The markets continued their rebound in May. Fueled by tax cuts and the repatriation of overseas funds, companies raised dividends and increased stock buybacks, benefiting shareholders. Credit Suisse is also reporting that capex (capital expenditure) spending on plant, equipment and other capital expenditures by S&P companies rose by 24% in the first quarter, a record for the first quarter of the year.
Globally, another story is starting to emerge. Until early May, low interest rates and low inflation had been propelling emerging market bonds as investors chased yield. However, emerging market bonds have recently come under pressure as indicated by the recent sell-off in emerging market bond ETFs following several years of inflows. This is a result of rising rates and a stronger US dollar drawing capital flows to the US from European and emerging markets.
Economic growth has also been slowing globally. Japan’s growth was in negative territory for the first quarter of 2018 and European growth slowed down from 2% in 2017 to 1.25%. In the US, automobile and housing sales also showed signs of decelerating. Rising commodity prices are also an indication that we are in the late stages of this cycle. In response to geopolitical concerns, tightening supply has caused an upsurge in oil prices (almost 50% higher than Q2 2017). It is interesting to note that four of the last five recessions were preceded by higher oil prices.
So far in 2018, it appears that the strong earnings growth predictions made last year have been accurate. However, markets are forward-looking and the tepid performance this year is an indication that investors remain uncertain. Renegotiated trade deals, geopolitical events, the level of global debt, rising interest rates, financial leverage and mid-term elections are just a few of the factors contributing to this environment of uncertainty.
May 2018 Fund Spotlight
In this month’s fund spotlight, we would like to focus on the one of the value funds in our Smart Money Portfolios. Typically, value funds are thought to provide a conservative, low volatility, consistent return over time. However, there are exceptions to every rule and the fund manager we are highlighting this month is one of them.
This month’s manager is the epitome of a value style manager who buys equities when they are selling at a heavy discount relative to historical prices. In addition, we can classify the strategy as contrarian, focusing on sectors that are completely out of favour with investors. This manager purchases the surviving companies in the out of favour sectors, who have proven their ability to make money in even the most trying of times. With good management, when the tide turns, these companies can sometimes return five to ten times the initial investment – a prospect that all investors dream about. Because of this approach, there are times with this fund is completely out of sync with the markets and the other managers in the model portfolios. The result is that this fund has the highest volatility and one of the lowest correlations of the funds in the portfolios – atypical for a value strategy. However, it has also provided one of the highest returns of the funds in the Smart Money portfolios since inception.
When constructing the Smart Money portfolios, we look for the right combination of manager style, return profile and risk, to create a portfolio with superior risk adjusted returns in comparison to our benchmarks. Should you have any questions about this month’s market commentary or wish to discuss the featured manager in further detail, please contact your Sightline Wealth advisor today.