Published: July 06, 2021

Relevant Strategies

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

Our Commentary

Vaccination progress

Around three billion doses of COVID-19 vaccines have now been administered in what has become a race against ever-emerging variants of the virus.

The success of the vaccination campaign in the United States has resulted in it now taking top spot in the Bloomberg Covid Resilience Ranking with many travel routes opening up to those vaccinated.

However, the Delta variant has become a particular cause of concerns in the UK, Europe and South Africa. The highly contagious variant is responsible for upwards of 90% of new infections in the UK.

Europe is divided on opening travel to other regions, with southern nations eager to participate in the usual summer tourism trade and northern countries, particularly Germany, loathe to risk another upsurge in infections.

Overall, the progress in vaccination campaigns combine with strict border control policy by governments have made a positive impact in controlling the infection rate. However, it is reasonable to remain cautious about the danger of new COVID variant emergence, which can surprise and cause panics in the markets.

How is the global economy recovering?

The path to full economic recovery continues apace. Vaccine progress has fed through to the uneven growth prospects of developed versus emerging economies, with Africa a particular laggard in this respect. While global growth prospects have been repeatedly upgraded this year by the likes of the IMF, World Bank and the OECD, the overall 4% plus growth this year belies an increasing divergence in growth across the globe.

The strength of the global recovery is largely attributable to a handful of major economies. The US and China, for instance, are each expected to contribute more than 25% of global growth this year and the US’s contribution is outsized relative to recent history – almost three times its 2015 to 2019 average.

Estimates for growth in Europe are also increasing. SP Global has upgraded its forecast for the Eurozone to 4.4% this year and 4.5% in 2022, noting the recovery now extends from industrial production to services as most restrictions are lifted and households start spending again.

Despite the anticipation of a strong recovery, the World Bank still expects 2022 global output to remain about 2% below pre-pandemic projections.

Corporate earnings remain resilient

Corporate earnings continue to beat expectations, contributing to upbeat forecasts for the year as a whole. Although base effects are magnifying the numbers, with the second quarter increase likely to be most pronounced, earnings growth would still be positive versus 2019 even without the base effect.

Based on the extent of the upside earnings surprises in the first quarter, for the year as a whole, earnings are expected to increase 35% after declining 13.1% last year – a considerable recovery.
Thus, while concerns have grown about whether an equity market meltdown may be in the offing, given the sky-high valuations, stocks could continue to rise if these earnings expectations are met.

Anyhow, our International Growth & Balanced Funds remain diversified to anticipate any unexpected market moves in the short and long-term.

Reflation trade paused, commodities saw mixed results

June saw a dialing back of the reflation trade, as concerns about inflation eased off towards month end and the technology sector once again outperformed.

This shift is evident in the Nasdaq’s 6.4% gain versus the Dow Jones Industrial Average, while the FTSE, and Japan’s Nikkei ended the month broadly unchanged.

India’s stock market put in its best performance of the year to date. There are some concerns about extended equity valuations, but the improvement in the country’s economic outlook during June as lockdown measures were removed, vaccinations continued apace and the economy opened for business again, served to sustain investor optimism.

The sectors that have taken the lead are materials and industrials, which are seen as offering the best performance potential during a cyclical economic revival. There are also opportunities in real estate, such as new generation technology parks (India has 75% of the world’s digital talent) and infrastructure.

The steep upward march in commodity prices for the first five months of the year plateaued during June, with the Bloomberg Commodities Index slipping 0.15%.

Oil prices remained strong, with the Brent Crude price gaining 8.2% to end the month above $75 a barrel. Gold lost ground as risk appetite remained in force.

The precious metal ended the month below $1,800, down some 7%, while copper’s record rally also lost ground during the month, with the price coming down 8.8%.

Don’t take your eyes off inflation yet

All eyes remain on any signs of inflationary pressures that could prove more entrenched than the central banks think likely. US inflation figures were higher than expectations and opinion remains divided on whether inflation will become a problem or prove transitory once the dust has settled. Federal Reserve Governor Jerome Powell called for patience, saying it wasn’t the time to make hard predictions in such unprecedented times.

However, a slightly more hawkish tone did appear in the Federal Open Monetary Policy Committee statement, with the dot plot bringing forward interest rate increases. Powell indicated that the bank would be talking about asset purchases in the meetings to come but warned against interpreting the dot plot as a forecast of interest rate moves. He stressed that any decisions around tapering would be well telegraphed and thus would be no surprise to investors.

In the immediate aftermath of his comments, markets sold off and US Treasury yields spiked. Subsequently, stock markets have rallied to end the first half of the year on a positive note.

Portfolio Actions

For now, the market has shrugged off any concerns about rising rates. However, volatility will likely return as we get close to the next Fed’s meeting in July, or at least until year’s end.

Our fund managers are therefore tactically allocating less than 10% of our portfolios’ value in cash to take advantage of any short-term opportunities arising in the future.

The portfolios’ June performance is:

Regards,

Euro Pacific Advisors Management Team

Published: June 08, 2021

Relevant Strategies

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

Our Commentary

Monthly recap

Stock markets, commodity prices and cryptocurrencies all experienced a volatile May, first climbing strongly and then selling off sharply as inflation fears surged and then subsided.

Headline US consumer price inflation came in at 4.2%, well above the US Federal Reserve’s 2% average target. Cars and food were the main inflation drivers with the 10% month-on-month increase in the price of used cars contributing one third to the overall increase in the Consumer Price Index (CPI).

The steep increases in commodity prices have also contributed to upward price pressures globally, with the Bloomberg Commodity Index 17.2% up for the year to date. The copper price has seen the highest gains of the commodity basket due to its use in renewable energy solutions although it did retreat from highs achieved earlier in May.

Semiconductor-pull inflation?

Central bankers and economists are convinced that supply shortages in key areas of the economy are behind many of the price increases. While these may continue into the third and fourth quarters, their view is that these will not have a persistent effect on prices as manufacturers adapt to post-COVID-19 demand levels.

The most acute supply shortages have been in semi-conductors. The shortage has affected a broad swathe of manufacturers in industries ranging from autos to smartphones to white goods such as washing machines. Contributing to the rising price of semiconductors is the hoarding of chips by manufacturers eager to ensure they have sufficient supply in a period of uncertain demand.

As worries about supplies have mounted, so have concerns about chip production, the bulk of which occurs in a limited number of countries and by a handful of suppliers. With shortages expected to last for at least the next few months, Goldman Sachs has estimated that at least 169 industries have faced disruption with a potential 1% negative impact on US GDP this year.

Uncertainty in the cryptocurrency market

Highlights

The assets dominating the news and proving most volatile in May were the cryptocurrencies, with Bitcoin (BTC)* holding the highest profile.

BTC price in April had shot up to almost $65,000 when Elon Musk, the CEO of Tesla, Inc., went public about making a $1.5bn investment into the world’s largest cryptocurrency. The coin then crashed after he criticized the energy consumption associated with its mining interests and announced that Tesla would be suspending payments using the Bitcoin token.

After selling off to below $32,000, the price recovered a little to end the month at around $38,000. It remains more than 350% higher than a year ago.

Causes of crypto volatility

Besides Musk’s unpredictable commentary, Bitcoin’s fortunes were adversely affected by the tough regulatory stance adopted by the Chinese government when it warned financial services companies that they were not allowed to accept Bitcoin payments. China also reiterated its commitment to positioning its Central Bank Digital Currency as the digital payment of choice.

While many believes that price movement in the crypto space are indicators of future stock performance, we are skeptical about this thinking’s merit but we are open-minded about the possibility of correlation between these two asset classes.

Outlook

Events in May highlighted that, until the global economy and financial markets have come out the other side of the pandemic, sentiment will remain extremely volatile.

For the rest of the year, global economic growth, which is showing very little sign of waning, may well remain a fundamental underpin for stock markets. One cloud on the horizon for corporate earnings is the impact of President Biden’s proposed tax increases, but for now the focus is elsewhere.

Portfolio Actions

The month of May witnessed positive performance by all of our funds:

Our portfolio managers increased the cash position slightly in May. The portfolios tends to keep a small cash element, also known as the Tactical Element, to take advantage of short term opportunities in the market. Beyond that, we continue to ensure that our core strategies are well-diversified and our commodity funds track their respective benchmarks.

Regards,

Euro Pacific Advisors Management Team

*Note that our funds do not hold cryptocurrency.

Published: May 11, 2021

Relevant Strategies

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

Our Commentary

April summary

As vaccine rollouts move forward at a promising pace in Europe and the US, and economies open up, optimism is translating into increased forecasts for 2021 economic growth. Meanwhile, the US Central Bank maintains that it is in no hurry to withdraw monetary stimulus. Consequently, many major equity indices have climbed to all-time highs and safe-haven assets such as treasuries and gold have stabilised after the steep declines of Q1.

The FTSE 100, undeterred by a large financial sector and lingering worries about Brexit, has surpassed the level at which it began last year. It is also worth noting that markets greeted the 18.3% rise in first quarter Chinese GDP with nothing more than a shrug. Coming in May, the base effects from a summer in lockdown are bound to be spectacular for equity outperformance.

Earnings season update

Most companies that have reported on the first quarter have announced their earnings per share (EPS) far above estimates – a performance attributed to both better-than-expected business performance and last year’s low EPS estimate as a result of the onset of the COVID-19 pandemic.

84% of the US companies reporting by the third week of April have beat EPS estimates. The average upside surprise was 24% – significantly above the five-year average of 7%.

Meanwhile, the majority of European companies have also reported earnings above market expectations and better sales growth than consensus estimates. Earnings surprises were delivered across various industries, with financials, consumer discretionary, materials and healthcare reporting the highest earnings growth. The industrial and energy sectors were the only ones to report year-on-year earnings declines.

It’s important to note that after three successive quarters of companies outperforming estimates, the surprise element and consequent positive impact on share prices has also diminished. In many cases, companies reporting earnings in line with expectations are now being penalized by the market. So, we remain cautious about investing in overvalued and low-quality stocks.

What’s next for equities?

Elevating market expectation

Companies will need to continue along their current upward trajectories for increasingly optimistic analyst expectations to be met. Concerns about overvaluations and stock markets moving into bubble territory have raised the risks of an adverse event having an outsized impact on investor sentiment and global stock markets. As a result, management of volatility in investment portfolios remains as important as ever.

A stimulus-driven bull market?

If we consider the almost unimaginable size of the US stimulus package so far, the $2 trillion in unspent household savings and the additional $1.9 trillion stimulus to come, a period of roaring 20’s type-economy would seem a racing certainty. Much of the stimulus is targeted at the consumer and the lower-paid and is effectively “helicopter money” putting dollars directly into the bank accounts and pockets of individuals. As such, it is unlikely to be spent on property or the stock market which is where so much cheap money ended up during the recovery from the Great Financial Crisis in 2008.

The Fed & inflation

If stock markets were looking for an excuse to take profits, one would have thought that the prospect of an inflationary scare pushing up bond yields would provide it.

To note the recent rise in bond yields is probably an acknowledgement that there are going to be some shockingly large economic numbers coming down the road which, under any other circumstances in almost any period in history, would greatly effect equities. After a surprising move to the upside in February and March which caught bouts of stock sell-offs, 10-year US treasury rate has stabilized for now.

It is the reaction of the Fed in response to a big headline inflation figure that is really what has been bugging bond investors rather than the stock market. Fed Chairman Jerome Powell, appears to be reassuringly relaxed about the coming boom and willing to tolerate a spike well above the 2% target rate if the evidence suggests it is no more than a passing moment of economic giddiness. If the Fed can look through an inflationary boom, so can investors. As proof, major US stock markets have all touched or surpassed their February levels, shrugging off any inflation fears.

Lastly, a willingness to keep rates low by central banks in the US and UK would add even more tailwinds for equities to outperform in May and onwards.

Biden’s tax hike

The impact of the proposed US corporate tax increase is certainly a concern for some investors but we think a stable and predictable stance from the central banks may promote a longer-term commitment to equities from investors along with a renewed focus on the long-term compounding benefits of dividends in a low interest rate environment.

In the UK for example, the ongoing resumption of normal dividend payments, across companies of all sizes, will make them more attractive – particularly to foreign investors who may have been absent for a few years due to Brexit uncertainty.

Nevertheless, we will continue monitoring this event to remain cautious about its potential long-term impacts on our equity holdings. Any reactions of the market due to this new tax plan may affect our portfolios’ performance in the short-term but the long-term impacts should be limited due to our diversification.

Portfolio Actions

International Balanced & Growth Fund

Sell iShares Gold Producers (IAUP) and replace with WisdomTree Enhanced Commodities (WCOA)

This new ETF provides exposure to a broad basket of commodities including precious metals, industrial metals, energy and soft commodities such as cocoa, sugar and cotton. It uses an optimization strategy to enhance the return when rolling futures contracts.

The inclusion of industrial metals and energy makes the holding more sensitive than the precious Metals Basket to the benefits of the economic recovery and, in particular, may show a greater positive response to inflationary pressure.

A resurgence in infrastructure spending will increase the demand for many commodities over coming years but a dearth of investment in raw materials extraction is likely to see supply remain tight. Furthermore, production yields on several agricultural commodities have been falling while consumption has risen. Recent weather patterns may provide further tailwind for agricultural commodities. The safe haven attributes of gold have diminished since the US election and the rollout of vaccines, while the gold price continues to respond negatively to steepening of the US bond yield curve. Although the new holding does retain an element of gold exposure, it is reduced.

Traditionally, commodity benchmarks have been limited to the extent that they have adopted a pre-defined schedule to manage the rolling of futures contracts, failing to account for particular seasonality and suffering significant negative carry returns associated with the front end of commodity futures curves when markets are in contango. They have also missed out on potential positive carry in backwardated markets. In the Wisdom Tree Enhanced Commodity UCITS, the optimised methodology has led to commodity carry being a primary source of alpha in comparison to the traditional approach.

Note that we retain our exposure in gold miners through L&G Gold Mining (AUCO).

Add iShares Euro STOXX SmallCap (DJSC)

The purchase will provide our portfolios with exposure to small-cap Eurozone equities, which are set to benefit from the consumer boom as the vaccination rollout gathers pace and the economic recovery in Europe continues to accelerate. To add, The Euro area’s business activity indicators (PMI) improvement for a second month while low interest rate expectation serve as tailwinds for small businesses in the area to outperform in the upcoming quarters.

Regards,

Euro Pacific Advisors Management Team