The rebound in oil prices from USD 26 to USD 40 a barrel, along with a renewed accommodative stance from the main central banks, drove an equity market revival since 11 February, on a similar scale to that seen in October 2015. From the numerous economic statistics published each day, the markets have chosen to focus on those that suggest a brighter economic outlook for both China and the US (never underestimate mankind’s ability to see what it wants to see).
A clear look at the facts, separating the wheat from the chaff, reveals that the new market conditions in place since last summer persist (see Carmignac’s Note for July 2015 “The great transition has started”). Central banks’ dogged pursuit of monetary stimulus allows for significant transitory movements, hence a degree of opportunism.
However, the accumulation of economic, financial, monetary and political imbalances creates asymmetric risks which are unfavourable to current market levels. So, we will not be dancing on the volcano like so many others, even if it is dormant for now.
We are paying close attention to risk management and concentrating our exposure on assets whose risk asymmetry still looks favourable (see Carmignac’s Note for March 2016 “Sleepwalkers”).