Love Letter – April 9, 2018

April 9, 2018

U.S. – China protectionist trade rhetoric adding to short-term volatility, but our positive thesis intact

Though markets are generally rational, they occasionally do crazy things.” (Warren Buffett, Berkshire Hathaway 2017 Annual Report, February 24, 2018)

Despite the strongest global economic growth in many years, capital markets have been volatile and performed poorly so far in 2018. As of the close on April 6, most global equity markets were in negative territory YTD and the MSCI World equity index was down 2.4% YTD. While inflation worries and higher interest rates triggered the sell-off in early-February, protectionist trade rhetoric emanating from the White House, and profit-taking in the technology sector have contributed to further deterioration in investor confidence in recent weeks (exhibit 1).

Quite contrary to media headlines on trade, geopolitics, and day-to-day swings in the marketplace, we continue to view fundamentals as positive, valuations as reasonable, and risks worthy of monitoring but manageable. In this newsletter we outline several reasons to maintain the course of a diversified investment portfolio strategy. Read More…


Love Letter – March 2018

March 27, 2018

Notwithstanding near-term trade uncertainties, interest rates remain the primary risk to our outlook

Entering 2018, we regarded the pace of interest rate hikes as the primary risk to capital markets. Although trade uncertainties and geopolitical concerns have dominated headlines in recent weeks, our portfolio management strategies continue to be guided mainly by our interest rate outlook.

The broadly held thesis is that gradually rising interest rates will eventually put the brakes on economic activity, and at the same time will make interest-bearing investments more attractive relative to equity investments. On March 21, the U.S. Federal Reserve’s rate committee followed through with a widely anticipated 0.25% rate increase (to 1.75%) and modestly increased its interest rate outlook. The committee’s median forecast now points to a Fed rate of 2.25% by the end of 2018, 3.00% by the end of 2019, and 3.5% by the time 2020 is over. Even though these interest rate levels may appear low from a historical perspective, we think a doubling of the Fed rate over the next 30 months could prove challenging to equity, bond, and real estate prices which have adjusted to a lower rate environment since 2009. With this timetable in mind, we continue to have a constructive view on equity markets for much of 2018, but expect returns to dip starting sometime in 2019.

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Love Letter – February 2018

February 12, 2018

Interest rates may be rising but runway for global growth still long

2017 was a strong year for global markets as virtually every equity index finished well into positive territory. The reason for this is straightforward: co-ordinated global economic growth is occurring for the first time in many years, lifting business, consumer, and investor confidence to multi-year highs. It has taken much longer than expected, but the slashing of interest rates after the 2008-2009 financial crisis is only now having the intended widespread stimulative effect. Indeed, initial estimates indicate that 2017 global GDP expanded at the fastest pace in six years and expectations are for further acceleration in 2018.

With global economies having been rescued by prolonged ultra-low interest rate policy, central banks have now understandably turned their attention to removing this unprecedented level of stimulus. Some central banks such as the U.S. Federal Reserve, Bank of Canada, and Bank of England have already started to gradually raise rates. The European Central Bank, Bank of Japan, and Chinese central bank have yet to start. With short-term rates in Europe and Japan still sitting at -0.4% and -0.1%, respectively, pressure is building for these economies to begin removing emergency-era stimulus (exhibit 1). We would interpret a decision to raise rates in these latter regions as a vote of confidence by central bankers. Read More…