Euro Pacific Bank

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

Euro Pacific Advisors’ Portfolio Commentary: Response to Coronavirus

Published: March 2, 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

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.

coronavirus italy
Empty streets of Venice after coronavirus Italy lockdown.

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

Euro Pacific Advisors’ Portfolio Commentary: Q4 2019

Published: January 10, 2020

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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

Euro Pacific Advisors’ Portfolio Commentary: Q3 2019

Published: October 4, 2019

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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

Euro Pacific Advisors’ Portfolio Commentary: Q2 2019

Published: July 1, 2019

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Relevant Strategies

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

Our Commentary

Positive returns were seen across all asset classes in the second quarter of 2019 even though the outlook for global growth weakened again.

Equities

In equity markets, the US and Europe provided some of the strongest returns as the central banks in both regions indicated that interest rates were likely to fall in the short term. As a result, bonds and gold also performed well. In currencies, the pound was weaker against all the major competitors with falls of between 2% and 5% against the dollar, euro and yen.

The FTSE 100 rose 2.8% on a total return basis with the more domestic FTSE 250 up 2.3%. Gains for UK investors in overseas markets were augmented by weakness in sterling.

In sterling terms, the broad US S&P 500 Index made a total return of 6.3% ahead of the technology focused NASDAQ which rose by 5.9%. The MSCI Europe Index made the best gains, up 8.2%, helped by comments from the European Central Bank.

Returns in emerging markets were lower, reflecting some concerns of a slowdown. The MSCI Emerging Markets Index returned 2.8%. In Japan, the Nikkei 225 gained 5.5%.

Fixed Income

Bonds benefited across the board from declining interest rate expectations. Gilts made a total return of 1.8% with Index Linked Gilts up 2.0%. As risk appetite returned, corporate bonds performed even better, gaining 2.4% over the quarter with High Yield bonds up 2.2%.

Commodities

Gold was the greatest beneficiary from the less aggressive stance of the central banks. Lower interest rates highlighted the attraction of gold as a non yielding alternative to cash and a store of value. The precious metal added an impressive 12.7% in sterling terms with certain investors speculating that it is set to break out into a new trading range. The absolute return sector made a total return of 1.1%, adding to gains from the first quarter.

Portfolio Actions

We have reached an interesting juncture with an apparent contradiction in capital markets. Whilst further falls in bond yields suggest recession on the horizon, this is not shared by the strength in equity markets.

The fact that interest rates now appear to have peaked is perhaps an admission that we are close to the end of the economic cycle. It is therefore surprising that equity markets have been so buoyant. Despite the best endeavors of central banks, equity markets are unlikely to be supported forever should the economic cycle turn down.

Diversification across asset classes and regions with a sensible amount of liquidity set aside for future opportunities remains a sensible approach at the current time.

Regards,

Euro Pacific Advisors Management Team

Euro Pacific Advisors’ Portfolio Commentary: Q1 2019

Published: April 4, 2019

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Relevant Strategies

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

Our Commentary

Equities

Despite weakening projections for global GDP growth and earnings, equity markets performed strongly in the first quarter of 2019.

Some of the best performance was seen in the US, particularly in technology shares which bounced back after a difficult end to 2018. The improvement in confidence was largely down to two key factors. Firstly, investors grew more hopeful that the US and China would be able to resolve their trade dispute amicably. Secondly, the US Federal Reserve scaled back its outlook for interest rate increases. The previous forecast of two interest rate increases this year was cut to zero with one now seen in 2020.

The UK equity market performed well and the FTSE 250, with a bias toward the domestic economy, gained 9.8%. Sterling strengthened against the other major currencies as investors reassessed their downbeat forecasts in respect of Brexit.

The diversified S&P 500 in the US made a total return of 13.7% in USD terms, MSCI Europe gave a Euro total return of 12.7% and FTSE Emerging Markets added 10.4%.

In the emerging markets, growth and value factors outperformed defensive sectors and the infrastructure exposure lagged. In Asia, Japan was the most disappointing market as the economy was hit by trade tensions with China. The Nikkei 225 made a gain of 6.9%.

Bonds

Bond markets also produced good returns for investors, gaining across the board in response to the Federal Reserve’s latest forecasts.

Corporate bonds gained 3.9% with strategic bonds up 3.7%. Despite little evidence of inflationary pressures, index linked gilts made a total return of 6.1% while the high-yield sector rose by 5.1%.

Commodities

Gold was broadly unchanged. Falling bond yields tend to enhance the attraction of gold, which yields nothing, as an alternative asset. The dull performance reflects the fact that investors were more confident in risky assets such as equities and saw little reason to chase gold at current levels. The absolute return sector gained 1.5%, helped by improving returns in bonds and equities.

The energy sector rebounded as the oil price made strong gains.

Portfolio Actions

The reversal in both equity and bond prices after the Q4 drop, led by positive performance from US tech, resulted in strong performance for the portfolio exposure to momentum factor strategies while the scramble for yield in an environment of extended low interest rates generated double digit returns for both the global property exposure and the UK REIT exposure.

We added exposure to REITs, operating in the booming industrial/logistics, sub-sector and trading on a large discount to NAV.

We are considering exposure to an airline company with heavily depressed profits but still benefiting from a valuable expansion into resorts and cruises. Valuation indicators indicate 29% upside.

Any positive resolution of Brexit and the trade war between the US and China would clearly be well received by the markets as they would likely result in an increase in economic activity in the short run. However, given the late stage in the economic cycle and the fact that equities have already come a long way in a short period of time, a certain amount of caution is warranted.

Diversification across a broad range of asset classes and regions remains a sensible approach for the long run.

Regards,

Euro Pacific Advisors Management Team

Euro Pacific Advisors’ Portfolio Commentary: Gold on the rise

Published: August 8, 2019

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Relevant Strategies

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

Commentary

Having reached its highest level for six years, the gold price looks set to move higher buoyed by the outlook of further US rate cuts, and the escalating trade war between the US and China. China’s central bank added a further 10 tonnes to its reserves in July while Russia and Kazahstan have also been consistent buyers.

Conversely, the latest US threats have dampened demand for other metals with copper weakening and iron ore down 18% in recent days. The oil price has also weakened and the natural resources fund has made little overall progress this year post January’s 8% gain.

The Gold & Precious Metals strategy was up by 13% in June alone and has been making further strong progress in recent days.

Goldman Sachs has upped its gold forecast 12 months out to $1,600 and should this occur, the precious metal ETCs and exposure to mining stocks in the portfolios should continue to make significant progress.

Portfolio Actions

Gold has recently breached $1,500, recording its largest daily rise in three years. After years of underperformance, we see no need to top slice for now and are riding the momentum until sentiment regarding interest rates turns more hawkish.

Euro Pacific Advisors is comfortable with the level of precious metals exposure in the four strategies above and will consider re-balancing them at a later date.

Regards,

Euro Pacific Advisors Management Team

Euro Pacific Advisors’ Portfolio Commentary: Q4 2018

Published: January 10, 2019

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Market Overview

Equity markets struggled in the final quarter of 2018.

Concerns mounted over equity valuations amid continuing uncertainty over a trade war between the US and China.

The US Federal Reserve raised interest rates for a fourth time for the year in December. However, expectations for further increases were cut slightly with two further hikes now expected in 2019 from three which were previously indicated. Even so, other central banks are gradually following the lead of the US as Quantitative Easing has reached its practical limits.

The pound was weaker against the other major currencies, including the dollar, euro and yen, due to fears over Theresa May’s Brexit deal.

Economic data indicate that growth is faltering.

The strongest data have been in the US, although there have been some signs of slowing momentum in leading indicators such as industrial production and durable goods orders. The outlook in the UK, Europe and Japan remains insipid whilst growth in China continues to moderate from a relatively high level.

Overall, 2018 was the weakest year for financial markets since 2008…

And most asset classes ended the year significantly lower. The optimism moving into 2018 fell away quickly and double digit falls would have been commonplace for multi-asset strategies generally were it not for the strong performance over the summer from US equities (especially tech) boosted by the impact of tax reforms.

Mindful of already rich valuations, our Core Portfolio Components missed out somewhat having not been heavily weighted to the US, while tactical opportunities in European equities opened in the Tactical Portfolio Components have been adversely impacted by the on-going US/China trade rhetoric. Other Tactical activity has produced positive returns, but this has been insufficient to overall outperform.

Despite significant weakness in the equity markets over the final quarter, it is important to bear in mind that global GDP growth of 3% is still expected this year.

This only marks a small fall from the 3.2% which was achieved in 2017 and is also likely to be the final outcome for 2018. Many commentators are forecasting sentiment to reverse and we will be positioned to benefit strongly from any green shoots in the UK and Europe in 2019.

Equities

The US equity market suffered a ‘fall from grace’ as investors showed concern over the valuation of technology stocks in particular. On a total return basis in sterling terms, the NASDAQ crashed by 15.2%. The broad based S&P 500 declined by 12.2%.

Other developed markets fared little better with the Nikkei 225 down 12.4%, the FTSE100 down 9.7% and the MSCI Europe Index off by 10.5%.

In a sad indictment of the quarter, the best performing sector was Emerging Markets which declined by 5.1%.

Fixed Income

Bonds benefited from a modest scaling back of expectations for interest rate hikes. Index linked gilts made a total return of 2.1%. Conventional gilts were close behind at 2.0%. The high yield sector fell by 4.1% as investors began to demonstrate some concern over lower quality issues. Corporate bonds and strategic bonds were little changed, down 0.4% and 1.2% respectively.

Gold

Gold advanced by 10% in sterling terms benefiting from uncertainty in equity markets.

Regards,

Euro Pacific Advisors Management Team

Euro Pacific Advisors’ Portfolio Commentary: US market correction

Published: January 3, 2019

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Despite the recent sell off in the US, we continue to maintain our US exposure where we feel business will continue to be supported by deregulation, tax cuts and a pro-business tax reform.

The US has managed to shrug off a series of external shocks, political risks and enjoyed its fastest growth since 2005.

With confidence high, consumption and business investment have grown solidly despite a further correction in interest-sensitive residential investment.

Regards,

Euro Pacific Advisors Management Team

Euro Pacific Advisors’ Portfolio Commentary: Q3 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.

Regards,

Euro Pacific Advisors Management Team