The equity markets have just about come full circle after bottoming late last year, and managers of one hedge fund say things have played out pretty much as they have expected. They now expect the current rally to last at least through May.
At the time of their Feb. 28 letter, the Frontaura team estimated their February return “between 0% and 1%.” The month marked their third straight month of “modest” gains following a “long losing streak.” They also said their results continue to go about as they had expected based on the four-part scenario they described in October.
The Frontaura team said the first three parts have already played out. The first part was continuing near-term losses, which occurred in October and November. The bottoming process occurred between December and February, and now the markets are up against a risk of turbulence in the U.S. market. Even though December was a turbulent month, Frontaura did manage to post a positive return for the month.
Based on the first three steps they see, they now expect the fourth phase to play out. They look for the “typically robust seasonal performance of March through May that strengthens and deeps our nascent rally.”
Frontaura describes valuations right now as “favorable.”
“Terrible” frontier market sentiment
The fund’s management explained that one reason they developed their four-step scenario was because frontier market sentiment was “terrible” toward the end of September. In fact, they said sentiment on these markets was worse than it was during the Global Financial Crisis.
As a result, they believe that such extreme pessimism probably indicated that the bottom was close, and as of the end of February, frontier market sentiment has rebounded dramatically. Frontaura management noted that stocks have been setting more highs than lows recently, which is another good sign of a rebound off the lows in late 2018.
Focus on Nigeria
They called particular attention to Nigeria, which held its presidential election in February. Incumbent Muhammadu Buhari won, but his challenger Atiku Abubakar alleged fraud and contested the results. Nigeria’s stock market rallied last month as investors hoped Abubakar would end up winning because of his more business-friendly views. Then as the markets got used to the reality of Buhari having another term, Nigerian stocks started to sell off.
“We had mixed views on each candidate and the reasons for our Nigerian stock investments did not hinge on the election outcome,” Frontaura wrote. “We agree that Abubakar would have likely ushered in faster economic growth and improved handling of exchange rate policy, but his rule probably would have rolled back Buhari’s anti-corruption gains.”
The fund maintained its 7% weight in Nigeria. Frontaura’s heaviest weightings were in Vietnam at 18% and Egypt at 10%.
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