GAM manager aided by short calls on commodities and shares

David Morrison, investment director for the Star Global Macro product of Swiss manager GAM says the fund’s shorts in equities and some commodities have aided performance after a difficult period for the fund.

He said a clear reduction in the tail risk associated with a disorderly Greek default, hopes of permanent increases in liquidity via quantitative easing, and the release of “generally better-than-expected macroeconomic data from the US, and even Europe” are now fully priced into markets, “perhaps more than fully.

“Thus, we feel that the impact of monetary easing is starting to fade. Simultaneously, the effects of fiscal tightening, which tends to be something of a silent killer, are becoming stronger and we predict that the inflection point will become more pronounced as the quarter progresses.

“Markets could also become unsettled by mutterings regarding the end of quantitative easing. This applies specifically to the UK, although some Federal Reserve advisors have also become concerned about the future impact of continuous liquidity injections in the US.”

He said the tail risk relating to Greece is “taking a nap rather than being in a coma”.

Punishment of politicians for austerity – witness the Netherlands and possibly next week France – will continue, and spread maybe also to the US, he added.

“The current pullback could continue for some time longer.”

Morrison has also made money from shorts in sugar, cotton and crude oil.

“We have high conviction in our short sugar position. Brazilian sugar production is set to rebound strongly, while Thai production is running at record-high levels and we are seeing large-scale sowing of sugar beet in Europe. Therefore, the supply of sugar is growing, while demand is set to continue to decline.

“Sugar prices have already fallen from 26 US cents/lb a couple of months ago to today’s 21-22 cents. However, we expect it to have further downside of 20% or so. Similarly, cotton is suffering from excess supply and high inventory levels, and to us appears overpriced.”

The fund has no fixed income positions, which Morrison says are “too highly valued at present.

“We like gold, although would find it more attractive at a lower price point. A number of the factors that were in gold’s favour during its big rally remain in place. First, interest rates are low and therefore the opportunity cost of holding gold is very low.

“Second, the so-called fiat currencies are being debased. So gold also looks attractive as a store of value, especially if we see further troubles in the eurozone.”

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