Let It Ride
A successful hedge fund manager must know when to be fully invested, when to take some chips off the table, when to fold (going to cash) or go net short.
By nature, we are skeptics always looking for that inflection point that leads to a major shift in our asset allocation. It is difficult at times to keep our hands in our pockets as the global stock markets rise week after week. But that restraint is and remains the right decision today, as it was three years ago, two years ago, last year and today.
Paix et Prospérité has advocated a fully invested position since it was founded in 2013 outperforming the markets by a wide margin while running circles around the hedge fund index. Our strengths remain capital allocation, regional, industry and stock selection along with our ability to find that next investable trend. We stay the course as long as the facts support our core beliefs while always looking for that inflection point.
Last year we correctly positioned our portfolios for Trump’s pro-growth, pro-business agenda including tax reform and regulatory relief. We anticipated that Trump would be going to Davos to announce that the U.S. was open for business cajoling heads of corporations to build plants in the U.S. hiring our citizens. Herein lie many investable trends, which may last many more years.
Global economic and monetary data reported last week continues to support our beliefs – our True North – guiding us through our investment process:
- Global economic activity is accelerating. In fact, the IMF raised its growth forecast for both 2018 and 2019. Other countries will follow the U.S. with tax and regulatory reform boosting growth for the foreseeable future.
- Inflationary pressures remain muted held down by globalization and rapid technological change (the disruptors). The Philips curve and historic measures of productivity no longer work. Productivity gains will offset wage increases and higher raw material costs over the next two year with clear winners and losers.
- Interest rates remain incredibly low, as real rates remain negative in the Eurozone and Japan despite accelerating growth. Both the BOJ and ECB last week reaffirmed QE putting downward pressure on U.S. rates. We still expect yield curves to steepen throughout the year but not to the level, which would slow economic activity. All monetary bodies will be one step behind until inflation rears its ugly head. And finally, the dollar will continue to weaken over fears of rising U.S. budgetary deficits.
- Corporate profits and cash flows gains are accelerating and will beat most analysts’ current projections especially after factoring in tax reform. We are estimating S & P earnings over $150 per share in 2018 and $165 per share in 2019. Cash flow growth will be even stronger than earnings growth.
- Capital spending will grow more than expected in 2018 and 2019 bolstered by an improving economy, trade policy, tax reform and regulatory relief. America is open for business. We continue to expect that the U.S. will pass a trillion dollar infrastructure program that will kick in next year adding to growth.
- M & A activity will accelerate across all borders.
- Financial regulatory relief both here and abroad will unleash banks to accelerate lending while maintaining record liquidity and capital ratios. China will be the exception clamping down on excessive growth in lending forcing financial companies to improve their capital ratios. Notwithstanding. China will grow in excess of 6.5% in 2018 and 2019.
- Industrial commodity prices will rise in 2018 and 2019 as demand outstrips supply due to low levels of capital spending over the last 6 years. We are watching to see whether managements maintain a disciplined approach to capital spending as the cycle extends. It goes for the energy sector too.
- Stock markets remain undervalued today but not all markets, sectors or companies are equal. Herein lies our strength: We are able to separate the wheat from the chaff.
Rarely have the stars been aligned as they are now providing such a positive backdrop for continued rising global stock markets. But, never be complacent. Always monitor for possible trade tensions and hot spots like North Korea.
Always be on the lookout for that catalyst which may shift your stance. Right now we are focusing on the BOJ and ECB. As long as they remain embarked on QE, all is good.
Stay the course, and let it ride.
There will be a time to shift our view but it is not now nor may it be anytime in 2018. We recognize that corrections could occur at any moment so we maintain excess liquidity at all times to be able to add to positions.
Our areas of concentration remain the financials, global industrials and capital goods companies, technology at a fair price to growth and special situations where internal change will lead to upward revaluation over time.
Finally, we want to give a shout out to Byron Wien, my former partner and Co-CIO at Century Capital, for his many years of contributing to our industry. He has made us all better investors by challenging our core beliefs. We will continue to look forward for his annual 10 surprises for years to come.
Remember to review all the facts; pause, reflect and consider mindset shifts; analyze your capital allocation along with risk controls, do in-depth independent research and …
Paix et Prospérité LLC