Q&A
As I have said, this will be a year where the uncertainties around outcomes remain high. The dispersion of results offers an opportunity for return, but that will have to come from uncorrelated investments, for the most part. The best money managers will make their decisions on much more specific information than is provided here or in most “outlooks” for the year 2016. I have added below a summary of some of the questions that appear to be on most people’s minds, which gets a bit more specific. Specificity is hard to come by in the investment
business and the half-life of most specifics is quite short. You can see a bit more detail and some other questions that have come up primarily from the media on the blog mentioned at the beginning of this document.
As many of you who on occasion read the Altegris blogs, you have seen me write that “Past Performance is Not Indicative of Future Results.” Given some of the dispersion we did see in 2015, this may be a time when last year’s performance may be more indicative of this coming year’s results.
Below are some of the consistent questions that have come up from those looking for answers.
Q: Taking into consideration the rollercoaster some equity investors found themselves on this past year, particularly in August, what are the biggest risks facing investors in the stock market in 2016?
A: There’s a long list of factors impacting the stock market as we begin the New Year. The global slowdown, a strong dollar and the Federal Reserve’s late-in-the game rate change, to name a few, all add a degree of uncertainty for investors. I would also stress two other factors that will play into investor returns: another year of profit disappointment driven by wage increases and the end of the oil dividend for many corporations.
Q: What will be the biggest surprise for investors over the next 12 to 18 months?
A: Inflation could pick up a lot faster than widely anticipated. I would encourage investors to keep an eye on wage growth.
Q: How are you advising clients looking to allocate assets and potentially reinvigorate their returns entering into the New Year?
A: To the extent an investor doesn’t need liquidity, the opportunities in the less liquid parts of the markets will likely benefit from a growing illiquidity premium. Just don’t buy a daily liquidity fund that has been buying illiquid securities to juice returns. Investors experienced no to low equity returns in 2015. We’re predicting more of the same for equities in 2016. It may prove to be a good year for true equity hedge fund managers. In terms of fixed income, we’re anticipating some credit accidents, but on balance, no major credit meltdowns. The recent moves in the high yield markets may have provided some opportunities if one does very specific credit analysis security by security. Activist and event-driven managers are likely to experience favorable returns as M&A activity continues to be strong going into 2016. As we have seen this in 2015, sometimes an activist approach doesn’t work, but I think over time it does. This recent action does open up opportunities for those who have a longer time horizon and are dealing in the less liquid parts of the markets. I recently made a point (of which I stole from one of our own, Greg Brucher) “…investors buy and hope, activists buy and influence, and private equity firms buy and fix.” There will be a lot of situations open for fixing over the next few years.
Q: Looking forward to the next 12 months, on which sectors are you taking a bullish or bearish stance?
A: We’re relatively positive on defense stocks, technology and healthcare. In terms of technology, we’re actually favoring old tech over new tech, particularly companies involved with the cloud, cyber security and have been spending on R&D. Moore’s Law continues to be operative. Consumer staples and most fast food companies are where we’re currently bearish. While staples tend to be a more defensive sector that does relatively well in slow growth environments, changing eating and drinking habits among Americans are going to make it tough for these companies to keep up and generate meaningful returns. I brought this up in last year’s “What to Expect...” Once again, it is company by company, but they won’t all be making the adjustments to new habits in a timely fashion. We will likely see more management changes in the sector. That may produce buying opportunities.
Q: If you had to give 2016 year-end targets for a handful of major market indicators and indices, what would they be?
A: Take the point estimates with a grain of salt because on any given day those numbers can and will change. But overall the market may keep pace with nominal GDP results in spite of the profit picture looking quite weak.
• S&P 500: 2,120 (but with big dispersion)
• Dow: 18,100
• 10-year Treasury yield: 2.65%
• Gold: $1150
• Crude oil (WTI): $52 (this was my target
before this latest downdraft and I’m
sticking with it—at the moment)
• Fed Funds Rate: 0.75%
RISKS AND IMPORTANT CONSIDERATIONS
This material is being provided for informational purposes only. The author’s assessments do not constitute investment research and the views expressed are not intended to be and should not be relied upon as investment advice. This document and the statements contained herein do not constitute an invitation, recommendation solicitation or offer to subscribe for, sell or purchase any securities, investments, products or services. The opinions are based on market conditions as of the date of writing and are subject to change without notice. No obligation is undertaken to update any information, data or material contained herein. The reader should not assume that all securities or sectors identified and discussed were or will be profitable.
Past performance is not indicative of future results. There is no guarantee that any forecasts made will come to pass. Due to various risks and uncertainties, actual events, results or performance may differ materially from those reflected or contemplated in any forward-looking statements. There can be no assurance that any investment product or strategy will achieve its objectives, generate profits or avoid losses.
All investments carry a certain degree of risk including the possible loss of principal. The value of any portfolio will fluctuate based on the value of the underlying securities. Complex or alternative strategies may be speculative and may be subject to significant financial risk. Equity securities are subject to market risk and may decline in value due to adverse company, industry or general economic conditions. Investing in debt or fixed income securities involves market risk, credit risk, interest rate risk, derivatives risk, liquidity risk, and income risk. As interest rates rise, bond prices typically fall. The risks of investing are magnified in emerging markets.
ABOUT ALTEGRIS
The Altegris group of affiliated companies is wholly-owned and controlled by (i) private equity funds managed by Aquiline Capital Partners LLC and its affiliates (“Aquiline”), and by Genstar Capital Management, LLC and its affiliates (“Genstar”), and (ii) certain senior management of Altegris and other affiliates. Established in 2005, Aquiline focuses its investments exclusively in the financial services industry. Established in 1988, Genstar focuses its investment efforts across a variety of industries and sectors, including financial services. The Altegris companies include Altegris Investments, Altegris Advisors, and Altegris Clearing Solutions.
Jack Rivkin is CEO and CIO at Altegris Advisors.