January Opens a Rewarding Road
By Simon Angelo
One of the things I miss about living in Europe is the high speed motorways that traverse the continent. Although there are often tolls, you can get to places fast. Variety comes quickly. From the rapeseed fields of France to the mountain tunnels of Switzerland to the sleepy vineyards of northern Italy. And it was a great chance to open up the supercharged engine in the car.
January felt like we were back on the road again...
Our composite portfolio blasted ahead, returning 5.34% for the month.
Investors let go of some fears that were weighing on the markets late last year. They seem to sense a way through can be achieved with the US v. China trade spat. With iron ore demand remaining strong - as we anticipated, Rio Tinto [LSE:RIO] contributed a 20%+ boost.
Even fears around an explosive, no-deal Brexit seemed to dissipate. Lloyds Banking Group [LSE:LLOY], a stock we believed offered great value last year, jumped 15%.
In the US, the Fed looks to be keeping a steady hand on interest rates. This along with a very positive jobs report, saw holdings lift.
Keeping the pulse of the markets
Success comes from having convictions and not giving up on them. When Investing in global shares, you're always looking for the next great value buy. One that provides a growth opportunity, ideally with some income along the way.
And you need a clear understanding of the trends impacting on the markets. So this year I've stepped up my commentary and analysis with a new role:
I'm now a contributor to Money Morning NZ. It's part of the Agora network, the world's largest publisher of financial newsletters. The unique match between Money Morning and Vistafolio, is that both go beyond the mainstream financial news to find the real trends and opportunities that drive return.
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Money Morning provides financial commentary beyond the mainstream.
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Performance update & strategy
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January 2019 was one of our best months since July 2016 - delivering 5.34%. The same forces were in play. Back in 2016 we picked up distressed value after the Brexit vote. Here, we've been boosted after picking value from the floor at the bottom of 2018.
January often sets the tone for the upcoming year in the markets. After a mini crash in the last quarter of 2018 (The US S&P 500 was down about 20% - we were down 3.67%), the bounce in January shows the ongoing and latent demand for shares in good quality businesses. As we'd moved to a more defensive approach last year, focusing on value and income - January has seen many of those stocks picked up by other investors.
If we could continue at over 5% per month, we'd deliver more than 60% in the year! The reality is that there will be ups and downs as we navigate the road.
Here are some flash-points to watch out for:
1. A hard Brexit:
There remains the risk that the UK fails to negotiate a deal and the ensuing chaos drags down sterling and shares on the FTSE. With renewed commitment to a deal, however delayed, we see this as a low risk, with ultimate increase in values once a deal happens - most likely at the last minute.
2. US v. China
So far China seems focused on the survival of its export economy and is bowing in to US demands to open up imports into the country. As the party with the most to lose, I think China will continue to cave on US demands and financial markets will like both the certainty and the gradual opening up of the large domestic market in China.
3. Interest rates
Right now central banks around the world, including the US Fed, seem intent on keeping interest rates relatively low. The volatility of 2018 has shaken markets and the risk of recession lies on the horizon. Central banks want to keep the money supply flowing. That's what Trump demanded - and his results, at least financially, have been good. Low interest rates mean investors have more appetite for stocks in order to achieve better returns.
4. Australasian property collapse
The writing is on the wall. Australian and New Zealand home prices have been too high for too long. Head winds in the form of banning foreign buyers, investor regulations, a tightening of lending and a flow of new supply could bring back house values and threaten some of our stock interests such as banking and home building.
5. Debt wobbles
Unsustainable and toxic credit caused the last financial crisis. Yet debt worldwide has expanded since then and there are areas of concern: Chinese public and corporate debt on infrastructure - which requires the continuation of rapid growth to fund it. Australasian housing debt - which is based on the premise of rising property prices. EU public debt, particularly in Italy, a large member state that has not yet managed to reduce levels to within the recommended limits. Debt defaults place massive stress on banking and if they happen across multiple countries, can tip the world into recession.
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Lloyds Bank is the largest retail bank in Britain and was founded in 1765. Source: LLoyds Bank ad. |
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Lloyds Banking Group PLC [LSE:LLOY] is completely exposed to the domestic British economy. It has no major exports as such. For this reason it has been something of a Brexit barometer. And with so much uncertainty around Brexit, the share price has been distressed. It has indeed been a dark horse.
We started buying Lloyds at around 50p. That valuation supports a dividend of over 6%, a P/E of approx. 10 and a Price to Book of approx. 0.8. That looks even cheaper than the Australian banks that have been trading low after the Royal Commission of Inquiry.
As a Brexit deal falls in place, one way or another, Lloyds looks set to rise. Meanwhile the management of the bank itself is looking good. Although CEO, António Horta Osório has admitted publicly that restoring Lloyds Bank's fortunes “almost shattered” his own mental health, the future of the bank is looking healthy.
Earnings are projected to rise 13% and Lloyds has risen to become the UK's largest digital bank, with 30 million online customers. This is where most banking now takes place. Lloyds has an open policy of partnering with the best fintech solutions. We see more opportunity to grow their banking base through online innovation.
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January is often a signal of how the market will behave throughout the year. We have started with a bullish January. In particular, strategic investments we made last year have paid off in spades.
This week, the Chinese New Year begins. It is the year of the pig and 2019 is supposedly a great year to make money and to invest!
As contrarian value investors some volatility helps us buy assets at good prices. There is plenty of uncertainty in the current environment. As we saw in 2018, investor nerves are running raw after so many bubbling years. It only takes a spark for things to explode. But it is in those explosions we find the next great buy.
Meanwhile the road awaits. We remain optimistic and bullish about some of the big trends changing the world and creating investment opportunities. More about these next time.
Regards,
Simon Angelo
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If you're a client, thanks for taking the long view with Vistafolio. If you'd like to find out more about our innovative, managed account solutions for eligible or wholesale investors, please visit vistafolio.com
*Past performance is not an indicator for future performance. Your actual portfolio will differ from the composite portfolio mentioned. Annualized returns are after management fees and after withholding taxes. The information contained in this document does not constitute an offer to sell or a solicitation to buy an investment, nor should it be construed as investment advice.
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