Deltec International Group investment letter for the second quarter ended March 2017.
We are pleased to provide you with our latest Deltec Investment Letter, an excerpt from our Q2 2017 Deltec Quarterly Global Strategy Outlook presentation, entitled “Protecting Capital vs Pursuing Growth”.
Deltec International Group – Last Quarter’s Key Calls:
The below calls were published within the last Quarterly Outlook, Investment Positioning and Key Trades materials, and expressed across Deltec’s Investment Advisory, Investment Management and Investment Fund portfolios:
- Remaining Overweight Equities: Over the last quarter the MSCI All World Index generated a total return of 3.7%, more than doubling the returns of the Barclays Global Aggregate Bond Index.
- Increasing Long Technology: Over the quarter, the Eurostoxx 600 Technology Index increased by 10.4%, outperforming the Eurostoxx 600 by 5.5%, and the MSCI Japan Technology Index increased by 3.7% outperforming the MSCI Japan by 3.4%.
- Remaining Long US Housing: Over the quarter, the US Homebuilders Index increased by 7.0%, and the US Home Construction Index increased by 13.5%, outperforming the S&P 500 by 4.1% and 10.6% respectively.
- Short Commodities and Mining Equities: Over the quarter, Industrial Metals prices declined by 2.2%, Iron Ore prices declined 10.1%, and our short position in Mining Equities generated returns of 7.1%.
Protecting Capital vs Pursuing Growth:
“Where we’re going, we don’t need roads.” – Dr. Emmett Brown, Back to the Future (1985)
Our previously contrarian expectations of stronger global growth and an extension of the economic and market cycle are now being met by consensus, with higher asset prices validating our investment positioning. Following the sharp increase in global growth momentum in recent periods, a pause is expected, with regard to global growth, liquidity conditions and even asset prices. However, this pause is likely to prove temporary, as we maintain the view that, save for the parallels to the 1990s, the forthcoming periods will be like almost no other time in investing history.
From a tactical perspective, asset prices are expensive, and whilst the broader outlook remains positive, second derivatives drive investment markets, and peaking growth momentum that will decline in the coming period, coupled with changing liquidity conditions, both temporary, will likely to lead to bouts of consolidation and rising volatility. Whilst, on balance, still positive, this investing environment advocates greater capital protection, as the latest period of synchronized global growth is atypical, in addition to the multitude of changes around peaks that renders asset, country and sector allocation increasingly important.
From a strategic perspective, the global economy has entered a new regime, underscored by seismic changes that are occurring at a political, demographic and capital level. From a political perspective, more than ever, investor sentiment is being framed by the policy outlook, however ironically, recent economic and investment market outcomes have been driven almost entirely by the private sector, and are dependent on policymakers less than ever. From a demographic perspective, the focus on aging populations and protectionism masks the benefits of migration and freedom of movement in an age of labor shortages. From a capital perspective, the surfeit of liquidity of the past fifteen years is parching rapidly, with the necessary increase in capital investment to generate productivity growth already occurring, generating immense technological changes that will soon challenge the conventional notions of industrial production, inflation and asset values. This investing environment advocates the pursuit of growth, as the global economic expansion is likely to continue for several periods, and change in in terms of its participation by geography and industry, which is only partially capitalized into asset prices.
Economic and investing outcomes are rarely linear and often staccato, as is the case with the current tactical and strategic outlook. This underscores the current environment, where the deployment of capital becomes paramount to the attraction of capital, presenting substantial opportunities for active managers. This need for increased selectivity provokes misunderstanding and prompts significant risks, which manifests in investment markets as mispriced assets and tremendous investment opportunities, both long and short, and can only be negotiated through balancing the need for Protecting Capital vs Pursuing Growth.
From a strategic perspective, the relationship between economic growth, liquidity conditions and asset prices is the key long term driver of investment markets, with the outcome for any one dependent on the interplay between all. From a tactical perspective, global growth momentum (growth in the rate of growth) and liquidity growth (growth in the amount of money supply) are the key short term drivers of investment markets. The coming period will see investors challenged by the desire to protect capital in anticipation of peaking growth momentum, after a sharp increase in recent months, and stabilizing liquidity growth, after recent major changes across regions and in aggregate. Against this, investors will be beckoned by the appeal of pursuing growth, especially in a global economic expansion that is expected to continue for several periods. Read More – Global
Emerging Markets have improved, due to the combination of increasing real interest rate differentials, stable USD liquidity conditions, improving growth momentum and significant earnings upgrades, all driving substantial capital inflows and a virtuous, albeit temporary, cycle. Globally, productivity growth is supplanting liquidity growth, structural reform is substituting competitive devaluation and trade reform is displacing globalization, benefitting in aggregate, although weighing on selected Emerging Markets. Whilst selective opportunities for significant capital growth in Emerging Markets exist at present, secular changes in USD liquidity conditions will manifest in deteriorating currencies, domestic demand and financial stability, and the periodic need for capital protection. Read More – Emerging Markets
The US outlook is framed by peaking growth momentum that is likely to temporarily decline, auguring the protection of capital, and an economic expansion that is likely to continue for several periods and broaden across sectors, inviting the pursuit of growth. Although well progressed, the economic expansion continues to broaden across sectors, with consumption, housing, industrial production all participating, and leading to increased inflation. The heralded increase in capital investment is now occurring, fostering the transition from liquidity growth to productivity growth, which will ultimately curb inflation in the outer years, underscoring an even more positive outlook. Policy uncertainty remains a risk, yet also a sideshow within a private sector driven expansion. Read More – United States
Europe is at the crossroads of protection and growth, both from an economic perspective, as policymakers contend with their place within the bloc, and from a market perspective, as cyclical exposures benefit from an improving outlook. The overall economy continues to improve, bolstered by key trading partners, however also benefitting from increased private sector participation, despite the significant public sector risks, both fiscal and monetary. Growth momentum is strong and liquidity growth is being maintained, and, whilst both are likely to turn as the year progresses, the outright expansion is now solid enough, and the banking sector now better positioned, to withstand these cyclical changes. Demographic factors and a lack of realization of the initial goals of architects of the bloc present longer term risks to the region, hence structural reform at both a country and regional level is needed to protect the expansion, with the coming outcome of upcoming elections key to this achievement. Read More – Europe
For the better part of three decades, the outlook for Japan has