Analysis
Published
Share
Share on facebook
Share on twitter
Share on linkedin
Share on email

Ostrica Guest Blog: Corona – Corona – Corona Hedge – Hedge – Hedge

Ostrica – using data and technology as a guide through financial turmoil 

Ostrica is an active quantitative asset manager with over 20 years’ experience in building investment portfolios using data, for a wide range of clients. Since Ostrica implements dynamic hedging strategies for equities, bonds and currencies, downward volatility is reduced by over 50% during market downturns. Ostrica stands out from the ‘classic’ asset managers by using data and technology as a guide through financial markets and rather reduces risk than having to fall back to the classic answer to severe downturns, namely: “investing is long term, just don’t move and wait for the recovery”

 

Corona 

The world news headlines were all about Corona and its impact on our everyday life. In January the general opinion was that Corona was an isolated incident in China. However, the level of integration globally and movement of people has made the spreading of Corona unstoppable.

Although Corona is just a mutated flu wit high survival rates, supply chains throughout the US, Europe and China are being disrupted at an alarming rate.

Ostrica has been offering protection where the investment crowd turns and leaves deep drawdowns in major asset classes.

 

Our recent investment policy? 

Ostrica added protection to its core equity and currency holdings during the fourth quarter of 2019 and January 2020, whereby protection levels were raised from 0% to 60%.

 

Background 

Last year can be characterized by an enormous rebound in financial markets from 2018 lows. Although the US and China were in a trade war for the majority of 2019, equities had one of their best runs since the Great Financial Recession of 2008. The results in the major equity indices ranged from 25% – 30% depending on different global indices, which is four times the expected annual return of 7%.

These strong returns were built on the belief that 2020 would be a year of double-digit profit growth due to the trade truce between the US and China. Actual earnings in 2019 declined due to the trade war while equity prices kept going up.

 

Trigger in raising protection levels 

Since prices and profits started to differ at an increasing rate Ostrica’s warning systems were triggered to gradually start adding protection in Western markets. If you go against the crowd (as we tend to do) it will cost you in the short run and it did with us as well. The crowd was cheered by Trump and the fact that private investors were able to trade free of charge in the US since October last year. Since October last year Tesla for instance had a run from $ 250, – to $ 900, -. Next to that a lot of technology companies trade higher resulting in the Nasdaq generating 25% in Q4 of 2019. Multinationals started to climb to unsustainable levels of 35 EPS and higher. If valuation levels tend to go over 20 times earnings, the company has to grow at a rate which brings back the multiple to 20 within a short period of time (excluding exceptions).

 

Near future 

In the coming quarter we will sustain a range of protection between 50% and 70%. Within this range we will be able generate extra returns in volatile markets and provide protection at the same time, given the deteriorating economic environment.

We expect a strong recovery in Asia, slow recovery in Europe and moderate growth in the US. Corona will put downward pressure on growth globally. The US and Europe are most vulnerable due to their high valuations.

 

What we expect going forward for 2020 

After a decent correction in all major markets (we believe markets are still 5%-10% overvalued) the focus will shift to repairing the economies and their disrupted supply chains. When markets tank, the voice for monetary help (central banks) has been very loud since the GFC in 2008. This time is no different whereby the crowd cries to be bailed out.

We believe monetary stimulus is reaching its limits and the crowd will be disappointed given the limited arsenal of central banks. Fiscal stimulus has been enormous in the US, while Europe still has some room left. Strangely enough China, the centre of the outbreak is well positioned for a rebound given its low valuations.

 

Investment policy 2020 

Due to an overvaluation of markets we believe there is still room for a minor correction ranging between 5% and 10%.

After markets have stabilized, we believe the global economy faces a two-way outcome towards the end of 2020.

  1. V-shape recovery
  2. 2. A mild recession in the US and slow recovery in Europa and Asia

In case of a V-shape recovery we will lower the hedge to 0% in a speedy manner as to be able to grab the upside in risky assets. We believe markets will trend back to their earlier highs of the year in this scenario.

A mild recession the US and slow recovery of Europe and Asia will dampen any upside potential in the short term. Markets will keep on falling towards their earlier 2018 lows and in the end of 2020 recover to levels 5%-10% below current levels. In this scenario, we will increase the hedge until markets reach the lower boundaries and unwind later in 2020 for any upticks.

 

Share this Article
Share on facebook
Share on twitter
Share on linkedin
Share on email
Related Insights
Featured
Amsterdam Fintech Week
Get ready for XFW 2021 coming up from the 4th-11th June!
AMLD5 Guide
A source for consulting PSD2 legislation coupled with commentary, tips & tricks, and applicability.