Precisely on 20th January prices of many assets experienced local lows. This goes both for equity markets in developing and developed countries, commodities and precious metals. During next three months, previously expensive markets like American equities rose significantly while very cheap assets –equities in Russia or mining companies – exploded with growth of 41% and 100% respectively. Everything in just one quarter.

Equity markets

As you know capital never ends up in various markets in perfect proportions. This quarter investors allocated their capital mostly in cheap markets. Expensive equities could get you 13% (black) so a little bit higher than an average of developed markets (14%, blue). In red you can see a very positive climb of developing markets where stock prices started at considerably lower levels. This all pales compared to a fantastic return of Russian market – 41%.

What is the reason of such disproportions between the US and Russia? Firstly, equities in the US were extremely overpriced according to earnings they made. CAPE was equal to 24 vs 4.9 in Russia. P/BV tells a similar story, price over book value for the US was at 2.8 when in Russia below one – 0.8.

You can see that sometimes market corrects disproportions in equities by capital transfers from expensive markets to cheap ones. We can see a resemblance to this situation and Chinese market in mid-2014. Between 2011 and 2013 Chinese equities were losing although, the most markets in the world were booming. In 3 years significant price discrepancies emerged. They balanced themselves at the end of 2014. Why then and not 12 months earlier or later? No one can answer that question. What we can imply is that in most cases investors after some time spot undervalued assets, invest capital in them and as a result cheap assets ultimately give a decent return, even if you have to wait for it.

Today, after great surge most of equity markets is short-term expensive. Below you can see the price of an ETF giving you exposure to the global (expensive) equity market. Its RSI is nearing 67 and in my opinion, if someone owns shares in developed markets (the USA, Western Europe, Canada, Japan, Australia) this is a good moment to leave.


Surge comparable to the one in equities was seen in commodities. I was writing about them in February. Since then RJI (commodity index, blue) rose by 15%, just like gold and silver. Mining agricultural companies gained nearly 38%. The real winners – basically doubling their price – were small mining companies ETF GDXJ (red).

When talking about commodities I highlighted that they are very cheap. What we see now is just a reaction to discounts from last 4 years. Commodities, as you know, are often called an anti-dollar. Whenever the price of USD rises, commodities fall and vice-versa. Last quarter dollar index fell from 100 to 93 (today) and I believe, this trend should continue.

Why am I thinking that USD will weaken?

The first time I flagged the peak of the dollar was in March last year. Right after hiking interest rates in December I also mentioned that. Historical peak dollar reached during first rate increase. Investors in anticipation for the interest rate increase were buying the currency and rate hike discounted it. Buy the rumour, sell the facts. In 2015 dollar index touched 100 after which it was falling. I think that recent discount is due to investors reacting to a certain event. Media will mention that in few months.

I can be wrong but soon the FED will have enough data to argument that the US economy is not that well and interest rates must be lowered. This can be only the beginning. Next move – start printing. Both actions will negatively affect American currency. This is known to those who short dollars. Very important factor – negative for dollar – is Iranian oil being sold for euros. In 2003, Saddam Hussain experimented with this. Three months later Iraq invasion started. Today the US cannot destroy another regime. Politically and militarily the US is a different state than the one from 13 years ago. We saw that in Syria.

In general, if the dollar weakens even further, a boom in commodity markets will pick up speed especially thanks to low levels we are starting from.

Equities in the era of QE

The EBC is printing like mad, following the BOJ.  What if the FED joins the line? What if 3 central banks destroying currencies simultaneously can’t initiate another boom in equities?

The global economy is in the recession. The velocity of money circulation is dropping. Only part of the printed money ends up in the real economy (financing budget deficit). The majority goes to buy toxic assets from banks or so-called strategic sectors – the US shale sector. The real rate of inflation should not exceed 10%. Today it is at 8%

So expensive equities made in the US should grow at 10%/year minimum? In my opinion, no. Right now they are very expensive and what is even more important, earnings of corporations listed on NYSE are shrinking. NYSE is 45% of combined capitalisation of the global exchanges. If the FED prints, equities should in one year be at the same level as today in the best case scenario.

The situation in developing markets may be quite different. They are considerably cheaper (CAPE 13.7) with Middle-Eastern Europe leading at (CAPE 7.9). Additionally, last two years currencies of many developing countries experienced severe discounts and today they are already visibly cheaper. Mass printing done by the biggest central banks can positively swing investor’s mood but this can result in many of them transferring capital to developing markets. Developing markets are allegedly riskier but there are arguments against that accusations. Arguments for better equities’ performance in developing markets:

- underpriced equities,

- cheap local currencies,

- lower debt level at every level (private, corporate and public),

- EM vs DM cycles (emerging markets vs developed markets).

Below you can see the table explaining where capital shifted according to respective cycle.

Source: Self-made

Pay attention to the periodicity of capital migration. For few years, capital is building up in EM and this results in fantastic surges. After some time equities become too expensive and investors pick DM in next part of the cycle. Capital bounces back and forth between EM and DM in very periodical manner.

Since 2008 the S&P 500 expanded by 60% while EM lost over 18%. We can imply that in few years capital should give much bigger returns in emerging markets.

What about gold?

Gold, silver and mining companies have a negative correlation with the dollar. A weak dollar means climbs in this group of assets. Below I attach a chart showing the dollar index, its power vis-à-vis other main currencies (red) and indices of mining companies (blue) and gold and silver (green). You can say it is nearly perfect, negative correlation.

What is more, printing and ZIRP or NIRP make a perfect environment for metals’ price to rise. I said it many times and I will gladly repeat myself. Gold is not an inflation hedge. It is a security against the madness of governments, especially bankrupted ones. Very important: gold records the biggest climbs during real negative interest rates, so when inflation is bigger than deposit or bond interest rates level. This is the situation we see today and it doesn’t seem to change soon.


Last three months were very good for both commodities and equities in developing countries. Industrial materials miners performed great but everything else paled in comparison with mining companies doubling their price. Today we see many assets expensive in short-term and some correction should be in place. This is why I’m not buying any assets for now.

Long-term I am an optimist when it comes to gold, silver, commodities, small mining companies and EM equities. My only position in emerging markets is in Russia. Chinese market caught my attention after a year of falls, it starts to look attractive again. Turkish market is cheap but I expect some Russian retaliation for shooting down a plane few months back. Revenge tastes better when enemy least expect it.

Should I take any position in the near future it would be increasing short position on some extremely overpriced sectors in the US. This is a highly speculative move which I wouldn’t advise to people without knowledge and experience. Simply put, in inflationary circumstances, it is the easiest to take position in cheap assets. The most important here would be one factor: patience. I’m still holding my cash position: commodity currencies and CHF.

I wish you all next 3 months to be as good as the first quarter, but let’s be honest chances for such great results are very small.