Published: July 21, 2022

Relevant Strategies

• International Balanced
• International Growth
• Natural Resources
• Gold and Precious Metals
• Peter Schiff

Our Commentary

Market overview

Stock markets notched up their worst first-half performance since 1970 in the face of fears that tackling sky-high inflation may come at the cost of the global economy’s post-Covid recovery.

Recession has become the watchword for investors who dragged down US benchmark indices into bear market territory in extremely volatile market conditions. The S&P500 shed 10% in one week alone before recovering some ground into the end of the month. The Index has come off just short of 20% year-to-date and 7.5% for the month. The Nasdaq saw greater losses, off almost 30% year- to-date and 7.4% in June.

Elsewhere, the UK FTSE 100 shed 3.7% and is marginally in the red for the year so far. The Eurostoxx 50 lost 6.3% in June, leaving it 17.5% down year-to-date. China’s CSI 300 bucked the trend last month, gaining some 9% but still lost almost 8% in the first half of the year. The Nikkei eased 2%, leaving it about 7% off for the six months.

Bonds failed to provide a haven

Bonds have also taken a tremendous hit this year. The benchmark 10-year US Treasury yield doubled from around 1.50% at the end of last year to above 3%. As a result, many bond indices have fallen in excess of 15% year-to-date. Some long-dated issues, which are particularly sensitive to interest rates, have halved in value over six months—pretty spectacular for a supposedly ‘risk-free’ asset! Some argue that aggressive interest hikes are now sufficiently priced into bond markets and it is time to buy with yields in both the US and Europe higher than their 10-year averages.

As economic growth slows many analysts expect inflation pressures to begin easing and for US interest rates to have peaked by next March at around 3.75%. In this scenario, bonds should regain their appeal as a safe-haven asset, offering a means of reducing overall portfolio risk.

Judgement of US Central Bank called into question

The first half of 2022 has seen inflation in many regions rise to its highest level in four decades – a reality that has translated into aggressive interest rate rises. In the US, incremental changes of 0.25% have given way to 0.5% and, most recently, an increase of 0.75% – a sign of how worried about inflation the central bank has become.

Also notable is that central bank economic forecasts have successively been revised downwards at each monetary policy meeting since the end of 2021, casting doubt on the banks’ ability to predict the future trajectory of economic growth and inflation.

Central banks in developed countries have been taken to task for surprising markets with rate moves that have not aligned with their forward guidance. In many analysts’ eyes, this unpredictability has significantly undermined the central banks’ credibility – a crucial determinant in the role of monetary policy in controlling inflation expectations. These expectations threaten to entrench higher and stickier inflation, as workers demand higher wages and set in motion a wage-price spiral.

How to deal with recessions

The multi-trillion-dollar selloff in equity markets, concerns about the impact of higher inflation and the increasing likelihood of a recession could all affect company earnings. This has called into question whether it is worth taking on the risk of investing in stock markets or whether it is better to head for safety in other assets or cash. This is apparent in US equity funds, which saw outflows of more than $30 billion in the week ending 15 June – the biggest sell-off since July 2020.

However, history has convincingly shown the benefit of riding out bear markets and momentous crashes with ample rewards for investors that resist giving into panic over short-term circumstances.

Analysis by Schroders based on US equity data since 1877 shows that when stock markets have sold off by more than 25%, investors have usually recouped all losses within two years and on all but one occasion within five years.

During the global financial crisis, investors that sold out after their investment had halved in value in the six-month period to March 2009 missed the opportunity of making up those losses by the end of 2009 and going on to enjoy a further trebling of value.

Moreover, the pandemic-induced sell-off in 2020 saw investors nursing year-to-date losses of over 30% by mid-March only to benefit from a full recovery within three months.

There are many well-managed companies built for success that are trading as much as 50% lower than they were at the beginning of the year. Gradual and selective purchasing over the coming months reduces the risk from short-term price fluctuations and provides some insulation from economic shocks. Encouraging signs would include evidence of inflation reaching its peak and the central banks moderating their tone regarding the inflationary threat.

Long the sage of the investment world, Warren Buffett sums up why investors should be investing for the long-term: because the secret to getting rich is to be patient.

Outlook

After the stock markets posted the worst first-half market performance in half a century, we might see more volatility in the second half of 2022 if economic uncertainty and inflation remained high. In combination with ongoing pressures such as the ongoing Russian-Ukraine War, oil production shortage and supply chain bottleneck, markets are under immense pressures, and the investment environment is more challenging to navigate than ever. In such situation, a diversified portfolio and patience are the most optimal assets to own for the most positive outcomes.

Our portfolios’ performance in June is as followed:

Regards,

Euro Pacific Advisors Management Team

Published: June 16, 2022

Relevant Strategies

• International Balanced
• International Growth
• Natural Resources
• Gold and Precious Metals
• Peter Schiff

Our Commentary

Market overview

It was an exceptionally volatile month for stock markets with the main developed market indices losing substantial ground before experiencing a bear market rally in the closing days of May. A trifecta of factors was behind this turbulence: hawkish central banks, the ongoing impact of the Ukraine-Russia war on the macro economy and a slowdown in China as a result of its zero-Covid policy.

The 5% bounce-back in the S&P 500 in the final four trading days of the month saw the broad-based index end the month flat but still 13% lower for the year to date. The NASDAQ didn’t manage to get into positive territory and remained a hefty 22% in the red after its rout over the past six months.

Most European equity markets also remain in the red year-to-date but not to the extent of long-dated bonds, which have fallen in value by around 20% since the start of the year (and in some cases by more). Commodities remain strong with the broad-based Bloomberg index up by 33% this year.

The end of month fillip saw US stocks end their longest losing streak in two decades:

Bloomberg’s data also showed the S&P 500 Index daily trading range having exceeded one percent 89% of the time this year, the most sustained period of daily variations since 2008:

The range of performance across sectors was extreme, with energy stocks up almost 60%. The worst performing sectors—communication services and consumer discretionary stocks—have declined well over 20%:

Sentiment reversal for Chinese stocks?

Chinese stocks surprised by eking out a 0.3% gain during a month when the economic news was particularly dire. The CSI 300 Index remains 18.5% off for the year to date but a massive stimulus and an easing of Covid restrictions, alongside emerging signs that infection rates are declining, should provide positive tailwinds for Chines equities in the months to come.

In late May, the government announced a 33-point stimulus package of almost 500 billion yuan that included 140 billion yuan ($21 billion) in additional tax rebates, emergency loans for the aviation sector and 300 billion yuan in railway construction bonds.

These measures are intended to provide a cushion for an economy suffering from the government’s stringent implementation of its zero-Covid policy.

Technology shares starting to offer value?

Meanwhile in the US, technology stocks have taken a real beating this year but an increasing number of analysts are convinced that valuations have declined to the point where these stocks offer an attractive upside.

CEOs and investors who sat on a panel at Davos during the World Economic Forum pointed to the fact that even though there has been a $1 trillion sell down in technology stocks, good business models and strong revenue generation mean fundamentals are much more supportive than they were during the dotcom bubble. The industry is trading at close to its three-year average PE ratio of 29.0x and some of the tech giants are trading at cheaper valuations than traditional value stocks.

For example, Facebook parent Meta Platforms Inc.is trading at 14 times forward earnings, cheaper than prominent value stocks like Berkshire Hathaway Inc., Johnson & Johnson, UnitedHealth Group Inc. and Procter & Gamble Co.

Google parent Alphabet Inc. is also trading at a relatively low multiple. However, the prices of Amazon and Tesla are still based on a high multiple of current profits. Overall, Morningstar metrics suggest technology stocks are at their cheapest since March 2009 when markets were beginning to recover from the global financial crisis.

Outlook

In the period of market stress, defensive assets such as investment grade credits and value stocks become more attractive. While the question of future growth and inflation remain unanswered, the most logical stand is to wait and see while maintain a comfortable allocation in liquid assets.

Our portfolios’ performance in May is as followed:

Regards,

Euro Pacific Advisors Management Team

Published: May 13, 2022

Relevant Strategies

• International Balanced
• International Growth
• Natural Resources
• Gold and Precious Metals
• Peter Schiff

Our Commentary

Market overview

April was the month reality set in for investors that the myriad headwinds facing the global economy and financial markets are not about to alleviate any time soon and could magnify beyond current expectations.

Stock markets sold off sharply in a three-day rout in late April and ended the month deep in the red. The US S&P 500 and Nasdaq led global equity markets downwards, with the former shedding 8.7% and the latter 13.3% in April alone. For the year, the Nasdaq has lost more than 21.1% and the S&P 500 12.9%.

China was also hard hit, extending its losing run that was set in motion last year when the Chinese authorities clamped down on tech and online industries, imposing much harsher regulations on their business activities. This year the world’s second largest economy has been dogged by ongoing Covid flareups, with Shanghai under strict lockdown during April and growing fears that Beijing may be next in line.

Elsewhere, Covid is proving less disruptive because even though numbers are rising, deaths are not and countries such as the UK are learning to live with the virus in the absence of a new more virulent strain emerging.

Learning to live with inflation

The last several commentaries have identified inflation as the main driver of market movements since last year. In May, the bond markets had one their worst months ever, with yields jumping higher on concerns that the central banks may become overzealous in their implementation of more restrictive monetary policy conditions via higher interest rates and quantitative tightening. In both the US and Europe, indices of bonds with maturity greater than 10 years have declined in value by over 15% YTD.

With inflation at forty-year highs, the US Federal Reserve is still on track to raise the federal funds rate by at least 50 basis points at its next meeting. Moving forward, there is a growing argument that the Fed will take into account the potential for monetary conditions to tighten for other reasons, and that inflation is close to peaking.

BlackRock and FTSE Russell see the central banks as learning to live with inflation. Notwithstanding projections of a series of rate hikes this year, they believe the central banks are likely to maintain low real yields, cognisant of the risks of reversing their quantitative easing policy too sharply. Excessive tightening could destroy demand and lead to a rise in unemployment.

Despite the hawkish tone, central banks will be wary of raising rates too quickly.

Downgrading growth forecasts

The IMF, the World Trade Organization and private sector economists are still factoring in a material slowdown in the global economy this year, downgrading their growth forecasts to reflect inflation, hawkish central banks, the ongoing Ukraine-Russia war and extended supply constraints, with China still set on maintaining its zero-Covid strategy.

The IMF downgraded its economic growth forecasts across 143 countries that account for 86% of global GDP, with global economic growth now expected to come in at 3.6% in both 2022 and 2023 – 0.8 ppt and 0.2 ppt lower than the growth projected in January this year.

The WTO is even more pessimistic, expecting world GDP to increase by a mere 2.8% this year and to pick up to 3.2% next year. The Peterson Institute for International Economics (PIIE) predicts that global economic growth will come in at 3.3% in both 2022 and 2023.

Clearly, recession is still not a base-case scenario but Europe is perhaps the region most vulnerable to this downside scenario. Despite the sharp deterioration in investor sentiment of late and material downgrades in growth forecasts, the world economy is still expected to avoid recession this year.

U.S. elections loom on the horizon

Ahead for the US are the mid-term elections in November, which will inevitably affect the mood of the electorate. The prevailing view is that Republicans could well take back both chambers of Congress, which could result in policy gridlock.
Although markets tend to take such outcomes in their stride, it may increase volatility as policy differences become more apparent.

Republicans taking control of the House and the Senate is likely to result in fewer tax changes, greater increases in defence spending, fewer green initiatives and some contentious negotiations around the debt ceiling. That compares with the status quo, namely a moderate increase in defense spending, further climate bills aimed at putting in place green incentives and an easier path to raising the debt limit. We will doubtless see greater focus on the implications as the time nears.

Outlook

For opportunity seekers, April’s market volatility may prove to be a good thing. After years of being overlooked by investors who were seduced by handsome equity gains, the bond market may become attractive again as the yield on the 10-year Treasury note rose above 2.9% this month, notching more than 25% in gains.

As we are approaching the tail end of this economic cycle, some investor camp thinks it is not too early to be prepared for recessions by shifting to traditional defensive strategies. On the other hand, optimistic investors who still believe that the current bull market still have some legs may find hidden gems in the tech market, which is still reeling from rate hikes news and inflation.

We are currently adopting the wait-and-see dynamic in May. Additionally, by maintaining a small percentage of portfolios’ weight in cash (less than 10%), we may be flexible if attractive investment opportunities emerge for short-term plays.

The portfolios’ April performance is as followed:

Regards,

Euro Pacific Advisors Management Team