Co-founder of Aravana Capital Management, professional investor, trader with more than 15 years of experience, Ivan Kladov answered the most popular questions from an audience interested in investing.

What are the major events in 2020 that have shaped the dynamics of the global stock market?

In 2020, previous events played an important role. We expected the market to fall exactly in 2019 due to the fact that the markets were overheated – a lot of money was poured into them, which eventually stopped working. And the pandemic gave another impetus for the markets to start falling much more.

After a while, the markets began to recover. But by what means? Through new injections, new money printing. All of these facts have negatively impacted the entire economy, as the injection of money puts a strain on ordinary taxpayers, who suffer the most as a result. We have seen this story more than once: the times of the great depression in the 30s, 45s, 84th year.

As a rule, the crisis always clears – throws off parasites that cannot accelerate the economy and create jobs. They are localized and are much more exposed to risk than companies that are constantly developing and creating something new. The government primarily helps big business to stay afloat, as it bears the key burden of job creation.

As we can see, the market was naturally bought back. Absolutely everyone, including individuals, was inspired. And those who have accumulated capital began to bring it to the market. The market reversed this situation and we saw a V-shaped reversal.

Globally important news – US elections. The market does not yet know exactly how to behave. It is growing on news of vaccine readiness that could contain the pandemic and improve the situation in 2021.

But the economy is still unstable. In the United States, this is complicated by the fact that it is not known how Biden will behave with China, which is trying to win a leading place on the world stage and in the economy in particular. Biden supports his market with an injection of money, but China also has a lot of money. I draw your attention to the fact that the United States has a very large debt burden (even for the same Treasuries of which it owes more than $ 1.5 trillion to external borrowers). The United States has always had a budget deficit unlike China.

People always get used to everything quickly enough. Companies start to feel good – managers get dividends, employees – good bonuses. All of this is starting to generate great demand.

The situation is similar to the story about real estate in 2008: everyone wanted to earn more and believed that, in fact, real estate should always grow, that it was wrong from the beginning. The situation is the same with the market: many people think that the market will always grow and this is a very big mistake.

This cannot be purely physical. If you look at the S & P500 chart, the higher the movement, the stronger the fall.

Share your opinion on the current crisis (taking into account the prolonged pandemic, the US elections, and other highlights).

Saving. At the moment, the following trend can be traced: wages are gradually beginning to overtake the growth of profits that companies have. It is also worth noting that people are gradually starting to save. The middle class is cutting back on their purchases. What we saw at the beginning of the pandemic partly saved and pushed the tech sector up. The S & P500 tech sector has grown with the majority switching to telecommuting. I note that a large number of companies have purchased more software this year than over the past 10 years. Yes, companies have made a profit, but this is just one sector, and the market is not held by just one technical sector. I always draw an analogy with the same crisis in 2008. We see the totality of how the technical sector and the events of 2008 are accelerating, when real estate has been growing in value for some time, people, companies and banks wrapped it all in structured products, bonds, debt securities, i.e. they wanted to make a permanent profit.

What is being done now is that not only do companies issue their shares, they also issue bonds accordingly (because some companies do not have enough funds to pay dividends). Therefore, a “explosive mixture” is being formed, which can quickly bring down the market as in 2008, and the Fed, unfortunately, will not be able to keep it.

To date, the Fed has supported the market and it has begun to stabilize – more money was invested in Q1 2020 than in 2019 (about $ 8 trillion was injected – we crossed this milestone in Q1 2020)

Sagging sectors. In my opinion, the crisis has not yet arrived. And the pandemic is simply one of the factors that has shown that the economies of all countries are subject to various risks. Any sector can sink. If we look at the S & P500, we will clearly see that some sectors have grown, they have shown new historical highs, while other sectors have remained in the red. For example, oil has risen in price, but companies that extract and refine oil, as far as I know, have not worked out even half of their decline.

The markets are calm now, but some sectors still feel bad – in particular banks. They have a serious drop in transactions, credit and debit cards. This suggests that people began to save money, and someone went into the market.

Unemployment. Many large companies are undergoing or will be downsizing. For example, banks are cutting their costs through thousands of cuts. Industrial production is not growing, factories are not buying machines in such quantities as before. The suspense is not over.

How can you characterize the global stock market in the current realities?

I would draw an analogy with space – in new universes, with new stars that are being formed. They are very unstable and there will be great uncertainty for them. The same is happening now in the market. We are seeing market volatility.

People with little capital cannot feel calm in this market. When they had the opportunity, they were able to buy stocks, futures, and now they are making some profit. But as soon as the market starts to fever, they will be at risk first.

Why is the hedge fund structure becoming relevant today?

The hedge fund has always been relevant (before, mainly for large institutional investors – large companies that tried to hedge their risks, because everyone understood that profits would not always go up forever. They needed to reinsure their risks in order to get through the hard times. – the fund is much better suited for this why – because when everything grows – we look at it with skepticism.

Yes, we go along with the market, but we know that this story will ever end. Therefore, we expect that it may end tomorrow, taking this into account, we are building our positions, we are looking more at alternative instruments that will allow us to get more alternative profits, and secondly, when the market reversals, they will help us not to lose what we have earned and, in addition, will help to further strengthen our position and provide an opportunity to receive additional profit for us and our clients.

That is, the very concept of a hedge fund is diversification. We can compare a hedge fund and a traditional bank. A traditional bank is a very clumsy structure – in order to complete a transaction on the market, you need to go through a large number of approvals. In the bank, everything goes through the committee, but responsible people make this decision so late that we can already earn and close the position during this time, and they only enter it.

We are more mobile, more adapted to the market, we try to look ahead a little more, since investing in securities is our main activity. Due to it, we receive the main income from management.

Is it advisable to invest in bonds now?

It makes sense to invest in bonds, but now the conditions have changed. At the moment, diversification into bonds (government and corporate) is playing a cruel joke with people.

A fairly large number of our clients invested in bonds and they did not fix their profitability. Let’s start with the fact that bonds are a capital freeze. It is necessary to clearly understand that in the case of bonds it will not work to exit at the moment when we can do it during the day, maximum three or a week (depending on the instrument). Even if there is a stalemate, we can close everything in one day and remain either with a minimum profitability or at zero at the moment. Naturally, then all this is worked out through our hedge or through futures on goods or currency. Bonds do not provide such an opportunity, because you need to find your buyer. But who will buy bonds when markets are down? Of course, you can invest in bonds, but not with all your capital. You should always diversify your market position. This is exactly what we do – yes, we have a certain bond portfolio, but it is not large. If we close some positions, bonds will start to grow and show better yields, and accordingly, we will also make money on them. But now, bonds bring almost nothing if they are good bonds. Let me remind you that each bond has its own rating. If we buy a bond with a BBB- rating, then it is clear that its yield is off scale, but, accordingly, the possibility of default is very high (recently it has reached about 70%). High-yield bonds have the potential to default.

And the fact that now bonds do not provide profitability is simply a freeze of money, but we must not forget about inflation, which is still eating up capital.

Conclusion: When forming an investment portfolio, the optimal solution would be to divide the amount that you plan to invest in bonds and invest the second part of your capital in more liquid instruments. Thus, you will be able to make your capital more mobile.

What defensive assets reduce the risk of an investment portfolio?

Promotions. We always hedge our positions. If we talk about stocks, we work with stocks of American companies. Focusing on S & P500, Nasdaq, Dow Jones. Based on this, when buying shares in one of the indices, we clearly understand that the shares are growing. If they start to fall, then we gradually gain positions against the market. What does it mean? We take long-distance futures or options on the index. It helps us to be in good shape. When the market rallies, we take a very small loss on these futures or options, but we have a fairly large and good return on stocks. If we see a “fading” of the market, then we gradually begin to increase our volumes (to increase our hedge). Thus, we constantly fix our profits, we can completely exit the stock and essentially stay with our futures and options, which will give us the opportunity to earn much more at the moment. Futures on the S & P500 index or futures on gold at the moment make it possible to have a good hedge that works out with a bang.

For example, we hedged our exposure with gold. We entered at $ 678 per ounce and fixed our yield at $ 1,070. How we forecast: we apply technical analysis of the market, we use a complex of fundamental analysis, insider awareness, we look at trends in the market, we follow every event that takes place in the global economy.

Don’t forget about currencies. Of course, there is always volatility, but this also needs to be done, since keeping money in one currency is not correct. Better to keep in two or three base currencies (dollar / euro / pound or yen). Recently, many investors have become interested in the yuan. The Bank of China supports its currency, artificially regulates (increases / decreases) depending on the state of the economy.

Conclusion: in addition to stocks from alternative protective instruments, it is worth considering futures, commodity futures, futures on a key index (in particular on American ones) and various currency pairs, on which you can also earn money without having a high risk of capital loss. This is our goal: to preserve and grow.

Disclaimer: The author’s comments are not an individual investment recommendation in accordance with Federal Law No. 39-FZ of April 22, 1996 “On the Securities Market”. Individual investment advice / investment advice can be provided by the author on the basis of an appropriate agreement (investment advice agreement).

Experts of Aravana Capital Management with many years of experience will create for you an individual investment strategy based on your wishes.

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