Equity markets are flying and the correction we had been expected is not happening. The FED, Donald Trump and the bond market are providing massive liquidity and trading in March has been challenging for any portfolio manager.
Last week saw our Model Portfolio catching back up after the whipsaw of the previous week, adding +1.23% for a +19.03 % for the first quarter of 2019 and -2.58 % for the Month of March 2019.
This leaves us still well ahead of the main equity indexes even if the cost of our hedging policies was around 2 %.
The cumulative performance of our Model Portfolio over the 5 years and 1 quarter stands at + 195 % or the equivalent of +22.81 % per annum compounded.
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Liquidity is pushing equity markets higher.
The extremely dovish stance taken by the Fed last week has triggered massive advance in bonds and besides low interest rates everywhere, bond yields have now fallen sharply in March, flattening and even investing the yield curve in the US while the stock of bonds earning negative yields has now reached a record again.
Today, around $10 trillion of bonds are trading at negative nominal yields, mainly in Europe and Japan and most bond markets around the world trade at negative real interest rates.
Investors are hungry for returns and fly to equities where dividend yields compete attractively with cash and bonds, despite the less rosy prospects for earnings.
10 Year US Government yields fell 83 basis points – or1/4 of their value – since their August peak.
and 30 year US government bonds lost 60 basis points.
Bond investors are clearly sensing the deflation scare and economic slowdown that we have been predicting at the beginning of the year and investors are rushing again into equities.
China also had a strong end of week even if the week was mixed overall. The strong tax reductions decided at last week’s NPCC and a highly probable positive resolution of the Trade War is sending Chinese stocks flying after their February – March consolidation.
Friday’s surge in Chinese stocks rounds up a winning quarter for the country’s investors.
China’s equities have outrun every other national market in the world in the three-month period. The CSI 300 Index’s 29 percent rally is its best since the end of 2014, when the nation’s equity bubble was forming.
Finally the LYFT IPO came our at the upper end of valuations sending all technology stocks flying.
Last week, two important events took place on companies we recommended and invested in last year and sold at significant profits, illustrating the benefits of our stock picking process.
Satellite operator Inmarsat, that we bought at 344 on May,22nd 2018 and sold at 550 on June 6th 2018, has accepted a $3.4 billion bid from a private equity consortium that includes Apax Partners and Warburg Pincus among its backers. The sale of Inmarsat has been on the cards for a while, following two high-profile and unsuccessful bids from rival Echostar last year.
It is not clear yet whether Echostar might decide to rejoin the battle for control of the firm. If it does it will need to offer substantially more than it did last year to secure control of the company.
The new bid values the firm at 555 a share, which is a 46% premium on the share price on January 30 before takeover talks emerged and juts slightly above where we sold the stock in June 2018.
Hennes & Mauritz AB shares surged after the ailing Swedish clothing retailer reported first-quarter profit that beat expectations on lower clearance sales. We had bought the stock at 134.71 on May 24th 2018 and sold it at 162 on 3rd Oct 2018, slightly higher than yesterday’s close. At the time, the founder’s son and current CEO of the company had used 900 Mis of his own money to buy back stock in the company.
The stock rose as much as 16 percent after the company pulled back on discounts, compared with the fire sale it held a year earlier. The gains may have been spurred by “short squeezes,” when a bit of good news spurs investors who have bet against the stock to rush to reverse positions.
Sales growth accelerated so far in the second quarter, rising 7 percent in local currencies in March compared to 4 percent in the first quarter. Pretax profit of 1.04 billion Swedish kronor ($112 million) in the three months through February was the smallest quarterly total in 18 years, but it beat analysts’ estimates for 678 million kronor.
We clearly see this business turning around and Brick and mortar retailers adapting to the new sales over the internet environment. We may be re-entering the stock at a later stage.
In Commodities, most of our position sin soft commodities fell over the week and this does not really surprised us as we adopted a baby step strategy to accumulate position on the way down.
On the other hand, our patience and consistency was rewarded as Palladium finally cracked and had the worst there days fall of its history, ending the week down -11.18 %
Our arbitrage SHORT PALLADIUM / LONG PLATINUM paid off finally with both sides of the trade leaving a 4 % profit.
Gold and Silver had another bad week and it is still too early to re-enter the position.
Our three US equity positions delivered positive returns with DYNAVAX Technologies giving sign that is has found a floor. We may increase our position in this promising Immunology stock. that is a prime candidate for a take over.
Another sign that liquidity is plentiful is the strong performance of our TELECOM ITALIA bond which is up 4 % since we bought it back in November 2018.
Most of our European and Japanese Stocks were up apart from VALEO and ORIX and we added to our positions in French banks by increasing our position in BNP PARIBAS and added SOCIETE GENERALE as a new investment.
As is the case with Chinese Banks, French Banks dividend yields of respectively 7.51 % and 8.54 % are ridiculously high and the highest since the 2011 crisis. NOTHING IN THE ENVIRONMENT AND THE SPECIFICS OF THE BANKS JUSTIFIES SUCH A RISK PREMIUM.
Both banks have surprised positively in the past two quarters and banks are now outperforming the indexes on a relative value basis. At a Price to Book of 0.33, a P/E of 5.6 and a dividend yield of 8.54 %, SOCIÉTÉ GÉNÉRALE is a steal and we shall increase positions significantly there.
The having of the stock price since 2017 offers a great entry point.
Our Chinese equity portfolio was mixed, with the airlines, Tsing Tao Breweries and Fosun doing well while banks, our index certificates and most internet stocks doing badly. We added two airlines on the back of the strong result and positive configuration of Air China and sold CTRIP after a 41 % performance so as not to be too exposed on the travel market.\
In Asia, New Zealand and Dubai are doing well.
In our short portfolio, we took profit on the NASDAQ short position built last week and our remaining shorts including Bitcoins are contributing negatively apart from Google.
Our Portfolio is now significantly more long than it was a couple of weeks ago and we hav reduced our short positions considerably. We have increased Europe and China considerably and will continue to add to positions in Europe.