May We Live in Interesting Times

The iconic essay “The End of History,” authored by Francis Fukuyama in 1989, celebrated the triumph of liberal democracy, markets and globalization and seemed to capture the moment of the Fall of the Berlin Wall but now may prove to be short-lived. A mere 27 years later investors find themselves facing increased market volatility along with increasing frequency of “tail” occurrences (previously thought to be too remote to merit attention), largely driven by socio-political forces, headline news, negative interest rates, unprecedented experiments in monetary expansion, asset bubbles driven by credit expansion, deflationary winds and the most significant of all, the questioning of the ideological tenets of unrestrained free-markets and globalization.

US Markets had a roller coaster week with the continuing fallout from the BREXIT referendum followed by a near recovery by the end of the week showing the resilience of US Equity Markets. Nevertheless, our Global Fund Flow Summary indicates that investors pulled money out of all asset classes except Fixed Income the past week.  As the economy and markets adjust to the consequences of BREXIT and a plummeting pound, the short term possibility of a recession will continue to exist in the UK. Japan continues to fight a surging yen on its way to 100/1 USD and with that, renewed deflationary winds.  The fear of further “exit” referendums in the EU, continued mass migration flows from chaotic regions near the EU and bolder terrorist attacks are likely to feed investors fear and thus volatility in the markets going forward.  Commodities and energy are likely to continue to be subject to economic reports.  Alternatively, Precious Metals continue their upward march.   Both $SGDJ and $SGDM dominate the top positions in Basic Materials our Equity Select List.  SGDM moved up significantly in our Behavioral Quant Model.

Reviewing this week’s Select List and Quant Movers, quality Asian ETFs like $EWY and $FXI and in Europe, $EWG and $FEZ all score an attractive 66 or more in our Quant Score model.  Dividend strategies like MOAT and infrastructure strategies like $EMLP, $EMIF, $EEM and core quality positions like $IEFA are also attractive.  In the US, $IYT and $IVOV score high as well in our Quant Model.  High Quality Fixed Income Funds continue to attract investor assets despite potential interest rate risk.

Potential beneficiaries of these trends are likely to be ETFs, tactical asset management and potentially nimble active managers. Periods of heightened volatility have traditionally increased volume in ETFs. In Europe alone according to The Financial Times, demand for iShare products surged over 3x normal in USD terms.

Long-term investors favoring traditional asset allocation strategies are likely to be penalized in this type of news and event-driven market.  Fortunately for investors, the ETP marketplace has evolved to offer investors over 1,900 US listed products.  There is virtually an ETP to offer investors exposure or protection to almost any plausible investment scenario.  Subscribers to ETF Global can use the ETF Screener to identify those vehicles.  The success to date of State Capitalist powers like China and Russia as well as ideological challenges from Islamic Fundamentalism assures us that we are nowhere near realizing Fukuyama’s observation.

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