Up-Date to a previous blog; at the end of October, we discussed the recent travails of the Hedge Fund community (here). We will very shortly find out how bad it could get; this article picks up on the theme and points out that Investors who wish to redeem their HF holdings have to give 45 days notice of their intention to do so. So, November 15th is the deadline to get out (penalty-free), for year-end. After another really poor year and the likely shock of seeing October's (lack of) returns, many could decide to head for the exits, which could (theoretically) scupper any chance of a year-end rally (as Hedge Funds could be forced sellers).
Found in a church in France.
“When you enter this church it may be possible you’ll hear God’s call. It’s unlikely He will call you on your mobile. Thank you for turning off your phones... If you want to see God, send Him a text while driving”
As of Friday last week, World Equities had lost $15 trillion in value (-7%), with almost two thirds of Global stocks now in "Bear market" territory (i.e. down 20% or more). In Wall Street, talk is already turning to the possibility of the "Powell Put" being in play - the idea that, should markets fall below a certain point, the Fed will ride to the rescue with rate cuts/money printing/buying assets directly etc. or whatever else is deemed necessary to ensure that asset prices don't fall. As we pointed out a couple of weeks ago, asset prices appear to be the only relevant metric in policy decision-making - and don't the markets know it!
A teacher asks a class a question: There are ten sheep in a pen. One jumps out, how many are left? Everyone but one boy said nine are left. That one boy said none are left. The teacher said you don’t understand arithmetic and he said: "You don’t understand sheep."- Charlie Munger…
The last year of the US stock market has seen some wild swings, but one thing has remained constant - Growth has continued to outperform Value, especially in the US, but Globally too. We are still no closer to seeing Value recover its poise and in USD terms, it has now lagged by c. 3.7% per year over the last decade. So, the "Value premium" has become the value discount, or so it seems.
More recently, things have taken a turn for the bizarre; I came across this Bloomberg screenshot (from the Macro Tourist website), which shows the Factor returns over the last year from US markets, whereby the overall return is a function of the average return of the top Quintile performance minus the bottom Quintile (or top fifth of the sample versus the bottom fifth). The conclusions are rather depressing;
Ethical investing is most definitely in! In the last 5 years, the business of Socially Responsible Investing has seen huge growth, as investment "consumers" start to think more carefully about the effect they have on the world in a myriad of different ways, leaving fund management groups scrambling to react, (or board the bandwagon, depending on your view). There are now more than 200 funds available to UK investors, and flows via platforms (i.e. from retail investors) were up 19% in the first half of 2018, according to ESG Clarity an ethical investment-focussed website for investors. Amundi, a prominent ETF fund manager, has announced it will fully incorporate ESGinto its' money management and voting practices by the end of 2021, with a view to influencing Corporate managements across the Globe. Pressure is mounting on fund managers as Local Authority pension schemes are being pressed to divest their…
"You can check out any time you like, but you can never leave" - Hotel California (The Eagles).
Up-date: today (28/9), it appears the HSBC mobile app has gone down. Ho hum.
“We are looking at a society increasingly dependent on machines, yet decreasingly capable of making or even using them effectively.” ― Douglas Rushkoff, Program or Be Programmed: Ten Commands for a Digital Age
The doctrine of "Amercian Exceptionalism", which has been around for a while, has mainly applied to politics and international relations, but recently it appears to have moved into the realm of asset markets - in the last year, US equity returns have diverged significantly from those of the rest of the World, with the last 4-5 months seeing the US markets going their own way, with little regard to global trends. The chart below shows that in the last 4 months or so, they have diverged massively from World ex-US equities, as an apparent "rolling bear market" has engulfed Emerging Markets, Europe, the UK and Asia. As of 19th September, the MSCI World Index (including the US) is +4.8% year-to-date; ex the US, it is down 0.9% .
The Venezuelan economy is in freefall. In the last 5 years, their economy has shrunk by 50%, amidst shortages in medicines, food, and other material basics, inflation is over 500,000%, (and the IMF projects it to be 1 million percent by year-end). According to U.N. estimates, nearly 2.3 million Venezuelans have left the country over the last 2-3 years (about 7% of the population). The currency has collapsed too, as confidence implodes, with some wags now suggesting that the State TV broadcaster drops their version of "Who wants to be a millionaire" as even the jackpot is now worthless - 1 million Bolivars is currently worth about £3.09. In mid-August, President Maduro announced a 95% devaluation
Around 2 years ago we talked about the performance (or lack thereof) of Hedge funds and wondered whether they would survive - they clearly have done so, but the self-styled "smartest guys in the room" are now resembling the dumbest creatures on the planet. After 2017's volatility-free rise, the masters of the universe unanimously agreed that when Volatility picked up they would be on hand to benefit. A fall in February did indeed allow them to (briefly) shine, such that by the end of April they were up 0.4% year-to-date versus a 0.4% fall for the S&P 500 over the same time frame. It did not last though - as the major indices saw a succession of new all-time highs going into August, the (equity) hedge fund returns fell to -1%, whilst the S&P 500 rose 8% as of mid-August. What went wrong (this time)?
“Whoever has the sword will have the earth.” - Oliver North.
The "Matthew Effect"is a term coined by the Sociologist Robert Merton to describe how eminent scientists get more recognition for their work than do less well-known researchers and thus get more funding and so on in a seemingly virtuous circle of success. A similar story appears to be playing out in asset markets, too, with the US seemingly impervious to bad news and now homing in on new all time record highs for both the Dow and the S&P 500 - the NASDAQ Index managed that last month. But the laurels are not being shared equally as the following charts show. Year-to-Date, there have been some big fallers, particularly in less-developed markets and the MSCI Emerging Market has, over the last 10 and a half years been trounced even by the dunce of the developed world class, the FTSE All-Share Index.
"I can calculate the motion of heavenly bodies, but not the madness of people". - attributed to Sir Isaac Newton.
"To every action there is always opposed an equal reaction". Newton's Third Law of Motion
August is supposed to be a quiet month, as dealers go off to the beach, but it is not turning out that way so far - Turkey has seen a nasty decline in both its currency (the Lira) and it's asset markets as investors look to get out at almost any price. It seems that it is becoming increasingly difficult to distinguish between the Lira and Bitcoin on volatility terms and is in danger of starting a self-reinforcing bout of contagion in global asset markets. How did this happen and what does it mean for investors ?
Value investing at its core is the marriage of a contrarian streak and a calculator. Seth Klarman- Hedge Fund Value Investor.
We touched on this subject at the end of April, but thought it might be a good idea to look at the subject of present and future value discounting in more detail.
Last week the Bank of England raised interest rates by 0.25% to 0.75%; although Mortgage rates moved at the speed of light, (I got an e-mail from HSBC telling me that my mortgage was going up 2 and a half hours later!), it appears that savings rates will be moving at a more sedate (or glacial) pace. Many of the newer UK house buyers have not seen a rate rise at all (as we have been stuck at or below 0.5% since 2009), and the effect on consumer spending and confidence is unclear.
“Nothing is so painful to the human mind as a great and sudden change.” – Mary Shelley.
"The key issue is the shift of the centre of gravity from the West to the East, the rise of China and India" - Klaus Schwab. (Chairman of the World Economic Forum).
“Better a diamond with a flaw than a pebble without.” ― Confucius
We return once again to the subject of Value (last discussed c.18 months ago). In truth, not much has changed, except that the chart below now shows an underperformance of Value vis-a-vis Growth of c.4% per annum annualised compared to 2.73% over the period shown in the December 2016 blog post. This has left many (including ourselves) in a quandary. Nearly all of the arguments advanced in the previous blog are still valid (if not more so!), but it has not, aside from a brief 6-month recovery in the second half of 2016, amounted to much; if anything, Growth has recovered with renewed vigour in the last 3 months.
“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief. ― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable.
Having relatively little to do at the moment, analysts appear to be playing the spot the “black swan” game, with attention focussed on the likely cause of the next market hyperventilation. A recent Deutsche Bank study suggests that financial crises are occurring with increasing frequency of late, defined by them as a 15% stock market fall, a 10% foreign exchange rate decline a 10% drop in bonds, a 10% rise in inflation or a sovereign default.
"Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge" - Tina Vandersteel, Grantham, May, Van Otterloo & Company (US Hedge fund).
"A basic principle of modern state capitalism is that costs and risks are socialized to the extent possible, while profits are privatized" Noam Chomsky.
(Equity) markets appear impervious to risk of any sort; no matter what politics, economics, diplomacy or military conflicts throw at them, they either ignore it totally or bounce back within days (and sometimes hours). What gives? Is this a(nother) bubble, or has something changed to reflect a new reality that we may not yet appreciate?
Going back to 2013 (May 2013 to be exact - i.e. 5 years ago), the S&P 500 was at 1,627 and trading on a trailing P/E of 17.6; fast forward to today and we are 2,705 and a P/E of 24.6. So the market has risen by 66%, but earnings by only 19% over that time. The residual is the rise in the multiple that investors are willing to pay for those earnings streams. The P/E has risen by more than twice the growth rate of earnings over that period. Why?