April 15, 2024
1Q24 Highlights
Risk assets continued their march higher against the backdrop of having one of their best 4th quarter performances last year (2023). Furthermore, the push higher was achieved despite a considerable pullback in the market’s expectation of lower year-end interest rates - from six 25 bps cuts at the start of the year to one 25 bps cut as of today!
Mixed economic data had been fueling hopes that the FED might be able to achieve an economic soft landing (bring down inflation to around 2% without causing recession). However, the stronger than expected inflation reports (Consumer Price Index in particular) over the last few months have dented those hopes. Rising commodity prices, particularly crude oil (+16%), has also given participants something to think about. In light of these developments, the reset of rate cut expectations is not at all surprising.
Below is the snapshot of some key market data for the quarter:
Performance Review
OppoQuest’s three main strategies delivered strong performance again this quarter and exceeded their respective benchmarks. This is the fourth quarter of outperformance in the last five and we are particularly pleased to have achieved these numbers without relying much on the Magnificent 7 stocks that have pretty much driven the performance of all popular indices.
The main contributors to our performances were the AI levered names like Advanced Micro Devices (AMD), Nvidia (NVDA) and Palantir (PLTR) as well as financials like Wells Fargo (WFC) and Wisdom Tree (WT). Dragging on the performance were streaming names like ROKU and WBD as well as China levered exposures (KWEB and LIT).
Outlook
We expect the downward trajectory of inflation data to reverse course and head higher for the next few months although we eventually expect it to resume the downward trend in 2025. The catalyst for higher inflation is likely going to be rising oil prices. Even if the current Mideast conflict remains contained, supply is getting tighter. OPEC+ production continues to stay disciplined and there are growing indications that US producers will be unable to ramp up production materially after having already increased it significantly to >13 million barrels/day.
If the recovery in major global economies exceeds current expectations, we may see oil demand firm up right in the middle of a supply constrained environment. That would be inflationary and certainly take all rate cuts off the table until conditions improve. We think such a scenario presents a tradable opportunity and we are therefore positioning our strategies accordingly.
Our current allocations are roughly 75% equities and 25% fixed income. Recall that we were 100% equities at the beginning of 2023. So, we have shifted to a more defensive posture having shed exposures in areas like semiconductors, software, money-center banks, and industrials. In addition to fixed income, we also have acquired almost 10% of exposure to mortgage REITs and Business Development Companies (BDCs) that provide yields of ~ 10%.
We have also taken ~5% exposure to Natgas related businesses. This is a counter cyclical idea as Natural Gas prices actually declined ~ 30% last quarter on warmer weather and LNG infrastructure outages that reduced demand and caused a glut. However, we have a very positive long-term view of Natgas as LNG exports from North America are expected to more than double by 2027. Most of that growth is expected to be in U.S. as illustrated in the chart below.
We intend to continue positioning your portfolios defensively. While our natural inclination to sell into strength has gotten some urgency, we will not force sell any position unless warranted. Meanwhile, we are already looking at how best we can deploy the 25% fixed income dry powder in your portfolio.
For OppoQuest
PARESH JAIN
Managing Member & Portfolio Manager
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