Euro Pacific Bank

Euro Pacific Advisors’ Portfolio Commentary: Q4 2018

euro pacific advisors fund manager portfolio commentary


Market Overview

The continued escalation of trade tensions between the US and China led to a further flight to the relative safety of the US dollar and depressed asset prices throughout the rest of the world. This was most apparent in declines of overseas currencies and investors punished those where there are large current account deficits and a reliance on overseas sources of funding. Investment returns have been mixed and the dispersion of returns in the second quarter an ongoing theme.

Europe has confirmed that it will end its Quantitative Easing program by the end of the year, although interest rates are not likely to climb until next year. UK interest rates were increased to 0.75%, the first hike of 2018, but no further move is expected until after Brexit. There are no signs that Japan is ready to end its Quantitative Easing program and it recently expanded the range of equities eligible for purchase.

Economic data have been mixed. The US has continued to outperform other regions. Whilst growth picked up in the UK and Japan, there remain some doubts about its sustainability in these countries. Leading indicators in China point towards lower GDP growth. There remains a risk of US tariffs rising to 25% on the full range of US – Chinese imports with the most pessimistic forecasts suggesting a 15% yuan devaluation and China’s current account going into deficit. Meanwhile in Europe, the economy remains relatively solid, although political issues still linger.

Equities

The US equity markets outperformed again. This came despite the US Federal Reserve raising interest rates again and the market is now becoming more confident in their outlook for higher rates over the next year.

UK markets posted negative total returns over the quarter and the FTSE 100 lost -0.7% with the more domestic based FTSE 250 down -1.8%. The US made the best overall returns in global equity markets, the S&P 500 making a total return of +8.9% when converted to sterling. Eurozone indices and broad based emerging market indices were roughly unchanged.

Fixed Income

Government bond markets struggled as investors priced in the prospects for additional rate hikes, particularly in the US. Conventional Gilts made a total return of -2.0% with Index Linked Gilts down -1.4%. The only gains to be had were in High Yield which gained +1.9% and Strategic Bonds up +0.4%. Corporate Bonds were little changed, down -0.2%.

Gold

Gold fell by -4.4% in dollar terms over the quarter. The precious metal tends to struggle in an environment of rising real interest rates, although it remains valuable as a hedge within portfolios.

Euro Pacific Advisors’ Portfolio Commentary: Q3 2018

euro pacific advisors fund manager portfolio commentary


Market Overview

A robust global economy, fuelled by improving US economic data, led developed markets broadly higher during Q2. Dispersion of returns across equity markets increased and there was weakness in emerging markets where growth prospects have been trimmed. European data has also cooled and political risk there has again come to the fore.

United States

Strength in the US dollar continues to be one of the defining features in markets. The US Federal Reserve increased interest rates by 25 basis points for the second time this year and it remains committed to two further hikes within the calendar year. It has resulted in weakness in other currencies, primarily in emerging markets where underperformance has been widespread, partly as a result of reliance on dollar-denominated debt and ensuing pressures on lending activity.

We expect foreign exchange rates to continue to play an important role in markets in the short term and remain positive on the US dollar, largely because of the progressive stance on monetary policy adopted in the US in comparison to other countries. Conditions do not appear ripe for a recession and an imminent equity bear market looks unlikely. The momentum in US assets looks set to continue for now although valuations, particularly in the technology sector, look expensive. Europe and emerging markets are at an earlier stage in the cycle and could outperform if fears regarding global trade wars and political risk in Europe subside.

Europe

Europe committed to ending its Quantitative Easing policy at the end of 2018, although there remains no clear exit for Japan. In the UK, interest rates continue to rise at a glacial pace; with the disappointing economic backdrop setting back the timetable for rate increases.

Equities

The majority of equity markets are still lower in 2018 with the US market a notable exception.

The US produced the best returns in global equity markets and the tech-heavy NASDAQ made a total return of 7.3%. Returns were more modest elsewhere. UK equity returns were augmented by weakness in the pound against the US dollar which has helped exporters. The oil price rallied sharply as the US stepped back from the Iran nuclear deal, meaning that global supply would be lowered as a result of the renewal of sanctions.

Fixed Income

There was little movement in fixed interest markets over the quarter. The sector remains an important source of income and offers diversification.

Gold

The gold price declined by -5.5% as investors moved into riskier investments such as equities. The Absolute Return sector was unchanged and in the current environment it remains difficult for managers within the sector to add value.

Euro Pacific Advisors’ Portfolio Commentary: Q2 2018

euro pacific advisors fund manager portfolio commentary


Market Overview

Positive momentum in equity markets continued into the new year but gave way to volatility in February as investors showed increasing concern about inflation. The pound strengthened modestly against the dollar and euro which depressed sterling-denominated returns.

Central banks remain on a tightening path on the grounds of controlling inflation and maintaining financial stability. The US Federal Reserve raised interest rates once and at least two more hikes are expected this year. The Bank of England is likely to follow to a lesser extent and even the European and Japanese central banks have guided to a more restrictive monetary policy, signaling a slowdown in Quantitative easing, if not outright rate increases at this stage.

Equities

Weakness was widespread across global equity markets.

In the US, the broad S&P 500 index declined by 4.4% in sterling terms while the tech-heavy NASDAQ index fell around 7% from its peak in early March.

Emerging Markets fared better with the MSCI index declining by 2.2% but our Core exposure weighted to India (a potential loser from trade tariffs) and infrastructure (susceptible to higher rates) failed to capture the more resilient sectors.

Fixed Income

Fixed interest markets were generally weaker but strong demand from pension funds generated some recovery towards the end of the quarter.

United States

Following the imposition of tariffs by the US on certain trading partners, fears arose about the potential for escalation into a broader trade war.

In the US, the technology sector, which up to now had been leading the market higher, was pressured following concerns over Facebook’s privacy issues. As a result, the high level of Valuations across the sector has been questioned.

Europe

There were several other developments for investors to digest. The Italian election demonstrated that populism in Europe remains strong as the mainstream Democratic party suffered a resounding defeat.

The FTSE 100 made a total return of -7.2% over the quarter. Our Core UK exposure is dominated by exposure to mid-caps and the property sector which held up better, supported by bid activity as companies responded to the value opportunities emerging.

Conclusion

The recent volatility highlights the importance of maintaining a well-diversified spread of assets. Some sectors that were previously trading at a premium to net-asset-value or fair-value, such as infrastructure and asset-backed income, have now seen those premiums eroded and this is likely to throw up attractive opportunities to deploy the cash recently realized over the coming weeks.

Euro Pacific Advisors’ Portfolio Commentary: Q1 2018

euro pacific advisors fund manager portfolio commentary


Below is a quarterly update of Euro Pacific Bank’s mutual fund and separately managed account positioning, related market commentary, and outlook.

Market Overview

As unemployment normalizes in Europe there is scope for GDP to grow at levels above other economies like the US and the UK which are far ahead in the economic cycle. From a peak of over 12% in 2013, unemployment has fallen to 8.8%; as it continues to fall and domestic demand rises, GDP is likely to rise. On a relative basis, European equities still offer good opportunities, as do equities in Japan.

Equities

Equity markets continued to surpass expectations during the fourth quarter, as they have done for much of 2017. There was support from upgrades to GDP growth forecasts in Europe, Japan and Emerging Markets, although that has been coupled with cautious monetary normalization due to weak increases in Consumer Price inflation.

The earnings recession of 2015-16 in the US is over. NASDAQ earnings growth rebounded strongly in 2017 and Japan has benefited from a somewhat weaker Yen, a rebound in international trade and better domestic growth.

There is an opportunity for investing in global infrastructure. In general terms, with little upside pressure on interest rates, inflation-linked returns are likely to remain in demand.

Fixed Income

Structural changes in demographics, debt and technology are likely to keep inflation in check in the long-term. However, central banks are showing increasing concerns about asset price stability, hence the moves in the US to reverse Quantitative Easing and the move to taper it in Europe. With the market only pricing in two 25 basis point hikes in the US next year, there is potential for volatility in the bond market.

However, it should be noted that previous hikes have caused a flattening of the yield curve. With fixed income showing increasing levels of inverse correlation to equities, it remains a suitable and important asset class in the portfolio.

The Armageddon feared by many in the bond market has yet to materialize but risks remain.

Gold

Gold continues to provide diversification benefits. However, despite rallying during the summer when tensions between the US and North Korea were heightened, it has failed to progress further.

United States

Valuations are looking increasingly stretched in the US but the more extreme cases can be avoided by screening and targeting of sectors, or factors such as value.

Europe

After years of low/declining earnings in Europe, earnings per share are now growing on a broad front and equity markets have responded strongly. Our exposure to UK equities have also been rewarded by better earnings growth in 2017, and our bias for FTSE250 rather than focus on larger companies has been justified and beneficial.

Property in the UK, at least the listed REITs market, has seen a very significant sell-off in the wake of Brexit. Discounts to NAV of around 30-35%, with strong income support, may offer an opportunity, given that the sector has been de-risking in large part.

Emerging Markets

Emerging Market equities exited a five-year bear market at the end of 2015 as investors anticipated a trough in the earnings cycle. This was broadly confirmed in 2017. The portfolio maintains targeted exposure to the Indian equity market where the growth prospects from favorable demographics and structural reforms continue to attract investors.

There are long-term opportunities in emerging markets but some caution is warranted given the increasing popularity of the asset class. Additionally, emerging markets have benefited from a weak dollar in 2017 so any reversion in 2018 may put equities under pressure.

Euro Pacific Advisors’ Portfolio Commentary: Q4 2017

euro pacific advisors fund manager portfolio commentary


Below is a quarterly update of Euro Pacific Bank’s mutual fund and separately managed account positioning, related market commentary, and outlook.

Market Overview

Despite rising geopolitical risks, notably in North Korea, equity markets edged higher over the quarter. Fixed interest markets remained pressured as central banks signaled an easing of stimulus measures and guided towards higher interest rates. The pound strengthened against the dollar and yen, but marginally underperformed the euro.

As monetary support is withdrawn and interest rates move back to more normal levels, there is likely to be a degree of uncertainty in global markets. However, we note that this is likely to be a slow and gradual process and unlikely to cause major disruption. Question marks remain over the implementation of Brexit and with sterling having recovered to a 12 month high relative to the dollar we have begun removing some sterling hedges. Additionally, there are rising political risks in Europe, notably Spain and Germany. Despite these issues, robust, albeit unspectacular, global growth and solid earnings are likely to support valuations in the short term.

United States

Investors remained broadly positive about economic prospects as the US Federal Reserve finally announced an end to its Quantitative Easing program. By not reinvesting maturing bonds, it will gradually reduce its holdings in Treasuries and continue to move interest rates back to more normal levels over time.

Our targeted US exposure consisting of SPDR S&P Dividend ETF and Vanguard Russell 2000 ETF rose, outperforming the broader S&P 500 index.

Europe

The European Central Bank hinted that it would start to taper its own bond buying program and the Bank of England adopted a more hawkish attitude, suggesting that it would raise interest rates for the first time in a decade as soon as the fourth quarter of 2017. Investors were emboldened by this coordinated policy action from central banks in the belief that the global economy has now moved to a more secure position and requires less monetary support.

United Kingdom

With a rise of 2.8% on the quarter, our overweight exposure to the more domestically focused FTSE 250 Index again outperformed the FTSE 100 which was held back by sterling strength, rising only 0.8%. Geopolitical concerns peaked in September and we took the opportunity to reduce our tactical short exposure to the FTSE100.

Emerging Markets

Overseas returns were again offset by currency movements and we benefited by currency hedging some of our overseas exposure to equities as well as fixed income.

Fixed Income

Yields moved slightly higher (and therefore values lower) in both the US and the UK over the quarter as investors weighed up the potential for higher interest rates. However, the yield curve continued to flatten as shorter-dated yields moved higher than longer dated ones. The High Yield sector again outperformed with a gain of 1.5% on the quarter and is now starting to look fully-valued relative to both investment grade issues and emerging market debt.

Euro Pacific Advisors’ Portfolio Commentary: Q3 2017

euro pacific advisors fund manager portfolio commentary


Below is a quarterly update of Euro Pacific Bank’s mutual fund and separately managed account positioning, related market commentary, and outlook.

United States

US earnings season is positive and macroeconomic data indicating modest growth, but prospects for tax reform and fiscal boosts are diminishing and political risk is increasing.

United Kingdom

Recent data has softened concerns around the growth/inflation trade-off for the Bank of England. Potential of an imminent rate rise has faded. With growth forecasts weakening, we do not expect Bank of England tightening until Brexit risks have been reduced.

Europe

After a good run, European equities are becoming vulnerable to negative data surprises, although the euro looks set to run again after recent pullback.

World

Equity market volume globally yet to pick up, as risks remain.

Continued strong performance from our India shares in past two months but we are easing off this week and are looking to take profits on Tactical exposure replacing it with Japan exposure. We will retain India exposure in the Core component of the strategies.

Portfolio Actions

We will adjust the strategies to reflect our market views over the next two weeks. In summary, the main changes are:

  • An increase in European exposure
  • An increase in Japanese equities
  • A reduction in UK exposure
  • A reduction in Indian exposure

What is the difference between a Mutual Fund and a Separately Managed Account?

Euro Pacific Bank mutual funds and separately managed accounts are both managed investment products. You can buy a mutual fund with a smaller upfront investment, a minimum of $2,500, whereas a separately managed account has a $100,000 minimum opening balance.

If you want a more personalized approach, a managed account is individually and separately managed. Unlike a mutual fund, all the transactions are made in your account, under your name. Managed account clients also receive a Client Portal, where they can watch their account being managed by Euro Pacific Bank in real time.

The same team, Euro Pacific Advisors, will be managing both the mutual funds and the separately managed accounts.

How do I track my Mutual Fund progress?

You can track the Net Asset Value (NAV) of the fund(s) in your Online Banking, or at the Euro Pacific Bank Mutual Funds page. NAVs are updated every business day, with the exception of the Diversified Strategies Fund, which is updated monthly. Additionally, fund holders will receive quarterly statements from our independent fund administrator via email.

How do I sell or liquidate my Mutual Fund(s)?

You can redeem a mutual by simply notifying your Euro Pacific Bank banker or the bank staff. There is no redemption fee after 30 days from the purchase date. Otherwise, a 2% early redemption fee is assessed.