Weekly Notes With Tiho — Issue 09I know, I know.I can’t believe it either. The first half of the year is already finished.It seems to go faster every year, or do we just say that as we get older?Please don’t tell me its the latter of the two.I will take this chance to summarize the asset price performance. I must admit, it has been a steady and bullish first half.Not too much anyone could do wrong, and yet the performance of average funds is still lagging behind major indices.This seems to be an occurrence every year.Last week I posted a sneak peak year to date performance some of my clients achieved, especially those who happen to have a higher risk appetite. The link on Twitter can be found here.At the time of the Tweet, and at the time of writing this article, their portfolios are up
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Weekly Notes With Tiho — Issue 09
I know, I know.
I can’t believe it either. The first half of the year is already finished.
It seems to go faster every year, or do we just say that as we get older?
Please don’t tell me its the latter of the two.
I will take this chance to summarize the asset price performance. I must admit, it has been a steady and bullish first half.
Not too much anyone could do wrong, and yet the performance of average funds is still lagging behind major indices.
This seems to be an occurrence every year.
Last week I posted a sneak peak year to date performance some of my clients achieved, especially those who happen to have a higher risk appetite. The link on Twitter can be found here.
At the time of the Tweet, and at the time of writing this article, their portfolios are up over 18% year to date.
Let us compare this performance with what various asset classes have posted in the first 6 months.
Foreign Assets Outperforming
When constructing a portfolio most investors will opt to have a mixture of asset classes. These might include stocks, bonds, real estate, commodities and precious metals.
Let us look at the risk assets first.
Generally speaking, so far this year everything is up.
United States stocks and Gold have been head to head this year. Have I written this article a month ago, Gold would have been leading the performance race.
However, US equities are now up 9.8% year to date, while Gold is up 9%.
The key developed in 2017 is the outperformance of foreign assets, outside of the United States.
This is something I have pushed throughout the year and highlighted on the blog a few months ago.
Developed markets outside of North America are up 14.7% in 2017, which is just about the same as Emerging markets.
Asia excluding Japan (ETF: AAXJ), which is not shown in the chart above, is on a tear… up 24% year to date.
After a big regional crash last year — linked to the pop in the Chinese stock bubble — we are witnessing a powerful recovery.
Whenever asset prices crash hard, they tend to rebound — at least temporarily.
Recovery In The Bond Market
It’s exactly what happened in the bond market, too.
Near the end of 2016, just as Trump got elected, bond investors panicked and sold assets. They threw everything out the window, including the baby with the bathwater.
This pushed interest rates higher across the board, with a narrative that Trump’s policies (none of which have passed through Congress yet) were going to be inflationary!
This year, the bond market is out to prove them wrong.
A strong recovery can be seen across the board however, the theme once again shows foreign assets outperforming.
International Treasuries excluding the USA, together with Emerging market debt, are showing returns of around 6 and a half percent for the year.
Considering how low the interest rates around the world are — mainly thanks to artificial interference by global central bank’s bond-buying programs — this kind of a return is impressive.
After a stellar 2016, Junk bonds are lagging behind higher quality Corporates. Meanwhile, US Treasuries of similar duration are up 3.6% in 2017.
With the yield curve flattening close to the narrowest levels in a decade, some of my readers might point to longer duration Treasuries (ETF: TLT), which are up 8.4%.
That’s a valid point, and my clients’ portfolios have exposure there (for now). Those that follow me on Twitter should remember my timely calls to purchase bonds at the end of 2016 and start of 2017.
Now that the rally has been playing out, I would remind my readers to be mindful of the duration risk — at one of the highest levels in history.
A Tale Of Two Markets
On the surface, it looks as if every single asset class is rising this year.
Broadly speaking, this is true.
However, there are several instances where it is a tale of two totally different market conditions.
Coming into 2017, we watched Mr. Donald Trump inaugurated as the 45th American President.
The consensus held a view that Trump will be very bearish for Mexican asset prices. Most stayed away from Mexican stocks.
At the same time, Mrs. Clinton was never a fan of President Putin so naturally, market participants held a view that Trump’s victory will have a positive effect on Russian assets.
Conventional wisdom rarely helps investors, and this time was not different.
Russian stocks are down 11% for the year, while Mexico is having a stellar run — up over 23% in 2017.
A similar story can be examined between two great (football) rivals — Argentina and Brazil.
Moving in lock step during the first quarter, things looked normal in Latin America.
However, Brazil’s political scandals have made a comeback and with that, stock market is struggling once again.
It’s flat for the year, while Argentina is up a staggering 28%.
Speaking of rivals, recent geopolitical turmoil between Saudi Arabia and Qatar is yet another example where asset prices have moved in opposite directions.
Recent political changes in Saudi Arabia has investors cheering — the stock market is up almost 10% year to date — while Qatar is under heavy selling pressure (down almost 12%).
The final chart which speaks a tale of two markets is a diverging performance of Technology stocks (which are up over 17%) relative to the underperformance of the Energy sector (down 13% in 2017).
I’ve discussed how Technology sector is a very overcrowded trade, but truth be told, it’s nothing compared to the giant run-up in Semiconductors.
Second Half Of 2017 Might Surprise You
As stated above, 2017 has been a relatively easy year. Volatility is dead quiet and investors are complacent— something I will discuss in the future posts.
I hold a view that the second half of 2017 will not be as easy for investors.
Will the stock market correct?
Which countries will outperform?
Which sectors of the stock market will lag?
Are interest rates set to rise? How will this affect Gold and Real Estate?
The answers to these questions are very difficult and positioning for the right outcome very complicated.
You need an investment specialist to make the correct tactical overweight and underweight portfolio decisions, away from conventional wisdom and consensus trades — majority of which disappointed in 2017.
If you would like to know how I positioned my client’s portfolios, to achieve as much as an 18% return in the first half of 2017, and what I am doing for the remainder of the year — don’t hesitate to get in contact by clicking below and filling out the brief survey.
I’ll get back to you within 24 hours.