When To Take Your Gains Off The Table...
As an investor, when is enough, enough? Investors are rightfully questioning how much steam is left in the market, as the S&P 500 has returned over 18% year-to-date. Normally, investors would look to rebalance their portfolios, moving a portion of their gains to what many think of as safer more conservative assets such as bonds. 2019, has been anything but a normal year with an estimated $15 Trillion held in negative yielding global debt, investors moving towards bonds have reason for concern, and the alternative asset story is not providing reassurance. This month’s issue of The Samra Report provides insight on current market conditions and answers the question of whether there is a recession or economic contraction on the horizon, provides guidance on alternative assets such as real estate, and gives an indication on where and how to invest for the remainder of 2019. Retail and institutional investors continue to speak of uncertainty, top economists are calling for an interest rate cut, while money managers promote inflows to their respective funds. “It should not be surprising that the most recent Fund Manager Surveyreport showed the most defensive level of positioning since the Financial Crisis.” However, this does little to answer the question, “Is there a recession on the Horizon”. This question may be appropriate for economist; however, it is less important to those investing in developed markets. Research has shown that there is little correlation between price return and GDP, when factoring in inflation. In the later stages of a bull market, investors tend to pay less attention to fundamentals, and focus on market sentiment and technical analysis. Although only the history books provide insight into when a bull market ends, what is surprising is valuations are far below their all-time highs, based on our preferred measure: the Shiller Price/Earnings Ratio, which factors in average inflation-adjusted earnings from the prior 10 years. At Samra Wealth Management, we believe the Fed is able to delay a recession with a dynamic plan to manage interest rates, as well as openly communicating with the public. Furthermore, with the trade war underway, we believe the President needs a win, to secure another term in the White House, suggesting a market correction of 10% or greater is likely, however a recession or economic contraction is unlikely. Financial advisors have moved past allocating their clients assets amongst stocks and bonds, with many advisors choosing to adopt some form of Markowitz’s efficient frontier, adding alternative investments to their client’s portfolios. In theory, this practice works: In reality, the right market conditions must apply, and trades must be placed at optimal levels. As central banks continue to cut interest rates, the global debt market for negative yielding bonds is estimated to be over $15 trillion. Suggesting two things: there is little value in fixed income, and an increase in key interest rates could cause havoc, spilling over into the equity markets. With these factors in mind, investors have been allocating more towards alternative assets, specifically real estate. As funds move towards the real estate sector, real estate prices have become artificially inflated, resulting in investments made at above optimal price levels, a trend similar to what was seen during the housing bubble. With the recovery still underway in some areas, money managers continue to attract funds into their portfolio’s, placing a higher emphasis on their compensation, rather than the quality and price levels of their portfolios. With global markets reaching new all-time highs, the question investors should be asking, is where to invest. At Samra Wealth Management, over the last three years we have opted towards a risk-on sentiment, staying clear of US fixed income investments, and allocating towards emerging market debt and convertible bonds. With the market returning 18.89% year-to-date, we believe the common strategies of rebalancing or moving to cash are not well suited to today’s market. Alternatively, we recommend the following:
As opposed to moving towards cash, we recommend investors move funds towards ultra-short duration fixed-income funds. With extremely low volatility, and a year-to-date return of over 2%, we prefer ultra-short duration as a hedge against inflation over gold, given recent volatility in the commodities space.
With regards to real estate, we believe diversifying broadly over the real estate sector carries unnecessary risks. Alternatively, we recommend investors looking towards real estate look toward 2 specific areas:
Pooled rental real estate in secondary and tertiary areas of the United States, following social migration trends.
Pooled net lease corporate real estate, staying away from retail.
At Samra Wealth Management, over the last 3 years we have stayed clear from investments in Latin America, the United Kingdom and Africa. However, our guidance is now evolving to the below recommendations:
The United Kingdom is becoming a more attractive investment, on a currency hedged basis. As a Brexit with or without a deal will likely impact equity markets, and weaken the sterling.
On a continent where Presidents have been imprisoned for corruption, and militia groups have used military helicopters to attack government buildings, Latin America has been an area we have stayed away from. However, similar to the UK, Latin America is now looking more attractive, with companies like Mercado Libre cashing in on e-commerce and digital payments.
The African continent has been plagued with political corruption, and our recommendation for exposure to Africa, is to invest in those companies, specifically Chinese, working on African infrastructure projects.
In the United States, we continue to favor a sector rotational investment strategy, favoring Technology, Healthcare, Industrials and Financials, with exposure to select areas of Consumer Discretionary. With regards to tactical investing, given the current investment landscape, we are recommending our clients allocate a larger portion of their strategy towards short-term tactical, with a flight towards quality.
References Bartels, M., Devery, J. and Shields, A. (2019). The RIC Report: Summer rally follows best 1H since ’97. [online] ml.com. Available at: https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fstockresearch%2Fapi%2Fdm%2F1.0%2Fdocument%2Fwithreadership%2F6208-12015100-3%3Fsegment%3DDIRECT [Accessed 30 Jul. 2019]. Bloomberg.com. (2019). Bloomberg - Stocks. [online] Available at: https://www.bloomberg.com/markets/stocks [Accessed 30 Jul. 2019]. Fred.stlouisfed.org. (2019). Nonfarm Business Sector: Real Output Per Hour of All Persons. [online] Available at: https://fred.stlouisfed.org/series/PRS85006092 [Accessed 30 Jul. 2019]. 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. Investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.