My retreat from risk
last month
didn't pay off. The model portfolio gained a smidgin, but the great
snap back in risk appetite came and went and still the reflation rally
lurched forward. Particularly painful was a move into Electricite de
France, which would have lost nearly 19 per cent in Euro terms, but
gained nearly that much back in dollar terms thanks to the greenback's
slide. Otherwise, big positions in European and Russian bonds continued
to pay off, but the model was virtually flat for the month. Worse it
has been underperforming the S&P since September. My adherence to
macroeconomic fundamentals instead of going with market sentiment has
proved unwise.
I still believe the risk roller-coaster is heading downward, so
this month I'm reducing my exposure to Russian debt as a proxy for emerging-market credit and instead putting more into European and US bonds. Given the uptick in inflation expectations, this may prove a repeat of last month's torpor. Just in case, I'm buying a smattering of equities, which brings the cash portion of the portfolio down significantly, to 35 per cent from 50 per cent. As some analysts have said, with the Fed and central banks pledging to keep money cheap amid doubts about whether the recovery has legs, anything may be better than cash.
