The Weekly Update

Next month we will be publishing the latest NFA figures for the 50 most significant countries that we track. We have data for 189 countries but most of these are not investable, hence the publication of a subset.

Stratton Street’s NFA calculations are based on the tremendous work undertaken by Philip Lane and Gian Maria Ferretti (reference at the end for those interested). Our calculations are undertaken on a consistent basis allowing us to compare across countries, something that is not possible if one were to use the “official” central bank numbers which are constructed on varying basis. Kuwait has by far the largest NFA position with our estimate for 2016 being 442% of GDP, easily surpassing Hong Kong which ranks second, with assets more than 100% of GDP below that of Kuwait. It should be noted that whilst Kuwait’s NFA position is indeed very healthy, we currently find better value opportunities in other markets and as such have no positions across our portfolios.

The calculations undertaken by Lane and Ferretti end in 2011, but we estimate where these countries NFA positions will be in several years time. This requires us to make assumptions about various factors, the most important being projections of current account balances and exchange rates. These calculations give us advanced warning of countries that may get into trouble in future. Our model has allowed us to identify problem countries in advance, including Spain, Portugal, Greece, Brazil  and Ukraine, to name but a few. Of the developed countries, Australia looks to be particularly vulnerable, and by our calculation by 2020 the United States will lose it’s current 3 star rating which would make it ineligible for inclusion in our funds with a 3-star cut-off. These estimates may change, depending on how economic conditions evolve, so for now the US remains rated as 3 stars; you can find the 2016 star ratings on our website.

As we had expected, the FOMC did not move to raise rates last week, and in fact surprised the market with its more dovish than expected stance; revising the dot plots down to two (and a quarter) rate hikes this year from four back in December, the median dot is now at 0.875%. On balance the US economy has shown signs of stability and in some sectors, i.e. the job market, further strength. What continues to remain of concern to the central bank members is the spillover from “global economic and financial developments” which have recovered somewhat off the lows seen earlier this year.

In regards to future rate hikes, Yellen said that “caution is appropriate”, but she insisted at her press conference that it would be better to raise rates once the economy accelerates and not fall behind the curve, and on the flip side she said the central bank cannot afford to be too rash in cutting rates if the economy begins to show signs of faltering. She did however state that April remains “live”, but the futures market says otherwise; pricing in less than a 40% chance of a hike before June. We have said for some time that the Fed will struggle to hike rates this year, with our Fed Funds rate expectation back in January at below 1% for 2016.

As we predicted last year, we expect a gradual weakening of the dollar in 2016 and expect to see further strength in the euro and the yen, but also the Chinese renminbi.

Reference:

Philip R. Lane and Gian Maria Milesi-Ferretti (2007),  "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004", Journal of International Economics 73, November, 223-250.