Value investing is under attack. The US equity market is at its most expensive level in history and has spent most of the past six years in the top quintile of expensive. In addition, value equities have underperformed the broad market and more widely growth equities for over ten years.
We recently met with Geopolitical Strategist Peter Zeihan to discuss three geopolitical shifts for US financial advisors to watch in the coming months.
The stock market continued to hit new highs through the third quarter, confounding those who focused on the rapidly changing headlines in the U.S. and throughout the world.
Matthews Asia ended 3Q 2017 with US$31.4 billion in assets across Asia investment strategies. The investment team includes 45 members, with portfolio managers and analysts aligned by strategy.
Our market Outlooks over recent quarters have offered clients our views into topical issues affecting interest rates, economics, and asset prices. We have also endeavored to introduce topics of interest less directly linked to current market conditions (recently, technology valuations and Behavioral Finance). This quarter, for a discussion of Bitcoin and other “cryptocurrencies”.
Here are four developments within the technology sector that are worth investment consideration.
Potential implications of Prime Minister Abe’s convincing win.
In a nutshell, we believe that the slow growth, low inflation trajectory will continue a while longer and, as a result, the Fed can maintain a very measured pace unwinding its unprecedented monetary ease.
Since the start of this year, the US Treasury market is signaling a scenario of rising growth expectations and falling inflation expectations, as reflected by the various components that comprise interest rates.
Last Month in Perspective: The convoy of developed world central banks reducing policy accommodation appeared to gather steam. Global political developments continued to capture headlines. Interest rates moved higher on the hawkish tilt in central bank rhetoric, and equities gained on generally positive economic data.
Investors pursuing high dividend yields are paying a sizable premium today, judging from valuations of the biggest stock holdings across the 10 largest dividend-focused exchange-traded funds (ETFs). In fact, these stocks are trading in line with the valuations of their growth counterparts today.
Learn from our experts on what may further support small cap outperformance.
In the second quarter, the global economy produced its best showing in six years, based on our estimates. Has strong growth continued in the third quarter? Survey data suggest the answer is yes.
The revolving door at the White House continued its rapid rotation during August. The Trump inner circle is now almost unrecognizable from the team surrounding him in January. If the White House was in the private sector the shareholders would be calling for the scalp of the CEO – and probably well before now. Soon everyone will be required to wear name tags. It is beyond fiction.
What might the German election mean for markets?
A review of last month’s market-moving events across countries and asset classes.
Global markets have been relatively calm this summer despite many uncertainties. Geopolitical risks have continued across the globe, and in some areas, looming monetary policy changes also appear likely. A key question for many investors is whether the sleepy summer period of low volatility will give way to a more turbulent autumn.
What shouldn’t you do as the Federal Reserve tightens policy? You shouldn’t be passive. Passive muni investors suffer from the painful phenomenon of clipped wings. That’s when passive strategies can’t rapidly reinvest in higher-yielding securities as rates climb, unlike their more nimble, actively investing cousins.
When the Federal Reserve starts raising interest rates, the knee-jerk reaction for many investors is to reduce exposure to US Treasuries and load up on credit assets, which tend to be less sensitive to interest-rate changes.
Momentum, trend-following, managed futures - are terms that can seem intimidating and opaque for many investors. But, while these types of investment strategies may be less familiar than traditional strategies, they can be quite intuitive and offer attractive diversification and return potential that is worth getting to know.
We believe biotech's long-term historical drivers, demographics and mergers and acquisitions (M&A) activity to secure patent protected drugs, may outlast near-term political headwinds and should lead investors to consider bio-pharma from a longer-term perspective. Biotech valuations also currently appear attractive relative to the broader market and look less crowded than other growth sectors. Over the short term we see potential opportunities in select individual biotech and pharma names.
We see three factors that potentially support Japanese equities going forward: 1. Improving earnings outlook amid a strengthening domestic economy and synchronized global expansion. 2. Currently attractive equity valuations compared to developed market peers. 3. Continued monetary stimulus from the Bank of Japan and a potentially stable yen.
UFC and mixed martial arts (MMA) have seen their popularity grow in recent years from relative obscurity, banned in many states, to the mainstream. Does the current fight represent a view of the future (e.g. the NFL and the upstart AFL) or a novelty (e.g. the XFL)? The fight highlights the topic of convergence and its current poignancy, from boxing to politics to investments.
A new study reveals how large registered investment advisors (RIAs) select actively managed U.S. equity mutual funds. Among its key findings were that advisors are relatively insensitive to expense ratios on those funds – and that most fund companies should not be pressured to reduce fees. The study also found that wholesalers have little influence getting advisors to select their funds.
A review of last month’s market-moving events across countries and asset classes
In our last quarterly letter, we discussed seven transactions from early 2017: two buys and five sells. We also provided an update on our then largest position, Express Scripts. There was zero analysis of the economy, asset classes, and central banks. We have been relatively quiet on the transaction front since then.
With energy setting records as the worst performing sector year-to-date, we were curious about Geopolitical Strategist Peter Zeihan’s thoughts on fossil fuels in the context of the United States’ continued retreat from the global theater.
Second quarter economic data continues to suggest that the US economy is still on track even as the labor market continues to provide no discernable increase in wage inflation. Economic data wavered slightly during the quarter but continues to demonstrate a stable overall environment amidst a perceived slowing in labor market trends and some downwardly revised GDP forecasts.
Supply and demand seems to have been placed on the backburner in today’s world of prognosticating inflation, employment, and GDP. The first point is the supply of publicly traded stock in the US. The second point is the supply of money.
US equity markets continue to march upward, fueling fears of a correction. History suggests that a downturn is overdue. So how should investors prepare?
We project solid global economic growth into 2018. The US should continue to raise rates gradually, while tapering of asset purchases moves onto the European Central Bank's agenda in the second half of this year.
Historically, we have not been able to find many interesting, really high quality companies in China which has largely centered on our discomfort with corporate structures, governance and alignment between majority and minority shareholders. While this continues to be the case, recent trips by members of the team have certainly provided plenty of food for thought.
Illinois’s fiscal woes, shaped by years of political gridlock, culminated in a rating downgrade to BBB– on June 1. A downgrade to junk is possible. But Illinois could recover its footing, should legislators muster the political will to work together. We know it can be done, because of California’s example.
US growth stocks surged in the first half of 2017, fueled by mega-cap technology companies. Active managers of growth portfolios have done especially well, reinforcing the case for stock-picking strategies.
With a new majority in the French National Assembly, President Macron has increased the chances parliament will pass his ambitious reforms aimed at labor and economic growth. But France also faces some hard fiscal realities that may take some time to fix.
Munis sold off in the wake of Trump’s election victory, but have been clawing their way back up as investors glean the difficult paths ahead for tax reform and infrastructure spending.
On the surface, passive municipal ladders seem like a sensible investment. Simple. Easy. Cheap. But the numbers don’t lie.
It would be pleasing to see a month go by without a terrorist atrocity somewhere in the world but, sadly, May was not going to be one of those months. The Manchester abomination is just one more in a string of similar attacks. It is difficult for the authorities anywhere to protect citizens from extremists who operate alone, wear no uniform and are prepared to die for their beliefs. There will, undoubtedly, be many more unhappy months.
As interest rates rise, it’s that time in the cycle when many advisors are turning to convertibles for shorter-term tactical overweights. Convertible bonds, which combine characteristics of stocks and traditional fixed-income securities, have historically outperformed fixed income during periods of rising interest rates.
One of the most common questions that we’ve heard/received from clients over the past year has been our view on active versus passive management. Active management has come under significant pressure due to its underperformance relative to passive over the past few years, particularly in the very competitive US large cap space, as well as the broader theme of fee compression in the industry. This theme is well illustrated by mutual fund flows over the past couple of years. According to Morningstar, passive fund strategies in the U.S. experienced inflows of $505 billion in 2016, while active funds saw outflows of $340 billion. Will this trend continue, or will active management again have its day in the sun?
We met with Geopolitical Strategist Peter Zeihan for a quarterly update right before the French presidential elections. In addition to calling Macron’s win, Peter outlined the three most important geopolitical shifts for US financial advisors to watch in the coming months.
Is it time to add convertible bonds?
South Korea’s young democracy has successfully withstood months of political turmoil, which concluded recently with the election of President Moon Jae-in as its new leader. What can investors expect next?
With markets seeking to avoid similar toe-stubbing in the policy arena, we examine the drivers of the fixed income markets for the near term. In doing so, we consider President Trump’s fiscal policy influence, Janet Yellen’s monetary policy impacts and evolving exogenous geopolitical dynamics. So, who or what will determine the market’s course moving forward?
With his victory as France's new president-elect, Emmanuel Macron can celebrate – for now. Much depends on whether he can secure a parliamentary majority in June. Nevertheless, Macron’s win helps investors see the more positive side to the European story.
During the first four months of 2017, we were relatively active on the buying and selling front. With a reasonable amount of information to report on individual positions, we will dispense with any broad economic and asset class commentary and dig right into each of the transactions that occurred between January and April.
