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Island Investing

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IIM International Portfolios: Q1 2024

Where Do We Go From Here?

Wars raged in the Middle East and Ukraine, Houthis attacked vessels in the Red Sea, a barge ran into the Baltimore Key Bridge, interest rates and inflation remained stubbornly high and the S&P 500 reached a new high in the first quarter of 2024. The lure of the Magnificent Seven narrowed, however, as Tesla and Apple endured significant corrections and Alphabet lagged the FAB Four – Nvidia, Meta, Microsoft and Amazon. (For more insight, please check out Cale’s blog on our website “Perspective on Valuations of the Magnificent 7.”) Although these stocks contributed greatly to the S&P 500’s rise, the overall market did well as evidenced by the performance of the equally weighted RSP ETF, whose NAV was up 7.85%. The real estate sector and bonds were negatively impacted by sticky interest rates. In the meantime, bitcoin reached a new high driven by its inclusion into exchange-traded funds.

International indices also benefitted from interest in stocks associated with the deployment of artificial intelligence (AI). As those indices are less concentrated in high flying stocks, they lagged their US counterparts. Interestingly, whether growth or value outperformed depended upon the focus of the index and the index provider.

Frigate held many of the same successful stocks as those included in its benchmark’s top ten, but unfortunately held a few that undid those that performed well. Three of worst detractors in the first quarter of 2024 were plasma producer Grifols, world renown Bayer and placement specialist Adecco. Grifols share price fell following a report by Gotham City Research, a short-seller, which questioned Grifols’ governance and accounting. The company denied the allegations, filed suit against Gotham employees and published a positive statement from the CNMV (Comision Nacional del Mercado de Valores) – subsequently the share price bounced off its bottom. Bayer disappointed investors by cutting its dividend, thus freeing cashflow to reduce debt and buffer against further glyphosate litigation. Adecco announced good fourth quarter results, but warned that volumes were marginally lower at the beginning of the year. On the other hand, Toyota’s share price continued its strong run as management raised current year’s sales and operating estimates. Anticipation of AI demand for semiconductors contributed to great performance for Taiwan Semiconductor Manufacturing and ASML.

Treasure Harbor didn’t hold any stocks that endured major losses, but among those that gave back some of previous gains were material stocks Rio Tinto and BHP and logistics provider DHL. The best performers were an eclectic group including financial company Barclays, pharmaceutical provider GSK and semiconductor assembler ASX.

So where do we go from here? In my opinion, an excellent starting point is Morningstar’s article published on March 28, “Q2 Stock Market Outlook: Contrarian Plays Look Increasingly Attractive.” The author, David Sekera, CFA, suggests that the US technology sector is overvalued and the communication and consumer cyclicals sectors are nearing fair value. Sekera suggests overweighting undervalued and/or unloved areas such as value and small cap stocks. This parallels my outlook for the international equities – as a specialist in this area, I am feeling especially unloved.

Perhaps there will be increased interest in international equities this year. In an April 8th strategy publication, “Europe Chasing the ‘American Dream,’ Part II”, Goldman Sachs suggests that even considering sector composition and differing growth expectations, European equities, in general, are trading at very attractive valuations. For added diversification, Goldman’s strategists suggest investing in Japan and Emerging Markets. Thank you, Goldman.

Going into the second quarter, persistent inflation in the US has cooled expectations for interest rate cuts. The ECB, however, has indicated it is not ‘Fed-dependent,” and may cut rates in the near future. This divergence in policy may lead to a divergence in performance of various asset classes. So, please reach out to Cale or myself to discuss your asset allocation investment policy and your investments in our proprietary Spoke Funds®.

Lauretta “Retz” Ann Reeves, CFA AWMA

Footnotes:

(i) Performance figures are estimated and unaudited. Estimated Benchmark Returns are in the column to the right of its respective Folio. Net Returns are after international taxes on dividends, management fees and trading fees, when necessary. Historical returns are available on request and at Callan and Investment Metrics.
(ii) Gross Return
(iii) SPDR S&P International Dividend ETF. Returns estimated based on NAV.

Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Historical performance data above represents performance results as reported by the portfolio identified. Performance results are for illustration purposes only. Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and timing of initial investment. Investing may cause capital loss. The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.