Equity Market Insights – Testing Our Faith In Value Investing

Value Investing is Teasing Us

Value under-performed Growth last week in the US and abroad – some of this is sector driven
Investors are losing faith in Value but should out-perform should the broad market tumble (lower beta)
Global equities had a rough week under-performing bonds
EM Equities continue under-performing YTD but last week lost the least (-0.3%)
Our models have recently turned more cautious about EM stocks despite being much cheaper than their developed market counterparts
Our top-rated asset class at the moment is International Developed Markets (EAFE) but last week was not good for this asset (-0.9%)
Year-to-date US equities are vastly out-performing international assets – strong home bias fuelled by strong US growth plus an appreciating US dollar
Momentum strategies are losing their effectiveness but remain top dog for the year
There is no sign of fear among investors – our Risk Aversion Index remains in the Exuberant Zone
We remain perplexed by this lack of concern especially as central banks are becoming less stimulative and the possibility of an all-out Global Trade War is rising

Countries & Region:

Poor showing in the last 5 days with Japan being the only major market showing gains
Equities under-performed bonds last week
Growth out-performed Value over the last 5 trading days in the US as well as internationally
- Traditional Value sectors such as Materials and Financials gave up some of the gains from prior weeks
Energy performed best in the US as well as in global indices

Style & Sector:

In the US, mega-caps outperformed (lost less, unfortunately)
Value once again under-performed Growth –mainly due to losses in the Materials and Finance sectors
Growth and Momentum keep dominating YTD among US stocks
Asian Developed markets (mostly Japan) boosted international market returns but EAFE was still down for the week
EM LATAM recovered last week but trouble continues in the region (Brazil and Argentina)

This Coming Week:

Risk Aversion continues to surprise on the downside – maybe old historical metrics don’t apply anymore? We don’t agree!
Momentum and growth were kings once again last week – can this continue? Will Value only out-perform in a crisis?
The battle may not be between growth and value – feels more like momentum versus reversal
Tariff wars do not seem to have much of an effect on US stocks – will this persist?
Small caps have quietly under-performed large caps over the last 3 months – has anybody noticed? YTD they are still ahead but barely
Will EM equities recover? Seems to be all about the direction of the US dollar at the moment

To read our weekly report including style factor breakdowns please click here

Eric J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

___________________________________________________________________________________

Publications:

Weekly Asset Allocation Review – Free

Weekly Equity Themes Review – Free

The Equity Observer (Monthly) – Subscription Required

The Asset Allocation Advisor (Monthly) – Subscription Required

Equity Market Insights – Just When We Thought That Value Was Dead

Just When We Thought That Value Was Dead

Global equities once again out-performed bonds over the last 5 trading days
Developed Market International Equities provided the best returns last week aided by a nearly 4% return to Japanese equities
EM equities, while still on a downtrend, recovered somewhat last week (up 1.9%) but remain down nearly 9% for the year
Our models have recently turned more cautious about EM stocks despite being much cheaper than their developed market counterparts
Our top-rated asset class at the moment is International Developed Markets (EAFE)
Year-to-date US equities are vastly out-performing international assets – strong home bias fuelled by strong US growth plus an appreciating US dollar
Value outperformed Growth last week in the US and abroad – some of this is sector driven but we are starting to see signs of a quiet sector rotation going on in the market
Momentum strategies are losing their effectiveness but remain top dog for the year
There is no sign of fear among investors – our Risk Aversion Index remains in the Exuberant Zone
We remain perplexed by this lack of concern especially as central banks are becoming less stimulative and the possibility of an all-out Global Trade War is rising

Countries & Region:

Great last 5 days for global equities with Japan leading the pack
Equities vastly out-performed bonds last week
International equities and Emerging markets outperformed US equities
Growth under-performed Value over the last 5 trading days
Traditional Value sectors such as Materials and Financials made a comeback
Utilities were the only sector in the red

Style & Sector:

In the US, mega-caps outperformed
Value for once out-performed Growth –mainly due to a recovery of the Materials and Finance sectors
Growth and Momentum keep dominating YTD among US stocks but trailed last 5 days
Asian Developed markets (mostly Japan) propelled the MSCI EAFE to a 7% return
EM LATAM recovered last week but trouble continues in the area (Brazil and Argentina)

This Coming Week:

Risk Aversion continues to surprise on the downside – maybe old historical metrics don’t apply anymore? We don’t agree!
The bull market in US stocks remains intact but we are seeing evidence of some quiet industry rotation
The battle may not be between growth and value – feels more like momentum versus reversal
Tariff wars do not seem to have much of an effect on US stocks – will this persist? I
Small caps have quietly under-performed large caps over the last 3 months – has anybody noticed? YTD it is a different story
Will EM equities recover? Seems to be all about the direction of the US dollar at the moment with Argentina and Turkey inflicting further damage
Are Chinese equities going to further lose ground or is this temporary? Is the downtrend due to tariffs or domestic growth issues?

To read our weekly report including style factor breakdowns please click here

Eric J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

___________________________________________________________________________________

Publications:

Weekly Asset Allocation Review – Free

Weekly Equity Themes Review – Free

The Equity Observer (Monthly) – Subscription Required

The Asset Allocation Advisor (Monthly) – Subscription Required

Equity Market Insights – Investors Keep Glamorizing Growth Stocks

It’s Growth Over Value Again

Global equities once again out-performed bonds over the last 5 trading days
US Large Cap Equities outperformed Developed Market International Equities
EM equities, while on a downtrend, recovered somewhat last week (up 0.96%) but remain down 7% for the year
The recovery of EM as an asset class depends massively on what direction Chinese stocks take, but contagion concerns from the Turkish Lira and Argentinian Peso have increased significantly
Year-to-date US equities are vastly out-performing international assets – strong home bias fuelled by strong US growth plus an appreciating US dollar
Growth keeps outperforming Value in the US as well as in International markets
In the US last week was all about growth and momentum
There is no sign of fear among investors – our Risk Aversion Index remains in the Exuberant Zone. We remain perplexed by this lack of concern especially as central banks are becoming less stimulative and the possibility of an all-out Global Trade War is rising

Countries & Region:

Good week all around for global equities with Australia having recovered from last week’s loss
Among sub-asset classes, US Large Cap and Developed International performed the best
Equities once gain beat bonds by a handy margin last week
Growth outperformed Value over the last 5 trading days
- Traditional Value sectors such as Staples and Telecom suffered losses
- Tech has regained its mojo along with Consumer Discretionary
Energy stocks keep recovering – tensions in the Strait of Hormuz will provide further support for oil prices

Style & Sector:

In the US, mega-caps outperformed
Value once again under-performed Growth – a big portion of this differential is due to sector concentration differences
Growth and Momentum keep dominating among US stocks
Asian Developed markets (mostly Japan) propelled the MSCI EAFE to a 1.5% return
EM LATAM continues to struggle with Argentina becoming a concern (never mind Venezuela)

This Coming Week:

Risk Aversion continues to surprise on the downside – maybe old historical metrics don’t apply anymore? We don’t agree!
The bull market in US stocks remains intact with growth out-performing value – we don’t see anything that is going to change this dynamic
Tariff wars do not seem to have much of an effect on US stocks – will this persist? I
Is small cap outperformance about tariff “protection” or something else. We think that it is mostly about momentum
Will EM equities recover? Seems to be all about the direction of the US dollar at the moment with Argentina and Turkey inflicting further damage
Are Chinese equities going to further lose ground or is this temporary? Is the downtrend due to tariffs or domestic growth issues?
Not much in the way of important earnings in the US

To read our weekly report including style factor breakdowns please click here

Eric J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

___________________________________________________________________________________

Publications:

Weekly Asset Allocation Review – Free

Weekly Equity Themes Review – Free

The Equity Observer (Monthly) – Subscription Required

The Asset Allocation Advisor (Monthly) – Subscription Required

The Bull Market For US Stocks Remains Alive But What About Internationally?

Weekly Equity Market Highlights

Global equities out-performed bonds over the last 5 trading days but the big story is the effect of the US Dollar on international asset class performance
EM equities, while on a downtrend, recovered somewhat last week (up 2.6%) but remain down 8% for the year
The recovery of EM as an asset class depends massively on what direction Chinese stocks take – China carries a 30% weight in the MSCI EM index
Year-to-date US equities are vastly out-performing international assets – strong home bias fuelled by strong US growth plus an appreciating US dollar
Growth keeps outperforming Value in the US, but last week the margin was only 10 bp for the Russell 3000
In the US last week was all about market cap – the smaller the cap the better
There is no sign of fear among investors – our Risk Aversion Index remains in the Exuberant Zone. We remain perplexed by this lack of concern especially as central banks are becoming less stimulative and the possibility of an all-out Global Trade War is rising

Countries & Region:

Good week all around with Australia being the only down market
China recovered nicely but remains in a downtrend for the year
EM equities have been on a downtrend this year but got a reprieve last week – up 2.6%
Lower beta sectors under-performed last week giving up some of the gains from the previous week
Energy stocks keep getting whipsawed but had the best weekly performance – up 2.5%

Style & Sector:

In the US, small cap won big last week while low vol and yield strategies under-performed
Value and Growth had inline performance but YTD the gap remains quite wide in favor of Growth
EM and International Developed equities out-performed US strategies – big US dollar effect
EM LATAM continues to struggle with Argentina becoming a concern (never mind Venezuela)

This Coming Week:

Risk Aversion – expect the RAI to jump into the Neutral Zone
- Investors keep under-pricing risk
Will US stocks keep leaping ahead of the rest of the world? Is this just dependent on the USD?
Tariff wars do not seem to have much of an effect on US stocks – will this persist even as Trade negotiations stall?
Will EM equities recover? Seems to be all about the direction of China and the the US dollar at the moment
Are Chinese equities going to further lose ground or is this temporary? Is the down trend due to tariffs or domestic growth issues?

To read our weekly report including style factor breakdowns please click here

Eric J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

___________________________________________________________________________________

Publications:

Weekly Asset Allocation Review – Free

Weekly Equity Themes Review – Free

The Equity Observer (Monthly) – Subscription Required

The Asset Allocation Advisor (Monthly) – Subscription Required

Less Bunny, More of a Rocky Balboa Market!

Rocky Balboa View

The start of the year felt like a Rocky Balboa fight. Risky assets were absolutely pummeled during the first 6 weeks of the year and were down for the count.

Most investors were taken by surprise by the strength of the first punch and the retail section started emptying out early. White towels were being thrown about but out of nowhere equity markets started gathering strength.

Just like a fighter on the ropes biding time equity markets started little by little chipping away. By the end of February stocks had stabilized and the first real signs of a competitive fight emerged during the first week of March. The point count had evened out and by the end of the month the count had swung around in many categories. At the end of Q1 world equity markets were essentially flat but there were surprises galore.

The biggest surprise by far this year has been the re-emergence of Emerging Market Equities. The asset class had been left for dead after many years of disappointing returns, but this year the asset class is punching above its weight – already up 4.4% (MSCI EM).

Q1 2016

EM equities have vastly out-performed developed markets especially those in Asia and Europe. A 9% gap has developed between developed and emerging international stocks (MSCI EAFE).

Despite the poor showing of the average Chinese stock how is it possible that EM equities as a whole are up for the year? No doubt investors are somewhat stunned by the YTD eye-popping returns to resource-oriented markets such as Brazil and Russia.

In our sample of global equities the average Brazilian stock is up over 24% while the average Russian equity is up about 16%. South Africa, another major EM market, punches in at an average stock return of close to 14%. Other emerging markets with average YTD returns exceeding 10% include Indonesia, Turkey, Chile and Malaysia.

Commodity markets have no doubt recovered, but is the strong performance of EM simply due to a recovering commodity market?

Precious metals have done very well this year with gold up 15% and silver up 9%. While $20 oil is still mentioned from time to time, energy markets have had a tenuous recovery but still show losses close to 10% for the year. Smaller components of commodity indices such as grains, livestock and industrial metals are all only slightly above water this year. Our conclusion is that there is more to the re-emergence of EM equity markets than simply a direct benefit from recovering commodity markets.

While broad based equity indices have gyrated at times like a punch drunk Rocky Balboa behind the scenes we have been witnessing a strong rotation toward out of favor sectors such as Energy, Materials, Utilities and Telecom. Momentum sectors of the past few years such as Health Care and Technology have receded.

The country and sector performance numbers indicate to us that global investors have been quietly changing their stripes. Glamour sectors and equity markets with the best post-Financial Crisis performance are being re-priced.

Part of this shift toward more value-sensitive sectors and regions may be driven by a desire to better protect the downside and capture yield in what most strategists would agree is a low capital market return environment.

We perceive that investors are changing their stripes. Valuation levels are being more carefully examined. Investors are also showing a desire for lower risk both from a return as well as financial statement perspective. Momentum strategies have lost their punch as have sell-side analyst recommendations.

Many of the characteristics typically associated with larger capitalization companies such as lower volatility, higher yields, stock buybacks and higher levels of profitability seem to be gaining favor among global equity investors.

We see global markets being more similar to Rocky Balboa – at times exhausted and bloodied but despite great hardships triumphant in the end. For the foreseeable future we see ourselves living in a risk on/off world with investor preferences increasingly tilted toward capital preservation strategies.

Click here to download the report: Less Bunny, More of a Rocky Balboa Market

Sincerely,

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

eweigel@gf-cap.com

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

Many 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.

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

Surprise – The First Gold Medal Goes to Brazil!

With 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.

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

Tag Archives: Emerging Markets

Value Investing is Teasing Us

Countries & Region:

Style & Sector:

This Coming Week:

Publications:

Just When We Thought That Value Was Dead

Countries & Region:

Style & Sector:

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It’s Growth Over Value Again

Countries & Region:

Style & Sector:

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Weekly Equity Market Highlights

Countries & Region:

Style & Sector:

This Coming Week:

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