Published: May 8, 2020

Relevant Strategies

• Moderate
• International Balanced
• International Growth
• Gold & Precious Metals
• Natural Resources
• Peter Schiff

Our Commentary

An increasing number of countries worldwide are poised to set their economies’ wheels turning again in May as COVID-19 infections level off.

Equity investors are acting as if the worst is over, and the extent of the stimulus has buoyed their optimism.

The US S&P 500 index has returned to the levels of autumn 2019 and the price-to-earnings ratio for 2020 has rocketed back up to 21, significantly above its five- and 10-year averages of 16.7 and 15 times.

The robust policy response by the US government and the central bank means the US economy is likely to show some uptick from here.

We believe the extended S&P 500 valuations are fueled by stimulus.

During April, governments and central banks upped the ante in their economic support, further extending stimulus measures to unprecedented levels.

Against a backdrop of around $85 trillion global output, the US federal government alone passed a $2 trillion stimulus bill and is looking to further expand support for small businesses and individuals. Alongside this, the US Federal Reserve put in measures that will see $2 trillion finding its way into credit markets.

The EU endorsed a short-term government rescue package worth more than $500 billion.

Japan, battling a second round of infections having emerged from the shutdown prematurely, announced a fiscal package worth close to $1 trillion.

The IMF has warned that the world could be facing its worst economic downturn since the global depression. In addition to reducing its global growth projections substantially to -3% this year (a figure even it admits could be optimistic), the Fund also focused on the considerable financial support that emerging markets may need to avert a full-scale economic disaster.

However, we are concerned that markets are factoring in a short-lived recession and a steep, quick recovery.

If the current slowdown fails to reverse significantly into the second half of this year, the impairment to the corporate sector could herald a further decline of at least 40% in the S&P 500 from current levels.

Recent unemployment, growth, retail and housing statistics in the US are highlighting the extent of the economic damage inflicted on the economy there.

US GDP fell by 4.8% in the first quarter. The bigger than expected decline is worrying because the economy was operating at pre-coronavirus levels for about 80% of that period. Risks that second quarter GDP declines will significantly exceed 30% projections are high.

There is a strong and geared—albeit lagged—correlation between US production and profits. Year-on-year US production declines are likely to exceed the 15% falls seen during the global financial crisis and this could mean US corporate earnings are halved.

The extraordinary circumstances have been further highlighted by the collapse in the price of oil. Ahead of expiry, the May WTI contract traded negatively for the first time in history, as low as -$37.63 per barrel.

With countries preparing for a carefully staged exit from shutdowns, the manufacturing and construction sectors may recover reasonably quickly.

However, consumers, who will still be maintaining social distancing for some time to come, may not provide the spending boost required to get the retail and entertainment sectors going as fast as equity markets hope.

The uncertainties and risks that lie ahead in a recovery based on trial and error will make the path difficult to predict.

For now, the US Central Bank’s position of ‘whatever it takes’ to prevent a credit crunch has left many investors assuming a floor to both economic decline and stock market performance.

In whose interest would it be to see a greater collapse? At some point, focus will switch to the impact of governments gradually removing support and the longer-term consequences of the pandemic and recent interventions.

Portfolio Actions

We are currently maintaining a comfortable degree of cash in all portfolios.

We are also shifting equity investment to growth sectors, which are less impacted by the pandemic and whose valuations benefit from lower interest rates.

There will undoubtedly be companies such as those involved in health care and certain technologies (cyber security, cloud infrastructure, smart cities, etc.) that will prosper regardless, or even because of, developments this year and these are areas we are focused on.

Regards,

Euro Pacific Advisors Management Team

Published: March 17, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources
• Peter Schiff

Our Commentary

With lockdowns increasingly being imposed across the globe, data for the current quarter could indicate a slowdown in economic activity greater than that in the ‘Great Financial Crisis’ of late 2008.

The future trajectory of the COVID virus is of course open to wide variation and consequently the economic impact of the consequences still very hard to judge.

What is certain, is that Central Banks have been quick and decisive in offering monetary policy support while fiscal support will certainly be forthcoming.

However, even the US Fed last Friday cutting interest rates to near zero and announcing an increase of $700bn in bond purchases, as part of a package of global coordinated measures, has not stemmed the on-going decline in equity markets.

Credit spreads have been widening and US high yield is vulnerable.

Portfolio Actions

Our strategy remains focused on broad, global diversification across asset classes together with a tactical overlay.

The exposure to gold and platinum held up well but has succumbed to profit taking in recent days as investors have sought to cover losses made elsewhere.

Historically, the time for a full equity market recovery from a decline of this magnitude averages 22 months. Sentiment remains weak and volatility very much elevated.

We await some encouraging news regarding the COVID virus before redeploying cash and will provide you more commentary from our fund managers as we receive them.

Regards,

Euro Pacific Advisors Management Team

Published: March 2, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources
• Peter Schiff

Our Commentary

Markets have taken a sharp turn downwards in recent weeks on concerns that the Coronavirus, or Covid-19 as it is now known, will slow economic growth and reduce corporate profits.

Initially, its impact on markets largely depended on their proximity and economic exposure to China, with investors working on the basis that it would progress in a similar way to the 2003 outbreak of SARS, eventually petering out with limited impact on the global economy.

However, its recent appearance in Italy and other countries has sparked wider recognition that the virus has spread and led to investors adopting a ‘Risk off’ stance.

A ‘Risk off’ stance is where more cautious investors reduce their exposure to equity markets and potential buyers step back on the expectation of lower prices.

While the human impact of the virus itself is of great concern, the key focus for investors has been the ‘lockdown’ response of governments. The immediate effect of this policy is not only to reduce economic activity in the areas affected, but to slow or stop the distribution of components needed in processes elsewhere in the world and to reduce tourism and travel related activity, reducing activity globally.

While the eventual impact of both Covid-19 and the lockdown policy is unknown, what is clear is that corporate profits in the first half of the year and possibly beyond will be lower than previously expected, justifying a correction in equity markets that were only recently hitting new highs. In other words, the recent correction is the ‘pricing in’ of upcoming drops corporate profits.

Should the virus continue to spread, the effectiveness of and need for the lockdown policy will increasingly come under scrutiny.

On any suspicion of positive change in the lockdown policy, investors will rapidly shift to a ‘Risk on’ stance, with potentially significant gains in those parts of the market most hit by the policy.

In other words, whilst the authorities are focused on reducing the spread of the disease there could be a significant economic impact. If there comes a point where specific containment measures are seen to have achieved as much as they can and governments effectively start sending people back to work, there may well be an overall positive impact as the brakes are released.

Portfolio Actions

Having added exposure to emerging markets on valuation grounds, our portfolios underperformed when the virus first surfaced in January due to the exposure to China.

Since then, with the spread of the virus slowing in China and the rush to invest into biotech, medical services, pharmaceutical and educational stocks in China, indices there have held up relatively well.

Most analysts still feel it is too early to assume a long term economic impact and that globally the downturn in earnings and economic activity will be short-lived with potentially a partial catch up in H2.

With major equity markets around 15% off the peak, we are not advocating widespread selling at this stage and would be cautiously seeking to purchase where reduction in asset value appears unjustified.

Today, we are closing our exposure to CSOP SOURCE FTSE CHINA A50 (CHNP, IE00BGSHB123). Although it is our core exposure to China, during February and the Coronavirus outbreak the holding has held up well and outperformed the MSCI World by approximately 15%.

In addition, we are closely monitoring the markets and intend to re-balance the portfolios with some of these actions this month:

Potential Reductions

• Vanguard S&P 500 UCITS ETF
• Vanguard FTSE Developed Europe UCITS ETF
• iShares MSCI Japan Index Fund
• iShares FTSE EPRA/NAREIT US Property Yield Fund
• L&G Gold Mining UCITS ETF

Potential Closures

• Xtrackers FTSE China 50 UCITS ETF
• iShares S&P Em. Markets Infrastructure
• iShares MSCI India ETF
• iShares Edge MSCI World Value Fact UCITS
• iShares MSCI World ETF

Potential Additions

• UBS MSCI World SRI
• UBS MSCI Emerging Markets SRI
• iShares MSCI EM ESG Enhanced
• L&G Gold Mining

We will provide you more commentary from our fund managers as we receive them.

Regards,

Euro Pacific Advisors Management Team