Two opposing themes for 2016
There are two very different paths that markets can take for the rest of the year, so understanding how to profit or hedge in times of market drawdown is crucial.
While the playbook for the year is naturally diverse (2016 has been all about doing the opposite to what feels right) there are two key market thematics that I feel take pride of place on the radar.
First, the prospect of a sizeable correction in markets is increasing, although the cause is not yet known.
But one suspects it will come from a US dollar rally causing instability in China and emerging market Asia. In this environment being short the iShare MSCI Emerging Market ETF (ASX: IEM) will be one of the preferred ideas.
On the polar opposite of the correction idea is positioning for a sizeable move into trades that benefit from a longer-term reflationary cycle.
Central bank policy is (rightly) accommodative, notably with the real "neutral" Federal Reserve funds rate sitting at -1.6% and both the European Central Bank and Bank of Japan incentivising the supply of credit.
The real kicker here will come from a genuine rotation by global mutual funds and asset managers out of a fairly concentrated technology and healthcare position into energy, industrials and US financials.
We are also seeing a massive increase in corporates issuing debt in the US and Europe, which is bullish, while corporate buybacks should keep equity markets supported.
Oil prices, at the time of writing, look bullish and again this should lead to higher nominal inflation expectations.
Names I like in this environment are JP Morgan and Bank of America (reflation should provide a steepening yield curve) and current valuations suggest minimal longer-term earnings growth.
On the energy side, BP, Chevron and Woodside Petroleum look attractive, although each appeals to an individual's risk tolerance to the sector.