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

Published: August 26, 2020

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.

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.

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

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.

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

Published: May 8, 2020

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.

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.

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

Published: March 17, 2020

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

Published: March 2, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources
• Peter Schiff

Our Commentary

Markets have taken a sharp turn downwards in recent weeks on concerns that the Coronavirus, or Covid-19 as it is now known, will slow economic growth and reduce corporate profits.

Initially, its impact on markets largely depended on their proximity and economic exposure to China, with investors working on the basis that it would progress in a similar way to the 2003 outbreak of SARS, eventually petering out with limited impact on the global economy.

However, its recent appearance in Italy and other countries has sparked wider recognition that the virus has spread and led to investors adopting a ‘Risk off’ stance.

A ‘Risk off’ stance is where more cautious investors reduce their exposure to equity markets and potential buyers step back on the expectation of lower prices.

While the human impact of the virus itself is of great concern, the key focus for investors has been the ‘lockdown’ response of governments. The immediate effect of this policy is not only to reduce economic activity in the areas affected, but to slow or stop the distribution of components needed in processes elsewhere in the world and to reduce tourism and travel related activity, reducing activity globally.

While the eventual impact of both Covid-19 and the lockdown policy is unknown, what is clear is that corporate profits in the first half of the year and possibly beyond will be lower than previously expected, justifying a correction in equity markets that were only recently hitting new highs. In other words, the recent correction is the ‘pricing in’ of upcoming drops corporate profits.

Should the virus continue to spread, the effectiveness of and need for the lockdown policy will increasingly come under scrutiny.

On any suspicion of positive change in the lockdown policy, investors will rapidly shift to a ‘Risk on’ stance, with potentially significant gains in those parts of the market most hit by the policy.

In other words, whilst the authorities are focused on reducing the spread of the disease there could be a significant economic impact. If there comes a point where specific containment measures are seen to have achieved as much as they can and governments effectively start sending people back to work, there may well be an overall positive impact as the brakes are released.

Portfolio Actions

Having added exposure to emerging markets on valuation grounds, our portfolios underperformed when the virus first surfaced in January due to the exposure to China.

Since then, with the spread of the virus slowing in China and the rush to invest into biotech, medical services, pharmaceutical and educational stocks in China, indices there have held up relatively well.

Most analysts still feel it is too early to assume a long term economic impact and that globally the downturn in earnings and economic activity will be short-lived with potentially a partial catch up in H2.

With major equity markets around 15% off the peak, we are not advocating widespread selling at this stage and would be cautiously seeking to purchase where reduction in asset value appears unjustified.

Today, we are closing our exposure to CSOP SOURCE FTSE CHINA A50 (CHNP, IE00BGSHB123). Although it is our core exposure to China, during February and the Coronavirus outbreak the holding has held up well and outperformed the MSCI World by approximately 15%.

In addition, we are closely monitoring the markets and intend to re-balance the portfolios with some of these actions this month:

Potential Reductions

• Vanguard S&P 500 UCITS ETF
• Vanguard FTSE Developed Europe UCITS ETF
• iShares MSCI Japan Index Fund
• iShares FTSE EPRA/NAREIT US Property Yield Fund
• L&G Gold Mining UCITS ETF

Potential Closures

• Xtrackers FTSE China 50 UCITS ETF
• iShares S&P Em. Markets Infrastructure
• iShares MSCI India ETF
• iShares Edge MSCI World Value Fact UCITS
• iShares MSCI World ETF

Potential Additions

• UBS MSCI World SRI
• UBS MSCI Emerging Markets SRI
• iShares MSCI EM ESG Enhanced
• L&G Gold Mining

We will provide you more commentary from our fund managers as we receive them.

Regards,

Euro Pacific Advisors Management Team

Published: January 10, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources

Our Commentary

Equities

Economies and stock markets most exposed to manufacturing fared best, with China, Asia and Emerging Markets all gaining ground.

Global equities closed the year at new highs on news that the US and China had agreed terms for a partial settlement of their long-running trade dispute.

Although the wide-ranging dispute is far from over and could potentially rumble on for years, stock markets rallied at the prospect of stronger global economic growth and a rise in corporate profits.

Fixed Income

Inevitably, not all assets provided such positive returns.

Fixed interest stocks continued their steady retreat from their summer highs as the prospect of recession diminished and investors sought better value in other assets, primarily equities. Other defensive assets remained out of favour.

Our 2020 Outlook

Building on an upbeat 2019-year end

Financial markets enter 2020 propelled by generally positive expectations for the year ahead and with central banks remaining accommodative.

However, it is not likely to be smooth sailing for investors, given several potentially market-moving events scheduled for this year.

Coming up are the likelihood of the UK’s exit from the European Union at the end of January, US elections in November, and the ongoing US-China trade negotiations. Geopolitical risks also remain heightened in the Middle East, with rumblings in North Korea and Iran under scrutiny.

Global growth underpinned by 2019 central banks

Underpinning financial market fortunes, however, are expectations that growth will be propped up by the comprehensive monetary policy easing that took place across developed and emerging markets last year.

Ongoing mini-quantitative easing operations conducted by the European Central Bank and the US Federal Reserve will continue to add liquidity to the economy.

Most major investment banks are predicting global growth to recover to above-trend levels in 2020 after slowing in the final months of 2019. JP Morgan Research estimates global growth to come in at 2.5%, US growth at 1.7% and emerging market growth at 4.2%. Goldman Sachs is more circumspect but still expects moderately better economic growth. Morgan Stanley expects consumption improvements to propel a mini-recovery with global growth averaging 3.2% in 2020, coming predominantly from emerging markets and, to a lesser degree, an improving outlook in Europe.

US-China trade will remain under the spotlight

The trajectory of the US-China trade negotiations will continue to have a material impact on financial market fortunes. Business sentiment, which was dented by the uncertainty around trade negotiations, should firm as the US and China Phase 1 trade deal is scheduled to be signed in January.

A relatively upbeat outlook for equities

Against this broadly encouraging macro-economic backdrop, the outlook for global equities is relatively upbeat, notwithstanding the significant advances achieved by the asset class during 2019. Gains are, however, not expected to be as substantial as last year.

In the US there is the continuing risk posed by the trade war, and the possibility of the next Congress reversing the 2017 US corporate tax cut. Goldman Sachs forecasts that such a move could see S&P 500 earnings growth in 2021 contract by 7% rather than grow by 5%.

There will be many forces at play during 2020, many of which could well be positive. However, a cautious and considered approach is advisable in navigating the risks and potential challenges that lie ahead.

Portfolio Actions

Although there has been a steady flow of bids for UK businesses and assets by international companies over the past three years, this quarter saw the return of mainstream portfolio investors attracted by low valuation.

This inflow, together with relief over the election outcome saw sterling rise, reducing the translated returns of international assets for sterling-denominated investments.

We continue to look to capitalise on extended short-term relative weakness of defensive sectors and the year ended strongly for our exposure to the utilities sector and to stocks such as Smith & Nephew and Mowi ASA.

We expect emerging markets to be prime beneficiaries of an uptick in global manufacturing, the phase one trade deal and better economic news out of China. With ethical considerations an increasing focus for investors, we are looking to add further exposure to emerging markets, focusing on companies with a socially responsible bias.

Regards,

Euro Pacific Advisors Management Team

Published: October 4, 2019

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources

Our Commentary

Financial headlines are still dominated by continued trade uncertainty between the US and China, a trade spat between the US and the EU ripe to surface at any time, a weakening global economy with global manufacturing effectively in recession and little obvious progress in Brexit negotiations. Central Banks have consequently veered towards a more dovish stance but it is doubtful that this alone can continue to propel markets to new highs for much longer.

Equities

Stock markets also delivered positive returns but economies and stock markets most exposed to manufacturing fared worst with Emerging Markets losing ground.

US shares continued to outperform and provided a return of 5% in sterling terms.

UK and the broader Continental European equity markets rose between 1% and 2%. With the pound and UK equities both out of favour and arguably undervalued, we saw a succession of bids for UK companies including media company Entertainment One and pub operator Green King. German economic growth has stalled, dragging Europe’s down with it.

Fixed Income

Consequently, the European Central Bank has agreed to restart its quantitative easing programme in November with €20bn of bond purchases monthly.

Most European bond yields hit record lows in August, as did US 30 year treasuries. The 2/10 yield curve became inverted for the first time since May 2007 and this is just one of the indicators pointing towards a recession by H1 2021.

Commodities

A further consequence of the low yield environment was the positive performance of gold which rose 8% in August alone.

Portfolio Actions

In the short term we expect the economic and corporate news, on which traders rely, to reflect the slowdown in global trade led by the US-China trade war. Indeed, the most recent manufacturing data has failed to meet even reduced expectations and the concern is that this will spread to the broader economy with the European service sector leading the way downwards. Market volatility moving into Q4 reflects this.

However, with interest rates now firmly in ‘lower for longer’ territory again, and governments lowering taxes and looking to increase spending, we expect the outlook for investors with longer time horizons to improve as we enter 2020. All strategies were re-balanced accordingly.

Regards,

Euro Pacific Advisors Management Team