We’ve been over it and over it.
So have others.
You already know the story.
Or maybe you don’t. Because if we were sure you did, we wouldn’t be writing this.
Do you know what performed and what didn’t in Q1? Relatedly, do you know what the general cross-asset themes were? Probably not.
We’d be willing to bet that most people only know one, or at most two things: 1) there was some dip-buying in equities, and 2) the dollar had a rough quarter.
But believe it or not, there were other things worth noting and there’s some important nuance. For those interested, find Goldman’s concise review below.
Q1 was another quarter to own risk. Equity rallied and credit followed its standout 2016 with more positive returns. In particular, four asset pairings/thematics stood out to us with notable return divergence: (1) metals v. oil, (2) EM v. DM, (3) USD underperformance, and (4) equity v. bonds.
The most striking divergence was perhaps in commodities, where GSCI Industrial Metals outperformed GSCI Energy by c.19%. Copper was up 5.3% while WTI oil was down 5.8%. EM outperformed DM on a cross-asset basis, with MSCI EM up c.5% more than MSCI World, EM credit outperforming DM HY credit by c.1.5%, and EM FX up 3.6% against the dollar. More broadly, the dollar fell c.3% on a trade-weighted basis. Equity across regions was generally up, with the primary laggard being Topix (+0.6%), while bonds were mixed (UK 10y +1.8% return, German 10y -0.4% return) but more flat. This has meant passive portfolio and risk parity strategies have continued to do well.
Which of these divergences will hold going forward? We see EM over DM and equity over bonds as most likely. This also seems consistent with investor positioning – CFTC equity sentiment indices across regions are rising – and mirrors our client conversations. In addition, we continue to favour equity over credit and see opportunities in implied vol. Equity vol remains anchored while CDX IG, CDX HY and Gold 3-month ATM implied vol are at their 0th percentile relative to the past 10 years.