B. G., Opalesque Geneva
Welton is an alternative asset manager founded in 1988 and based in California, with an office in New York City and a Research Center in Paris, France. The firm invests in multi-strategy global macro, systematic trends, and multi-asset ESG.
According to Dr. Patrick Welton, we have transitioned into a more normal market environment – compared to the previous QE and low-rates years. The transition means there is now a normal prospect of returns environment for global macro investing*.
Opalesque: Do you think we have transitioned into a more normal market environment?
Dr. Patrick Welton: We have transitioned. The evidence is everywhere, in every asset class.
For the first time in seven decades, the US M2 aggregate money supply has been declining. And the rate of growth is declining too. It is unusual but understandable for a quantitative tightening.
If we look at relative differences in financing costs, known by traders as “carry”, in the G10 and G7 economies, carry levels are at their highest opportunity set in 12 years. Interest rates are no longer at the zero-bound; this is of itself newsworthy. The implication is that there are two ways of potential movement, up and down, instead of just one way.
Related to that, yield curves’ shape has fundamentally been distorted, both in nominal and real terms. So there are both positive and negative real rates at different parts of the yield curve in all of the major western economies. It is abnormal, and it leads to more of an opportunity set. The theme is a more normal macro environment.
Energy, whether it be use, composition, sourcing, or trade patterns… it’s all in motion. It is not just post-Covid demand or war-related, it is also longer-term geopolitical sourcing and climate goals.
China is a big story. It is transitioning back to a more normal economic environment, and it is happening faster than market participants had anticipated.
Risk asset pricing used to be at high extreme levels before last year. With the sell-offs and some of the changes, those risk asset prices are off extremes. More importantly for macro implications, they are not uniform across world economies.
Central banks’ quantitative tightening policies are in place. As are yield curve control policies, as in Japan. But they are at the margin of whether they will continue or not. This is a story that has affected Japanese assets in recent months.
Opalesque: What are the effects of that transition?
P.W.: There is a medium to long-term effect; the financing cost impacts of the rapid rise of rates are only beginning to work their way through the economy. First fast as we all absorb news cycles, it often takes months if not quarters for rates to adjust and then months if not quarters after that for the increased amounts of payments of those rates to hit cash flow. That is going to be around for the next several years.
A longer-term effect is found in the demographics, which of course guide destiny in supply and demand for goods and labour. It is still relentless, not just in all of the Western economies but also in China, where the population decline is official.
Opalesque: What are the implications of the transition for global macro investing?
P.W.: The implications are straightforward: first, there is a normal prospect of return environment for global macro for the next one-to-three years – which also means a lower-than-normal return environment, with volatility, for normal assets. Second, there is an above-normal period of time where global macro will have beneficial impacts on traditional portfolios.
The implications mean that there are normal expected return opportunities, with a normal palette of opportunities, not just for one manager but collectively.
Opalesque: How did you navigate the commodities market in 2022?
P.W.: Our gross return for commodities last year was over 4%; it was our second-best sector overall in the macro book. We made money across all of our strategy groups: directional, longer-term, shorter-term, and even taking advantage of the risk-off strategies. The gains were principally in the first half of the year, with net losses in the second half.
Energy was our biggest mover, and that included a spectrum of energy from products like gas and heating oil to underlying energy commodities, like diesel, gas oil, natural gas and crude. There were prominent winners outside of energy, some in base metals including aluminium and nickel, some in agricultural markets including soya beans. The biggest loser was from the soft markets, especially coffee, whose prices moved up and down throughout the year.
We are not looking at it only by markets but also by what happened in the market’s pattern: the volatility of commodities was an alpha factor for us because so many commodities went from low vol to high vol and back again in a way which helps us capture profits.
Opalesque: What are your commodity positions so far this year?
P.W.: The portfolio came into the new year positioned short on energies, and across different strategy sub-sets. It has been generally long industrial metals, somewhat long precious metals as the dollar weakens, mixed in food commodities.
China will be taken into account: long industrial metals and some of the food stuff as a response of China’s re-opening. It is anticipatory at this point.
Opalesque: What are you expecting from the US dollar?
P.W.: The strength or weakening of the dollar will depend on data. We are at a turning point on the dollar; we had a tremendous dollar rally, but it went too far, too high and it has come off. As we speak now, it is highly data-dependent.
* A global macro strategy bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles. Holdings may include long and short positions in various equity, fixed income, currency, commodities, and futures markets.
(Article reprinted with permission from Opalesque).
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