Dec 8, 2016
Tyler Mordy's Top Picks: December 8, 2016
BNN Bloomberg
Tyler Mordy, president and chief investment officer at Forstrong Global Asset Management Inc.
Focus: Global macro ETF portfolios
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MARKET OUTLOOK
Economies worldwide are now approaching a key inflection point — moving from fiscal austerity to expansion. While macro fears (Trump, Brexit, etc.) continue to dominate headlines, the more important story is the return of fiscal stimulus. As we move into this next stage, expect a blurring of monetary and fiscal policy; a development that will pave the way for “helicopter money” style policies.
However, we do not expect an adjustment to occur all at once. Much more likely is a gradual transition that will play out over the years to come. The steep climb in yields since the U.S. election appears to be a panicky reaction, and we expect stabilization is forthcoming. While a spike in yields is clearly detrimental to fixed income investors, a slow and steady rise allows for a higher reinvestment rate without incurring large capital losses. This is good news for retirees who have had considerable difficulty generating sufficient income in an abnormally low interest rate environment. Particularly appealing are inflation-protected and floating rate securities, which offer a prudent means to offset the effects of rising inflation and interest rates.
We also believe the current negativity surrounding emerging markets (EMs) presents an opportunity. EM assets were hit hard post-US election as a surging US dollar raised solvency concerns (on US dollar denominated borrowing), and Trump’s protectionist leanings threaten exports. We expect the US dollar, which is already overvalued by most conventional metrics, to stabilize shortly. Regardless, many EMs have taken large strides since the Asian Financial Crisis to protect their economies, including building foreign exchange reserves, implementing flexible exchange rates and controlling fiscal spending. Furthermore, many EM corporations now have global operations with revenues booked in foreign currencies including the dollar. While trade protectionism remains a risk (we will be monitoring developments closely), oversold EMs with devalued currencies (boosting trade competitiveness) have become increasingly attractive.
TOP PICKS
DEUTSCHE X-TRACKERS HARVEST CSI 300 CHINA A-SHARES ETF (ASHR.K)
Most recent purchase: September 20, 2016 @ US$24.59
China needs a better financial system as it moves from the resource mobilization stage of growth (where the main job was to invest as much as possible to build up infrastructure and basic industry) to the resource efficiency stage (where the job is to maximize the return on investment). Therefore, over the next several years China will see slower but better growth—thanks to reduced capital waste (less white elephant infrastructure spending, less corruption, less unproductive debt). On balance, this shift is positive for asset prices. Given China’s enormous economic footprint (China surpassed Japan as the second largest economy in the world in 2010), global investors are immensely underweight Chinese equities. As China continues to open its financial markets to foreign investors, Chinese equities will ultimately become a predominant holding in global investment portfolios.
iSHARES MSCI JAPAN ETF (EWJ.US)
Most recent purchase: July 18, 2016 @ US$47.52 ($11.88 pre 4:1 share consolidation)
Japan faces some serious structural headwinds (high debt levels, aging demographics, etc.). However, few understand the micro story. Over the last decade, Japanese companies faced the twin burdens of chronic deflation and an overvalued currency. What has been the result? First, corporate Japan is now extremely lean and efficient. Aggregate Japanese return on equity has been trending upwards as companies have focused on improving corporate governance and benefitted from a weak yen. Japan is also a veritable hotbed of companies at the forefront of several technologies reshaping the global economy — including robotics, electric cars and alternative energy. Second, lower oil prices are indisputably positive for Japan, which imports most of its energy needs. Thirdly, Japan is likely transforming itself from a nation of savers to a nation of investors. Contrary to popular belief, the Japanese savers have never been wealthier, having a net worth that is double what it was at the peak of the 1980s bubble. A mere 6 per cent of Japan’s household wealth is invested in listed equities, compared with 38 per cent for the U.S. Finally, and perhaps most importantly, Japan continues to lead the world in unconventional monetary policy. The IMF estimates that the Bank of Japan will run out of government bonds to buy next year or in 2018 when its ownership will reach JPY400trn (the bank also owns 47 per cent of domestic ETFs). Expect further forays into the realm of unorthodox policy. Notably, “helicopter money” — a true money-financed fiscal stimulus — will likely surface in Japan first. Investors may balk at the efficacy of these policies, but they should also understand that they are immensely helpful in raising asset prices.
VANECK VECTORS INDIA SMALL-CAP INDEX ETF (SCIF.K)
Most recent purchase: N/A
Fundamentally, India has a lot going for it (young, rapidly growing consumer economy; net-importer of commodities; pro-business government pushing through structural reform; monetary policies devoid of ZIRP, QE, etc.). However, a new catalyst may have emerged: with the central bank smashing inflation, there is big potential for Indian policy rates to come down. This has a high likelihood of creating a “triple merit” scenario of falling interest rates, rising currencies, and rising asset prices.
Indian small caps represent a high beta approach to these themes. However, the Modi government’s recent surprise demonetization of Rs. 500 and Rs. 1,000 notes (approximately 86 per cent of cash in circulation) will weigh on growth in the short term, as businesses and households are forced to adapt. Over a longer time horizon this is a net positive, as anti-corruption measures will bolster corporate India’s credibility. Additionally, by providing an incentive for Indian citizens to open bank accounts, this should help relieve clogged bank lending channels, and allow the government to make direct household transfer payments. Accordingly, the recent equity market weakness should be viewed opportunistically.
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
ASHR | Y | Y | Y |
EWJ | Y | Y | Y |
SCIF | N | N | N |
PAST PICKS: SEPTEMBER 20, 2016
DEUTSCHE X-TRACKERS HARVEST CSI 300 CHINA A-SHARES ETF (ASHR.US)
- Then: $24.59
- Now: $25.30
- +2.88%
- TR: +2.88%
iSHARES MSCI INDIA ETF (INDA.BATS)
- Then: $29.43
- Now: $27.50
- -6.55%
- TR: -6.55%
POWERSHARES SENIOR LOAN PORTFOLIO ETF (BKLN.US)
- Then: $23.14
- Now: $23.30
- +0.69%
- TR: +0.69%
TOTAL RETURN AVERAGE: -0.99%
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
ASHR | Y | Y | Y |
INDA | Y | Y | Y |
BKLN | Y | Y | Y |
FUND PROFILE: HORIZONS MANAGED GLOBAL OPPORTUNITIES ETF (HGM.TO)
PERFORMANCE AS OF: December 7, 2016
- 1 Month: Fund -0.92%
- 1 Year: Fund -0.38%
- Since Inception (Aug. 25, 2015): Fund +4.32%
* Index: 60% S&P Global 1200 Index, 40% Bank of America Merrill Lynch Global Broad Bond Index
TOP HOLDINGS
- iShares MSCI EAFE Small-Cap ETF: 7.42%
- WisdomTree Japan Hedged Real Estate Fund: 5.59%
- Deutsche X-trackers Harvest CSI 300 China A-Shares ETF: 5.21%
- iShares MSCI Japan ETF: 5.14%
- PowerShares Senior Loan Portfolio: 5.06%
TWITTER: @ForstrongGlobal
PERSONAL TWITTER: @tylermordy
COMPANY WEBSITE: www.forstrong.com