Big Picture - Markets
- Important to look back at recent years and what has happened in the market
- There was an industrial recession that started at the beginning of 2018 and proceeded through 2019 – coincided with trade war with the US and China
- This turned into a legitimate recession in February 2020
- Markets have been recovering since the intervention from central banks that took place in late-March and April of last year
- We are still in the early stages of the economic recovery, NBER has not even announced that the recession has ended
- Stock markets are trading the way it typically does out of a recession – cyclicals over defensives, copper over gold, small caps over large caps, life in international markets and the yield curve steepening
- Very little has changed, other than if you get under the hood; recent increases in interest rates have been more rapid – elections, vaccines, economic recovery – driving interest rates up
- Rates remain 50% below where they normally should be, given the level of economic activity
- This steepening caused a rotation in the markets
- Interest rates are high enough that Financials became investible again
- David’s team was able to get back into Financials with interest rates being higher
- Also seen within other areas of cyclicality – tech companies that performed well last year have taken a break
- There has been a rotation in technology from very resilient businesses in software and services towards semiconductors; much more cyclical place
- If you look at what has done best since late last year it is the most hyper cyclical areas of this market
- Better economy, rising rates, vaccines
Rotations – is this a sign of things to come as economies open and recovery becomes more robust?
- It will depend on the industry
- There were circumstances where there were dramatic increases in share prices of businesses that were truly challenged
- Rhetorical question – if people were decreasing their usage of shopping malls in the past, there is no question that we can restore traffic in malls, but it was declining before the pandemic
- David and his team are trying to find the businesses that are on sale because of current circumstances and that will reassert their growth
- Toughest challenge in building a portfolio is knowing how much should we be exposed to businesses that had a tough year in lockdowns
- Trying to find the true long-term opportunity – that is to try and find investments that are not just trades, those are things we are not interested in
- Important to find businesses that can do well in second half of this year and into 2022, 2023
- More to come for the re-opening trade? It’s up to the shorts if they are forced to cover – could get pushed higher, but if continue long-term decline they are not sound investments
- If businesses re-establish their growth after the pandemic, those businesses will continue to do well
- If we look at market action, particularly in November of last year, the stocks that did the best were the most challenged businesses – David does not see a ton of upside there
- Short-term if someone wants to get excited about movie theatres that is ok, but long-term they saw less traffic before the pandemic, and people likely won’t be rushing back
- Fingold’s team is focused on the long-term growth and companies that will drive earnings on the other side
Stimulus
- Sentiment that stimulus and liquidity is positive for equities is a correct sentiment
- People do need to be careful though between what they hear on the news and what happens in reality
- In reality, a lot of money from prior stimulus has gone unspent – there has been a massive amount of stimulus, but the headline numbers were not spent
- It is important to understand that Infrastructure falls at the state level not the federal level
- The idea that there is a tremendous amount of money that will be spent into Infrastructure in the short-term, does not make sense and David is positive on Infrastructure
- Does not see massive amount of money getting spent anytime soon
- A lot of what they are talking about is money that will take years to spend
- Additionally, once money is authorized, projects take time to get approved and paid for
- Hearing headline numbers, government spending is rising but before people get concerned about size of stimulus, they should think about whether this money gets spent
- Consumer savings rate is at record high levels
Sectors
- David’s position on Utilities is relatively unchanged - owning these assets is being at the mercy of regulators
- Investments in Utility to improve grid quality, storage – you need to go to the regulator and go through that process
- He does not want to be in the position where he is directly leading to taxpayers paying more money
- Investors need to look at high quality Utility positions that are priority with the regulators – Berkshire Hathaway Energy
- Not against idea of Utilities but want to get involved where we have certainty that we get the right return and investing in the energy of the future
- Utilities and Real Estate are also sensitive to interest rates and as David highlighted earlier, we could see rates go up 30-50% just to get back to normal levels with where economic growth is
- History has shown us these sectors don’t perform well in rising interest rate environments
- Energy – David likes wind and solar
- Fossil fuels; David prefers the picks and shovels exposure to this
- 12-months ago had a negative oil price
- Areas in picks and shovels that excite David’s team; equipment for oil and gas production – compressors; generators; electric heating equipment
- In a growing economy where price of oil is increasing and doing well and we are not fully recovered, oil price can be higher and this benefits picks and shovels exposure
Inflation
- David always invests in businesses that have pricing power – if there is inflation, companies can increase prices
- In disinflation, they hold their prices
- He does not spend a lot of time thinking about inflation, good businesses can navigate and benefit from higher inflation
- As recently as 12-months ago we were worried about deflation
- If chairman Powell will let inflation run, he is looking to calm people down about deflation
- In prior economic expansions, FED tightened to early and before it was possible to bring discouraged workers back into the workforce
- David thinks current FED wants these workers back into the workforce
- Fixed income investors – tough scenario
- This is also aspirational, government trying to get to 2% core inflation for a long time
Credit Markets
- Currently behaving as exactly would be expected
- These markets tend to improve into the later innings of the economic expansion
- Ex. Spreads were improving into late 2006 so we were over three years into the expansion and credit was still doing well
- Cycle also ended two years after that; took two years of credit deteriorating before an actual pullback
- Growth in consumer credit is big, but people forget about the base effect
- Plenty of room for consumer and business credit to expand
- From a stock picking perspective, it is easy to understand - he is an equity investor and gets wiped out first before bond investors
- This is why David does credit work on all his companies
- Quality is what David does and where they invest
- We are in an environment with abundant credit and that is a reason to be bullish
- David wants to make it completely clear he is fully bullish and sees no reason not to be in the economy or stock market
International Markets
- We just came through a very long period of US outperformance
- US outperformance ends when you get a bear market and then the baton is passed to international markets
- David thinks that is what happened last year
- Reason why? International markets contain more cyclical industries as an overall percentage of their markets versus the US
- More industrials, energy, financials, materials
- Prospect for international markets to outperform at least until we get until the middle of the cycle
- A lot of investors are overweight US and are looking for more diversification – going international is a good option
- David had strong US exposure in his global funds when the US was working
- Now, he has rotated and shifted capital in the global funds to international markets
- US is still largest market in the world and least volatile – it needs to be an anchor of global equity funds, especially low to moderate risk funds
- International fund at this juncture is a great start – happy about his portfolio launch
- Where is David finding value? Cyclical industries
- Ex. Private banking in Switzerland
- Ex. Luxury goods – Europe
- Ex. Distillers – France
- Ex. Cosmetics – opening up plays and best companies are international
- One area emerging for David and the team is commercial insurance
- Investments in Israel – some of the best tech companies in the world
Anything keeping you up at night?
- They always say in boxing that you don’t see the punch that gets you
- Tough to predict these events that lead to big market drawdowns
- This is the reason why David is a conservative investor
- Willing to raise cash when the markets pull back
- Put conservatism together with optimism and will continue to see encouraging results into the future