How to beat the S&P 500 (by only investing in the S&P 500)

This month’s issue of The Samra Report puts an end to the age-old debate of active vs. passive investing.  The ‘Oracle of Omaha’, Warren Buffet, chairman and chief executive officer of Berkshire Hathaway, earned his fortune and reputation through value investing, an active strategy.  In February of this year, Warren Buffet, however, slammed Wall Streets’ active managers, while praising passive investment pioneers such as Jack Bogle, founder of The Vanguard Group.  This month’s issue of The Samra Report explains: how Warren Buffett’s remarks were taken out of context, how to beat the S&P 500, and provides insight from Benjamin Graham, Warren Buffet’s mentor, professor and widely known as the father of value investing. 

“In 2008, Warren Buffett wagered half a million dollars that a professional investor wouldn't be able to select hedge funds that, over a decade, could match the performance of a low-cost Vanguard index fund tracking the S&P 500.”  “Over the last nine years, the hedge funds have delivered a compounded annual average return of just 2.2%. That pales in comparison to the index fund's 7.1% gain.  In other words, $1 million invested in the hedge funds would have gained $220,000, while the index fund would have been up $854,000.”  Unfortunately, Warren Buffett’s annual letter was taken out of context by the media, and to clarify, an index fund is a traditional investment vehicle, whereas a hedge fund is considered an alternative investment.  In stressing the importance of this difference, at Samra Wealth Management, we believe no client should allocate more than 30% of their entire portfolio towards alternative investments, and depending on the client, the ideal range falls between 5% to 30%.  

Most investors compare their portfolio returns to that of the S&P 500, a common mistake on the part of the investor.  In reality, the average investors are risk averse, looking to accept lower returns than the benchmark, with lower volatility.  The S&P 500 has a standard deviation, a measure of risk(volatility), of 18.1%, whereas a moderately aggressive benchmark: the DJIA Moderately Aggressive Index, carries almost half of the risk at 10.31%.  At Samra Wealth Management, when our clients are asked about their expectations for returns, taking into consideration: “higher expected returns correlate with increased volatility”, our clients understand their portfolio expected returns require lower correlation to the S&P 500.  In simplifying, most investors will not take on additional risk, in search of higher returns.  

Although Warren Buffett’s wager gained a lot of media attention, it should be noted, that this was a calculated statement by the ‘Oracle’.  Historically speaking, hedge funds underperform during bull markets, however, outperform during bear markets.  At Samra Wealth Management, it is our opinion that no investor, should allocate 100% of their portfolio to any form of alternative investments, let alone make a 100% allocation towards hedge funds.  Eight years into a bull market, it should be no surprise Mr. Buffett was right, however, it is our belief that Mr. Buffett would be reluctant to place the same wager as economic indicators start to show a slowing of economic growth.  The graph below shows the Credit Suisse Hedge Fund performance appreciation with a lower slope, than the MSCI World Index, and S&P 500, during bull markets.  However, their is less exposure to the downside, during bear markets. 

 

Although Warren Buffett was right to question, in our opinion, excessive fees charged by hedge funds, typically “2% of assets under management, and 20% of profits above a predetermined benchmark.”  It should be noted that as of April, the majority of active stock-based mutual fund managers beat their benchmarks in the first quarter. 

Financial advisors attempting to keep up with the S&P 500, utilizing “off-the-shelf” investment products, would have great difficulty, mainly due to holding period requirements.  At Samra Wealth Management, we believe research based portfolio management is the key to success.  In our post-election edition of The Samra Report, published November 30, 2016.  We advised our investors not to stay on the sidelines and recommended increasing allocations towards Technology, Healthcare, Industrials and Financials.  An equally weighted portfolio invested in these sectors would have a year-to-date return of 13.30%, almost 3% higher than the S&P 500 year-to-date return of 10.34%.  The S&P 500, widely known as “the market”, is distributed amongst 11 sectors.  The key to beating the market, while only investing in the S&P 500, is not to over-diversify into all 11 sectors.  Research and common sense help in determining sector allocation, and guidance.  The rationale behind our sector allocation is as follows:

Financials: We expect financials to continue to perform, as the FOMC continues with its plan for unwinding its bond purchase program, known as quantitative easing.  Placing the U.S. economy in a rising interest rate environment.  Retail banks look to decrease their dependence on human capital and rely on technology, while the current administration leans towards deregulation with President Trump’s Wall St. friendly demeanor. 

Technology: Although technology is up 21.34% year-to-date, we believe there is still room for growth in this sector, this belief is based on: expected changes in the corporate tax code, allowing for repatriation of assets held abroad.  Robotics, 3D printing, and automation will continue taking the place of human capital, while AI continues to innovate at a faster pace.

Industrials: The White House has indicated, and is pushing for a $1 trillion infrastructure spending plan over the next 10 years.  Given increased tensions in North Korea, and the Presidents choice of James Mattis for Secretary of Defense, Defense spending looks to increase.

Healthcare: There is a growing demand for emerging market healthcare, as internet penetration in rural areas increases, along with access to smartphones in growing middle-class regions, technology and advancements in medicine make this an attractive investment area.  In the United States, it is unlikely there will be a total repeal of the Affordable care act, as hospitals and insurance companies have heavily invested in ACA implementation.  ACA continues to provide large tax revenue for the government, and it is unlikely the government will allow twenty million Americans to lose healthcare coverage.

Benjamin Graham, widely known as the father of Value Investing, and Warren Buffett’s Columbia professor, separated investors into 2 categories: (1) Enterprising Investors (Active), and (2) Defensive Investors (Passive).

1. Enterprising (Active) investors who have the time and skill to analyze stocks in an attempt to outperform the market averages.

2. Defensive (Passive) investors who either don’t have time or the skill to actively analyze securities, but nonetheless want a satisfactory return while preserving the safety of their principal.

Regardless of how much wealth an investor has accumulated, they now have access to active investment management.  Although the media will lead you to believe active management lags behind that of passive.  It should be noted, many of the most well-known names covering the financial news have no formal education specializing in finance, and are usually graduates of journalism.  Since any investment manager, or portfolio can be considered actively managed, it is important to be able to distinguish the difference between an actively managed, and closet-actively managed account.  True actively managed strategies are measured by their active share ratio, a measure in percent, active share represents the portion of portfolio holdings that differ from its benchmark holdings.  That being said, true actively managed investment vehicles, those portfolios with an active share ratio of greater than 60% beat their benchmark, after fees, across all markets cycles studied, 62% of the time, with a better downside capture, providing a higher sharp ratio (risk-free return).  Those investors who invest in a portfolio with a higher active share ratio, have been found to outperform the underlying benchmark by an average of 1.26% a year, after fees and expenses. Finally, answering the age-old debate, actively managed accounts outperform passive portfolio's, when they are actively managed, and not passively managed accounts disguised as actively managed. 

 

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor.

 

Modern Portfolio Theory & your Portfolio

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This month the Fed signaled its confidence in the U.S. economy, as the FOMC continued with its plan for unwinding its bond purchase program, known as quantitative easing.  The decision to raise key interest rate by 0.25% in June, signaled a strengthening economy, prompting investors towards global diversification in search of yield.  This month’s issue of The Samra Report will focus on the dangers of over-diversifying, the need for global diversification, and how investors should allocate their portfolio’s 8 years into a bull market. 

Financial advisors have for years, educated their clients on the benefits of diversification, as part of a sales process.  However, many financial advisors lack a fundamental understanding of Modern Portfolio Theory, resulting in over-diversification: “Over-diversification occurs when the number of investments in a portfolio exceeds the point where the marginal loss of expected return is greater than the marginal benefit of reduced risk.” When adding individual investments to a portfolio, each additional investment lowers risk but also lowers the expected return,” essentially watering down returns.  Modern Portfolio Theory (and the Markowitz Efficient Frontier) suggests an investor can only lower their investment risk to a certain point, beyond which there is no further benefit from diversification.  As a matter of fact, an investment of one share in each of the top 5 mutual funds by asset size, would create an investment portfolio worth approximately $355.00, and would invest in over 26,000 investments, providing a lower return than the comparable benchmark.  This widely unknown case of over-diversification plagues client portfolios, as financial advisors typically do not build or manage client investment portfolios, however, they assess the clients risk profile and select pre-constructed investment allocations.  Essentially, off the shelf investments, deemed suitable for all clients within a specific risk profile sleeve.  At Samra Wealth Management, no two clients have identical portfolios.  The rationale behind individualized portfolio construction and management comes down to market timing.  Although it is possible for two clients to have similar needs, expectations, and appetite for risk.  It is improbable these clients would enter the market during the same market cycle.  This flaw is prevalent amongst passive investment themes, as client funds are invested into a mutual fund, regardless of the price of the underlying securities within the mutual fund.  This investment strategy, or lack of strategy, can cause an investors to purchase assets at inflated prices.  At Samra Wealth Management, our portfolios are researched based, and aim to capitalize on factors effecting the macroeconomic landscape.   

 As the S&P 500, NASDAQ and the Dow hover around all-time highs, at Samra Wealth Management, we emphasize the need for global diversification in select markets.  In recent weeks we have seen Moody’s downgrade Australian and New Zealand banks on increased housing risk, downgrade China on mounting debt, and a weakening Yen.  These unfavorable conditions are not only concentrated to Asia, however, spill over into Europe and Latin America: A weakening Swiss Franc, lower U.K. earnings expectations as the likely outcome of Brexit discussions will be unfavorable to Britain.  Although political uncertainty has calmed in recent months throughout the EU, Latin America continues to be plagued with corruptions and uncertainty.  It is important to remember that volatility and uncertainty are not necessarily always negative, as they can create opportunity.  For instance: with the Nikkei rising, investors in Japanese equities would expect to see their gains cannibalized as the Yen weakens against the greenback.  However, investors placing these trades on a currency hedged basis would see a rise in the Nikkei magnified through the currency hedge.  We expect to see above average growth in India and China, as a growing middle-class with increasing incomes contributes to a greater degree towards GDP.  With growth in entrepreneurship and workforce mobility, technology utilization creates greater opportunity in the small and micro-cap space.  Furthermore, with India on track to implement GST July 1st, this single tax on the supply of goods and services looks to provide stability, structure, and increased tax revenue.  China, meanwhile has proven to be a global customer, as it is not only the largest consumer of coal, iron ore, and aluminum, however, their growing middle-class may be able to save Hollywood as American consumers migrate towards online streaming platforms.  China now accounts for 48.6% of the worldwide revenue for the top 7 films released in the first 9 weeks of 2017, adding up to $983 million or a total $1.69 Billion.  What is more astonishing, is U.S. Box Office only accounted for $216 million, or 22% of China’s $983 million.  As the U.S. economy starts to lose steam, American’s will see more companies catering towards a global consumer, specifically those of India, China and Spanish speaking countries. 

With U.S. equity volatility at all time lows, financial advisors and investors should rethink their investment philosophies.  For the most part, the largest wire houses use a cookie-cutter approach.  Placing their clients into risk profile sleeves, from conservative to aggressive.  However, this passive investment strategy comes with a caveat: as investors lose out to opportunity cost.  There are more variables effecting the financial markets then most investors are aware, and although there is no crystal ball for predicting financial risk and returns, using a research based investment philosophy can highlight areas of opportunity.  For example, bad weather from Southern California to Texas, causes wind turbines to create more electricity from wind, scaling back the demand for natural gas, pushing down prices.  Longer winters create increased demand for winter clothing, increasing earnings of retailers, however, have an adverse effect on local travel, decreasing the demand for oil, pushing down prices of WTI, correlating to a decrease in the value of oil producers.     In using this research, we aim to invest more aggressively when we believe equities are trading below fair valuations, and decrease portfolio equity weighting when we believe valuations may have little upside.  Investors should expect more from their financial advisors, as the opportunity cost of investing in a conservative 10-year treasury note would yield an investor a negative 2.39% over the last year, whereas a portfolio equally weighted over the 30 largest U.S. corporations would have returned 23.43%.  The table below quantifies this difference in returns, along with returns from the other major benchmarks:

 

It is important for investors to remember, a conservative allocation does not mean investor will not sustain loses, however, correlates to the amount of volatility a single holding, or portfolio experiences.  For example looking at the table above, one of the most conservative investments: the 10-Year Treasury Note returned a negative 2.39%, with minimal fluctuations.  An investment in the Dow Jones Industrial Average Moderate Index, would have returned 10.90% over the last year, by taking only 58% of the risk of the S&P 500.  In comparison, and theoretically speaking, an investor would double their investment with the moderate portfolio 10-years sooner. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Arbor Asset Allocation Model Portfolio (AAAMP) Value Blog. (2017). Over Diversification: Hurting Your Investment Returns? - Arbor Asset Allocation Model Portfolio (AAAMP) Value Blog. [online] Available at: http://www.arborinvestmentplanner.com/over-diversification/ [Accessed 3 Jun. 2017].

Bankrate. (2017). Historical CD Interest Rates 1984-2016 - Bankrate. [online] Available at: http://www.bankrate.com/banking/cds/historical-cd-interest-rates-1984-2016/ [Accessed 29 Jun. 2017].

Cfapubs.org. (2017). Cite a Website - Cite This For Me. [online] Available at: http://www.cfapubs.org/doi/pdf/10.2469/cp.v26.n4.6 [Accessed 25 Jun. 2017].

Gstindia.com. (2017). About – GST India-Goods and Services Tax in India. [online] Available at: http://www.gstindia.com/about/ [Accessed 28 Jun. 2017].

Harris, B. (2017). The 10 Biggest Mutual Funds: Are They Really Worth Your Money?. [online] Forbes.com. Available at: https://www.forbes.com/sites/billharris/2012/08/08/the-10-biggest-mutual-funds-are-they-really-worth-your-money/#153e2faf3cfe [Accessed 3 Jun. 2017].

Hughes, M. (2017). How China Has Taken Over The Worldwide Box Office In 2017. [online] Forbes.com. Available at: https://www.forbes.com/sites/markhughes/2017/03/04/how-china-has-taken-over-the-worldwide-box-office-in-2017/#3f79feea7092 [Accessed 16 Jun. 2017].

Merrilllynch.com. (2017). Merrill Lynch RIC Report - Don’t be complacent while markets go up. [online] Available at: https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2fnet%2fUtil%2fGetPdfFile%3fdockey%3d6208-11751856-1 [Accessed 26 Jun. 2017].

MorningStar.com. (2017). Morningstar Portfolio Analysis. [online] Available at: https://awrd.morningstar.com/SBT/Tools/PA/GetPGReport2.ashx?random=863072953 [Accessed 30 Jun. 2017].

Nasdaq.com. (2017). Total Returns. [online] Available at: http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx [Accessed 3 Jul. 2017].

Ro, S. (2017). China is the world's largest consumer of most commodities. [online] Business Insider. Available at: http://www.businessinsider.com/chinas-share-of-global-commodity-consumption-2015-8 [Accessed 12 Jun. 2017].

Russellinvestments.com. (2017). Ten Year Treasury Yield - Helping Advisors | Russell Investments. [online] Available at: http://russellinvestments.com/helping-advisors/EconomyMarkets/EconomicIndicatorsDashboard/TenYearTreasuryYield.aspx [Accessed 3 Jun. 2017].

ubs.com. (2017). UBS House View. [online] Available at: https://www.ubs.com/us/en/wealth/research/uncovering-opportunities.html [Accessed 28 Jun. 2017].

 

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC

 

 

 

Divesting vs. Reallocating Exposure

As we approach the half-way mark for 2017, echoes of uncertainty continue to plague global markets.  With China experiencing its first downgrade since 1989, the Brits heading back to the polls in June for a snap election, and a deja vu scenario playing out in Brazil.  The S&P 500 has proven resilient to the investigations plaguing the Trump administration, as “political risk takes a backseat to improving economic fundamentals”.  Eight years into a bull market, it is natural for investors to be concerned, as the media continues to plant the seed of concern with talks of an impending bear market.  This month’s issue of The Samra Report will focus on divesting vs. reallocating exposure, depression babies, and alternative investments in the new housing market. 

Investors and advisors with a flawed fundamental understanding of macro-economics, are certain to experience negative returns during times of market appreciation, as they neglect to factor an appreciation of domestic currency, against the appreciation of foreign equity and debt instruments.  To simplify this: imagine converting US Dollars to Euro’s, investing Euro’s in an appreciating German company.  When it is time to liquidate the investment, if the USD to the Euro has increased in value, the investor stands to lose on this trade, on a currency adjusted basis.  In the past, the most common methods to hedge currency risk was via SWAP contracts, or holding foreign currency outside of the United States for investment purposes.  More recently, with the advent of currency hedged Exchange Traded Funds (ETF’s), these investment vehicles have allowed for a low cost alternative to investors with limited, or no options trading experience, exposure to foreign markets with a currency hedged strategy.  This strategy becomes significantly more important, as investors and advisors contemplate divesting assets out of select markets.

Oftentimes overlooked, investors have the capacity for investment exposure to almost any economy in the world, without direct foreign investment.  In fact, only 52% of revenue generated by S&P 500 firms is generated domestically.  

The United States is not alone, when it comes to crossing borders, to generate revenue.  Nestle, better known for its Swiss chocolate operations, generates more revenue ($92.36 Billion) from bottled water in the United States, than it generates with chocolate sales domestically.  Should the Trump administration be able to move forward with their campaign promises of: a border adjustment tax, and lowering the corporate tax rate to allow for domestic companies to repatriate cash held overseas investment strategies with global exposure will require fine tuning.  As Fortune 500 companies hold an estimated $2.4 Trillion in cash overseas, repatriating these funds at a lower corporate tax rate would further strengthen fundamentals. 

With Technology leading the S&P 500 YTD (20.03% vs. 7.73%) and over the last year (32.36% vs. 17.46%), a tech-led stock market, tends to frighten investors.  With flashbacks of the dot-com bubble, strong balance sheets, increasing technological innovation, and $70 Trillion in cash on the sidelines, we expect the bull market to continue at a similar trajectory.  Investors should take into consideration; the stockpiles of cash tech companies hold overseas.  A lower corporate tax rate, would allow these companies to repatriate the overseas holdings, further streamlining their operations. 

In the later stages of a bull market, fundamentals give way to market sentiment, as investors dismiss strategy and follow the crowd, in search of higher yields.  With interest rates forecasted to stay at historically low levels, it is likely holders of cash will grow impatient, take on additional risk, in search of higher returns.  Investors who exited the financial markets and moved to cash during the great recession, guaranteed their losses, missing out on an 8-year rally, and the potential to redeem their investment losses.  This trend dates back to the great depression, with investors who are better known as Depression Babies: “their experience of large macro-economic shocks affected their long-term risk attitude,” as a result, they never re-entered the financial markets.  A “recent Gallup poll showed 52% of Americans have money in the stock market, compared with 65% in 2007”.  With millennials sheltered from the market turmoil, we believe the bull market will continue to be fueled until technology and automation has a negative impact on labor demand.

For investors concerned with market volatility, modern portfolio theory states investors can optimize returns, lowering volatility by allocating a portion of their portfolios towards alternative investments.  Investments other than traditional (Cash, Stock, and Bonds), typically consisting of allocations towards real estate, hedge funds and commodities, as these investments have little to no correlation with stocks and bonds.  The subprime mortgage crisis, created a massive pool of abandoned homes, a problem for the foreclosing lenders, however, an area of opportunity for private equity and investment companies.  Investment firms purchased rental properties in bulk, entering the rental real estate market, while providing their clients with investment opportunities.  Recently, declining inventory has caused these firms to enter the new home and newly renovated multifamily rental markets.  With WTI fluctuating at session lows, Gold appreciating, but unlikely to hit new highs, and dismal historic hedge fund performance during bull markets, real estate within select markets is an area we expect to see grow.  The addition of an alternative investment allocation to a portfolio can be accomplished through sector specific ETF’s or SMA’s.  However, investors with sophisticated needs, may want to consider utilizing a private equity firm, specializing in this area. 

In January’s issue of The Samra Report, we predicted the FOMC would raise interest rates once in 2017, a contrast from Merrill Lynch and UBS who have predicted 3 hikes, while J. P. Morgan predicted 4 rate hikes this year.  With the stock market rallying for an eighth year, consumer sentiment at 97%, and April’s unemployment falling to 4.4%, it makes sense for the FOMC to raise key interest rates to steady inflation.  The Fed’s mandate of maximizing employment, stabilizing prices and moderating long-term interest rates, would be in line with the expected June 14th rate hike.  However, using Core Inflation (inflation minus energy and food) as a measure, over inflation, investors will notice a downtrend this year, ending April at 1.9%.  Furthermore, as Net Exports have been in decline since Q3 2016, a rise in key interest rates would lead to further declines. 

Economics at the most basic level, correlates a rise in interest rates with a decline in Net Exports.  Simplifying this statement: as interest rates in the domestic economy rise, the domestic economy experiences an influx of foreign investment, driving up the strength of the local currency.  As a result, domestic goods become more expensive to foreign consumer, driving down demand for domestic goods and services.  

It is our opinion, the Fed should consider the following factors, prior to raising interest rates:

  1. Homeownership rates in the United States have declined to levels not seen since the 1960’s.
  2. A lower corporate tax rate, triggering repatriation of foreign assets would lead to an influx of domestic assets. 
  3. Credit card default rates have seen an uptick from Q1 2016.
  4. The rise of automation and machine learning is cannibalizing domestic labor demand.

 

 

 

 

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC

 

President Trump Could Boost Technological Innovation...

President Trump Could Boost Technological Innovation...

With the media focusing on the Presidents Twitter account, and a list of failed accomplishments over the administrations first 100 days.  This month’s issue of The Samra Report will focus on identifying sectors of growth, as well as areas that have been overlooked as skeptics criticize the president on his campaign promises, while President Trump continues to push his agenda towards policy change.  

The Presidents controversial immigration plan has gained a lot of attention, and although the momentum has slowed, as congressional republicans have little appetite in risking a partial government shutdown, with demands for a border wall,   the White House continues to apply pressure with its demands.  “While more than 400 tech leaders in New York City have come together to speak out against President Donald Trump’s Immigration Plan,” claiming immigration policies could slow innovation.  We have not seen any direct correlation of a slowing of innovation, however, we have seen a window of opportunity arise for robotics and automation in farming.  Many readers will undoubtedly feel it is too soon to measure a correlation between decreasing immigration and that of increased innovation.  However, technology is now moving at a pace where the next big idea could become obsolete, and replaced with more innovative technology, before coming to market.  For instance, companies such as Uber are at risk of becoming obsolete prior to its IPO.  At Samra Wealth Management, it is our view the following sectors within technology are likely to experience above market growth over the next decade:

  • Artificial Intelligence
  • Robotics and Automation
  • 3-D Printing
  • Virtual Reality and Augmented Reality
  • Drones
  • Solar
  • Wearables

As robotics and automation look to replace the vanishing migrant worker, under the Trump Administration.  This unpopular campaign promise could lead to $1 Trillion to be repatriated, all while advancements in Artificial Intelligence continue to drive the need of more powerful microprocessors, sensors and imagining technology.  It should be noted that declines in migrant workers, specifically those from Mexico have seen declines since 2007, and although immigration policy has taken responsibility, it would be incorrect to assume a tighter policy stance is the only factor.  Over the last decade, farmers have decreased their dependence on human capital as they implement more technology into their businesses: more commonly known technology such as programable driverless combine harvesters, as well as lesser known technology such as wearables for cattle and strawberry picking robots.

With the affordable Care Act under continuous attack from house republicans and the White House.  The healthcare sector seems to have gained a lot of unnecessary negative attention, as the media focuses their efforts on the Affordable Care Act effecting hospital systems, they seem to have neglected the most promising areas of healthcare:

  • Emerging Market Healthcare
  • Assisted Living and Nursing Facilities
  • Technology in Medicine

Advancements in medicine have allowed physicians to diagnose, monitor, treat and prolong life to a level never seen before.  These advancements are now impacting emerging markets, as modern medicine crosses into rural areas in developing nations.  Through telephone networks, mobile applications and the training and education of local primary-care clinics, emerging market healthcare has the capacity to overtake medicine in developed nations.  Although it is unlikely we would see a shift of this nature in the near future, with a rapidly growing middle-class, emerging markets such as India and China are already seeing massive investments from some of the largest companies in the Fortune 500.   

As the national averages for assisted living facilities ($43,500/year) and nursing homes ($92,000/year) continues to grow in terms of cost, there is no shortage on demand for these facilities, domestically and internationally.  As modern medicine continues to diagnose, treat and prolong the lives of individuals, we expect this area to see continued growth over the next decade.  “Although it is a negative for Trump’s agenda, the failure to pass health care reform benefits a number of health care providers including hospitals, psych hospitals and physician staffing companies that have benefitted from coverage gains under the Affordable Care Act.”

The next decade will be the age of innovation, as technology looks to cross into a number of other areas.  Healthcare stands to benefit the most from technological innovation, as we enter an age where reality will mimic science fiction, as companies look to develop technologies such as nanotechnology.   Advancements in 3-D imaging and printing are already making their way into the design and manufacturing of prosthetic limbs.  Wearables and applications have created a network for mobile health monitoring.  However, Artificial Intelligence is the area we believe will make the largest impact on the healthcare sector.  As AI deep learning platforms such as IBM Watson Health and Google Brain are getting smarter by the day.  “Deep learning and advanced image processing techniques are being used to automate the reading of radiology scans including MRI, CT, ultrasound and X-rays.”  Helping physicians better diagnose and treat, with the assistance of massive pools of data.  

Financials have experienced a rocky ride so far in 2017, reaching a high of 8.13% in March, dropping into negative territory in April, to close the month up at 1.09%.  As the key beneficiary of rising interest rates, tax cuts and financial deregulation, we believe financials are poised to make strong gains during the remainder of the year, into 2018.  Furthermore, if the President is able to push through his aggressive tax plan, lowering the corporate tax rate to 15% from 39.6%, in the short-term financials would take a financial hit, as banks attempt to write-down their deferred cash assets, positioning them for a stronger 2018. 

 

With the S&P 500 hovering at all-time highs, many investors are concerned about the potential for a bear market, however, investors should note, that new highs are not an indication of new peaks.  Although equities are no longer cheap, they are still inexpensive.  In the near-term, we are not overly concerned about corporate valuations, as fundamentals play a smaller role this far into a bull market.   A corporate tax cut would make domestic firms more competitive in the international environment, and no longer would US firms be the target of potential takeovers.  With less funds set aside for taxes, allowing US firms to repatriate $1 Trillion we would expect GDP to experience 3-4% growth, starting in 2018. However, with technology replacing human capital, and credit card delinquency rate experiencing an uptick, recessionary fears should not be so easily dismissed.  

 

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All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC

 

Happy Birthday Bull Market

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Happy Birthday Bull Market

On March 9th, the stock market hit a milestone, becoming the second longest running bull market in history.  In quantifying this milestone, if an investor invested in the S&P 500 at the low, March 9th 2009, as of March 9th 2017, the investor would have seen a return of 250.08%.  However, it is important to note, that timing of the stock market with a long-term strategy is difficult.  If this same investor, invested October 9th, 2007 and liquidated their holdings March 9th, 2009, the same investor would have experienced the second worst bear market in history, losing 56.4%.  Over the last 8 years, many investors have followed the crowd into passive strategies, oftentimes quoting media headlines of “Passive Strategies Outperforming Active Managers”.  However, these statistics are misleading, as most investors who invest in an active strategy, invest in a strategy with little active management.  Those investors who invest in a portfolio with a higher Active Share Ratio, have been found to outperform the underlying benchmark by an average of 1.26% a year, after fees and expenses. 

 At Samra Wealth Management, we continue to recommend US equities.  As year-to-date performance of the S&P 500 is up 5.53%.  Our prior month’s consensus has called for increased allocations towards Technology (Red), Healthcare (Orange), Industrials (Purple) and Finance (Yellow).  Allocating an additional 10% to each of these sectors would have returned 0.402% over the S&P 500 in the first quarter, further strengthening the case of active management. 

For speculators waiting for the market to decline, we believe this scenario is highly unlikely, as U.S. equities are fairly priced, with innovation continuing to create value opportunities.  According to Savita Subramanian, Chief Equity and Quant Strategist at Bank of America Merrill Lynch, there is an increasing likelihood that we are entering the typical later stages of a bull market, during which the fundamentals typically take a back seat to sentiment and technicals.  We further advise our clients to look past domestic markets, and allocate a portion of their portfolios towards Asia, and the Nordic region.

With the U.S. Dollar expected to grow in value compared to other major currencies, we recommend investments in foreign markets to be selected cautiously.  With little volatility in terms of currency in the Nordic Region, investments in this area should be made on a non-currency hedged basis.  For those who are open to taking on more risk, we believe there may be opportunity to invest in Russia.  With the Trump administration showing a friendly stance towards Russia, both the MICEX and the Ruble have shown gains since the Presidential election.  However, investors looking to allocate a portion of their portfolios towards Russia should consider, some key points, regardless of the Russian Economy being on the path to recovery: (1) There has been heightened political risk, as thousands of Russians took to the streets to protest the current administration, on the grounds of anticorruption.  (2) Low oil prices could pose a detrimental effect on the Russian economy.  (3) Should Russia devalue the Ruble, any gains made in the Russian markets would be lost, without a currency hedge.

With regards to the remainder of developed Europe, their is heightened political uncertainty, as Theresa May has triggered article 50, positioning the U.K. to leave the European Union.  However, we expect the French and German elections to follow the path of the Netherlands, and learn from the surprise U.K. referendum vote, as well as the outcome of the U.S. Presidential Election.  Although the United Kingdom will attempt to negotiate the best terms for an exit of the EU, we remain caution, and recommend European investments should be made on an Ex-U.K. basis.

We favor select Asian markets, including Japan, Hong-Kong, Singapore, Taiwan, Thailand and small and mid-cap in the Chinese economy.  With Japanese inflation expected to grow, Japan is likely to experience an increase in nominal wages, making equities attractive.  We expect to see increased pressure on wages, as Bloomberg recently reported “Tokyo has more than two job openings for every applicant”.  With the shrinking pool of graduates favoring small companies over large, forcing large cap Japanese companies to compete for the limited talent pool, monetarily.  Furthermore, investments in Asia should be made on a currency hedged basis, with the aim of protecting investors as the dollar is expected to further appreciate in value, given the FOMC has raised interest rates, and economist believe we will see further rate increases in 2017.

 

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC

 

Don’t Buy Low, Sell...

Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Prior to buying or selling options, you must receive a copy of "Characteristics and Risks of Standardized Options" by clicking on the hyperlink text.

 

This month’s issue of The Samra Report will focus on President Trump’s proposed policies, identify areas of concern, as well as areas of opportunity.  As the market continues to show early and stable gains, bearish investors and the media continue to plant the seed of concern, reminding investors of past bubbles.  While the Wall Street Journal is correct in identifying a recent trend, where the bond and equity markets move in tandem, “a sign some investors may be losing faith”.  The Wall Street Journal fails to mention investors now have more options to choose, and no longer have to decide between treasuries or muni’s.   Investors have lost patience with low yielding treasuries, resulting in negative real-returns, and have moved into other areas of fixed income or alternative investments. 

The Samra Wealth Management 2017 Year Ahead report, highlighted some alternatives to fixed income investors, our consensus in High-Yield, Emerging Market Sovereign Debt and TIPS remains strong given the current global economic outlook.  For equity investors, 2017 continues to look like a good year, as President Trump’s policies could have a significant impact on domestic companies with cash held overseas, as well as the defense sector, industrials and financials. 

As low yielding treasuries have provided negative real-returns, the following fixed income investments are our best recommendations within this segment for 2017:

High-Yield Corporate Bonds

Although inflationary increases, and rising interest rates are bad news for High-Yield, growing demand and declines in default rates help the cause of high-yield, making it a good recommendation for the year ahead.  Investors of high-yield in 2016 witnessed a 17.5% return.  We recommend conservative investors look towards allocating to both high-yield and investment grade corporate bonds.

Emerging Market Sovereign Debt

Although EM bonds are threatened by the strengthening greenback, sovereign emerging market debt with attractive valuations purchased with a currency hedged strategy, look to be a good bet for the long-term investor.

TIPS

As long-term rates rise in an improving economy, credit is more attractive than duration.  As inflation increases TIPS maybe the closest return to a risk-free investment.  Conservative investors should look towards TIPS, as they protect from the eroding effects of inflation.

President Trumps tax plan stands to benefit some of the largest multinationals in the United States.  Effectively a tax break, allowing for the repatriation of foreign earnings.  The main beneficiaries of repatriation would be focused within the sectors of Healthcare and Information Technology.  Potentially allowing for billions of dollars to enter the U.S. economy at a much lower tax rate.  The following table shows the largest beneficiaries of repatriation.

Although we have highlighted the beneficiaries of the President’s tax reform policy, and there is significant support for these policies, as the chief executives of 16 companies, including GE, Oracle and Pfizer, sent a letter to congressional leaders in support of the GOP tax plan.  However, retailers like Walmart that expect their after-tax costs to rise substantially are upset, and for good cause.  Businesses importing apparel, or parts for assembly within the U.S. will experience most of the impact of a border tax, potentially laying more hurdles for the recently troubled auto industry, and disappearing mall staples such as Sears.  Off-price retailers like Burlington Coat Factory and Ross Stores are best positioned because they import virtually no goods from abroad.  The Economist estimates that the U.S. dollar would have to rise 25 percent to offset the proposed border adjustment tax. The following graph shows the areas that look to bear the most impact, as well as those areas that could benefit from a cross-border tax. 

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President Trumps policies look to face backlash, and have a detrimental effect on cross-border trade.  Regardless, we continue to recommend overweight allocations in:

Financials

Stand to benefit from President Trump’s Wall Street friendly policies and the prospect of lower corporate taxes.  Although Financials gained 22.8% in 2016, with rising interest rates and strong valuations, the financial sector looks to benefit in 2017.

Healthcare

With steps, already underway to repeal and replace Obama Care (ACA), we believe the aggressive terminology, translates to “refine”.  Given the loss of tax revenue generated by the Federal Government, and 20 million Americans would lose healthcare coverage, refining ACA is the most likely outcome.  Healthcare also stands to benefit from two other areas: (1) the repatriation of foreign earnings, and (2) the increase in demand in emerging market healthcare, prompted by an aging population.

Technology

With technological innovation impeding on all other areas of business, this looks to be a good year for technology.  Although there is concern over Trump’s immigration policies, repatriation should offset these concerns.

Industrials

With the Trump Administration’s promise of expansionary fiscal policy, we expect Industrials to see a boost.  With the prospect of a $1 trillion investment in infrastructure over the next decade, lower corporate taxes boosting business investment, and an increased military spending proposal of $20 billion, for a total of $603 billion, the near future looks good for Industrials.  

The Presidents foreign policies, attitude and campaign promises are creating opportunities away from the S&P 500.  At Samra Wealth Management, we expect small and mid-cap businesses to benefit from pro-growth policy actions, lower corporate taxes and reduced ADA requirements.  Given the administrations friendly and forgiving attitude towards Russia, and the year-to-date decline in the MICEX (-7.89%), we believe Russia presents a buying opportunity on a non-currency hedged trade. 

2017 continues to look like a promising year for investors, as President Donald Trump continues to build his dream team cabinet of business friendly-billionaires.  Although the Presidents methods and goals are unconventional, as we voyage into unchartered territory, we expect to see more volatility in March, given the following:

March 2         Northern Ireland Election

March 9          Key ECB Meeting

March 14-15    Key Fed Meeting

March 31         Self-Imposed Deadline for Brexit Talks*

 

*Referendum is likely to start a domino effect of Scotland and Northern Ireland separating from the British Union.

 

 

 

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC

 

The Fiduciary Rule...

The Fiduciary Rule...

With a new administration occupying the White House, investors have been pleased to see the stock market continue to rally, after the Presidential election, with the Dow climbing to over 20,000 for the first time.  Although President Trump has clashed with the media, and the new administrations’ actions have caused liberals to protest, nearly shutting down airports, the stock market has been little effected.  Economist Larry Summers pointed out that although President Trump’s policies have caused frustration, they have not yet affected trade.  Translation: The Presidents’ bark is worse than his bite, for now at least.  Since the global markets are not immune to U.S. policy, and with commodities prices increasing in volatility, investors sentiment is down from 46.20% at the beginning of the year to 31.58%.  The chart below shows the near perfect, negatively correlated relationship between the market, and the price of Comex Gold, which has seen a slight bump over the last few days. 

Source: Bloomberg

Source: Bloomberg

With the consumer sentiment index seeing a 5.4% decline in bullish sentiment over the previous week, it is no surprise the VIX, has seen increased activity, further strengthening our case for the addition of Alternative Investments (AI) to help dampen portfolio volatility.  With tech CEO’s from Apple, Facebookand Google coming together to protest the new administrations policies on immigration, it is unclear what is in store for the markets in the first quarter, as the President works to fill 657 positions of 690 key positions requiring Senate confirmation. 

 

Source: American Association of Individual Investors

Source: American Association of Individual Investors

As a result, the large wire-house brokerage firms have been using this time to prepare for changes in way advisors interact and invest client assets.  Since the beginning of the year, financial advisors have been receiving lists of client name, clients whose investment portfolios conflict with the Department of Labors Fiduciary Rule.  The new legislation expected to come into effect in April, has a lot of advisors worried about clients they may lose after contacting them.  Since these clients have investments, the Department of Labor has ruled do not align with the best interests of these clients, the advisor now has to offer the client another investment option which will compensate the advisor less, and could potentially result in the advisor losing the client altogether.  This is where the plot thickens:  investors should ask themselves, we’re these investment options not available when the client initially invested?  Suggesting these advisors were not doing the right thing by their clients, and alternatively selecting investments that were in the best interest of the advisor, and not of the client, compromising the fiduciary duty advisors have to their clients.

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC

 

 

 

 

 

 

 

 

 

The Year Ahead 2017

 

 

Content

 

3.         In Brief

4.         The Economy – The U.S

5.         The Economy – Global

5.         Developed Europe

5.         The Nordic Region

5.         Asia

6.        Important Dates

7.        Domestic Equities

7.       Financials

8.       Technology

12.      Healthcare

13.      Industrials

14.      Fixed Income

15.      Alternative Investments (AI)

 

 

 

 

 

In Brief

With global political volatility spilling over into the financial markets in 2016, the year ended on a positive note, with the S&P up 9.84%, however, a more extensive calculation with dividends, reveals the true 2016 S&P 500 return to be closer to 12.25%.  The 2017 Year Ahead, a Global Investment Outlook provides our insight for the year ahead, across the global landscape.  Essentially, our best ideas for 2017, across sector, geographical location, and asset class.

Over the next 12 months, we expect domestic equities reach double digit growth, in select sectors:

  • Financials
    •  Stand to benefit from President Trump’s Wall Street friendly policies and the prospect of lower corporate taxes.  Although Financials gained 22.8% in 2016, with rising interest rates and strong valuations, the financial sector looks to benefit in 2017.
  • Healthcare
    • With steps, already underway to repeal and replace Obama Care (ACA), we believe the aggressive terminology, translates to “refine”.  Given the loss of tax revenue generated by the Federal Government, and 20 million Americans would lose healthcare coverage, refining ACA is the most likely outcome.
  •  Technology
    • With technological innovation impeding on all other areas of business, this looks to be a good year for technology.  Although there is concern over Trump’s immigration policies, repatriation should offset these concerns.
  • Industrials
    • With the Trump Administration’s promise of expansionary fiscal policy, we expect Industrials to see a boost.  With the prospect of a $1 trillion investment in infrastructure over the next decade, lower corporate taxes boosting business investment, and increased military spending, the near future looks good for Industrials. 

With regards to geographical allocation, our consensus is on the United States, as domestic equities stand to gain for a number of factors.  We also recommend Japanese equities on a currency hedged strategy, given the dollar strengthening position against the Yen.  Europe (ex U.K) is also attractive, given steady growth, however, we recommend avoiding the UK, and focusing on the Nordic Region and Developed Europe.  The strengthening dollar should add value to the Travel & Tourism sector.

We continue to recommend investors consider high-yield over government and municipal fixed income, and allocate more towards equities and alternative investments (AI).  With low commodities prices already rising in in 2017, and real estate feeling the effects of rising interest rates, we recommend clients looking to allocate towards AI should be selective in terms of industry, and geographical location.

 

The Economy – The U.S.

Eight years into economic expansion, the bull market has continued with steady trajectory, with few signs of slowing down.  The U.S. markets have shown resilience, as equities are fairly valued, and the Fed has had to take little intervention.  The Trump victory, although a shock to the world had little effect on global markets, mainly due to the lack of transparency from the Trump administration, regarding fiscal and trade policies, as well as indications of financial deregulation, and the repeal of the Affordable Care Act. 

As the state of the U.S Economy continues to show improvement over all sectors, it is inevitable we will see signs of inflation.  Inflation supported by an expanding economy, supported by higher wages, lower gas prices, and relatively low mortgage rates.  In order to keep inflation steady, we expect the Fed to raise interest rates only once in 2017, and twice in 2018, stepping away from the broad popular consensus of twice in 2017, and two to three times in 2018.

Actions taken by the Fed, in terms of increases in the base interest rate, will negatively affect trade.  As our interest rates increase, foreign investors move assets to the United States, strengthening the greenback.  As the dollar increases in value, against foreign currencies, U.S. goods and services become more expensive for foreign buyers.  All while imports become more affordable to the U.S. consumer.

President Trumps policies are likely to be expansionary, as he leans towards protectionism, which is inflationary due to tariffs and curtailed immigration.  The Fed is willing to accept a slight increase in inflation, as long as they able to maintain close to a 2% target with a level of consistency.  Given the relatively low prices on energy, we believe Core Inflation is a better measure of the economy in the New Year.

 

The Economy - Global

Global economies have shown resilience to 2016’s two surprises: Brexit and the U.S. election.  At Samra Wealth Management we favor the following areas for geographical allocation:

  • Developed Europe
    • Technological advancements, and friendly immigration policies are leading to developed Europe to follow the United State in becoming a hub for entrepreneurial start-ups.  Cities such as Berlin, Dublin and London are just a few of the cities highlighted by the World Economic Forum, as the best cities for start-ups. 
  • Nordic Region
    • With an increased emphasis on renewable energy, the happiness of their citizens, entrepreneurial friendly policies and the best education systems in the world, the investment for the Nordic Region looks to pay off in 2017 and beyond.  The Nord’s have effectively driven down operating costs, from utilizing outsourcing and investing in cheaper and sustainable energy infrastructure.  They’ve started a war for talent, where top college graduates are investing their futures at home, as opposed to immigrating towards the West.  

  • Asia
    • Behind the U.S. Japan is our favored market, given the Bank of Japan’s continued stimulus and resilience to both Brexit and the U.S. Election, with low inflation these stimulus measures by the BOJ look to provide a jolt to the Japanese equity markets.  A weakening Yen against the dollar, causes concerns of foreign-yield risk, and we therefore recommend any investments in the Japanese markets be made on a currency hedged basis.

Source: UBS

Source: UBS

As China’s growth stabilizes, investors’ worries diminish, however we stand cautious of the Chinese market, given the PBOC’s vocal intent of devaluing the RMB, and the Private debt-to-gross domestic product, which has climbed to 200%.  Investors should look at small and mid-cap Chinese firms, and firms that are under-valued.  Trades in the Chinese market could prove detrimental to portfolios investing without an adequate currency hedge.  China could also benefit from President Trump’s trade war with Mexico.

Singapore and Hong-Kong will benefit from the global hunt for yield, however, investors of equities should be cautious, and again we recommend any investment outside of the United States to be conducted on a currency hedged basis.

With the recent demonetization in India, Indian equities look to outperform emerging markets.  However, given Narendra Modi’s ability to strengthen the Indian economy by making India an easier place to do business, and inviting in direct foreign investment.  India has something that is attractive to many foreign corporations: a young population and a rapidly growing educated middle-class.  Organizations from the National Basketball Association (NBA), Disney, Coca-Cola and Microsoft have poured billions of dollars into the Indian economy, attempting to capture additional market share, with a population that overshadows that of developed nations.  Since this strategy will likely support the Indian Rupee, any investments made in the Indian equity markets should be made with a non-hedged strategy. 

Source: BlackRock

Source: BlackRock

Domestic Equities

There is no doubt 2016 has been a rollercoaster year, a year where uncertainty has plagued the political and economic environment.  Although the quantifiable data and statistics from government departments (The Department of labor; The Department of Commerce; The Federal Reserve) have shown steady improvements:  it is now apparent that these statistics are not uniform across our economy.  A decrease in the unemployment rate to 4.6% the lowest jobless rate since August 2007, has not decreased uniformly across the United States, with rust belt states such as West Virginia and Pennsylvania trailing the nation with unemployment rates of 6.0% and 5.7% respectively.  The Bureau of Economic Analysis also indicates West Virginia and Pennsylvania per capita income has grown at 2.5% and 3.8%, far below the national rate of 4.5%.  A Trump victory, however, has boosted consumer confidence, in these states, as the index climbed to 113.7 in December, a 15-year high.  Given Donald Trumps ‘Wall St. friendly demeanor’, the year ahead looks promising to investors of domestic equities,

Over the next 12 months, we expect domestic equities reach double digit growth, in select sectors:

  • Financials
  • Healthcare
  • Technology
  • Industrials

 

Financials

“In the days following the U.S election, Financials were the best-performing sector”.  With financials being the key beneficiary to rising interest rates, banks and insurance companies should expect a good year ahead.  With President Trump Wall St., friendly demeanor, and cabinet make-up, there will be little to hold back financials this year.  However, not all financials will profit: with the advent of the Department of Labor’s Fiduciary Rule, set to come into play this April.  Insurance companies focusing on variable annuities will feel the pressure of losing out on sales opportunities, abiding by the new legislation. 

Technology

In early 2000, the dot-com bubble burst, leaving investors who opted for annualized returns of over 25% from 1995 to 2000, discouraged and ruined.   It is no surprise the media is echoing similar concerns, as the market continues to reach new highs.  At Samra Wealth Management, we believe there are reasons for concern and volatility throughout the remainder of the year, however, we do not expect a significant decline in US market valuation, with consideration to the technology sector.  Unlike the dot-com bubble of 2000, a time when great ideas just didn’t make sense in the real world, in 2016 these concepts are adding value through convenience.  At SWM, we have compiled a list of our top ideas based on the potential growth outlook in the industry as it relates to the market capitalization in each area.

 

Artificial Intelligence (AI)

“Artificial Intelligence (AI) is the new electricity” according to Tony Kim, a portfolio Manager with BlackRock’s Global Opportunities Group.  The ability to convert massive amounts of complex data to useful information can be used in every other business sector, from banking to healthcare.  Research shows AI to the best bet for future investment, as AI is on track to reach a market of $70 billion by 2020.  Investors should be cautious, as many ideas within AI will become obsolete, or replicated by larger firms that have the capabilities.  The Caveat here is, although AI could eliminate up to 47% of total US employment, it is important to remember a decline in the labor force would lead to less disposable income in the economy.  Expect domestic firms to use India and China as test markets due to their large populations.

 

Cyber Security

According to PwC; in 2015 the number of reported security incidents rose 48%, to approximately 118,000 per day, while organizations reporting financial losses in excess of $20m rose 92%.  The increased attacks are striking both corporate balance sheets, as well as brand image.  As we head towards a cashless society, with global internet penetration at an all-time high, and mobile platform increasing in popularity, it is our opinion at Samra Wealth Management, corporations of all sizes will dedicate more resources to battle cyber-attacks.  The US government has taken a proactive role in committing to fill an additional 3,500 cyber security positions by January 2017.

 

Virtual Reality/Augmented Reality (VR/AR)

Augmented Reality, which provides a user the ability to superimpose computer-generated images and data, on the user’s real world view, has seen recent advancements, with regards to optics and 3D mapping abilities.  These innovations are creating real world applications, and we expect to see further usage in the following areas:

  • Aviation & Aeronautics
  • Military & Law Enforcement
  • Education & Training
  • Medical
  • Gaming
  • Robotics

Organizations able to capitalize on AR technology are already experiencing brand recognition, and increased market capitalization.  The Pokemon Go craze is one example of an early adopter, the technology has helped Nintendo reawaken their public image, as they double their market capitalization to $42B in just seven trading sessions since the mobile game was launched. 

 

3D Printing

3D printing has the capacity to cross into every other sector, and we are already seeing the benefits within areas of: technology, communications, manufacturing and robotics.  We expect real world implementation within the medical and healthcare fields on larger scales as the practices becomes commonly acceptable.  Siemens predicts: 3D printing will become 50% cheaper and up to 400% faster in the next five years; expected to surpass $8.3B in global market by 2023.  As the automotive industry in the United States heads towards an average fuel consumption mandate of 54.5 miles per gallon, by 2025, 3D printing may be the key.  According to Mallikarjun Huralikoppi of NS-3DS a 3D consultant, 3D printers are now equipped to print more than just plastic, and have been used to print materials ranging from carbon fiber to human tissue.  

 

Drones

According to PwC; the global market for commercial application for drone technology is estimated to be $2B, and expected to grow exponentially to $127B by 2020.  Although drones have started to make an impact outside of military applications, they have not penetrated mainstream markets, due to the lag on legislation overseeing unmanned aerial vehicles.  Drones have become relatively inexpensive to make, and we see this trend continuing as demand for drone technology increases.  As Amazon, Walmart and other retailers experiment with Drone technology, this could spell bad news for shipping and logistic companies such as FedEx and UPS, as the industry has recently seen an influx of start-ups specializing in shipping and logistics.

 

Digital Marketing

Given global internet penetration and mobile internet usage at an all-time high, current trend suggest digital marketing will surpass television over the next 5 years. Our belief is based on the ability to collect data about the consumer, and the quality of this data.  With television and print media, there is little feedback to prove the success of the marketing campaign, whereas digital marketing allows the content creator to filter through multiple variables.  Digital media comes in many forms, from pop-up advertisements, to social media.  It is our opinion companies using social media effectively, by building a network of followers stand to succeed in this area. 

 

Robotics and Automation

According to the International Federation of Robotics; in 2014 robotic sales increased by 29%, with 70% of global robot sales going to 5 countries: China, Japan, United States of America, the Republic of Korea and Germany.  The majority of these sales are utilized in the automotive industry, followed closely by the manufacturing of electronic devices.  Given the reliability of robotics, and their negative correlation to the cost of human capital; it is in our opinion this move towards automation will continue with similar trajectory.

 

Mobile Internet Connectivity

Kaushik Basu, World Bank Chief Economist, recently stated “the digital revolution is transforming the world, aiding information flows, and facilitating the rise of developing nations that are able to take advantage of these new opportunities.”  A perfect example was recently highlighted by the State Bank of India Chairman, Arundhati Bhatacharya, at the Consulate General of India in New York, as Bhatacharya talked about the impact investment made by SBI in rural villages, providing Wi-Fi access to communities, on a path towards a cashless society.  Other examples supporting the growth of this segment are highlighted by increased mobile connectivity amongst all age groups, gaming, and healthcare and wellness monitoring.  

 

Solar

Solar technology first discovered over a century ago, has seen widespread availability in residential homes over the last decade, and is currently the fastest growing segment within the energy sector.  With companies from Walmart to Apple making commitments to go green, at SWM we believe companies specializing in solar technology for commercial and residential application should continue to grow at a faster pace than seen over the last decade.  The rationale behind this growth is focused in 2 main areas: brand recognition as a socially responsible business, and the decreasing cost of solar technology.  As we continue to see technological advancements in this area, and implementation around the globe, we expect to see solar technology in areas we have not seen before, powering personal computers and electronics, to transparent solar technology placed over windows and roads, as are currently being used in the Netherlands.  When power storage solutions such as home batteries have the ability to store power, we expect to see a further increase in the area of solar technology. 

Autonomous Vehicles (AV)

According to Mckinsey & Company; “it is unlikely that any on-road vehicles will feature fully autonomous drive technology in the short term,” however, automotive manufacturers are currently investing in driver assisted technology.  Tesla (TSLA) has recently made autonomous driving a reality, and this trend is expected to continue as competitors enter the market, pushing the price level down.

Wearables

CCS Insight reports the global wearable market will reach $14B this year, and is further expected to grow to $34B by 2020.  Wearables represent a segment connecting the user to health and wellness, media, retail and jewelry via technology.  With Virtual Reality and gaming joining the wearables segment, this segment continues to look attractive.  Once commercial applications have been integrated, and become mainstream in terms of training and simulation, we believe the wearables market will surpass previous expectations.

 

Healthcare

President Trump has indicated a repeal of the Affordable Care Act, we believe this is highly unlikely, and the Healthcare Sector will continue to see double digit growth in 2017.  Although we do expect to see some changes to the Affordable Care Act, these changes would assist the Healthcare Sector.  The most favorable of these prospective changes would be some form of Health Savings Account, allowing individuals to dedicate tax deferred income specifically towards their healthcare needs.  Repealing the Affordable Care Act would have a detrimental effect on the economy, at risk would be (1) 20 million Americans would lose healthcare coverage, as a result the insurance companies would lose 20 million customers; (2) Insurance companies would lose Federal Subsidies, they have calculated into their projections, given the large capital investments they made with the advent of the Affordable Care Act; (3) The Government would lose the $13.9 Billion in Affordable Care Act tax income.

 

With an aging population, and increased global wealth and healthcare awareness, the healthcare sector looks to be a good investment over 2017.  Pharmaceutical pricing could come under scrutiny with the Trump Administration looking to make improvements to the Affordable Care Act.

Source: BlackRock

Source: BlackRock

As technology impacts the world of medicine, and emergency response, we have witnessed some innovative ideas come to market.  Most recently, Rata Tata Chairman of the Tata Sons invested into the startup MUrgency Inc (pronounced Emergency).  A mobile platform in the form of an app that makes emergency response available with one tap on a mobile phone, in under 9 minutes in urban areas.  Although the one tap costs 350 INR, which converts to approximately $5.13 USD, the strategy is focused on building market share, and popularity.

 

Industrials

With President Trump’s promise of expansionary fiscal policy, we expect Industrials to see a boost.  With the prospect of a $1 trillion investment in infrastructure over the next decade, lower corporate taxes boosting business investment, and increased military spending, the near future looks good for Industrials.  However, the Trump administration may be able to affect the industrial sector, however, it is unlikely they will be able to bring back any manufacturing jobs.  Since the Presidential Election, many CEO’s have come forward and talked about keeping jobs in the United States, and the creation of new domestic jobs.  However, these CEO’s seem to only tell part of the story.  Recently Ginni Rometty, CEO of IBM, announced the creation of 25,000 new jobs, in the United States.  Unfortunately, there was no mention of the recent layoffs at IBM.  A similar story with Ford, as they cancelled plans for a Mexico plant.  President Trump failed to acknowledge that Ford had already planned to bring 700 new jobs to the United States, prior to him winning the Presidential Election.   

The real story with manufacturing is, President Trump has little control over jobs that have been lost in manufacturing over the last two decades.  These jobs have been lost due to three reasons: (1) Automation, advances in technology and robotics has made it more cost effective for human capital to be replaced by robots; (2) Offshoring, these jobs have gone to countries where labor is far cheaper than it is in the United States.  Although these jobs could come back, it is unlikely that consumers would be willing to pay the additional cost incurred by domestic labor; (3) A combination of Automation and Offshoring: although it may be cheaper to create goods in a country like China where the cost of labor is significantly cheaper than it is here in the United States, we can simply not compete with robotics operations that have been off-shored. 

 

Fixed Income

With increases in inflation, we will undoubtedly see increases in key interest rates, as the Fed acts upon its mandate for steady inflation.  Increases in interest rates will lead towards investments flowing out of fixed income, and into cash and dividend yielding equities.  Higher inflation has caused risk-free income to vanish, causing investors to look elsewhere for yield.

Although the Fed may not move as soon as some speculators may believe, interest rate increases are already priced in ahead of Fed decisions.  It is our consensus to move away from treasuries, and invest in TIPS (Treasury Inflation-Protected Securities), high-yield corporate, and select emerging market sovereign debt on a currency hedged basis.

  • TIPS
    • As long-term rates rise in an improving economy, credit is more attractive than duration.  As inflation increases TIPS maybe the closest return to a risk-free investment.  Conservative investors should look towards TIPS, as they protect from the eroding effects of inflation.  

Price Impact of a 1% Change in interest rates

Source: J. P. Morgan Asset Management

Source: J. P. Morgan Asset Management

  • High-Yield Corporate Bonds
    • Although inflationary increases, and rising interest rates are bad news for High-Yield, growing demand and declines in default rates help the cause of high-yield, making it a good recommendation for the year ahead.  Investors of high-yield in 2016 witnessed a 17.5% return.  We recommend conservative investors look towards allocating to both high-yield and investment grade corporate bonds.

 

  • Emerging Market Sovereign Debt
    •  Although EM bonds are threatened by the strengthening greenback, sovereign emerging market debt with attractive valuations purchased with a currency hedged strategy, look to be a good bet for the long-term investor.
 

Alternative Investments

A traditional "60/40" allocation to stocks and bonds may no longer be enough to provide you with the returns and diversification needed to achieve your long-term goals.  Since 1990, most portfolios carried predominantly equity risk: a 60/40 portfolio moved in the same direction as the S&P 500 Index 99% of the time.

 

Gold

With gold seeing an increase of 8.6% in 2016, we expect gold to see an increase of 7% in 2017, with an average price of $1350.  However, President Trumps policies are already causing volatility in the political landscape, we expect to see some investors move out of equities and fixed income into cash and alternatives, potentially pushing gold up to $1400.  We however, do not expect to see gold reach new highs.

 

Industrial Metals

As silver trades, significantly below its average, 2017 could see a 5% plus year for silver.  However, we expect palladium and platinum to see the biggest gains, with expectations of improving demand and rises in automotive sales. 

 

Crude Oil

We expect WTI to average $56/bbl while Brent averages $58/bbl.  Although global demand is expected to see an increase, technology in mining, and refining will keep up with the additional demand.  One Caveat to this rule would President Trump’s promise to strengthen the military.  A significant increase in the size of the United States Military would increase demand, and push prices higher, as the United States military is the largest consumer of fossil fuels in the world. 

 

Source: J. P. Morgan Asset Management

Source: J. P. Morgan Asset Management

Real Estate

Although global real estate will feel the effects of rising interest rates, with rates hovering at historic lows for so long, we doubt global real estate will affect the commercial market, although individual home buyer’s may feel the pinch.  From an investment point of view, we recommend REIT’s in Australia, Hong Kong and Singapore.  Domestically, we recommend staying away from the metropolitan areas, and looking for value in residential secondary and tertiary cities, as well as sector specific REIT’s in the healthcare sector.

 

Hedge Funds

During times of uncertainty and market volatility, Hedge Funds can help dampen the risk in a portfolio, while providing opportunities for higher return.  2017 looks to be a good year for Hedge Funds, as we expect interest rates to rise, and increases in volatility coming from an out of sync relationship between the White House and the Financial Markets.  The HFRI Fund Weighted Composite Index returned 14 percent annually from 1990 to 2006, however, since then, it has returned 3.4% up until 2016.  During times of market volatility, the HFRI has allowed investors to profit, while reducing the volatility of their portfolios.  The following graph shows how Harvard University is investing in Alternative investments, allocating 14% of $35.7B in 2016 towards Hedge Funds. 

Source: Bloomberg

Source: Bloomberg