Published: February 05, 2021

Relevant Strategies

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

Our Commentary

Market Overview

The past year has brought not only huge market swings between risk-on and risk-off phases but also a staggering divergence of returns between regions and investment styles. In equities, much of this can be explained by sector performance.

The outlook for inflation is not yet strong enough for the sector rotation of November and December to have continued at the same rate in January but many investors are expecting the recent recovery of cyclical/value shares (consumer cyclicals, energy, industrials, and financials) to continue and the valuation gap to close.

Last year, it was a COVID-19-determined market, with sectors that benefited from the pandemic doing well and those that did not having a torrid year. The best performing sectors included tech shares, consumer defensives, basic materials, freight and logistics and homeware. The worst performers were oil and gas, financial services (banks), retail estate and airlines.

The graph below captures the state of play in the sectors towards the end of last year:

Sector divergence remains in focus

As vaccines are being distributed, we are optimistic to see how the sectors will perform this year.

In its 2021 Global Outlook, Blackrock has divided companies into three categories based on its bottom-up analysis:

1. Those in trouble that may fall further
2. Those that that are hurt but should recover
3. Those that are strong and could get stronger

The report sees airlines in the first bucket because business travelers account for a disproportionate share of profits and expects that companies will wish to continue benefiting from the cost savings made by holding events virtually.

Housing, materials, and autos fall into its middle bucket as the interest rate-sensitive parts of the US economy are already recovering strongly.

Meanwhile, the tech sector is in the third category as it leverages accelerated trends, offers scarce growth amid rock-bottom yields, and boasts high profit margins.

In the next paragraph, we will see how this sector divergence affects stock indices and their valuation.

Impact on indices

For the S&P500 index metrics such as price-to-sales and price-to-earnings are often quoted as evidence of overvaluation, but it is important to consider the impact of the high weighting now attributed to mega-cap tech stocks.

These stocks are generally more highly-rated, at least partly justified by high earnings and cash flow, so as the share prices have rallied it is only natural that the P/E and P/S ratios of the S&P 500 have risen.

The table below generated by Deutsch Bank shows sectoral PE ratios and demonstrates how shifts in sector performance can move index-level valuations. It is worth noting a theoretical scenario where the ratios applied to an index could rise without it being the case for any individual sector, purely due to sector performance divergence.

*based on earnings estimates for 2022

Understanding the misunderstanding about the current valuation of index, we will continue to adopt the wait-and see stance in the short and medium-term for our holdings of index ETFs. Until the sector performance begins to shift, which will affect the indices valuation, we will keep monitoring and wait for the right time to adjust their weightings in our International Growth and International Balanced Fund.

A new battleground between the US and China

This year, another key driver of financial markets is expected to be the relationship between the US and China. Although Joe Biden is likely to take a less confrontational approach than his predecessor, both countries are likely to seek self-sufficiency in critical industries.

We continue to ensure that strategies contain diversified exposure to both poles of growth. As China opens its capital markets to global investors, the spotlight may switch from the bilateral trade deficit to climate and human rights. As this trend is playing out slowly, we are also beginning to steadily reflect this shift in our exposure to China.

Global growth recovery?

The pandemic continues to wreak havoc in many parts of the world and expectations of short-term economic performance have weakened. Furthermore, vaccines now appear not quite the silver bullet hoped for when it comes to opening up the global economy while supply constrains rollouts and the effectiveness against virus mutations remains uncertain.

Many commentators, including JP Morgan, still expect strong, back-end-loaded global growth this year and tailwinds continuing to underpin stock markets in a yield-starved world. Nonetheless, we remain risk-conscious and prepared for all eventualities.

The rise of TaaS

In recent news, Amazon is reported to order 100,000 electric vans last year. While this is good news for the electric vehicle market, there is a much larger trend simmering behind the lime lights of Tesla (NASDAQ:TSLA) and NIO (NYSE:NIO) .

According to FN Media Group, the Transportation-as-a-Service (or “TaaS”) industry is expected to reach a market valuation of $8 trillion , of which includes ride sharing in personal and freight transport, food and drone delivery and distribution market.

In the next decade, we believe the sharing “gig” economy, along with autonomous vehicles, electric vehicles (EVs), ESG investing and connectivity will be the future as the world is moving away from buying and owning gasoline vehicles largely due to rapid urbanization, increasingly gridlocked roads, ever-rising CO2 levels and the fact that we are using our cars at a falling rate, according to FN Media Group’s report. More importantly, the TaaS industry is where all four macrotrends will intersect.

Portfolio Actions

Sector Rebalancing

We continue to adopt our cautious stance and refrained from rotating the sectors because there are still gaps between the sectors’ performance and their valuation.

Additionally, sector rotation may not happen until the next quarter when the US vaccination program begins to bear fruits and its positive effects on the economy begins to kick in with rising inflation. Only time will tell.

Transportation-as-a-Service

In terms of our call on TaaS’ emergence, we are slowly building our positions in relevant industries and sectors. For example, within our investment in USA ESG ETF and the US market ETFs, there are holdings in Uber and Dominoes, both of which are members of TaaS.

Environmental, Social, and Corporate Governance

To note, our ESG investments, both US and Global, also have exposure to other aspects of the supply chain of TaaS-related companies. Holdings include Albemarle (NYSE: ALB), FMC Corporation (NYSE:FMC) and Livent (NYSE:LTHM) of which belong to the EV supply chain and their use through the gig economy and connectivity. There is also exposure to Tesla rather than Rivian, which is still private.

In the last six to twelve months, we have slowly increased our ESG exposure because we feel these are areas that will take on greater significance for investors and companies alike with the integration of greener and socially responsible values a key driver in decision making and development.

Furthermore, as more candidates begin to meet our ESG criteria, they may be added to the equity portfolios over time. This steady process will also contribute to our exposure to TaaS in the long-term.

Regards

Euro Pacific Advisors Management Team

Published: January 9, 2021

Relevant Strategies

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

Our Commentary

A look back at 2020

Describing 2020 as a roller coaster ride for investors does not do justice to the unprecedented series of events ushered in by the pandemic and the lockdowns across the world.

Although many markets sold off steeply into bear market territory as the pandemic escalated in March, the US Dow Industrial Average still managed to deliver 7% growth for the year after breaking through 30,000 for the first time in November. European indices including the UK FTSE 100 and equity markets elsewhere ended the year significantly lower.

As with equities, fixed income assets like sovereign debt sold off sharply in March but recovered quickly as announcements of central bank intervention soothed worst fears.

Stock market gains, however, bore little relation to the economic havoc wrought by the virus. Most countries experienced severe economic losses in the second quarter of the year before bouncing back in the third quarter when lockdowns were lifted.

The world economy ended the year on an uncertain note, with the impact of second and, in some instances, third waves of infections still to be quantified across developed and most-affected emerging market countries.

China stood out as the country that most quickly brought the virus under control and became the first economy to find its feet again. As such, it is expected to be the only country that will achieve positive growth in 2020.

Geopolitical uncertainty will prevail in 2021

It hasn’t just been the health and economic crises that made the financial market outlook so challenging to anticipate.

The US elections and Brexit negotiations have also dominated sentiment, and as we head into the new year, the fallout from these geopolitical events continues to hold sway.

US President Donald Trump made controversial presidential pardons and continues to challenge the Electoral College results.

In the UK, which continues to suffer severe economic hardship as a result of the pandemic, the last-minute Brexit agreement has at least averted the worst scenarios of short-term economic disruption.

China-US trade tensions also continued to hang over global geopolitical relations. However, while still likely to take a hard stance against China, a Biden presidency is expected to see the relationship between the two countries become less confrontational and volatile.

Vaccines give cause for hope

Looking ahead, much will depend on the successful rollout of the vaccines that have been given emergency authorisation. The prevailing hope is that the bulk of the populations in the developed world may be vaccinated by the middle of the year. Consultancy McKinsey believes the positive news about the vaccines in November makes it possible that herd immunity could be achieved by as early as the second half of 2021 and captures its thinking in the graph below.

But there are significant risks to this outlook. In addition to logistical obstacles, surveys like McKinsey’s (below) indicate up to half the US population will or may be unwilling to be vaccinated. Without a significant uptake, herd immunity will not be possible and the health impact of the pandemic is likely to be longer-lasting than currently factored into many of the economic forecasts for next year.

On the positive side, the Organisation for Economic Co-operation and Development (OECD) is expecting a brighter economic outlook for 2021 but cautions that the recovery will be gradual in its December World Economic Outlook. The organization sees vaccination campaigns, concerted health policies and government financial support as likely to result in global growth of 4.2% in 2021 after an equivalent fall of 4.2% in 2020.

The expected bounce-back is forecasted to be most robust in Asian countries where the virus appears to have been brought under control quickest. Elsewhere, even by the end of 2021, many economies will not be back to 2019 levels, according to OECD’s latest projections:

Meanwhile, Oxford Economics sees a mid-year boom following a “meaningful and sustained” lifting of restrictions in March or April and has raised its 2021 forecast for global growth to 5.2% from 4.9% based on a faster vaccination rollout than previously assumed. It estimates a 4.0% decline for 2020.

The investment case for emerging markets during 2021 is promising, particularly in Asian emerging economies that have managed to get the virus under control earlier than their emerging counterparts. Although vaccine rollout may be slower, more substantial demand from advanced economies, rising commodity prices and the ongoing weakening of the US dollar should all prove supportive for emerging markets.

India stands out as a country that has managed to turn around its economic fortunes, an achievement recognised by sovereign credit rating agencies which have upgraded their 2020/2021 fiscal year growth forecasts for the world’s second-largest emerging market. S&P Global Ratings now expects the contraction in India’s economy during the year to March 2021 to be 7.7% compared with its previous 9% forecast decline.

Our Equity Outlook

Barring a significant deterioration in the outlook for overcoming the pandemic, the investment outlook for risk and cyclical assets looks reasonably promising. Economies look likely to gather momentum again. Investors will seek growth potential in an environment where monetary and fiscal policy stimulus is likely to remain in place for the next few years and interest rates are likely to stay near zero.

UBS expects fiscal stimulus and the rollout of a vaccine to drive the economic recovery and outperformance in earnings for mid-cap stocks and select cyclical sectors, relative to large-caps.

While the Big 5 tech stocks are largely seen to have run their course, Asian tech stocks offer attractive potential. Notwithstanding anti-trust scrutiny, the technology sector will see strong secular growth in digital advertising, e-commerce, cloud computing and the 5G rollout.

The Inflation Question

The one much-debated unknown—whether inflation could take hold during 2021 against a backdrop of easy money—is the one risk that needs to be monitored carefully during the year. Opinion is still divided on how much of a risk potential inflation represents.

The concern is that if inflation does reappear, it would be challenging to eliminate given the multi-trillion-dollar stimulus programs needing to be unwound. Nevertheless, investors are increasingly seeking inflation protection instruments, as shown in the graph below.

Ethical investing comes to the fore

We have been reporting about the rise of funds that prioritise environmental, social and governance (ESG) considerations in their mandates since November of this year.

One promising outcome of the 2020 Covid-19 crisis has been the increased awareness and understanding of how material the health, social or environmental risks can be when faced with a crisis of such epic proportions. This awareness translated into a profound shift in investor appetite with flows into these ESG funds picking up materially during 2020 and expected to continue during the years ahead.

There’s no doubt that the consequences of 2020’s devastating confluence of health, economic and geopolitical events will be felt for years to come. We are, however, cautiously optimistic about the global economic outlook given the light at the end of the tunnel that the vaccines provide.

Portfolio Actions

As all previous financial market crises have shown, investment opportunities do arise during times of uncertainty and volatility. Those investors who can identify these through robust, fundamental analysis, and who are prepared to wait for the growth potential to be unlocked, stand to benefit most.

We continue to seek such opportunities to add to the growth potential for your portfolio. The portfolios’ composition remains unchanged as we stay cautious while awaiting new economic data before opening new positions.

Regards

Euro Pacific Advisors Management Team

Published: December 15, 2020

Relevant Strategies

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

Our Commentary

November Review

In November, a Biden projected win in the US elections and Pfizer breaking the news that their positive trial results saw most global stock markets rally strongly, with European stocks leading the way:

Following that first breakthrough, three companies came through with vaccines purported to deliver better-than-expected success rates at combatting COVID-19. This event has buoyed expectations of a global economic rebound from as early as the second quarter of 2021 onwards.

A large part of the developed world’s population may be vaccinated by the middle of 2021 and the prospect of seeing an end to the pandemic saw the US Dow Jones Index breaking 30,000 for the first time.

The US elections also proved positive for US stocks, with expectations that a Biden administration would deal more decisively with the exponential rise in infections experienced during November. A Biden presidency is also expected to place combatting climate change back on the federal government’s agenda, and the administration will take a more positive stance on global trade.

A lasting and unexpected effect of COVID

For all its economic damage, COVID-19 has had a profound effect on investor and broader societal attitudes towards sustainability. The pandemic has been an eye-opener for many investors regarding the genuine risks posed by the ‘S’ in Environmental, Social and Governance (ESG) investment considerations.

Until now, the focus has been on environmental and governance. But the pandemic has put the spotlight on social sustainability. The health crisis prompted companies to take labor standards, gender equality and human capital management seriously as they have had to prioritize the mental and emotional health of employees in the shift to remote working.

These realization further strengthens our view that ESG funds will become more popular as investors are catching up to this emerging trend.

Assets in ESG funds reach record levels

Against this backdrop of changing perceptions of the role green investments can play in delivering sustainable performance in the future, significant funds have flowed into ESG and other green investments this year. Morningstar figures show that some €52.6bn was invested in ESG funds during the third quarter of 2020, increasing assets under management in ESG funds to a record €882bn.This burgeoning appetite for sustainability has also seen the launch of a significant number of new ESG funds.

According to a recent report by PwC, assets under management in ESG equity funds in Europe could grow to between €2.6trn and €3.6tn in the next five years – potentially comprising almost 60% of European investment funds.

A critical factor that will determine ongoing growth in demand for green investments will be whether these investments perform at least in line with (and hopefully ahead of) investments that don’t prioritize ESG.

Morningstar’s research found that European equity funds with higher sustainability scores have generated better risk-adjusted performance since 2016. On risk specifically, it found that the level of sustainability was negatively related to the value at risk (VaR) of the fund, which means that funds that have higher sustainability scores are less prone to experiencing extreme losses.

This year, the performance of funds with a sustainability focus has been robust and most sustainable funds have outperformed non-ESG funds over one, three, five and ten years. Of course, sustainable investment strategies are not a homogenous group, as highlighted in the graphic below.

Green or ‘greenwashed’?

The unprecedented growth in demand for green investments has inevitably been accompanied by skepticism about the extent to which companies and investment managers may be engaging in ‘greenwashing’ – overinflating actual sustainability actions and achievements. Earlier this year, for example, Ryanair Holdings’ claim to be “Europe’s lowest-emissions” airline was challenged by the Advertising Standards Authority, which ruled the claim could not be backed up.

It is particularly hard to detect whether investment managers are fully incorporating the spirit of ESG considerations into their investment processes or whether they are paying lip service to these whilst doing little to take the actions that deliver positive sustainability outcomes.

Underpinning the momentum behind green investing is the fact that sustainability is at the heart of the recovery plan for many governments. Investments targeted by these plans include large scale renewables, clean transport, sustainable food, and shortening and diversifying global supply chains.

Implications

With COVID-19 inadvertently offering a window into the devastating impact a big-ticket environmental or social crisis could have on the world as we know it – with profound implications for the financial markets – the demand for green is unlikely to dissipate. It is easy to envisage a time when being green is so ordinary that it is no longer a differentiating factor.

Until then, the hard work will be in determining whether funds are genuinely green or whether they are merely engaging in greenwashing to benefit from the wave of demand for funds that invest for the good of all. Consequently, we prefer not to put ethical labels on our portfolios or to invest in funds purely because of a green label. Instead, we use analysis of the underlying components and factor in sustainability scores as part of our overall investment process. Evidence increasingly demonstrates the investment merits of this approach, in addition to the broader benefits.

Portfolio Actions

While the recent vaccine breakthrough and a Biden victory in the US elections have positive economic implications for European and US equities, we will await more positive data to verify economic recovery signs before rotating out of emerging markets equities.

Our International Growth and International Balanced Fund maintains an equity tilt towards companies that focus in ESG criteria—environmental, social and governance.

For International Balanced Fund, we have replaced both the US TIPS and the US Treasury 3-7 year bonds with an increased allocation to corporate fixed income for International Balanced Funds. This change is designed to increase the return profile of this asset class while incorporating an ESG element.

The iShares Global aggregate bond invests in government, corporate and securitised bonds which are diversified across the globe. All exposure in this asset is to investment grade bonds. This still incorporates US treasuries but increases the corporate bond aspect.

The iShares USD Corporate Bond SRI 0-3 year investment provides short dated exposure denominated in USD to investment grade corporate bonds across several sectors. The company debt is screened and only includes those with a top 4 MSCI ESG rating and excludes many issuers involved in weapons, tobacco, adult entertainment, gambling and nuclear power to name a few.

Regards,

Euro Pacific Advisors Management Team

Published: November 13, 2020

Relevant Strategies

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

Our Commentary

The pandemic, US elections, and Brexit see investors adopt a risk-off stance.

An exponential rise in COVID cases across the developed world – particularly in the latter half of October – weighed heavily on financial markets, with already jittery investors taking risk off the table in the weeks before the US election.

COVID daily infections are reaching record highs and further nationwide lockdowns loom. Hospitals are fast filling up and in Belgium there is already talk of doctors having to make judgement calls on who will be accommodated in ICUs that are already reaching peak occupancy.

Brexit & Developed Markets

European politicians are hard at work trying to negotiate a Brexit deal. The main sticking points remain fishing access to UK waters and mechanisms to resolve future disputes. There is, however, cautious optimism that a deal will be struck in the first two weeks of November, even if it is little more than a narrow trade deal. Ratification of a final deal would likely provide a fillip to UK stocks as long as the stock market is not overshadowed by the pandemic.

In spite of stagnation in Q4, investment bank Berenberg now forecasts UK GDP to drop by 5.5% resulting in an annual contraction of 11.8%. In the graph below, it forecasts an annual contraction of 7.4% in the Eurozone. The rebound next year in the UK is now forecasted to be sharper at +6.4% but much will of course depend on the timing and success of any mass vaccine rollout.

European and UK stock markets are still deep in the red year-to-date, with the Euro Stoxx 50 Index down 21% to the end of October and the FTSE 100 Index down 26%. Surging coronavirus infections and the ongoing efforts to reach a Brexit deal against all odds resulted in the European index falling 7.3% during the month and the UK by 4.5%.

US declines were smaller, despite disappointing reports from a number of the tech giants.

Emerging markets continue to shine.

Against the worrying backdrop caused by the pandemic, emerging markets are doing well compared to developed markets. The Bloomberg graph below shows performance of stocks in emerging markets compared to their peers in developed markets. The relative strength of emerging market stocks has broken out of a downward trend present since 2018 and the index is now outperforming its developed market counterpart.

The rally is being driven by China’s more positive economic performance and prospects, as well as the region’s better track record in preventing coronavirus infections from getting out of control again.

While shifts to risk-off sentiment continue to weigh on emerging markets, opportunities remain. Last month, Citigroup recommended that investors rotate out of European equities and into emerging market equities. The group’s own Economic Surprise Index shows disappointment in European equities as a result of the resurgence in coronavirus cases.

In contrast, it points to robust emerging markets and notes attractive valuations and inflows. Similar positive indications have come from the IMF’s GDP forecasts for 2020 which puts Emerging and Frontier economies at -1% with advanced economies languishing at -6%.

Defensive assets such as gold stay mute while oil’s performance remains sluggish.

Surprisingly, traditional safe havens, including US treasuries, the Yen, and gold have not been the beneficiaries of risk-off sentiment. Gold is usually a beneficiary of risk-averse investor behavior but the price eased 0.8% during October.

Oil prices remained on the receiving end of concerns about lockdowns and the impact this will have on global demand. Brent crude oil slipped almost 9% during the month, while the broader commodity universe, as reflected in the Bloomberg Commodities Index, managed to eke out a 1.2% advance but remains 11.2% lower for the year to date.

US Elections

A Biden presidency might signal higher taxes and a shift back towards a more multi-lateral approach to political and economic affairs – adjusting the America First stance pursued by current President Donald Trump during his four-year term. It would also herald regulation more aligned to Europe and a greater focus on anti-trust issues.

A Trump win would see more of the same arm’s length, if not acrimonious, approach to globalization and to China and EU relations, a continued threat of tariffs and sanctions on European goods and manufacturers and possibly the prioritization of a post-Brexit trade deal with the UK at the expense of the Eurozone.

With so many health, economic and political uncertainties at play, the outlook for the rest of the year remains highly unpredictable.

Portfolio Actions

Our strategy for International Balanced and Growth portfolios is shifting away from unstable and sluggish economies and reinvesting our cash into emerging markets with potential growth during and post-COVID 19. Geographically, we have removed our exposure to India while reducing our positions in Europe and Japan.

Protection-wise, we have boosted our exposure to gold which will act as an inflation hedge in the face of a money printing spree by central banks around the world to stimulate their battered local economies. Additionally, the move will increase protection for our portfolios in the case of unforeseen catastrophic events.

In terms of stock picks, our strategy is refreshed with a focus in the ESG criteria—environmental, social and governance. Companies with good ESG ratings will likely become preferred holdings, while the portfolio weights of poorly-rated ESG rated companies will likely be reduced. This factor will drive the long-term performance of global and domestic organizations that pay attention to this shifting investor demand—a new focus beyond the short-term financial gains typically favored in the past, to the long-term well-being of the people and the environment.

Regards,

Euro Pacific Advisors Management Team