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Draghi, Assad, Putin and me

August 2, 2012

Well, since mid-june, not much has changed on the European front. And today, Draghi’s declaration wasn’t really exhilarating either; all European equity markets are down again. I won’t comment on the “irreversibility” (Draghi’s own words) of the Single Currency anymore. The market, by pricing negative rates for “core” country debt and junk level rates for the periphery is effectively saying, “it’s a matter of time”.

Europe’s sovereignty is put to test. If it wants to keep some sovereignty, it will have to act like one sovereign state, or else…today, the urgency is about reversing the risk of a Euro zone breakup instead of trying to figure out if the risk exists and how big it is.

 

This problem is blinding another one: Over the summer, the Syrian civil war will probably come to an end with the furnace of a Holy month of Ramadan in August. The world is (only) watching and I sense some nervousness in the dark corridors of the Kremlin. Putin has unconditionally supported the Assad regime so far. When it falls, Russia will have lost a good client (for weapons) but also a gentle host for its only Mediterranean naval base in Tartus. This may explain Putin’s eagerness to lend cheap money to Cyprus to bail out its banks (July 5th, Reuters) as Europeans hesitated. And still do.  Having read Isaac Asimov’s foundation novels, it sounds “Very Russian” to provide support with (serious) strings attached. If the Europeans keep on passing the decisional bucket from the ECB to politicians and vice versa, Russia, in the middle of the crisis, may also have a financial role to play, besides being a dangerously quasi-monopolistic energy provider to some European countries. This is not Science Fiction. If I were Russian, I would think, “this is my time”.

Enough of doom saying…as it’s been three months I thought I should look back at the exchanged investment ideas and see how they did in the turmoil. Even though rates were already low, we kept to fixed income instruments. It made sense: Bond indices (JPM Bond Index and Barclays Aggregate Corporate Index) are up by 7 to 9% year to date. Then, reading back my own writing:

1)   17 April, We reduced overall equity exposure and hedged the € against US$. Equities didn’t move much (actually they did go up and down) but the Single European Currency lost serious ground from 1.3123 to 1.2271

2)   2 may, we bought some Belgian real estate. The relevant index went from 109.20 to 113.62 over the period.

3)   8 may, we bought US property. The relevant index went from 67.87 to 70.65 over the period.

4)   8 may, we sold out of the money put options on solid equity index components.  Most of the equity indices are either flat or higher, while volatility crushed. Options died worthless. We keep the premium.

5)   16 June, we bought some VIX futures. That was a bad idea. Volatility crashed dramatically. This is really a professional instrument for which structural demand is difficult to assess. We won’t get into that again.

What’s next? I like to stay in fixed income, more in high yield and emerging markets. As alternatives, I stick to real estate in Belgium and the US, while I add some exposure to global convertible bond funds. Lower structural volatility, lower interest rates and depressed share prices make this asset class a defensive component within the equity realm. Also, I add some sustainable (and ethical) investments, via dedicated funds.

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