Deltec Q3 2017 Investment Letter “Boom or Bubble?”

Deltec Q3 2017 Investment Letter  “Boom or Bubble?”

Deltec investment Letter for the third quarter ended June 30, 2017.

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Jonathan Ruffer July 2017 Commentary

Dear Investor,

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We are pleased to provide you with our latest Deltec Investment Letter, an excerpt from our Q3 2017 Deltec Quarterly Global Strategy Outlook presentation, entitled “Boom or Bubble?”.

Should you wish to receive a copy of this presentation, which contains additional charts and data, including our latest Investment Positioning and Key Trades, please contact your Deltec Representative.

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 8.1%, more than doubling the returns of the Barclays Global Aggregate Bond Index.
  • Remaining Long Japanese Equities: Over the quarter, the MSCI Japan Index rose by 10.5%, outperforming the MSCI All World Index by 3.0%.
  • Remaining Long Semiconductors: Over the quarter, the S&P 500 Semiconductor Index rose by 15.2%, outperforming the S&P 500 by 8.5%.
  • Remaining Underweight Real Estate Investment Trusts: Over the quarter, the US REITs Index underperformed the S&P 500 by 5.5%, and the MSCI Europe REITs Index underperformed the Eurostoxx 600 by 14.3%.

Boom or Bubble?:

“You will either step forward into growth, or you will step backward into safety.” - Abraham Maslow (1908 – 1970)

Our previously contrarian expectations of stronger global growth and an extension of the economic and market cycle are now being met by consensus, with the recent increase in growth momentum surprising even our positive view. Notwithstanding this, following the increase in global growth momentum and asset prices in recent periods, a natural cyclical pause is expected, although should not be a cause for concern, as it comes within a broader economic and market expansion that is likely to continue for several periods. Ultimately, tightening monetary policy will present a risk to the economic and market expansion, however productivity growth will likely limit inflation, not delaying the tightening cycle, though likely suppressing it.

From a tactical perspective, asset prices are elevated, and whilst the broader outlook is strongly positive, second derivatives drive investment markets. Peaking growth momentum that will decline in the coming period, coupled with slowing liquidity growth via a reduction in monetary easing, will likely to lead to bouts of consolidation and rising volatility. Selectivity is key across the investment landscape, with the importance of asset allocation and sector allocation increasing following the recent synchronized appreciation.

From a strategic perspective, a regime shift is occurring for economies and markets. The end of the era of policy led liquidity growth is successfully shepherding an era of capital investment led productivity growth. This is generating immense technological changes that will soon challenge the conventional notions of industrial production, inflation and even asset prices. This holds the potential for the current cycle to broaden in sector participation, narrow in country participation and continue in length, likely competing to become the longest economic expansion in recent history. This environment will allow the economic boom to continue, however risks an asset bubble, creating opportunities across sectors – both long and short.

Economic and investing outcomes are rarely linear, as is the case with the current tactical and strategic outlook. This non-linearity underscores the coming periods, where selectivity across asset classes is paramount to market timing within asset classes, and 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, as investors must distinguish… Boom or Bubble?


From a tactical perspective, global growth momentum and liquidity growth are the key short term drivers of investment markets. From a strategic perspective, the relationship between economic growth, liquidity conditions and asset prices is the key long term driver of investment markets. Growth momentum is peaking and liquidity growth is slowing, the combination of which is likely to lead to bouts of volatility in the coming period. This will come within a broader expansion in outright global economic growth and still ample liquidity environment that is likely to see higher asset prices as the cycle progresses. In this environment, investors must decipher whether the coming boom in certain sectors can justify the growing bubble in selected asset prices.

Emerging Markets:

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. Growth momentum is similarly peaking at present, and will decline in the coming period, with Emerging Markets a derivative on Developed Markets. 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 exist at present, secular changes in USD liquidity conditions will manifest in deteriorating currencies and financial stability.

United States:

The US outlook is framed by peaking growth momentum that is likely to temporarily decline, and an economic expansion that is likely to continue to broaden across sectors and extend for several periods, potentially becoming the longest period of economic expansion in recent history. Consumption, housing and industrial production are all participating, and the heralded increase in capital investment is now occurring, particularly in technology, fostering productivity growth. Inflation is currently muted, and should rise in the near term with economic growth, however longer term inflation is likely to remain contained as productivity growth curbs price pressures, limiting monetary tightening. Policy uncertainty remains a risk, yet also a sideshow within a private sector driven expansion.


The European economic expansion is firmly in place, with growth momentum approaching a temporary peak, however the outright economic expansion is only approaching the midpoint. Both cyclical and structural aspects are improving, with the improving private sector aided by diminishing policy uncertainty. Liquidity growth is being maintained in the near term, and whilst this guidance is likely to turn as this year progresses, the outright expansion is now solid enough, and the banking sector now better positioned, to withstand these changes. Demographic factors and a lack of realization of the initial goals of architects of the bloc continue present longer term risks to the region, hence structural reform at both a country and regional level is needed to protect the expansion, with recent elections proving that progress is being made.


Japan’s economy continues to improve, with growth momentum rising and outright economic growth at the early stages of an expansion. For the better part of three decades, the outlook has been characterized by an elusive pursuit of growth, and now, the outlook is strongly positive, without broad investor acknowledgement. The economy is the best leveraged developed market to the more positive global economic cycle, still relatively low oil prices, maintained policy support and, strategically, capital investment to confound the demographic headwind. Risks remain, globally, through the exposure to China, and domestically, through issues of fiscal policy uncertainty.


China’s growth momentum is peaking, and outright growth is stable at an elevated level, benefitting from the fading afterglow of the largest stimulus programs seen in any country ever in history, now coupled with a strong global economic environment. The outlook for China is currently stable, with the global economic expansion to continue to aid the cyclical outlook, however against a backdrop of changes in domestic policy, ongoing structural reforms and slowing global liquidity growth, all of which are potential risks. Beyond this, structural challenges abound, including the continued attempt to transition the economy from investment to consumption, slowing fixed asset investment growth, ongoing deleveraging, major demographic headwinds, capital outflows and the continued desire to maintain industrial production dominance sustained from labor in an age of transformative technology borne from capital.


The outlook for commodity prices is driven by global economic growth and global liquidity growth. Global growth is strong, whilst global liquidity conditions are changing, punctuated by still slowing USD liquidity growth. Recent sharp declines in commodity prices and a temporary stabilization in liquidity conditions have the potential to lead to a short term rally, however over the next year slowing Chinese fixed asset investment, the primary driver of demand, changing USD liquidity conditions, a key determinant of pricing, and selectively rising supply, an irrational response mechanism, are likely to lead prices lower.


Growth outcomes across regions are improving significantly, and becoming increasingly coordinated. This will ultimately lead to a coalescence of policy and liquidity conditions, which currency markets are beginning to price in, breaking out of the ranges seen over the past several years, particularly so relative to the USD, which to date has been the beneficiary of world leading growth and monetary tightening. As global economic growth expands, liquidity conditions will change rapidly, causing often unintended bouts of volatility. Peaking US growth momentum will continue to pressure the USD, with the outlook for other currencies dependent on the pace at which liquidity conditions normalize.

Latest Investment Positioning:

Equities are currently expensive in absolute terms, however rising earnings and contained bond yields should effect more attractive absolute and relative valuations. Slowing liquidity growth will positively impact Money Market Securities. Credit will remain strong due to the strong economy and long duration Bonds will remain supported due to a continued global shortage. Real Assets are expensive in absolute and relative terms. From a relative perspective, undervalued growth sensitive assets will outperform liquidity sensitive assets, with selected Equities providing the best risk adjusted returns, followed by Credit, Money Market Securities and Real Assets.

For further details, please refer to the full presentation of the Q3 2017 Deltec Quarterly Global Strategy Outlook, and the Investment Positioning and Key Trades documents. Should you wish to receive Deltec Investment Research or further information regarding investing with Deltec, please contact either myself or your Deltec Representative at any time.

Best Regards,

Atul Lele, CFA

Chief Investment Officer


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