What you need to know about the Three Musketeers in the context of the stock market
Musketeers
was the term for a part of the army’s infantry. This term is derived from the word “musket,” a weapon used from the 16th century to the mid-19th century. The end of the use of muskets by the army coincides with the advancement of the term musketeers in entertainment. The novels written by Alexandre Dumas from 1844 were a frequently used template for Hollywood flicks, particularly in the 70ies of the last century. There is always mention of three or four musketeers, depending on the version.
At the stock market too, numerous musketeers have been attracting attention with nighttime disturbances. During morning roll call, the following are called in particular:
1.
The new scary pair of the French presidential election, Le Pen and Melanchon,
2.
as always Kim Yon, the new chief occupation of the current global military boss, Herbert Raymond “H.R.” McMaster,
3.
Brexit reloaded, from cliff-hanger to safe haven with Theresa. Next show: June 8, “not in May”
(parliament approval pending)
Other troublemakers in no particular order:
The election in Italy; the balance sheet reduction of the central banks; the flattening of the U.S. yield curve with the risk of the rate potential of financial stocks fizzling out completely; and, in the area of the military, the Ukraine and Syria. See our list for further risks (Erdogan, red-red-green under the leadership of Maddin, etc.).
As you have probably noticed, from the aspect of behavioral finance the stock market has switched to “risk on.” It’s not to say that the risks aren’t real. But the perception is very different from what it was just a few weeks ago, although none of the underlying circumstances is new.
Once again, it’s likely that doomsday will be called off. Whether this will come from Janet Yellen, Super Mario Draghi or good business performance (top numbers yesterday for our core position Lam Research)—we’ll find out later on. But regardless—the troublemakers listed above have the potential to trigger a midsize correction, whose downward trend we’d rather not fully participate in.
To increase the likelihood of calm nights in the coming days, we have started to implement different safety precautions 14 days ago:
1.
Profit taking of midsize and small stocks in Switzerland now valued highly due to big price gains. However, the returns on sales are not exchanged into euros but remain in the Swiss franc account of our fund. Should the situation in France develop adversely, we are anticipating significant distortions at the exchange market with subsequent buying opportunities.
2.
A big difference between the election in France and Brexit is that France no longer has its own currency.
After the election, France will still pay in euros, and the euro has been developing remarkably stable compared to the U.S. dollar. Currently, we see shifts within the eurozone—e.g., away from French government bonds and on to German government bonds. This is neutral for the euro as a currency. The Swiss franc as always presents an alternative to the shift away from euro investments to curb possible election risks. So does Scandinavia and since yesterday: the British pound. In addition, we’re noticing that companies within our preferred industries and topic areas that are valued favorably can still be found in Scandinavia and the UK—as opposed to Switzerland. For now however, we’re holding off on new engagements until the fog has lifted sufficiently in France.
3.
For the most part, our fund has been fully invested in the past half year. Since the beginning of this month, however, we’ve started to decrease the stock quota and, in turn, increase the cash quota. In addition, we’ve started hedging through futures. The unhedged stock quota is already at under 80% as of today; we’re maintaining more than 15% of the fund volume directly in the form of cash.
In summary
we can say that as things stand today, no end to the positive developments in our preferred industries and topic areas is foreseeable.
We therefore believe that the current negative sentiment will be short-lived, and higher prices toward the end of the year can be expected.
As an active fund, however, we believe that it is our responsibility to mitigate risks by taking effective action until the fog has lifted a bit. Experience shows that the weather can change quickly. We are always on the ball, track developments in detail, and adjust the portfolio immediately when necessary. We are well prepared for both positive and negative scenarios. Nevertheless, buckling up is mandatory at this time due to possible turbulences.