July 20, 2024
2Q24 Highlights
Risk assets were subdued in the 2nd quarter as interest rates rose slightly despite supportive inflation data. In a major development during the quarter, OPEC (Organization of Petroleum Exporting Countries) announced that more than half of the 3.7 million bpd crude oil production cuts currently in place, will be gradually lifted by September 2025. This action takes away the major risk of rising oil prices and the consequent outcome of higher inflation. We have revised our expectations accordingly and now no longer expect an inflation trend reversal that would have presented a tradeable decline in risk assets.
That said, we would note that oil prices haven’t given up much ground either since that OPEC announcement in early June. In fact, as the adjoining chart shows, WTI prices have held up quite well given the material change in supply scenario. So, while we have changed our expectations as mentioned earlier, we remain guarded and are not going in the opposite direction of expecting lower oil prices either.
Reflecting the expectation of downward trend in inflation data, the market has revived hopes of additional rate cuts from the FED since the end of last quarter - from one 25 bps cut as of early April to three cuts today.
Below is the snapshot of some key market data for the quarter:
Notable moves include Natgas rising almost 50% on the back of some weather-related concerns and continued optimism around LNG exports growth – although we should note that the LNG catalyst is longer term in nature.
Bitcoin’s -12% move is also notable. Trustees of the 2014 failed Japanese crypto exchange Mt. Gox finally got the legal judgement to distribute some of its Bitcoin holdings to creditors which induced significant selling pressure. We view this selloff as more technical in nature and do not expect it to last too long.
On a related note, we have been watching the evolution of cryptos in the financial markets for a long time and think they have reached a significant milestone after $80 B moved into the ETFs sponsoring Bitcoin since trading began on Jan 11, 2024. In fact, we now consider them to be a mainstream asset class given the liquidity and convenience that has followed the ETF flows. While we have not made cryptos part of our strategies yet, we are actively studying scenarios that will make sense for us to get that exposure.
Performance Review
OppoQuest’s MODERATE and CONSERVATIVE strategies outperformed again this quarter while the GROWTH strategy lagged a bit. Given that GROWTH is mandated to take on higher risk, we are not surprised that it lagged the other two in a risk neutral environment. We have seen GROWTH mostly outperform in a strong risk-on environment and we expect that pattern to continue.
The main contributors to our performances were again the Artificial Intelligence (AI) levered names like Nvidia (NVDA) and Palantir (PLTR) as well as energy related names like GE Vernova (GEV) and Kinder Morgan (KMI). Positive sentiment for the AI sector continues while higher natural gas prices buoyed related equities. Dragging the performance were the solar sector (TAN) on continued negative news of business softness and PYPL which got negatively hit from Apple’s digital wallet initiatives. We don’t think these negatives are long term or structural in nature.
Outlook
Our outlook on risk assets has turned positive again. As mentioned earlier, we no longer expect inflation to reverse course and head higher because we now don’t expect oil prices to rise after the OPEC announcement. Given the lack of other negative risk factors on the horizon, we return to our original positive stance on risk assets by default. We now intend to maintain our risk exposures and even add if we get a decent pullback.
Our current allocations are roughly 75% equities and 25% fixed income. These allocations are almost unchanged from the end of 1Q24. While the overall numbers are unchanged, there have been some notable shifts within sectors and industries. E.g. we have reduced exposure to Consumer and Financials (ABNB, WFC) while increasing Technology (ARM) and Energy (GEV) sectors.
The second half of 2024 is likely to be volatile for financial markets due to US elections in November. In general, markets have always preferred a gridlocked government because of the inherent checks that it brings. Whether or not we get such an outcome, our investors can be rest assured that we will always position our strategies to benefit from any impending business environment.
For OppoQuest
PARESH JAIN
Managing Member & Portfolio Manager
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