FedFebruary will be remembered as the month of daily fresh new highs
. In fact, the US equity indexes set up their records highs despite the uncertainty about the fiscal plan, despite a mounting political risk in Europe and considering China inability to contain capital flight.

Overall, we can observe a clear sentiment of optimism, that is also confirmed by the evidence of strong economic data released so far, both in US and in Europe.

Regardless of a potential instability due to the European election season, equity inflows are still confirming that institutional investors are bracing the latest equity rally. According to EPFR, investors added $1.1bn to the funds in the week to the 22nd of February; hence the European equity funds have received inflows that almost matched the preceding four weeks combined. Still we need to highlight a divergence between institutional and retails investors. Apparently, the latter are assuming a more caution behaviour mainly because they are worried about political risk.

On top of it we have in front of us another big variable that could be a source of volatility. The FED decision to hike interest rate faster than expected could trigger down bond valuations and also equity ones. This is the worst scenario we can figure out because such a decision from the FOMC can imprint higher yields but also offset the marginal beneficial of a fiscal policy plan.rearview mirror

Of course there are several possible developments and there is no magic formula to face with this environment. Certainly, I continue to highlight the importance to protect ourselves from a growing uncertainty. A smart insurance could be the solution. I am confident to pay a premium that is hedging our portfolio against a correction of risky assets. At the same time we should find a way to finance it, by limiting the cost of our insurance. The new US administration fiscal plan is expected to be announced by the 28th of February. We don’t know any details about it. We can figure out some interventions that allow internal US players to benefit from the new plan. In fact, we always said that in case Mr. Trump won US election, America would have been the place to be.

Hence a clever strategy is to use the carry coming from US credit companies to finance an equity short position. If the hiking process will be subdued, then the risk premium incorporated into the bond market is sufficient enough to provide an extra return in the medium term.


Christian Zorico: LinkedIn Profile

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Ha conseguito il Master of Quantitative Finance and Risk Management (MAFINRISK) presso l’Università Bocconi nel 2005 dopo essersi laureato in Economia degli Intermediari Finanziari presso la stessa Università. Inizialmente ha svolto attività di ricerca e tutoring per i corsi di Portfolio management e Applied Econometrics presso l’Università Bocconi tenuti dal Professor Andrea Beltratti. In seguito ha avuto modo di consolidare le nozioni tecniche ed applicarle sul campo durante l’esperienza come quantitative analyst e risk manager in un Hedge Fund con strategia macro e successivamente ricoprendo la posizione di gestore di portafoglio e fund manager con mandato flessibile per una banca privata svizzera e un gestore di fondi. L’area di interesse è da sempre il mondo fixed-income e azionario, inseriti nel più ampio approccio di analisi top-down.


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