Saturday, November 28, 2020

​It’s Time to Applaud a Contrarian Mentality

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It’s no secret that most asset classes are struggling to find yield in the market, and it remains unclear when the pain will end, particularly with downside volatility in the international spectrum.

Morningstar reported that just 15% of mutual funds investing in large-cap stocks managed to beat index funds through June 2016. Hedge funds are also lagging in general and through July were headed for a third year of lower returns than the S&P 500 index fund. The bond market has also been a source of worry so far this year with more than 30% of Eurozone bond debt in a negative yield. Is this the calm before the proverbial storm?

The value rise of the dollar in our immediate past is dramatic and also serves as additional evidence of both market volatility and anomalous market movements as the US government surges towards $20 trillion in debt but is realizing a strengthening currency unit. It strengthened 26% against the Euro and 44% against the Japanese Yen over the past five years, according to Canadian Forex company Oanda. In less-developed nations, this has been even more significant as evidenced by a 50% rise against the Mexican peso. Would it make sense to any blackboard logic that the USD, despite the debt, anemic economic growth and political turmoil, would be increasing in value at the rate that it has. Are all the doomsday fanatics wrong about an imminent, new world reserve currency?

The Bank for International Settlements reports that hedge funds and proprietary traders reduced currency trading in the spot market by 29% during the past three years, while trading volume remains strong and averaged $200 billion a day in April 2016 alone. Why would that be? Are we seeing the speaking of hedge funds, and their efficacy to find alpha at any cost? Is the model of mega-funds that do it all retreating along with their yield to their investors? Perhaps the experts of currency trading should remain trading, and let the fund managers stick to the discipline that is native to the core tenants of their original PPM. In other words, there is so much money piled into hedge funds that most funds have nowhere to turn to provide yield, and often endeavor into practices that are not in line with their core expertise. Currencies are one of those for many funds. Unless you understand the market inside and out, and then also have the technology to facilitate the proper trading practices, it is a wise move to exit stage left.

So where does that leave you and me? It’s a good time to be a smart investor, and there is value in adopting a contrarian mentality at times like this. When everyone is buying, we believe it is wise to consider whether it is the right time to sell. In most cases, a buying frenzy often raises the prices of a “good.” Perhaps if hedge funds are going away from the market, it may be a signal that this is exactly where you want to be, but only if you are properly supported. Of course, all facts must be taken into consideration before making an investment decision and, regardless of volatility, the most important thing is the ability to navigate market complexity and bi-directional uncertainty The Know It Guy.




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