12 Jul Q3 2017 Market Commentary
This quarter we asked Gratus Capital Director of Investments Todd Jones to weigh in on the current financial environment to learn more about critical market trends.
Here’s what Todd is talking about this summer:
With equity markets at new all-time highs, where is Gratus now looking for different equity allocations?
Certainly, we’re being a little more cautious with our equity investments, while remaining at our targets. The reason we’ve been giving more caution to this side of the portfolio is due to elevated valuations. Specifically, equity markets are experiencing valuation levels that haven’t been seen in a number of years.
Furthermore, the number of bargains available to equity investors is among the lowest we’ve witnessed at any point in this recovery cycle. It’s important to recognize this, since as value investors, we consider price an important factor in all of our positions when determining what investments to add to or remove from a portfolio.
For the past 12 months, we’ve been focusing on developed international markets, such as Continental Europe, because we continue to see select opportunities available in these markets. However, this is not the case for other developed areas of the world, including Australia and Japan. In our view, these areas are more risky than Europe because of their proximity to China.
Emerging market stocks and bonds have been performing well. Is this an area Gratus is considering for portfolios?
We’re still considering these allocations both on the equity and fixed income sides. However, Gratus has yet to make any investments in emerging markets. This is primarily because of the substantial liquidity risks that are evident in most of these markets. As an example, on May 17, 2017, the Brazilian stock market was down approximately 18 percent. This one-day price plunge highlights the hidden risks in emerging market equities. Unfortunately, many investors aren’t paying attention to this rapid movement.
On the emerging market bond side, this asset class looks unattractive. Yields on emerging market bonds relative to U.S. Treasury bonds are nearing all-time lows since the 2008 global financial crisis. We believe this represents a negatively skewed risk-return tradeoff.
Technology stocks have been drawing a lot of news attention and seem to be up almost every day. Is this something we should be concerned with?
There certainly have been a number of publications correlating where technology stocks are today versus a similar high valuation situation in 2000, when there was a tech bubble. However, this time around in 2017, technology segments within the equity markets appear far less risky than in 1999 and 2000.
There are two reasons why:
#1 – The tech-knowledge economy is becoming larger, certainly larger than in 1999.
#2 – Technology companies are generating substantial earnings. Therefore, given that these companies are generating far-superior earnings as compared to 1999, the valuations are much more believable and reasonable.
Are there any portfolio changes Gratus is making now?
There are a number of things that we’re doing and have been doing throughout 2017. I’d like to highlight three:
#1 – Similar to the first quarter in 2016, we rebalanced all of our accounts this year, but for different reasons. Last year, equity markets had sold off dramatically. Therefore, we rebalanced in order to add to our equity positions. This year, we rebalanced all of our accounts in order to reduce equity positions, because prices have moved up substantially as compared to last year.
#2 – We are increasing cash positions where available. Overall, we haven’t held much cash in our accounts through this recovery. Still, we believe cash will create potential opportunities within portfolios in the near future.
#3 – We are continuing to transition some of our equity and alternative positions from passive indexes to active strategies. Given the deluge of money being invested in passive strategies, we believe active strategies will have better potential to outperform than they have at any point in the last 10 years. We discussed this active management approach in our June Market Insights, Investing In An Era Where Price Is Irrelevant.
Gratus Capital is an SEC registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request. The opinions expressed are as of July 2017, and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities. As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.