The rapid advances in both European and emerging-market indices since last December, reflecting investors’ allocation further along the risk curve, drove the decision to skew our trade ideas on the defensive side over the last few months. Full positioning in systematics, elevated hedge-fund gross and net leverage, and major US and EU indices trading at ATHs and resistance levels merited positioning for further downside ahead of a likely escalation in the Middle East conflict.
Out of the 15 trade ideas we proposed since early December 12 (80%) of them were defensive on the back of expectations of heightened volatility driven by geopolitical turmoil. These downside positions included Richemont, Inditex, Santander #1 , ASML, Infineon, H&M, Santander #2, BASF, and the SX5E, together with a limited set of upside but also defensive ideas in Deutsche Boerse, BP, and Sanofi. We only had three pro-cyclical ideas, namely upsides in Luis Vuitton, SAP and Adecco. The current defensive portfolio skew has produced a strong YtD outperformance of approximately +3%, compared to -5% for our benchmark, the SX5E and -8% for the Nasdaq. We continue to maintain a defensive outlook on the market, given the grave implications of both prolonging and further escalating the war in the Middle East. However, we acknowledge that the same indicators that drove our bearish stance heading into the year are now approaching levels that warrant playing the upside. For more macro thoughts please see our Equities Weekly.