• The bull case for a soft landing is getting more and more difficult to fathom. History is not on the Fed’s side in regards to its interest rate hiking cycle. The 2010’s coined addage, “don’t fight the fed” no longer rings true given the Fed is backed into a corner. Stagflation conditions could be on the horizon with a full global pandemic reopening one of the only potential positive fundamental growth catalysts on the horizon.
• With a relatively bleak macro picture, it’s understandable markets like the Nasdaq 100 and Chinese stocks have corrected sharply. However, the selling at this stage appears technical, providing a degree of optimism that a bounce/stabilization is near.
• Geopolitical risks take multiple forms in the current market environment. The West’s economic warfare strategy unfortunately results in just as many losers in the West as in target economies. We are only at the beginning of the capital markets reorganization that must take place if Russian global economic access continues trending downward.
• The case for Chinese stocks is multi-fold. Clearly, Chinese stocks are oversold on a technical and fundamental basis. Decoupling due to stable Chinese growth and a loosening of Chinese capital markets financial conditions at a time when the West is facing stagflation risks boosts confidence in a Chinese stock recovery from current levels. Additionally, discussions with Chinese experts provide assurance that China seeks to stay out of the Ukraine situation and avoid US sanctions at all costs.
• Hedge funds de-risked sharply in recent weeks due to geopolitical and macro uncertainty, leading to sizable technical selling pressure in highly consensus stocks and themes. While there is relative order in the downdraft in markets, the indiscriminate selling has taken its toll on hedge fund relative and absolute performance. Upside risks loom in the near term due to neutralized hedge fund positioning and rising short equity exposure by both Equity Long/Short and CTA systematic strategies causing short squeeze pain if markets reverse sharply higher from here. However, fundamental Equity Long/Short strategies have an abundance of highly attractive opportunities to target given the entire market is currently “on-sale”.
