The Market Turbulence Continues
November continues October’s turbulence. December will be similar. Volatility moved 1-2% daily and overall price pull-backs continued across all major markets.
Whilst the level of volatility, as measured by the VIX index, remains elevated compared to the very low levels seen in 2017, they are still well below crisis levels.
The trigger back in October of surging bond yields that finally had investors taking a cold hard look at the facts then, as always, overreacted across all industries, markets and stocks. Recent US Fed comments, trade wars, lunatic politicians and despots, slowing GDP in some regions, Brexit, Europe and anything else negative that added to pessimism is the current fuel to continuing price declines. As we write this update in December, nothing has changed.
November Fund Results
Global Capital Aware Fund (protected)
Nov -3.78% (MSCI -1.51%)
1 Year 3.72% (MSCI 3.02%)
Global Quality Equity Fund (no put options)
Nov* -3.12% (MSCI - 1.51%)
Positive contributions originated from Tencent, Twenty-First Century Fox, Biogen and Stryker. Negative contributors were Amadeus IT, Facebook, Wirecard and Nvidia.
No currency hedging continues across both funds. Insync considers the main risks to the Australian dollar to be on the downside. For Global Capital Aware Fund investors we hold ‘out of the money’ Index Put Options as a buffer against sharp and deep falls in portfolio price. For those in the Long-Only version, the Global Quality Equity Fund, our policy is to remain near fully invested. Indeed recent falls have us considering many excellent discounted opportunities for investment.
Market focus moves to gloom from boom
Good short-term news across major economic indicators, industries and companies is generally ignored at this stage of change - for now. Oil prices falling by a third and US company profits rising are examples. When markets finally react they do so with exuberance. This means most company share prices take a hit, irrespective of their actual current and future prospects. High performing companies and the high quality ones of these, get hit along with the rest - initially.
That last word, ‘initially’ is important to remember. What typically happens next? Investors begin to sort out the ‘wheat from the chaff’. A more nuanced and balanced lens is finally applied. Quality companies with high ROICs and long runways of future commercial opportunity then get rerated positively. We aren’t at that point yet. We are likely to be however in 2019.
Wirecard... an example in action
This portfolio holding exemplifies the immediate price action impact on your investment with us.
Over the last two months Wirecard experienced above average declines. This is despite the release of excellent financials and positive outlook statements (and its excellent longer term runway of opportunity and growth is still in place).
The graph below reflects this result. Despite 2019 earnings forecasts (red) remaining healthy, the share price (white) fell.
Some may say "But equity investors look 12 months forward and anticipate earnings forecasts to be cut as the US economy rolls over into recession. This is why its moved down”. The now growing market view of a looming recession may well appear later in 2019. For Wirecard market gyrations or a potential US recession are unlikely to reduce its future profits, opportunities, management quality, sales prospects etc. This is a typical disconnect between price and reality - for now.
The portfolio heading into 2019
The relative short-term decline of the Portfolio this last 2 months resulted in the composite PER of the Fund contracting from 24x to 21x (Market PER declined from 18x to 16x). This PER decline being due to relative share price falls.
In recessions, ‘cyclical’ stocks experience greater downward earnings revisions after the initial drop than those Insync invests in. The Wheat and Chaff process begins. This means the realized PE is significantly higher than what appears currently.
Your investment is aligned with more than 10 secular Megatrends that continue through recessions, buffering any negative impact on stock earnings in the portfolio. Combined, these duel dynamics create an opportunity whereby the relative PER premium of the INSYNC Portfolio is much lower than appreciated.
Insync has, and always will, invest with a longer view for quality investments in order to realise superior returns more aligned with our investors time horizons of 5 years plus. Shorter term price action, market sentiment swings and the usual markets moving through its cycles do not drive our stock selection or when we sell a stock. We do not manage outcomes for monthly or yearly returns.
Interesting opportunities lie ahead!