OUR JUNE RESULTS

Our weighted average return in June was +4.54%. Since 2015, we have generated a net return of +33.44%.

In terms of investment strategy performance, our weighted average net returns for June were (a) +1.88% for conservative strategies, (b) +4.76% for balanced strategies, and (c) +5.59% for aggressive strategies.

Stocks rallied in June following the false tariff escalation with Mexico at the end of May, and the S&P 500 ended the quarter near all-time highs. Hopes for reduced trade tensions between the U.S. and China following the Tokyo G-20 Summit ‘truce’ helped drive the rally, but it is hard to perceive any real progress. Although both sides agreed that they would not increase tariffs and China committed to purchase more U.S. goods, this is very similar to the ‘truce’ reached seven months ago at the previous G-20 summit. This protracted dispute has pushed down trade and business confidence worldwide, with the manufacturing sector in most Asian countries declining and expectations of an economic recession in Germany seen as inevitable (Germany’s high dependence on exports and the Chinese market means ever greater uncertainty until the customs dispute is resolved). Without actual trade deals that provide certainty to businesses, global growth will not be picking up.

Faced with poor economic data and no immediate threat of inflation, the US Fed conceded that “the case for somewhat more accommodative monetary policy has strengthened.” The market interpreted this statement to mean that the Fed would be henceforth cutting rates – the only questions being how soon and how much? The market is also pricing in European Central Bank rate cuts and the potential for further ECB quantitative easing. Risk assets like lower rates, and rallied nicely in June.

However, it remains to be seen if these monetary policy measures will stimulate real global growth without the addition of a growth orientated fiscal policy. The U.S. economy has just set the record for the longest economic expansion in U.S. history. Unemployment is at its lowest level in decades. Housing prices are again at record high levels. 20 million jobs have been created. And while it’s been the longest, it certainly has not been the strongest expansion. First, it started with a deep recession with a destroyed financial sector. The European debt crisis (2011) and energy crisis (2015) also weighed on global growth. Moreover, the past year and a half has been dominated by the trade dispute that has weighed on growth, weakened confidence and increased uncertainty.

Despite last month’s positive results, the current scenario continues to be very challenging. Lower interest rates are supposed to stimulate the economy, not encourage bidding up government and corporate bonds into negative yield territory, but that is exactly what has continued to happen. This implies that holders of capital around the world are so risk adverse (or at least highly incentivized to be so), that they would rather accept a guaranteed loss, than expose themselves to any asset class not inherently supported by a major central bank. In Europe’s case, negative rates have evidently created a negative feedback loop: the more bonds trade with negative yields, the more this is accepted to be ‘normal’. We are nothing if not an adaptive species.

Whereas the Great Financial Crisis erupted when financial markets understood that there was actually no money where they thought there was a lot, in our current circumstance we seem to be facing the opposite scenario. There is money everywhere, but it is being channeled to vast oceans of debt or cascading as swiftly as possible to rapidly flowing technology stocks. Unfortunately, neither oceans nor rapids irrigate the fields of broad, inclusive, and sustainable economic growth. For the world economy to accelerate once more, it needs irrigation in the form of properly enacted fiscal policy. Surely, China is not the only country that can build infrastructure and invest in new electricity generation capacity and electrification technologies that reduce carbon emissions. It is high time that the rest of the world began deploying capital towards investment, rather than riding the coattails of central banks.

Thus far, we have erred on the side of optimism, because it very clearly offers the far superior risk/reward dynamic. Our efforts to find value in unpopular sectors of the market have not yet proven to be as lucrative in the near term as we had hoped, but we will continue to choose to avoid sectors and asset classes that we deem to be unjustifiably expensive and heavily overbought. We remain clearly focused on what is happening, and what needs to happen for global markets to regain confidence and optimism, and are ready to reap the rewards.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!

Pauls

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.