As the saying goes, there’s always a “calm before the storm”, and May 2015 proved to be a very quiet month in markets. Exiting April, the “reflationists” hyped their story that the relative improvement of the rest of the world versus the USA meant that it was time to sell the American buck and get long resource stocks. In fact, growth slowed further in China, was decidedly mixed in Japan, and remains far from great in Europe. In contrast, post the release of minutes from the Fed’s April meeting, the pace of bear flattening of the US rate curve picked up, pushing the US dollar markedly higher and “reflationist” trades into the red. Both of the Forge First funds had a solid month, making money on each of the long and short sides, and outperforming the TSX which lost -1.22% for the month...
In mid-April, markets began to discount shifts in two key variables that drive investment performance: inflation vs. deflation and the relative prospects for growth in Europe vs. the US. In any short period of time, perception is reality, and that was certainly the case with stocks and currencies during the second half of April. The winners of Q1 2015 suddenly became the losers during the last half of the month. German stocks, the US dollar, and 'defensive' equities suffered sizeable declines, while Brazilian, Russian and basic material equities were examples of losers that became winners. These developments beg two questions to be addressed in this monthly commentary. Is this asset rotation fundamentally sustainable or merely a trade? And second, as we've now entered May, typically a tough month for stocks, will 2015 be a year to 'go away in May'?...
The launch of Europe's quantitative easing program on March 9th will likely be the most important financial event of 2015, but not the only surprise that markets will have to absorb. Draghi’s QE plan is 3 times larger than the Fed’s purchases (relative to the size of government borrowing) and will be equivalent in size to 250% of the total net bond issuance of all Eurozone governments during its currently envisioned 18-month life span. Its impact on financial markets was swift, as sovereign yields went negative, the EUR/USD traded to a 12-year low, and European stocks marched higher as quickly as Japanese equities did post Kuroda's version of 'shock and awe'. Also, March 2015 was another solid month for Forge First, as each fund bucked declining North American indices.
Despite softer than expected Q4 earnings and falling 2015 EPS estimates, risk assets enjoyed robust returns during February 2015 thanks to a stabilization in currency markets. US shares more than recovered their 3.0% January price decline with a 5.8% gain. In fact, February exhibited the strongest monthly advance since October 2011, the best February since 1998, and saw US indices enjoy four all-time closing highs.
The TSX, Canada's principal index, also enjoyed gains in February, though more subdued than those south of the border. Bank shares gained much of their January losses back as fiscal Q1 results weren't as bad as feared. Meanwhile, the Energy subsector climbed 1.3% as oil prices, which touched both US$45 and US$55 during February before closing the month at US$49.30, gained 3.6%. Relentless US supply growth caused natural gas prices to fall despite much of central and eastern North America experiencing the coldest February in over 50 years.
Both of our funds at Forge First continued the strong momentum seen during January....