Why I’m upping risk assets by 10%

January ended to great fanfare. The Dow and the S&P 500 rose almost 8% and markets are up 16% since December’s lows.

Emerging markets did even better, with Brazil and Argentina rising almost 20% for the month. It was a similar start to the year in 2018 but this time it was made sweeter by how much markets suffered as last year drew to a close.

As I discussed in my last report, we still like the stock markets in the US and emerging markets, particularly Brazil and Argentina. Not only do they benefit from stable interest rates, but a weaker dollar, valuations and rising commodities are playing in their favor. All things considered they offer more value than even the US equity market.

The Fed cleared any doubts about its strategy on rates: wait and see what the  economic data tells them so as not to rush into rising rates. After so much noise and confusion, the Fed went to great lengths to make its message clear after the wild volatility that it caused to the financial markets worldwide. 

There was also good progress in the negotiations between the US and China. While writing this report it was announced presidents Donald Trump and Xi Jinping will meet later this month in Vietnam. Despite all the political rhetoric, most analysts on agree that real progress has been achieved and they could reach a comprehensive trade deal.

Most companies reported a very good fourth quarter including leaders like Apple, Facebook, AMD, General Motors, Snapchat and General Electric. Even those that didn’t have a great earnings report were not savagely punished by the market as can often occur.

Another major focus of attention has been Venezuela. We still do not know what the final outcome will be and how long the leadership contest between its two presidents will last. We are following it minute by minute and reporting it to our clients. The US and its allies will want to avoid any direct confrontation and will likely wait patiently for the harsh economic sanctions they imposed to take effect.

Going back to the markets, given recent events we see a mild slow down taking hold but no recession on the horizon. We recommend adding another 10% allocation to risk assets, our favorites being US and emerging markets equities, mainly in Latin America with an emphasis on Brazil and a little Argentina for those with a high risk tolerance.

We also like the long side of the bond curve. With an attentive but data-dependent Fed, we see the ten-year bond between 2.7% to 3% without much change. In this context, adding emerging, corporate or sovereign credits in dollars is a good idea. For those who want to take more risk, with a more stable dollar adding exposure to  local currencies also make sense.

Interestingly, commodities started well this year almost without exception. This is a good omen for emerging markets and also points to evidence that China’s economy is working well.