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American Exceptionalism

Evidence Based Investing | September 21, 2018

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% .

Venezuela slides into the abyss

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

Hedge Fund Hell

Evidence Based Investing | September 7, 2018

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)?

The Winner Takes it All

Evidence Based Investing | August 24, 2018

“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.

Turkey Being Roasted

Market Commentary | August 17, 2018

“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 ?

Valuing the Future

Evidence Based Investing, Factor Based Investing | August 10, 2018

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.

Trees Don’t Grow to the Sky

Market Commentary | August 3, 2018

“Nothing is so painful to the human mind as a great and sudden change.” – Mary Shelley.

China in Your Hands

Market Commentary | July 27, 2018

“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).

The X (minus one) Factor?

Evidence Based Investing, Factor Based Investing | June 22, 2018

“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.

Looking for Black Swans

Evidence Based Investing, Market Commentary | June 15, 2018

“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.