Recent market events confirm our big picture view. We are and have been bearish on commodities and emerging markets. The spike in commodity prices during the so-called supercycle and the ZIRP (zero interest rate period) in the U.S. created irrationally exuberant conditions in many emerging markets. We are moving from a virtuous circle to a vicious cycle.
The commodities bubble is bursting. Events are unfolding the way we expected, but faster than anticipated. Because of weakness in commodities, emerging markets that export commodities are fragile. The commodities market risks are accelerating the possibility of a global economic slowdown. The slowdown is driven by decreased consumption by many emerging markets countries and is amplified by weakening currencies.
Cash will go to the developed world and to sectors and stocks with less emerging market or commodity exposure. Europe, Japan and the U.S. should benefit the most from this move in investments. We're looking at the real fundamentals and what the law of gravity will do once it has its say. Commodities are not going to rebound anytime soon. We expect emerging market currencies to be in continuous decline and weakness in currencies and emerging markets should create demand for securities in developed markets.
These are the facts for us and we're going to act on these fundamentals.
The equity bubble in China is deflating and the economy is having trouble rebalancing. China knows they are going to have a low growth problem for a while and this is already factored into their market. I don't see anything much more dramatic there otherwise. We don't think Chinese company earnings will be effected by the other problems happening in China. Apple's Tim Cook told CNBC's Jim Cramer that things have never been better in China. He's not seeing an impact from China's stock market decline on iPhone sales in China. At R Squared, even before the market acknowledged the situation in China, we were not exposed to its cyclical problems. Instead, we are exposed to the stocks riding secular tailwinds.
We did not buy additional holdings last week. We want to see things stabilize in China. We don't want to add to positions in emerging markets, commodities, or where there is cyclical exposure to the bubble economy, which we think is slowing down.
We expect to see further weakness in demand from emerging markets, which may decelerate the global economy. We expect to see weak economic growth in those areas impacted by the commodity slowdown.
We are positioned for a correction in emerging markets and commodities. We are adjusting the portfolio for weaker economic growth conditions. We may shift to more defensive positions by selling more cyclical names that could suffer from global economic deceleration. The market is in the process now of pricing in slower economic growth.
© R Squared Capital Management
