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Category Archives: Global Macro

Even A Wide Moat Won’t Save This Brexit

caerlaverock-castle-1220664-639x479In the weeks leading up to the Brexit referendum vote our assumption was that while the vote would be close the “remain” side would eventually prevail.  Our feeling was, I must admit, more based on our observation that under most circumstances electorates prefer to stay with the status quo.

My relatives in the UK had warned me against making such an assumption, but from a pure economic perspective the evidence seemed stacked in favor of remaining within the EU.

Now that we know the outcome of the vote and Brexit has become a reality it downs on me how out of touch we can sometimes be when dealing with unhappy electorates.  The evidence is scant for any positive economic benefit for separation from the EU, but the hope for change is sometimes so strong so as to overwhelm rational thought.  In my opinion, while the world may have recovered economically from the depths of the 2008 Financial Crisis the seeds of discontent are still alive within large segments of the population. 

The rise of nationalism in many countries is tied to the search for simple solutions for promoting adequate growth in the face of weak labor markets and rising income inequality.  These simple solutions are often expressed in the form of isolationist strategies with the underlying assumption being that inadequacies in economic growth are caused by outside forces.

But just as building a moat around one’s castle is a totally inadequate way in today’s world to keep outside influences at bay so are policies pretending that world economic forces can be neutralized at one’s door step.

Markets for goods and services today are truly global in nature and while pockets of every economy will remain domestically driven the vast majority of global economic activity takes place in the context of highly competitive supply and demand conditions involving companies frequently conducting business from multiple geographies.  Borders don’t matter as much as the ability to offer a value proposition to both producers and consumers.

The 52% of voters in the UK that voted for pulling out of the EU are betting that the UK economy will be better off long-term not being part of the larger economic union.  Stifling regulations imposed by the EU are one shackle that UK domiciled companies will no longer have to bear. Another, it is argued, will be removing the burden of subsidizing weaker members of the union.

But while the long-term ramifications of Brexit will not be known in totality for at least a decade or two the shorter-term issues are likely to wreak havoc with investor sentiment.  “Risk-off” is likely is to stay with us for a bit longer than expected!

Another Brexit casualty will be sterling denominated assets.  Not only will the British Pound depreciate significantly but the demand for UK domiciled stocks and bonds will decrease as well.  Sellers will remain highly incentivized so prices will need to drop for buyers and sellers to meet.  None of this is rocket science and markets on t+1 are already reflecting these negatives.

While the short-term implications for UK equity owners are negative we do not believe that Brexit will lead to the end of the world.  After all our belief is that company fundamentals drive long-term investor rewards and spikes in investor sentiment both positive and negative appear as mere blips in long-term performance charts.

Especially for companies not directly tied to the regulatory consequences of Brexit the news may be good in the short-term as investors express an increased preference for lower uncertainty situations.  Even for many UK companies the news does not constitute a death sentence as many already conduct operations in geographically diversified locales.  For some export-driven companies the depreciation of the pound will provide short-term competitive advantages.

UK-domiciled assets will not doubt remain under pressure for the foreseeable future.  Withdrawing from the EU bloc is fraught with technicalities and will require the negotiation of dozens of trade agreements.  Article 50 of the Lisbon Treaty will have to be invoked which will then allow for a two year period of negotiation between the EU and the UK government.  Pro-Brexit politicians have openly discussed delaying invoking Article 50 leading to most likely a period of 4 to 5 years of uncertainty. While the Brexit side rejoices today the withdrawal from the EU will not be immediate.

Most times when a political event such as Brexit occurs the size of the overall economic pie does not change materially at least over short and intermediate terms. What tends to happen instead is that the pie gets splits up differently creating losers and winners. 

Capital markets are reacting post-referendum as if the size of the pie has permanently shrunk and everybody will go hungry. The reaction of global capital markets would suggest dire consequences for global growth. Risky assets are getting uniformly destroyed and investors are flocking to safe heavens such as the US dollar, long-term US government bonds and precious metals.

Our view is that while global economic growth will experience a hiccup the longer-term effect for global growth will not be significant. For long-term investors with multi-asset class portfolios we do not expect a lasting effect from Brexit but understanding the likely short-term winners and losers could actually yield some very rewarding tactical trades.

In many ways this crisis while most likely painful for the UK economy resembles other periods in history when political events led to a spike in capital market volatility and a rise in investor risk aversion.  Such periods were uncomfortable for investors but also yielded tremendous opportunities to add value.

What can we reasonable expect over the next few weeks?

  • Investor risk aversion will remain elevated as investors seek to understand the long-term implications of Brexit
  • The US dollar, Swiss Franc and the Yen will strengthen at the expense of the Euro and the British Pound
  • Commodities apart from precious metals will face downward pressures as the US dollar appreciates. We, however, believe that oil will find its footing reasonable soon as supply/demand conditions seem to be close to equilibrium
  • Investors will increase the demand for high quality bonds leading to further interest rate decreases. Long duration bonds will benefit the most. Interest rate sensitive assets such as real estate will likewise benefit.
  • The US Federal Reserve will not raise rates in July and we would be surprised if they institute any hikes this year. The ECB and the Bank of England will cut rates and increase monetary stimulus. Global liquidity will remain plentiful.
  • Investors with short time horizons will flee risky assets en masse.  We should expect outflows from equities to accelerate in the short-term.  European and UK portfolios will see the sharpest outflows
  • Extreme contrarians will advocate buying into UK equities but there will be few takers. We would advocate passing on this trade for now
  • Contrarians will also advocate buying stocks domiciled in the US. Such a trade won’t require, in our opinion, as long as of a time horizon as buying UK stocks and it will thus entail less risk. Our two top equity tilts remain low valuation and above-average company profitability

 

In general, we would advocate making only small adjustments to multi-asset class portfolios.  The adjustments would be more driven by risk management considerations as we expect asset class volatility to remain elevated for the remainder of 2016.  Our risk aversion index (RAI) has also recently moved into the “extreme fear” zone thus calling for a more defensive risk posture.

From a tactical perspective we see opportunities emerging more from bottom-up stock selection activities rather than from sector or country allocation decisions.  When whole markets sells off as we saw on the day after Brexit the good gets thrown out with the bad.

In a crisis company fundamentals are often ignored as investors are forced to sell their most liquid holdings first.  Market turmoil tends to create attractive entry points for investments with robust long-term fundamentals.  We expect global equity markets to remain under pressure next week and we would thus advocate waiting a bit longer to put any excess cash to work.

 

Eric J. Weigel

Managing Partner, Global Focus Capital LLC

Feel free to contact us at Global Focus Capital LLC (mailto:eweigel@gf-cap.com or visit our website at https://gf-cap.com to find out more about our asset management strategies, consulting/OCIO solutions, and research subscriptions.

DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS. SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL. THERE IS NO PROMISE TO CORRECT ANY ERRORS OR OMISSIONS OR NOTIFY THE READER OF ANY SUCH ERRORS

Should Inflationary Expectations Be So Sticky?

Capital markets have brought lots of surprises this year. Two developments especially – recovering commodity markets and a falling US dollar – have important implications for future consumer prices.

Capital market participants do not seem overly sensitive to these two developments in terms of expectations of future inflation.   Commodity prices are for the most part an “input” into the type of goods and services consumed.  The US dollar on the other hand acts as a translator of value between goods produced abroad and domestic consumers.

Recent consumer price changes have been muted in the last few years.  Monetary authorities in the US as well as abroad seem particularly troubled by the prospect of deflation and have in some cases even resorted to the use of negative policy rates to revive growth.

The April 14 BLS Report on the CPI-U estimates year-over-year inflation at just 0.9%.  This number is welcome news after near zero inflation for most of 2015, but still lags the historical norm of 3% annual inflation by a wide margin.

CPI BREAKDOWN APRIL 2016A quick glance at the latest report provides interesting clues.  Two of the four main categories of consumption categories – Food, Energy, Commodities Less Food & Energy, and Services – exhibit price depreciation over the last year.

The biggest deflationary force has been the Energy category with a 12.6% price drop.  The other deflationary category is Commodities Less Food & Energy with a -0.4% year-over-year price change.

Federal Reserve members seem concerned with the possibility of deflation in the US, but what about market participants?  We evaluate two measures – the breakeven rates from TIP prices measuring the expected inflation over the next 5 years (orange line) and the so called 5-over-5 rates measuring inflation expectations five years from now over the next five years (green line). To provide context we also illustrate the rolling year-over-year CPI-U inflation.

infl expt april 2016

Capital market participants are expecting an uptick to inflation, but in light of this year’s commodity price increases and the depreciation of the US dollar do these expectations need to be revised? Yes, the market implied inflationary expectations seem low in relation to the resurgence in commodity prices and the depreciation of the US dollar.

Where do we see inflationary expectations heading to?  Our research based on our econometric model of 5 year inflationary expectations calls for steady but moderate upward revisions.

BE5 INFL PREDICTIONSThe latest market-based estimate of 1.61% is expected according to our model to rise to 1.7% by the end of Q2 and to 1.9% by the end of the year.

We are not expecting a huge bump up yet in inflationary expectations in large part due to the fact that rising commodity prices and a depreciating USD have only been in place for a short period of time.

Many strategists are still skeptical that these two trends have legs.  Our view is that even if there is no further change for the remainder of the year inflationary expectations have been too low and will slowly drift up.

What are the implications for investors of slowly rising inflationary expectations?  For now the more direct impact for investors of rising commodity prices and a falling US dollar is being felt through the rise of previously unloved sectors such as Energy and Materials as well as the revival of Emerging Market Equities.

The transmission mechanism from higher commodity prices and changes in the value of the US dollar to actual inflation pressures is not immediate of for that manner always straightforward as many other forces such as demographics and the overall health of the global economy come to bear.

Rising inflationary expectations would according to our risk management methodology benefit holders of risky assets such as equities, commodities and real estate.  Safer assets such as bonds would suffer as we would expect higher inflationary expectations to translate to higher nominal interest rates.  The effect would obviously be greater the longer the duration of the assets.

Click here to download the report: Should Inflationary Expectations Be So Sticky

 

Sincerely,

Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC

eweigel@gf-cap.com

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Is it Really All About Oil?

oil&stocks levels

A large number of stories in the financial press this year have revolved around the relationship between equity prices and oil.  In fact some commentators have focused on a recovering oil price as the key lynchpin for rising equity prices.

As an example, the Wall Street Journal published an article this year “Oil, Stocks at Tightest Correlation in 26 Years”. Many other publications and strategists have written pieces this year noting the close relationship between oil prices and equity index performance.

The human mind is conditioned to look for patterns and in the tumult of early 2016 the oil market meltdown started playing a leading role in explanations of why global equity markets were under stress.  But as any econometrics professor will say “correlation is not causation“.

In this note we look at the sensitivity of asset class returns to changes in the price of oil.  We take a risk management perspective and find that while oil price sensitivity is significant when analyzing one-on-one relationships, the effect is close to zero and statistically insignificant in a multivariate context.

Eq Beta to OilWhat you see is not always what you get.  We conclude that rising oil prices have little long-term significance for broad equity market prospects and that a rising oil price is more of a reflection of supply curtailment efforts.

 

The key lesson to us from our analysis is that commonly heard explanations for asset return drivers are often incomplete and in some cases highly misleading.

Every market environment has its own context and no single factor in isolation will ever be able to fully explain the complexities of market behavior.  Even in hindsight it is often hard to pin down a story that holds up to serious scrutiny.

Best to stay humble and realize that over shorter time periods capital markets will always be subject to a lot of noise of no material significance to long-term investors.

Click here to download the report: Is It All About Oil

Sincerely,

Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC

eweigel@gf-cap.com

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Mind the Gap! Emerging Markets Are Out-Running Developed Market Stocks

mind-the-gap-1484157-640x480Many years ago when my family and I took a trip to London my children took great delight in hearing the loud warning of “mind the gap” when taking the Tube.

To this day we still joke about it and hearing the expression always brings back a flash of fond memories.

But what I had in mind for this note was a different type of gap. Specifically, the gap that is developing between developed equity markets and emerging market stocks.

Going into 2016 sentiment was pretty bearish on emerging market equities.  Institutional investors were having a hard time hanging on to allocations that significantly under-performed expectations and retail investors had long been fleeing the asset class.

Moreover, over the prior ten years (2015-2006) emerging markets had only out-performed international developed markets by an annualized 0.45%.  Clearly not enough once transaction costs and the usually higher management fees are taken into account. Never mind the higher volatility of the asset class.

So what had happened to the emerging markets story? Investors once justifying their EM allocations on the growth of the middle class in these markets (the shift from export-driven to domestic consumption growth) had reverted back to explaining the disappointing performance of EM equities as a function of the collapse in global commodity prices.

At the end of 2015 it was hard to find investors willingly delinking expectations for EM equities from those of global commodity markets. Both asset classes ranked at or near the bottom of the pile in terms of 2016 prospects.

Not that every investors was bearish but you had to be a true contrarian to in the face of public ridicule increase allocations to EM or commodities.  The short EM/Commodity trade had become very crowded indeed!

What usually happens when you have a crowded trade? The short answer is nothing good for the crowd except for the small number of contrarians still hanging on.  Let’s think back to two recent examples of crowded trades:

The rise and subsequent bursting of the TMT bubble of the late 90’s.  Every portfolio manager back in those days felt the pressure to increase their exposure to companies in these sectors despite a lack of sound fundamentals and exorbitant valuations.

  • The real estate finance smorgasbord of builders, mortgage issuers, insurers and credit re-packagers of the 2004-2007 period.  The finance sector as a whole was gorging on low interest rates in the context of a low volatility capital market environment.  The end result was not unpredictable but in its day there was comfort in numbers and the possibility of something seriously going wrong was summarily dismissed by the vast horde of investors then making money on the trade.
  • The funny thing about crowded trades is that before they burst few people are willing to take a count of the players at the party.  Sometimes people will fail to even acknowledge that a party is taking place.  Tunnel vision sets in and investors are subsequently surprised when a turn of events has party attendees suddenly sprinting for the exits.

Is the short EM equities trade finally nearing exhaustion?  It sure feels like it. Systematic ways of looking at the “numbers” will invariably lag price behavior.  Our own allocation models have been pointing to a closing of the gap between expectations for developed and emerging market forward returns but we still slightly prefer the former.

Let’s take a look at major asset class performance in 2016.

AA_WEEKLY_HMAP

  • Last week EM equities were up 3.3% – best of the major asset class categories.
  • For the year, EM equities are up 4.4% -best among all equity sub-asset classes.
  • The gap between emerging and developed international market (EAFE) performance is widening.  Year to date the gap stands at over 7%.
  • The MSCI EAFE index is down 2.68% for the year while the MSCI ACWI-x US index (which has an EM weight close to 20%) is down approximately 0.4%.

The performance gap between developed international and emerging market equities is already causing some anxiety among international equity managers. Managers tied to the broader ACWI index are clearly having to swim upstream given their likely beginning of year under-weight to EM stocks.

Last year the consensus underweight to EM equities paid off handsomely.  EAFE out-performed EM equities by a whopping 14%.  An under-weight to EM equities could have hidden a lot of sins elsewhere in the portfolio but this year the tide has turned.

Having been a money manager for over 20 years I know the feeling when a previously ignored/disliked segment of the markets suddenly changes course and gaps up.

It’s never a good feeling and leaves portfolio managers in search of answers.  In the course of my career I have seen three types of generic responses by managers:

  • Ignoring the problem and remaining steadfast in the belief that the portfolio is correctly positioned.  The likely outcome of the “no action” manager is binary – at the end of the year the manager will either be a hero or a goat.
  • Gradually changing course acknowledging that the trade might have been crowded.  The manager works at finding investments with the right exposures thus gradually minimizing the under-weight to the previously ignored/disliked segment.  In all likelihood the manager will initially make small adjustments and is praying that the performance gap does not widen too rapidly
  • Throwing in the towel and joining the new party by aggressively over-weighting the previously maligned investment.  The potential to be a hero or a goat is large.  Such a response is usually driven by “gut” feelings that things have changed

Only in hindsight will investors be able to tell which course of action resulted in the best outcome.  Portfolio managers live in the present and must make decisions.  With that in mind here is set of principles to adhere to:

  • All predictions contain a certain amount of error – be humble about your ability to predict the future. Low probability events happen more frequently than we would like to
  • Seek to understand opposing points of view as a way to discover flows in your thinking.  You will gain a greater appreciation of what can go wrong
  • Strike a balance between what is happening now (recent evidence) and longer-term information. Don’t let your decisions succumb to feelings of either fear or greed
  • Research-based views are better than reactive off-the cuff conclusions – at least you will understand why you made certain decisions. Do your homework
  • Gradually changing one’s views given changing/new information is not a sign of weakness.  Making better decisions involves the constant calibration of new probabilities
  • There is no substitute for experience in providing context to the decision at hand, but experience without analysis is no way to make decisions in an ever evolving capital market environment
  • Understand the consequence of your decisions – never bet the farm on one major decision unless you (and your clients) are comfortable with binary outcomes

Sincerely,

Eric J. Weigel
Managing Partner of Global Focus Capital LLC

eweigel@gf-cap.com

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Can This Russian Bear Learn To Samba?

I have my own moves!

Last week we wrote about the amazing year to date performance of the Brazilian equity market. Despite all the awful headlines and negative investor sentiment the Brazilian market was up over 20% and last week it went up a further 4%.

A similarly widely disliked equity market fraught with negative headlines having a great start to the year is Russia.

Russian equities were up 2.5% last week and in 2016 they are up about 11%. Not bad for a market that like Brazil comes with lots and lots of baggage.

All resource-oriented equity markets have benefited from the resurgence of commodities and both economies are expected to contract further in 2016, but Russia and Brazil are not cut from the same cloth.

There are at least three key differences that investors should note before lumping these emerging markets together:

  • Economic Sector Composition
  • Fundamental Drivers of Return
  • Value Add of Top-Down versus Bottom-Up Implementation Approaches

Click to read the full report  Can This Russian Bear Learn To Samba?

Sincerely,

Eric J. Weigel
Managing Partner of Global Focus Capital LLC

eweigel@gf-cap.com

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Surprise – The First Gold Medal Goes to Brazil!

gold medal-1589651With all the bad news coming out of Brazil investors must be perplexed by the strength of the Brazilian equity market this year.  After a strong jump up last week in both equity prices and the Real, the MSCI Brazil index is up 20% for 2016.  

The news last week was not good. It was reported that GDP growth clocked in at -3.8% with little hope for a rebound this year.  The Zika virus keeps wreaking havoc on the local population, Olympic Game preparations are over-budget and behind schedule, and lastly Ex-President Lula De Silva was detained in a corruption scandal involving the country’s largest company Petrobras.

Capital markets are unforgiving to those foolhardy enough to believe that short-term predictions can be made with any accuracy and the example of Brazil hammers home the point. Just when you think that certain investments are basket cases with no hope things turn around.

A great example of this happened last week in global capital markets.

AA_WEEKLY_HMAP

Now, I am not all that confident that Brazil is out of the woods yet and in fact our country allocation model rates Brazilian equities toward the bottom of the pack.

The point is that capital markets are always full of surprises.

When do we get the biggest surprises? Usually when the consensus view is at an extreme.

After the walloping that commodities and emerging market investments have been taking in the last few years, it is not too surprising to find investor sentiment heavily skewed against these beaten up sectors.

Click here to download the report: EM & Commodity Resurgence

Sincerely,

Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC

eweigel@gf-cap.com

 

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Feeling a Bit Deflated This Year?

ballon-1382757-639x848

With the rough start to 2016 most investors are feeling a bit deflated.  Not only are most asset classes in the red but now there is even talk about the dreaded D word – Deflation.

In this report we look at deflationary conditions around the globe and the likelihood that such forces persist over the foreseeable future.

We share our thoughts on the issue of negative short-term interest rates and the ability of monetary policy to spur growth to levels more consistent with the potential productive capacity of the global economy.

Finally we assess the implications for key asset classes in the face of changing inflation expectations.

Some of our report conclusions:

  • The specter of deflation is already present in countries such as Greece and Switzerland and is not far off in a large number of other economies particularly those in Continental Europe
  • Over the last ten years no country in our sample has experienced a negative annualized inflation rate but Switzerland (0.25%) and Japan (0.31%) have come close
  • When using the Output-Gap to measure the divergence between current and potential levels of production, global growth has been disappointing for seven straight years
  • Despite massive monetary stimulus, the negative global Output-Gap of the last seven years highlights that impediments to global growth are likely to be structural in nature
  • Using negative policy rates are unlikely to sufficiently boost global growth and most likely will bring about an increase in investor uncertainty
  • Equity oriented asset classes would dis-proportionally benefit from an increase in inflationary expectations while high quality bonds would suffer
  • According to our macro risk factor model, the primary beneficiary of rising inflationary expectations would be at the moment Emerging Market Equities

 

Click here to download the report: “Being Back That Old Inflation Please

 

Sincerely,

Eric J. Weigel
Managing Partner and Founder of Global Focus Capital LLC

eweigel@gf-cap.com

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Is It Time to Get the Bear Market Cufflinks Out?

bear cuff links

Is It Time to Get the Bear Market Cufflinks Out?

It’s been a while. In fact, I think I bought my cufflinks when there was no such thing as business casual. In other words, a long time ago!

I was in business school during the 1987 crash (so that does not count), went through the 2000-2002 bear market as a growth manager and hopelessly repeated the experience in 2008.  I do not recall those markets with any fondness. Learning opportunities yes, but painful nonetheless. I still would have preferred watching a three day long cricket match!

It sure feels like we are entering one of these ugly markets again.  I did not think that we were going to have such a nerve wracking start to the New Year, but Bear Markets are unpredictable.

While the warning signs were there for subdued equity market returns – high valuations, little to no EPS growth, collapsing commodity prices – our research still favored risky assets over safer investments such as Treasuries.  Especially in a low inflation, accommodative monetary policy environment.

We have been in the “low return environment” camp for a while now, but have favored over-weighting equities and REITS over long-term horizons.  But as Keynes once said “in the long-run we are all dead” so that leaves us to live our investment lives in the present. And that is precisely the problem.

With all this noise around us the fundamentals start looking fuzzy.  We know it’s been bad but just how bad?

Technical Stage Chart 1-18We use our Technical Classification system to learn about the positioning of the overall equity market.

Our system employs 50 and 200 day moving averages in relation to the current price and classifies each stock into one of six technical stages.

Currently, 60% of stocks in our global universe are in the Down Trend Stage these are Bear Market numbers!

Bear Markets are typically categorized by a large proportion of stocks in the Down Trend Stage – typically 60% or more.

In the early stages of a Bear Market the next highest proportions tend to occur in the Deteriorating and Break Down Stages – these are stocks that most often were the last Up Trend stocks of the now gone previous Bull Market.

The situation as of mid-January resembles that of an early stage Bear Market.

  • 60% of our global sample is in the Down Trend Stage.
  • 18% are in the Break Down and 9% in the Deteriorating Stages.
  • Only 8% of our global sample is in the Up Trend Stage – as of a year ago that number stood at close to 60%.

Is the whole global equity market in the Down Trend Stage? Let’s look at some equity markets around the world.

Down Trend Stage Graph 1-18In the US things have been nasty (only 6% in Up Trend) but things have actually been worse north of the border in Canada where 81% of stocks are in the Down Trend Stage.

In China 62% of companies reside in the Down Trend Stage.

Among the largest markets only Germany and Japan enjoy less than 50% of stocks in the Down Trend Stage.  All of these numbers are significantly higher than 30 days ago!

The highest pain market is Brazil. Somehow, I doubt that the “Olympic Games” effect will be sufficient to offset the downturn in equity values.

Is this the beginning of a Bear Market or just a Correction?

Equity Market turning points are, in our opinion, impossible to predict with any reasonable amount of confidence.  Our approach examines the weight of the evidence and as of now we still believe that we are in a correction rather than in the early stages of a Bear Market.

Our perspective is that equity markets are in for a long-period of below average returns, but not a Financial Crisis type of meltdown. In a slow growth, low cost of money environment our research still favors risky assets such as equities.  We would view the current period of market stress as an opportunity to deploy capital at more favorable return-to-risk terms.

 

Eric J. Weigel

Managing Partner

eweigel@gf-cap.com

 

DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS. SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL.  IS NO

It’s Already Been a Stomach Churning Ride!

Hope you're buckled up for this ride

Hope you’re buckled up

Who would have expected this start to the New Year?  After a fairly humbling 2015 most investors were looking for a bit of a break heading into this year.

Yes, equity markets, especially the US looked expensive when judged relative to history using traditional metrics such as P/E and P/B.

But in the context of low interest rates and relative to other major asset classes our research was more consistent with a “dull” equity market offering below average returns, not a meltdown off the bat.

Of course we have also been saying for a while now that capitalmarket volatility is too low and that a whole generation of investors has become hyper sensitized to the smallest blip in uncertainty.

The memory of 2008 unfortunately still permeates our thinking. Investors as a whole have forgotten that while equities tend to out-perform safer assets occasionally you have to go along the ride and find yourself holding on for dear life on a roller coaster.

While everybody has already heard all the usual explanations for the correction, in all honesty, we have been taken aback by the suddenness and magnitude of the equity market downdraft. Let’s briefly review.

High Quality Fixed Income Has Been the Only Place to Hide

Asset Class Performance

  • Fixed income strategies have been the only true hedge for equity market risk
  • Superior fixed income performance has been associated with higher credit quality and extended maturity
  • US small caps have dropped the most, down over 8% (as of 1/11)
  • Precious metals have behaved like in the old days, i.e., as a safe haven asset during periods of market stress

All Equity Regions, Industries and Styles Have Suffered

unnamed

  • All major global regions have suffered with Latin American equities down the most
  • China is YTD the worst performing equity market
  • Energy and Materials have once again been the worst hit sectors
  • Some “smart” beta tilts such as Low Volatility and Dividend Growth have delivered smaller losses than core indices

Mixing and Matching Asset Classes Has Not Immunized Investors From Painunnamed (1)

  • Of the six multi-asset class strategies that we track, only our All Fixed Income strategy is in positive territory for the year
  • The more equities in the mix the more pain investors have felt
  • Even the plain vanilla 60/40 strategy was down more than 3% last week

Equity Downdrafts Create Some of the Best Stock Picking Opportunitiesunnamed (2)

Early in my career I used to hear how corrections were healthy for investors.  However I never felt that corrections did anything but make my stomach churn. Corrections have always made me nervous, but with the benefit of experience I have come to see corrections as often ideal starting points for picking up beleaguered stocks assuming an unchanged fundamental picture.

Our view at Global Focus Capital is that equity market fundamentals have not materially deteriorated thus creating additional opportunities for stock selection.  The list above highlights some stocks ranked by market cap deemed as attractive by our stock selection methodologies.  All these stocks have had losses exceeding 10% YTD.

We offer this list purely as an illustration of possible attractive stock selection opportunities and make no representation as to the suitability of the stocks in an investor’s portfolio.  We view such a screening exercise the same way a fisherman uses a fish finder – it alerts you to opportunities but you must still exercise judgment and possess skill to make the catch!

Sincerely,

Eric J. Weigel

Managing Director and Founder of Global Focus Capital LLC

eweigel@gf-cap.com

(617) 529-2913

 

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