes and the subsequent impacts on US dollar, real yields and commodity prices.
The main risks for gold / silver prices in the near term are: higher US real yields, stronger USD, outflows
from gold ETPs and weaker gold flows to Asia.
We believe prices will likely trough in mid-2016 as these factors begin to fade.
It’s not clear if whether the bottom is already in place or not.
At this stage, we think that gold / silver are still due for a final leg down. Our ultimate target
remains at 980- 1000 on gold and 12.5 on silver.
We’ve been OW gold since the spot broke above the 1070-1120 range. Our view was confirmed
when the 1200 threshold was broken, increasing the probability that a material low was already in place
Our positioning rules remain unchanged:
Neutral between 1120 and 1070.
OW below and above.
We will wait for 1050 to progressively start accumulating Gold.
Tactically and given the impulsive move we’ve been witnessing over the last 2 months, it seems
reasonable to turn neutral here and watch for a clean break above 1280 to become OW again

45
COMMODITY
Base Metals:
The main reasons behind the bear trend we’ve seen since 2011 (growth disappointments in China and
broader EM) are still alive… 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 are bearish the fundamentals. But, from a more tactical trade perspective, we remain Neutral on
base metals.
We don’t like holding Iron ore, nor Copper. But, from a tactical perspective, we turn Neutral on both
given the ongoing technical rebound. Coper, for example, can go as high as 5875 and remain within
its downtrend from Feb. ‘13.
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
At this stage, we choose to remain Neutral because of still evident excess supply.
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.

46
Crude – Fundamentals
“The global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the
surplus takes even longer to clear than previously estimated”, according to the International Energy
Agency
The global excess supply stands around 2 millions barrels per day
The inventory levels have increased every quarter for the last eight quarters.
Supply needs to decline and the current inventory level needs to normalize before any recovery
will occur in Oil prices.

47
Crude – Tech. Perspective
According to our positioning
rules, we’ve been OW on crude
since Jan. 19th.
It’s not clear if the market is still
in its corrective phase (view 1),
or in the early stages of a
reversal (view 2)
we still favor view recent price 1
Key levels to watch stand at
36.03-36.28. So far, there is no
evidence of a top forming.
A clean break higher would be
needed to confirm that the
bottom is already in place.
Next target 39.40
We remain OW and will move
back to Neutral if the WTI breaks
above 39 or below 25

48
Gold – Tech. Perspective
We’ve been OW gold since
1120.
Our positioning rules remain
unchanged:
Neutral between 1120
and 1070.
OW below and above.
We will wait for 1050 to
progressively start
accumulating Gold.
Tactically and given the
impulsive move we’ve been
witnessing over the last 2
months, it seems reasonable
to turn neutral here and watch
for a clean break above 1280 to
become OW again.
Such a break could significantly
increase the chances that a
material low is already in place.

49
ALTERNATIVE STRATEGIES
The HFRI Fund Weighted Composite Index posted gains of 0.5% in February, outperforming US
equities for the third month in a row. Gains were led by Macro strategies (+1.9% MoM, 3.1% YTD),
trend-following CTA strategies (+3.0% MoM, 5.6% YTD)
CTA performance was mainly driven fixed income long exposures (especially in German bonds),
currencies (especially on the Brexit risk and British Pound decline). CTAs lost money on short energy
(as oil reversed steep losses) and suffered from the rebound in equities.
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. Our choice has been rewarding as performance divergence between directional beta and
market and quantitative trend-following strategies expanded last month.
We think that the widening gap 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

50
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.

51
Volatility
Based on Lyxor platform’s aggregate
gross exposure, we see that hedge
funds (in aggregation) has stayed
cautiously on sideline during the last
bounce in risky assets.
At 7.8%, the median equity beta is
back levels last seen mid-2012.

Bottom Line: Global Asset Allocation
The tone in risky assets has improved, helped mainly by stronger U.S.
economic data, expectations for more ECB stimulus, a new round of
easing in China and some stabilization in oil prices
But, the market tectonic remains unstable, the trend in the economy
still looks shaky (just look at PMIs), and earnings recession is ongoing.
There is plenty of uncertainty and global worries in the market. We remain
cautious on risky assets and expect lower asset returns and higher
volatility to make the essence of the new year. More risk-off episodes
and downwaves should be expected in the course of the year..
We expect equity volatility to drift higher through 2016 as a result of
all these macroeconomic uncertainties
Equities, credit and commodities have bounced, in what seems very
much a technically-driven move. We will use the current rebound to
turn Underweight on equities (on which we are tactically OW, for now)
We reiterate our view that a perfect storm is building… It combines
historically overvalued stocks with stretched government bonds and
corporate credits. 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
52

53
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...
54

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)
55

Finlight Research - Market Perspectives - Mar 2016

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