The Island Investing Blog

• IIM International Portfolios: Q1 2021

  History is Rhyming

  The provenance of “History doesn’t repeat itself, but it often rhymes,” is questionable but sure seems to apply today to pandemics and stock scandals.  Although the current pandemic has not run the course, vaccines and therapeutics to counter secondary infections should keep the death rate below the 50 million experienced during the 1918-1919 pandemic, when  hygiene, disinfectants, quarantine and social distancing were the main weapons applied unevenly against the spread. In the meantime, I can’t help but shake my head at the meltdown of the overly leveraged family office Archegos Capital, which was run by Sung Kook “Bill” Hwang, who was convicted of insider trading when he was founder and manager of Tiger Asia Management.  Banks such as Credit Suisse and Nomura took billions of write downs when they liquidated positions to cover margins calls that Arechegos couldn’t.  If history rhymes, why don’t we listen? 

  Still, despite distribution hiccups, as more vaccines were administered, especially in the US, global equity markets continued their appreciation in the first quarter of 2021.  In general, US stocks did better than international stocks, international developed markets did better than emerging markets,  value stocks,  whether big or small/US or international,  did better than international growth stocks.

  

  Some strong 2020 performing Frigate stocks such as banks BNP and Bank of Nova Scotia and  Asia linked   DBS and Prudential continued to outperform in the first quarter of 2021.  Some Healthcare stocks suffered from COVID-19 lockdowns and lower patient visits including pharmaceutical company Novartis, Dialysis provider Fresenius, plasma collector Grifols and orthopedics developer Smith and Nephew.  After performing well in 2020, Adidas was also a detractor. Frigate’s net performance lagged that of the S&P500 index,  which benefitted from its high weights in Canada (over 20% at quarter end), Financials (over 23%) and Energy (over 10%).  According to Morningstar, their Global Markets ex U.S. Index gained 5.5% in the first quarter.  

  Treasure Harbor benefitted this year as more companies reinstituted dividends, although not always the same as previous levels.   Banks such as Bank of Nova Scotia and National Australia Bank did well, but Taiwanese semiconductor assembly and testing firm ASE Technology was the strongest performer. Pembina Pipeline offered up a positive earnings surprise and also did very well. Detractors were down less than 10% and included defensive stocks that did well during the height of the pandemic including Nestle, Iberdrola, Unilever and Spark New Zealand.  Still struggling with currency headwinds and COVID’s impact on the beer market, AMBEV continues to be an underperformer.

  As usual, Yellowtail swam in its own current, with Japanese stocks among the best performers. These included glass provider AGC Inc. and electronic components supplier Minebea Mitsumi both of whose products are linked to automobile demand; a third was Sumitomo Heavy Industries which manufactures a wide range of industrial machinery. Swiss EFG International, an asset management and private banking group, was also a very strong performer. On the other hand, the performance of IT service company ATOS SE was very disappointing after failing to takeover DXC Technology and announcing a review of its US accounting. Other detractors were in the healthcare space, including: generics manufacturer Hikma and long-term care operator Orpea. The stronger US  dollar, especially versus the Swiss franc and euro, eroded over half the local currency gains for Yellowtail. Its benchmark, however, benefitted from its high exposure to Canada, whose currency appreciated versus the dollar.

  

  With my recent location to Raleigh, I have been fortunate to “attend” asset outlook  Zoom meetings hosted by the North Carolina CFA Society. Consensus seems to be that the US economy, on the heels of rising vaccination rates and reopening businesses, will continue to grow well; but with excess capacity of funds and labor, inflation is expected to be tame until 2022 or 2023. Under this scenario,  underpinned by low interest rates and bond yields,  US equities remain attractive.

  In it’s April 2021 World Economic Outlook, entitled Managing Divergent Recoveries, the IMF lifted its projections for Global Growth to 6 percent in 2021 and 4.4 percent in 2022. The report highlights that certain economies and certain populations such as youth, women and workers with lower education have been hit hard and income inequality is likely to increase due to the pandemic. Although risks appear to be balanced for now, high uncertainty about the global outlook, which will be influenced by the “the path of the health crisis…;the effectiveness of policy action….; the evolution of financial conditions and commodity prices and the adjustment capacity of the economy”  exits. The report suggests that strong international cooperation is vital for achieving objectives that will evolve over time from escaping the pandemic, maintaining fiscal support, limiting long-term economic scarring boosting productivity to efficiently allocating productive resources.

  Strong international cooperation has always been needed after disasters, whether they are economic, environmental or humanitarian. History is rhyming – let’s listen.

  – Lauretta “Retz” Ann Reeves, CFA AWMA

  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.

  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] Benchmark is 15% SPDR S&P Emerging Markets Dividend ETF + 85% SPDR S&P International Dividend ETF. Total return estimated after taxes on distribution.

  [iv] Benchmark is Vanguard FTSE All-World ex-US Small-Cap ETF. Total return based on price.

  Posted by: Retz Reeves , on April 19, 2021 , For Investors

• How the $1.9 Trillion Stimulus Package Impacts Investors

  With the recent $1.9 trillion stimulus package now signed into law, more than $5 trillion has been authorized over the past year to combat the economic impact of the COVID-19 pandemic. Like its predecessors, this bill sends checks to households, supports small businesses, extends unemployment insurance, funds healthcare initiatives and more. 

  Although this spending is not without controversy, the fact that this level of relief has been passed one year after the lockdown began speaks to the long-term impact of the economic shutdown.

  That this stimulus spending now is controversial is due to the nature of the recovery – and the ability to provide targeted relief. While the overall economic recovery has been strong and is expected to accelerate throughout 2021, that is not universally the case. This divergence is often referred to as a “K-shaped recovery” in which some sectors – including tech and online retail – have not only bounced back but grown, while sectors at the “epicenter” – like brick-and-mortar retail, restaurants, and travel-related companies – continue to experience challenges.

  Although this disparity has clearly impacted stocks, the rotation from those pandemic-resistant sectors to those epicenter companies is happening now. This is in part due to the strong performance of growth and tech sectors over the past twelve months – and the resulting high valuations in those sectors – as well as the re-opening of the economy as vaccines are distributed. Year-to-date, the energy, financial, industrial and basic materials sectors have led the market higher, while information technology and healthcare have been flat. The equal-weighted S&P 500 Index has also outperformed the standard market-weighted index – an indication that gains are broader now than at the start of the recovery.

  As it relates to the economic rebound, the latest stimulus package raises three important considerations for investors.

  First, many investors are concerned about federal spending over the past year. 

  During the government’s 2020 fiscal year, the CARES Act pushed the federal deficit to 15% of GDP – even worse than during the 2008 financial crisis, when it reached 10%. In 2021, federal spending will continue to increase – but keep in mind that GDP will also improve, too, helping to keep this ratio in check. 

  Historically, the deficit jumps in times of crises and then moderates as spending returns to normal and the economy grows. Of course, “normal” over the past 70 years has also involved persistent deficits. So while it’s unclear what the limits on our federal debt will be, it’s also well understood why the government was forced to spend to keep the economy on life support over the past year. The question is really whether there will be political pressure to improve budgetary discipline as the recovery continues.

  Second, the stimulus bill will help to support those individuals and households who have been directly hit by the pandemic. However, the average household has been financially strong over this period. Not only did many jobs return quickly, but the stock market increased in value, home prices jumped and savings rates improved. This suggests that many households have a greater cash cushion today than in the past – and that increases the possibility of a further boost to the economy, as consumer confidence and spending improve in the months and quarters to come.

  Finally, business activity has recovered remarkably well. By many measures, industrial and manufacturing activity in the U.S. is growing at the fastest pace in 3 years.  Job gains have accelerated in recent months and there are now nearly 7 million open positions across the country – not too far from the historic pre-COVID peak. The market has begun to reflect this reversal, too, as manufacturing-related sectors – including ones tied to commodity prices – have surged.

  So while there are still many uncertainties surrounding the recovery, the situation has improved dramatically from a year ago. And although the stimulus package is not without controversy due to its size and timing, it’s also clear that many individuals and businesses still need support. Below are a few charts that put this economic picture in context.

  1. The federal deficit grew to 15% of GDP in 2020

  

  History shows that the federal budget deficit tends to expand during times of crisis. This was true during the Great Depression, World War II and the global financial crisis. The question is whether spending will moderate once the crisis subsides. In the near-term, while stimulus spending continues, a growing economy will also improve this particular outlook over time.

  2. Households are saving more
  

  

  Household savings have remained high – even as the economy has improved and consumer spending has returned. In the short run, this is a sign that consumers are still cautious. However, it’s also a positive sign for the health of consumer finances – and for possible future increases in consumer spending, too…also a tailwind for economic growth.

  3. Economic activity continues to accelerate
  

  

  Industrial activity continues to accelerate, another good sign for overall economic growth across the country.

  The bottom line? 

  The latest stimulus package should help to cushion many parts of the economy as the recovery continues. In the meantime, long-term investors should continue to focus on the light at the end of the tunnel as markets adjust to this improved outlook.

  Please let me know if you have any questions or comments.

  – Cale

  Posted by: Cale Smith , on March 20, 2021 , Commentary

• 2020 Annual Investor Meeting: Video Two – The Way Back

  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.

  Posted by: Cale Smith , on February 1, 2021 , Annual Meeting