Contributors to World GDP Growth, Years 1 to 2015

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Monthly Economic Commentary

Economic and market highlights

Economics

The US Federal Reserve left the federal funds rate unchanged in October but adopted a more hawkish tone in its press release, removing references to global financial and economic risks. The implication being that the chances of a December rate rise have increased. The target band remains 0 to 25 basis points. We forecast that the first Federal Reserve interest rate rise for the new tightening cycle will occur in December 2015, which is in line with market consensus.

The Chinese Caixin Flash Purchasing Managers Index (PMI) shows manufacturing activity continues to slow, although the reading was fractionally stronger than anticipated at 48.3, up from 47.2 the previous month. In the eurozone, PMI readings have been relatively robust for most of the year, with October’s registering at 52.3 while after some strong data in the US over the past year, things are looking a little more subdued with the PMI at 50.1 with purchasing managers surveyed citing the strong dollar and energy markets as headwinds.

Source: MWM Research, Caixin, ISM, Markit, November 2015

Deflation in Europe remains a concern with Germany's Harmonised Index of Consumer Prices (HICP) registering a 0.2% fall year-on-year, while import prices fell 3.1%. The Euro area HICP is -0.1% year-on-year with core inflation running at 0.9%.

The latest real GDP figures from China show a 6.9% growth year-on-year, with the announcement after the 5th Plenum reiterating the goal to double China's GDP between 2010 and 2020, implying an average growth rate of 6.5% per year over the next five years.

Canada entered a technical recession in the first half of the year but is expected to return to growth in the third quarter. Australia was sailing close to the wind with a 0.2% quarter-on-quarter growth rate in the June quarter, although we expect a rebound for the third and fourth quarters of 2015 with a pickup in manufacturing output and strong retail trade.

Bonds

The downward trajectory of US 10-year note yields over the last few months looks to be reversing with the latest statements from the Federal Reserve conspicuously removing warnings about global financial and economic risks. Fixed income markets are pricing in a greater chance of a December rate hike after what was perceived to be relatively more hawkish statements. Yields in the United Kingdom, also close to a new rate hike cycle, followed suit. In Europe, while 10-year rates moved, there was very little response at the short end, which remain relatively stable near or below zero due to quantitative easing.

Equities

Equities were broadly stronger in October as they began to shrug off the volatility of August and September. In local currency terms, the strongest developed markets were Germany and Japan, up 11.8 and 10.9% respectively. The US gained 8.1% while Australia lagged, adding only 4.2%. Emerging market equities underperformed developed markets with China rallying 9.1% while the MSCI Emerging Market Index recovered 5.3 percent, dragged down by Brazil, India and Russia.

The S&P500 has staged a dramatic recovery, rallying 11.6% from its September lows and now rests just 1.4% away from new highs.

Currencies

The Canadian dollar and Swiss franc gained 2.4% while the British pound was up a fraction less at 2.0%. The Australian dollar has strengthened 1.6% over the course of October. The Quantitative Easing currencies euro and yen lost 1.0 and 0.8% respectively.

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4 Investment Risks Warren Buffett Says You Should Not Take

What does risk mean to you...and Warren Buffett? 

If you ask the average person, they’re likely to say the probability of losing money. If you ask most financial professionals, they’ll probably equate risk with volatility of returns. (While these may sound similar, they’re not exactly the same thing.) For example.

Let’s say investment A loses 3% one year and gains 2% the next and investment B gains 5% one year and 20% the next. Most people would call investment A riskier since it lost money while financial professionals would say investment B is riskier because the returns were more variable.) But if you ask Warren Buffett, the second richest American and widely considered the greatest investor alive today, he would say they're both wrong.

In his 2014 annual letter to shareholders, Buffett wrote:

“Volatility is far from synonymous with risk… If the investor…fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things.”

Instead of volatility, Buffett measures risk as the loss of purchasing power or basically how much you can actually buy with that money, which is the whole point of actually having it.

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What is your risk tolerance?
How much risk is there in your portfolio? 

Start below or Learn more here >>

So what are those “very risky” things investors may do by focusing on volatility? Here are 4 that Buffett mentions and what you should do instead:

1) Keeping long term money in cash.

Many people keep most or even all of the long term money in cash because they're afraid of market volatility. Buffett admits that “owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents,” but he argues that over the long term, “a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.” That’s because in the long run, the erosion of the value of your money due to inflation is much more devastating that the short term fluctuations in the stock market.

Average money-market rates are less than a tenth of a percentage point while the average inflation rate last year was 1.6%. That means, the real value of your cash is decreasing by about 1.5% a year. In the short run, that’s a lot less than what you could lose in stocks but in 10 years, your money will have lost almost a quarter of its purchasing power. Compare that to the S&P 500, a selection of 500 of the largest companies in the US, which more than doubled with dividends reinvested over the last 10 years despite the financial crisis in 2008,

Bottom Line: Match your investments to your time frame.

2) Not being adequately diversified.

Another mistake is people having too much in one stock. Often its their employer's stock or the stock received in exchange of a sold company. Sometimes it’s a majority or even all of their money in one stock. There are lots of different reasons. They may know and trust their employer and don’t understand or trust their other options. This stock may have been performing particularly well. The employer stock may be one option out of several in their retirement plan and by spreading their money around, they may inadvertently put too much in their employer stock. They may have acquired the stock as a gift or inheritance or from options, grants, or an employee stock purchase plan and they don’t know what to do with it.

Regardless of the reason, any individual stock (no matter how good the company) is inherently very risky. Unlike what Buffett calls a “diversified equity portfolio” an individual stock can go to zero and never come back. That’s not volatility. That’s a permanent loss of purchasing power.

Bottom Line: Make sure you own a larger number of individual stocks in a a variety of industries or stick to broad-based mutual funds or ETFs that diversify the money for you.

3) Attempting to “time” the market.

Although not thought often as such, this is one of the most common investor mistakes. How many times have you heard people say that they know the market will decline and are waiting until then to jump in. Yes, it’s true that the market will decline at some point. The problem is that no one knows when. 

As Buffett puts it,

“Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”

Bottom Line: Instead of trying to time the market (which even Warren Buffett doesn't try to do), make sure you have adequate time IN the market, as that is what matters most. 

4) Active trading.

Instead of trying to time the market, others try to beat it by trading stocks they believe will outperform the market as a whole. This belief can be strengthened if an investor has one or more lucky trades. In many of these situations, the investor mistakes a rising market for his or her investing prowess.

However, many economists believe that the stock market is essentially efficient, which means that it’s extremely difficult if not virtually impossible to beat over the long run. Even if you don’t subscribe to this theory, it’s noteworthy that the vast majority of professional mutual fund managers consistently under-perform the market. Even the few that do outperform over a given time period are actually less likely than average to do so over the next same time period. In other words, any out-performance may be due to luck, exactly what the economists would have predicted.

So if not higher performance, what does all this trading produce? One study found that all this trading costs the average mutual fund about 1.44% per year. That loss comes out of your pocket but is not included in any of the fees reported by mutual funds.

Bottom Line: If professional investment managers, many from top business schools, with access to cutting-edge research and teams of research analysts working for them are unable to consistently beat the market, what makes you think you can? Instead of actively trying to beat the market, limit your trading to making sure your portfolio matches your time frame and risk tolerance, harvest tax losses to offset taxable gains, or switch from higher cost funds to lower cost funds.

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US Leading Indicator

RATE-OF-CHANGE TICKS UP, CONFIRMING MARCH 2015 LOW

The US Leading Indicator for June is up 5.5% from one year ago, with the 1/12 rate-of-change holding steady from its upward revised May value. Several successive months of strengthening building permits and a steepening yield curve have pushed the Index higher. The March 1/12 low confirms our expectation for a cyclical low for US Industrial Production in early 2016.

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2Q2015 Market Observations

Below is a summary of what took place in the second quarter:

US Equities end flat for the quarter 

• The S&P 500 returned (0.3%) for the quarter. Small cap outperformed mid and large cap. Mid cap was the weakest performing market cap segment with a negative return of -1.5%. 
• The growth style outperformed the value style across the market cap spectrum. 
• The health care and consumer discretionary sectors continue to outpace all other sectors. 
• Utilities, energy, and industrials continue their negative streak with consumer staples joining the pack. 
• Momentum and growth continue to be top performing factors while value and quality were weak performers. 

International and emerging market equities manager marginal gains 

• MSCI EAFE returned 0.6% while MSCI EM returned 0.7% in the quarter. 
• Small cap stocks outperformed in both international and emerging markets. 
• In international developed markets, the Far East was the best performing region due to strong performance from Japan. The Pacific was the worst performing region due to Australia and weak commodity prices.
• Emerging market performance was driven by the BRIC countries ex India. Brazil and Russia bounced off lows while China finished with strong gains despite a reversal late in the quarter.
• Top and bottom performing sectors in international markets were telecom and financials at the top and health care and information technology at the bottom.
• In emerging markets the top performing sectors were energy and health care with the bottom performing sectors being information technology and consumer discretionary. 
• As in the US, momentum and growth were top performing factors in both developed and emerging markets. Beta and value were weaker factors in both developed and emerging markets. 

Global bonds sell off in the quarter 

• Worries over rising US rates and a Greek default brought about volatility in bond markets. 
• Long-dated Treasury bonds were the best performing segment of the bond markets as the yield curve steepened during the quarter. 
• Short-term Treasuries and bank loans were the only positive performing segments during the quarter. 
• Spreads widened for investment grade and high yield credit, negatively impacting returns. 
• Non-US bonds posted negative returns except for dollar-denominated emerging market credit. Sovereign debt yields rose while currencies had a mix impact.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Investment strategy - Asset Management, 2nd quarter 2015

Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe.

At a glance

• Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe. They are the motive behind the ongoing global easing cycle.
• A stronger US dollar and the resulting foreign exchange market volatility argue for greater differentiation amongst portfolios, in accordance with their reference currency. Hedging has become a must.
• Euro area investors will benefit from both liquidity injections and the materializing economic recovery – a positive outlook that supports our preference for risky assets over cash.
• A more balanced approach is required when it comes to US dollar- and Non-US dollar- based portfolios, given the more limited equity market upside.
• External debt levels and commodity intensity are dividing the emerging economies into two camps: those who can afford to loosen monetary policy (Asia) and those who are forced to keep rates high (Russia, Brazil).

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Top geopolitical risks to watch for

Synopsis of Eurasia Group's Top Risks 2015 

Read more details >>

1 - The Politics of Europe
Europe's economics are in substantially better shape than at the height of the Eurozone crisis. But the politics is now much worse. That's true on three different levels: bottom-up, intra-EU, and outside-in.

2 - Russia
Last year, we highlighted Russia as one of the top risks to global security--that was before Moscow carried out the most brazen redrawing of European borders since World War II, and then fell into a severe currency crisis. The conflict with the West over Ukraine has crystallized a newly aggressive and explicitly anti-Western Russian foreign policy. Western sanctions, a sagging oil price, economic stagnation, and the ruble's plunge are weakening Russia economically and financially, though not driving it to the point of crisis. 

3 - The Effects of China Slowdown
We're quite optimistic about China this coming year. President Xi Jinping has consolidated an extraordinary amount of power since ascending to the presidency. He has launched policies long overdue to rebalance the economy, pushing ahead on improving air quality, pursuing a series of measures aimed at making state-owned enterprises more efficient and spearheading a massive anticorruption campaign within the Communist Party.

4 - Weaponization of Finance
The United States remains the world's only superpower, but Washington is now using its influence in important new ways. After World War II, American dominance was established by the forging of us-led alliances such as NATO and multilateral institutions such as the IMF and the World Bank that enshrined US-authored rules and standards.

5 - ISIS, Beyond Iraq and Syria

In 2015, ISIS faces setbacks in its core bases in Iraq and Syria, but its military power remains significant, and its ideological reach will spread throughout the Middle East and North Africa. It will grow organically by setting up new units in Yemen, Jordan, and Saudi Arabia, and it will inspire many jihadist organizations to join its ranks. Ansar Bayt al Maqdas in Egypt and Islamists in the Libyan city of Derna have already pledged allegiance to ISIS leader Abu Bakr al Baghdadi.

6 - Weak Incumbents
Political risk stemming from weak incumbents who recently won reelection will weigh on key markets in 2015. With the important exceptions of India and Indonesia, the wave of emerging market elections in 2014 saw incumbents win underwhelming victories. Sluggish growth and mounting popular demands were not enough to displace ruling party candidates in Brazil, Colombia, South Africa, and Turkey, and are unlikely to do so in Nigeria in 2015.

7 - The Rise of Strategic Sectors
In 2015, success and failure for business will depend increasingly on governments. For decades, the perception was that multinational companies were developing greater autonomy from policymakers, both in their home governments and in the countries where they operate, eroding state authority to regulate the flow of goods and services around the world. Instead, government influence is expanding, focused more on political stability than on economic growth.

8 - Saudi Arabia vs. Iran
Saudi-Iran tensions will spike during 2015, worsening the Sunni-Shia sectarian rift across the region.
The relationship will be especially volatile this year because: 1) there will be an unprecedented number of theaters of proxy conflict 2) domestic politics in both countries will enhance conflict and 3) the evolution of diplomacy on Iran's nuclear program, regardless of the outcome, will provoke more strife between Riyadh and Tehran. 

9 - Taiwan/China
Relations between China and Taiwan will deteriorate sharply in 2015 following the opposition Democratic Progressive Party's (DPP's) landslide victory over the ruling nationalist party in November's local elections. Taiwan's political class will focus overwhelmingly this year on throwing elbows at one another ahead of the 2016 presidential election. President Ma Ying-Jeou is already a lame duck, and we expect no progress toward an agreement with China on any form of trade liberalization.

10 - Turkey
For the second year in a row, Turkey makes our list. Lower oil prices have been good news for this country, but that's about all that's going well. Heavy-handed rule, short-sighted political decisions, and bad foreign policy bets will all conspire against Turkey. At home, Erdogan has used election victories in 2014 to ensure decisive defeat of his political enemies (of which there are many) while remaking the country's political system to tighten his hold on power.

Red Hearing 1 - Asia Nationalism
Red Hearing 2 - The Islamic State
Red Hearing 3 - Petrostates
Red Hearing 4 - Mexico

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.