This week Robert Swift, head of the TAMIM Global Equity High Conviction Individually Managed Account (IMA), reviews both the market and his portfolio coming out of July. He also provides a brief outlook for global markets. We hope to reinforce the idea that portfolio management is more than simply “picking stocks". Identifying mispriced stocks is a part of it but position sizing, measuring and identifying aggregate risk exposures, and knowing why and when to buy and sell are all part of it too.
July Global Market & Portfolio Review
Robert Swift
- August 2016 -

​MARKET REVIEW - July 2016
 
Equity Markets rose strongly in July. This rise confounded expectations that the UK Brexit vote in late June would cause financial “Armageddon”. Our model portfolio was fully invested which helped returns. It is very difficult to time markets; predict from month to month when they will rise and fall, and move in and out of cash. We do that rarely.
 
The UK exit stance and end game has yet to be revealed but it is conceivable that some form of modified access to the single market with a number of opt outs would be possible. The UK will still contribute to the EU budget but would be free to negotiate bilateral trade deals independently and have greater control over immigration. Now Sterling has fallen the UK looks capable of performing better economically.
 
Prospects for the European Union and the Euro may have been improved by Brexit. Economic policy can’t get worse and this may serve as a “wake-up” call. For the Euro to remain a viable currency a proper fiscal union is needed for which a political consensus is necessary. Without this consensus the Euro will continue to strangle growth in the Southern European countries. Ultimately the financial system in Europe will require re capitalisation with, or without, the Euro.
 
The USA economy continues to grow, albeit, slowly and the well-publicised Chinese slowdown and bad debt problems appear both manageable and discounted by markets.
 
Overall things could be better but we think that investors should still be holding exposure to equity risk.  
 
 
​PORTFOLIO REVIEW - July 2016
 
  • Bond yields have fallen further and represent an impediment to profitability in banking and insurance. All Euro banks are short of capital. North American banks are well capitalised. We own no Euro banks. We have not invested in European banks believing them to be ‘value traps’. They look cheap but there is a serious doubt about their asset quality and capital adequacy ratios. They are all interlinked and so if one country goes, others will be effected. As we prepare this monthly the Italian banks are under severe pressure, again.
  • We sold SNAM in Italy and reinvested in Singapore Telecom in order to gain exposure to Asia which has lagged over the last 3 years. We like Singtel’s valuation and its geographic exposure to Asian retail and business customers which provides steady modest growth. There is a fair amount of technology embedded in the Telecom companies and M2M (machine to machine) connectivity revenues are showing promising signs.
  • The UK holdings, National Grid, Glaxo Smith Kline, and HSBC all performed well, aided by a slide in Sterling and a reappraisal of their prospects post Brexit.   
  • Microsoft made an agreed bid for Linkedin the business networking site. We have expressed concerns about Microsoft’s ability to make good acquisitions after the debacle with the Nokia mobile phone business. For the moment we hold Microsoft but need to see continued growth from its cloud and business applications. Verizon made a bid for parts of Yahoo and will integrate this with its AOL division. These two deals illustrate the likely increased competition for additional consumers via the internet. Google and Facebook will see more competition for advertising revenue.  
  • Apple is unlikely to stay on the sidelines and is promoting its music subscription service heavily. Its shares rose after results which indicated the trough for iPhone sales has been reached.
  • Our Japanese holdings, Fuji Heavy, Toray and Japan Airlines continue to struggle against a strengthening Yen. This is frustrating since the businesses continue to perform well. Japan Airlines for example continues to see strong yields and has a commitment to share rising profits with shareholders -  a rare and beneficial attribute amongst Japanese companies.
  • We remain fully invested in the model portfolio.           
 
 MARKET OUTLOOK

We think that Value stocks look very attractive but need a catalyst for a sustained rally. Value oriented strategies have underperformed “Growth” and “Quality” styles for a while now and the valuation gap between these different types of stocks is too wide. Investors are paying too much for safety when there is little sign that the economic world is going to end.
 
We do expect large variability of returns between Value and Growth strategies to continue as this transition occurs. Equity volatility will itself be volatile.
 
The USA election in November is now going to come into focus. We are focussing on 3 developments in the USA that we believe will occur regardless of who is elected.
 
  1. Interest rates, and the yield curve, will start a return to ‘normal’. This will be positive for financials since net interest margins will rise. We hold JP Morgan, Wells Fargo and Bank of Montreal.
  2.  From recent visits to the USA in January and May it is clear that Infrastructure investment is now a recognised ‘must have” in the USA. Levels of capital expenditure are running at about half the level needed to maintain productivity. This will rise regardless of who is elected. We own Vinci and are exploring other interesting candidates. 
  3. Technology will continue to be innovative and dominant. As we write this monthly, Glaxo Smith Kline and Alphabet, (Google’s parent company) are establishing a JV to develop miniature implants for more effective drug delivery. Technology is becoming everywhere and in everything. We own several USA technology companies.

Happy Investing,

​The team at TAMIM
https://www.tamim.com.au https://www.tamim.com.au