Robert Gibbins’ Autonomy Global Macro Fund gained another 2% in July, bringing the year-to-date number to 14% in a period that most global macro funds have been struggling. And, interestingly, with net short exposure to ripping equity markets. Its July gains were driven by exposures to the front end of the Brazilian, U.S. and European interest rate curves. In Brazil, the fund had added to their rates exposure on the extreme sell off resulting from the Temer bribery scandal and this paid off in July.
Autonomy’s gains this year have been concentrated in interest rates and currency positions. Equity positions (hedges) have detracted 2% while credit positions have been modestly positive. North America was the largest contributor to the gains in rates as Gibbins correctly expected markets to reprice the likelihood of fiscal expansion and the timing and probability of interest rate hikes by the FED. In FX, the Mexican Peso and Icelandic Krona featured prominently, two cases in which Gibbins’ contrarian views have come true. A well-timed hedge on the Brazilian Real also contributed.
The fund has maintained a relative balance in the portfolio between “risk on” and “risk off” positions and pivoted the portfolio in H1 2017 towards having a greater proportion of the Fund’s risk in developed markets versus emerging markets. Around 40% of the fund’s risk is currently concentrated in rates positions with the balance equally divided over credit, equities and currencies.
The European economy is doing much better than was priced, fitting with Autonomy’s view that European growth is catching up with the U.S. They expect the ECB to taper in 2018 and to raise rates in 2019. Growth in the U.S. is expected to be at or above 2% next year with growth in the Euro area of close to 2.5%, underpinning global growth for 2018. And while U.S. inflation remains stubbornly low, central banks seem to agree that tail risks are sufficiently low and global growth sufficiently firm to enable the reduction of extraordinary accommodation. China’s systematic risk remains a key concern to Autonomy’s view for 2018. They believe growth in China will cool going forward after peaking in Q1, but the country will likely avoid a sharp deceleration.
The benign global backdrop was a key driver for the recent Emerging markets rally in Autonomy’s view. The combination of exceptional monetary accommodation, a broad-based acceleration of global growth and the rebound in commodity prices set a powerful backdrop for pro-cyclical EM assets to perform well. Currently, Autonomy’s view is more nuanced. On the positive side, steady global growth and low inflation would support a continuing strong performance of EM assets. On the other hand, tapering by core central banks may well result in bouts of market volatility, impacting the more vulnerable EMs most notably. After the rally in emerging markets, general valuations are not as compelling as 18 months ago. Still, Autonomy sees pockets of compelling value such as with the Mexican peso and the Polish Zloty.
We very much look forward to hear more of Robert Gibbins’ market views and investment opportunities he sees at the Legends4Legends event on September 28th.