Euro Pacific Bank

Portfolio Commentary: Inflation continues to dominate financial markets

Published: June 08, 2021

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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.

Chip shortages is predicted to affect GDP growth negatively

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.

Will increasing chips’ prices add upward pressure to inflation in the upcoming months?

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

Elon Musk has been one of the main causes of BTC’s volatility this year.

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:

Fund NameMay's Performance
International Balanced+1.44%
International Growth+1.74%
Natural Resources+3.70%
Gold and Precious Metals+10.95%

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. If you are interested in trading Contracts for Difference (CFDs) that tracks BTC and ETH, you can sign up for a free MetaTrader 4 demo here.

Portfolio Commentary: Should investors be worried about inflation?

Published: May 11, 2021

euro pacific advisors fund manager portfolio 
commentary

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.

The base effect from a Summer in lockdown may elevate many companies to outperform high market expectation. Source: MacroOps, I/B/E/S Data from Refinitiv

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.

Q1 ’21 witnessed record inflows into equities. Will the rally continue?
Source: BofA Global Investment Strategy, EPFR Global

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

Portfolio Commentary: Stocks Have Momentum in Q2

Published: April 11, 2021

euro pacific advisors fund manager portfolio 
commentary

Relevant Strategies

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

Our Commentary

Now that Spring has sprung, there is a palpable sense of optimism in the air. The hope is that the dark days of winter will prove to have been the peak of the COVID-19 pandemic in the US and Europe, and that global growth will surprise on the upside this year, buoyed by the promising pace of vaccine rollouts and economies opening up.

Vaccine progress

The race to administer vaccines to curb spiraling infections and, in particular, hospital admissions was a feature of the quarter. Globally 15 million doses have been administered but most countries have barely started. Nonetheless, the US and the UK have seen infection rates coming down significantly.

Progress in the EU has been slower. The region is battling to roll out vaccine programs fast enough and infections are rising steeply again, particularly in France where hospitals are filled to capacity.

Irrespective of regional differences, it is clear that the global impact of the pandemic will continue to impact daily life for some time. Governments will attempt to reopen their economies depending on the infection rate’s improvement.

Will Bulls prevail over Bears?

After a turbulent February and March, the US stock market has staged a full recovery and continues to hit new highs. The S&P 500 index climbed past 4,000 for the first time in its history, while the FTSE 100, hindered by a large financial sector and lingering worries about Brexit, has recovered to within 10% of the level at which it began last year.

Cyclical stocks that were hardest hit by the pandemic last year, as well as emerging market assets, have been the primary beneficiaries of the reflation trade that has prevailed during the quarter. The cyclically adjusted price-earnings ratio is now the second highest it has ever been which could be evidence of a speculative bubble. It is, however, usually the pre-emptive tightening of monetary policy that bursts a bubble, we see no sign of that coming any time soon.

Sectors with ties to the economy are poised to outperform in the upcoming quarters. Source: Columbia Threadneedle Investment.

While equity investors’ sentiment is still bearish, their worry is nothing new. A chart of the US stock market recovery from the financial crisis in 2008 looks like one continuous worry-free bull market. Even the eurozone crisis of 2012 barely registers more than a blip. In reality, we know that throughout that decade things certainly didn’t feel so calm. Looking back, there was always a long list of dreads demanding the attention of financial pundits, investors, and global asset allocators. One of them is rising treasury yields.

A closer look into bond markets

In recent daily press, the stock and bond markets have been way ahead of the mood, especially bonds.

Throughout most of the recovery, sovereign yield curves were firmly positive, forecasting a rise in interest rates that never came. Instead, they fell further to nearly zero, providing fuel for the rising stock, bond and property markets.

In the US, UK and even in Germany, bond yields have risen to where they were in January 2020. The direction of travel has been similar across all developed markets. But that is where the similarity ends. The US 10-year Treasury now yields 1.7% whereas the UK 10-year Gilt yields less than half that. The German bond is still in negative territory, yielding -0.3%. This is a big difference.

Combined with the continued strength of the US dollar, some analysts believe treasuries could yet again prove to be a tempting target for asset allocators while only a minority are anticipating the rise in yields to directly precipitate a bear market in equities.

Central Banks will keep rates low…for now

Inflows from the rest of the world would ultimately act to put upward pressure on the US dollar. This, in turn, would alleviate inflationary pressures in the US – which is what everyone seems to be worrying about.

Perhaps this explains why the US Federal Reserve appears to be so sanguine about its own inflation targets? The European Central Bank, perhaps fearing a sell-off in its own government bonds, has stepped up its bond-buying program to keep yields down. While the US can seemingly prosper with relatively higher borrowing costs, clearly the concern of the ECB is that the eurozone cannot.

The Fed Reserve doesn’t appear to worry about inflation surprises that many investors are fearful about. In March 18th’s FOMC meeting, the Fed has decided to keep rates near zero until 2023 despite the fact that the central bank now sees inflation running to 2.4% this year, above its previous estimate of 1.8%. Core PCE inflation for 2022 is now expected at 2.0% and 2.1% in 2023. Source: Bloomberg.

In addition, because rising 10-year yields push up expectations of future rate rises, the UK could also have a problem with its sensitivity to rising base rates. This is because the payments for UK mortgage borrowers are linked to short rates in a way that those of US borrowers, linked to 25-year rates, are not. The Federal Reserve may be reluctant to raise base rates back up to 1.5% but for the Bank of England it is almost unthinkable.

Whatever directions that bond yields may go, our international funds are well-diversified to be resilient against the current market’s volatility and fears.

Precious metals

Will gold rally again in April?

The prospect of inflation that so bugged investors actually came in the form of rising asset prices rather than in the cost of living. The gold price doubled in the years following the financial crisis and while there has been some profit taking since the US election, gold retains many attractions, from being a potential inflation hedge to a safe haven.

We retain exposure to the gold price as inflation, rather than Covid-19, appears once again to have been investors’ main concern since the start of the year.

Stock market outlook

Economically-sensitive stocks should continue to perform well, albeit they remain susceptible to bouts of volatility sparked by movements in bond yields. The $1.9tn US fiscal package, continued monetary policy support, rising vaccine supply and distribution, and significant amounts of corporate and consumer cash waiting to be deployed are tailwinds of equity values.

Earnings continue to beat consensus analyst estimates and conservative company guidance with earnings momentum greatest in energy, materials, financials and information technology.

Technology remains within the top five earnings momentum plays, even though mega-cap technology stocks were the most affected by the reflation trade and rise in bond yields during the first quarter. Economically-sensitive sectors, including cyclical stocks and reopening plays, could surprise further to the upside.

Moreover, after a decade of over-predicting inflation, central banks will require strong evidence of wage growth before reducing stimulus this time. This is supportive of positive stock performance in the future.

Portfolio Actions

Historically, April has been bullish for US stock markets. Despite the devastating impact of COVID-19 to the global economy, we have seen bullish sentiment remaining resilient in many stock markets. However, rising treasury yield remains a threat to Tech stocks that we cannot undermine.

We believe that our funds with exposure to US stock markets are currently well-diversified so that an unexpected performance of either the stock or bond markets may become a neutral factor to our portfolios’ performance.

Despite the Fed’s reassurance of keeping inflation under control, investors still fear that inflation may surprise to the upside in the short-term. Hence, we maintain our exposure in gold to capture both shot term and long term price appreciation of precious metals, which are affected by current easy monetary policy and expansionary fiscal policy of governments to jump start their COVID battered economy.

Lastly, we will continue to identify new trends and seeking exceptional investment opportunities to add to the growth potential of your portfolios.

Regards,

Euro Pacific Advisors Management Team

Portfolio Commentary: A New Megatrend in 2021

Published: February 05, 2021

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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:

Consumer Staples and Informational Technology led in performance 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.

Index 1-year Return 3-year Return General Estimated Next Year P/E (as of 28/01/2021)* General Estimated Next Year P/E (as of 29/01/2018)
S&P 500 Index 15.6% 31.8% 19.4 16.9
S&P 500 Consumer Discretionary Sector 35.5%s 53.9% 27.5 19.4
S&P 500 Consumer Staples Sector 3.2% 11.2% 19.1 18.2
S&P 500 Energy Sector -26.9% -46.5% 16.0 20.4
S&P 500 Financials Sector -2.2% -2.1% 12.2 13.1
S&P 500 Healthcare Sector 13.6% 27.6% 15.4 16.1
S&P 500 Industrials Sector 5.3% 7.9% 18.5 17.1
S&P 500 Information Technology Sector 36.6% 93.1% 25.0 17.9
S&P 500 Materials Sector 22.3% 13.0% 18.5 16.6
S&P 500 Real Estate Sector -6.7% 16.2% 43.0 34.6
S&P 500 Telecommunications Sector 7.2% 45.2% 25.2 19.3
S&P 500 Utilities Sector -8.6% 22.6% 16.9 15.7

*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.

China and EM are expected to see the most GDP growth in 2021.

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

Portfolio Commentary: Cautious Optimism for 2021

Published: January 9, 2021

euro pacific advisors fund manager portfolio 
commentary

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.

Source: McKinsey & Co.

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

Portfolio Commentary: COVID-19 Sparks Green Investment Revolution

Published: December 15, 2020

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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.

ESG investing is the second largest group by dollar value.

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

Portfolio Commentary: US Elections and the Pandemic

Published: November 13, 2020

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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.

US Peak COVID-19 Case Rates by Wave. Source: Time.com

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.

Source: Berenberg.de

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

Portfolio Commentary: Ongoing conomic risks

Published: August 26, 2020

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Relevant Strategies

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

Our Commentary

July continued to see a growing divergence between stock markets, buoyed by technology stocks and many economies stalling in the face of renewed flare-ups of infection.

The US Federal Reserve delivered a gloomy assessment of current economic conditions and the risks that lie ahead for the global economy. To counteract the most severe downturn “in our lifetime”, it left the doors open to using any tools at its disposal to support the US economy “until it is confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The diagram produced by J.P. Morgan below puts the recession into context.

recession economy
 

Contracting economies, weakening forecasts

The US economy shrunk by 9.5% in the second quarter (annualised -32.9%) and personal spending was particularly hard hit, declining 34.5%, its steepest contraction since the 1940s. Meanwhile, the Eurozone’s economy contracted 12.1% in the second quarter – the most significant quarterly decline on record.

recession europe
European Commission projects decline in growth.

On a more positive note, PMI data moved past 50 for the first time since COVID-19 appeared in the US and Europe. This suggests expansion, although Goldman Sachs’ Current Activity Index pegs the recent economic slowdown in July at -3.8% versus a positive 0.5% the month before.

The path of the virus remains the dominant driver of near-term growth. As infections continue to spread, forecasts are weakening. Early in July, Goldman Sachs reduced its US GDP estimate for 2020 to -4.6% versus -4.2% previously, based on a 25% rebound in the third quarter, also lower than its previous 33% figure.

Meanwhile, the European Commission put forward a GDP Summer Forecast contraction of 8.3% for 2020, a steeper decline than its previous expectation of a 7.4% decrease in economic growth this year.

China bucks global downward trend

china economy
China projected to continue rebound.

The outlook for China looks more positive and authorities have acted quickly to prevent infection flare-ups spreading further. Economists expect the Chinese economy to grow by 2% this year, the slowest growth since 1976 (see the graph below), but still one of the few countries in the world likely to put in a positive performance for the year.

The stock market is not the economy

By the end of July, the S&P 500 had managed to get back into positive territory year-to-date, reminding us that the stock market is not the economy. Most companies in the S&P 500 reported earnings above analyst expectations, with particularly strong figures from the large technology companies.

Apple’s quarterly revenues were significantly above analyst forecasts, with sales of iPhones, iPads and Mac computers surging. Revenues for the period were $59.7 billion, an 11% increase on a year ago. Facebook’s second-quarter sales also exceeded the most optimistic analysts’ estimates, with almost 3 billion monthly active users during the period.

sp500 big 5
 

The value of Amazon, Apple, Facebook, Google owner Alphabet and Microsoft has increased 50% since the beginning of 2020. In comparison, the other 495 companies in the S&P500 Index remain down at -11.4% (see graph below from Williams Markets Analytics).

At the other end of the spectrum, Expedia, the online travel giant, reported an 82% decline in revenue in the second quarter with total gross bookings declining $2.71 billion (90% down on the previous year).

 

Portfolio Actions

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

Regards,

Euro Pacific Advisors Management Team

Euro Pacific Advisors’ Portfolio Commentary: A Stimulus-fueled Recovery?

Published: May 8, 2020

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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.

fed stimulus
Stimulus package checks expected to ease the impact of COVID-19 restrictions.

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.

consumer spending covid
The chart above produced by Deutsche Bank shows the importance of older people for consumer spending in the US.

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

Euro Pacific Advisors’ Portfolio Commentary: Stock Markets Continue to Slide

Published: March 17, 2020

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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