Download The Post-2008 Economic Soft Depression and Your Portfolio

Viking Medium Risk Portfolio:
Investment Strategy 2015
Eric N Roseman & Thomas Fischer
ENR Asset Management, Inc.
Montréal, Canada
January 12, 2015
Viking Medium Risk Portfolio
• Seeks growth-based returns from a diversified portfolio
of mostly global dividend-paying blue-chip
multinationals and high quality bonds
• May invest in REITs, gold and commodities
• Defensive asset allocation designed to reduce risk
• Consumer staples and healthcare = 23% of portfolio
• Value approach to stock selection
• Only purchases dividend-paying equities
• Companies must grow dividends greater than inflation
rate
• Buys only near/at 52-week lows
• Currency diversification (46% non-USD)
• Portfolio yield: 2.60%
Global Balanced & Yield-Driven
• Portfolio seeks less volatility than MSCI World Index by emphasizing
a defensive asset allocation embracing value equities, dividends and
fixed-income securities
• Global equities @ 61% of portfolio, Europe @ 46% of total
• Consumer staples @ 14.6% of portfolio; healthcare @ 8%
• Dominant global brands, yield 3% +
• Buybacks, annual dividend hikes
• Dividends growing in excess of inflation
• Plunge in foodstuffs bullish for input costs (Nestlé, Danone, Pepsi)
• Crashing oil prices positive for most global businesses
• Short-term high quality USD corporate bonds @ 23% of the
portfolio; cash @ 13%
• UK REITs: British Land plc (3%)
• Top Three Stock Holdings: Wisdom Tree Europe Hedged Equity ETF
(6.7%), Nestlé (6.5%), Pepsi (5.5%)
Macro Review 2014
• Worst year since 2011 for overseas markets; soaring USD
strips away most foreign stock market returns when
converted to USD
• Global currencies plunge vs. USD; EUR and ¥en correct sharply
• S&P 500 Index dominates since 2009 low
• Global GDP slows on weak Europe, China and Emerging
Markets; Russian Crisis; Commodities fall again
• Commodities decline for 4th straight year; Brent Oil plunges
50% since June, Gold holds the line amid USD surge
• U.S. T-bonds lure foreign investors; higher relative rates
• German bund yields turn negative, joined by Swiss, Dutch,
Austrians, Danes; Commerzbank first German large-cap bank
to impose fees on certain client deposits
• MSCI World Index +2.9%, MSCI EAFE -7.3%, S&P 500 +13.7%
S&P 500 Dominates since 2009
US Dollar at 12-Year High
CRB Peaked in July 2008
Secular Stagnation?
• Massive debt overhang and poor demographics challenge Western
& Japanese economies
• Non-financial debt in major economies surged from 212% of GDP in
1999 to 279% of GDP in 2014 – half of that increase post-2008
• Failure to post strong recovery post-2009; Japan and Europe
• China’s Debt Hangover and New Normal
• Why Bonds keep rallying
• Chronic weakness in most commodities
• Central banks as conduits for growth
• Inflation jolt coming but not in 2015
• Deflation or accelerated disinflation to persist
• Low interest rates in OECD, weak demand
• Depositors and ‘yield starvation’ spreading
Avoid Emerging Markets
• Strong dollar will trigger balance-of-payments
crisis in weakest emerging markets
• Budget deficits will get worse
• Commodities bear markets and correlation to
emerging markets; Russia, Brazil, S Africa
• Russia factor and contagion?
• Asian corporate credit growth exceeds 1997
peak; Chinese credit overheating
• Some currencies in region will be devalued
Bonds: Focus on Short-Term High
Quality Corporates
• Secular bull market in bonds almost over
• Inflation-adjusted rates are ‘bread crumbs’ or
negative in several countries
• Investors paying Germans, Swiss, Danes, Dutch
and others to own short-term government bonds
• Bearish on most sovereign bonds and high-yield
• Biggest accident in financial markets likely tied to
leveraged credit and hedge fund borrowing
• Only buy high quality corporate bonds with low
duration (maximum 4-Year duration)
Still Cautiously Bullish on Equities
• Global tumult and weak growth will deter Fed from hiking
interest rates in 2015
• U.S. economy not in consistent uptrend; services,
manufacturing and housing remain soft
• Possible EMU crisis again; Greece debates exit
• Russian contagion, Asian debt binge and high USD
• Plunging commodities, crashing oil prices, soaring USD, TIPS
surpass 2008 break-evens and T-bonds yielding below 2%
are NOT symptomatic of a bullish global growth trend
• Base case supports more global QE
• High quality stocks provide best relative and absolute
values compared to other assets, especially overseas
• Short-term USD bonds act as volatility buffer
Investment Strategy 2015
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U.S. profits recession unlikely in 2015; but S&P 500 Index multinationals to suffer
currency losses on strong USD
• USD to remain strongest currency this year; 54% total exposure
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Higher volatility to ensue in 2015; Compared to other assets, stocks still offer
greater yields provided the interest rate backdrop remains bullish
International equities (excluding USA) offer good value; Europe trading 48% less
than S&P 500 Index based on Shiller P/E; Shiller Euro-zone P/E at 14x earnings
ECB and BoJ to offset Fed’s QE
Bonds very expensive, heavily overbought; high-yield exposure to shale
Stocks to outpace Bonds and Commodities in 2015
Focus on Euro-zone as ECB Starts QE, Select US Large-Caps
Earnings boost from sharply weaker EUR
Consumption boost from crashing oil prices
Wisdom Tree Europe Hedged Equity ETF (6.7%)
Viking Medium Risk: Europe (46.3%); U.S. (17.7%)
Asset Allocation Now: Stocks 61%; Bonds 22.7%; REITs 3%; Cash 13.3%
Overweight Europe in 2015
• Bearish investor sentiment prevails; Greek elections, deflation
squeeze; very negative environment for investors
• What is catalyst for bullish case?
• Company values are inexpensive compared to other regions,
including big FX push for Euro-zone earnings from plunging EUR;
50% greater dividends
• Crashing commodities & oil = bullish boost for global food and
beverage companies and other industries; Euro-zone consumption
• Nestlé and Danone shifting impetus to nutrition & wellness
• Volkswagen and China Sales, Audi Division Booming
• Roche Holdings and Pfizer drug pipelines
• Royal Dutch Shell and refining margins; safe dividend
• Norwegian Air Shuttle and struggling legacy carriers
• HSBC Holdings primed for bank sector recovery in UK
• Strong USD bullish for large-cap Euro-zone exports (Wisdom Tree
Europe Hedged Equity)
Targeted Themes
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Follow the QE Trail in Europe and Japan
Lessons of QE in USA (2009-2014)
Crashing Oil: Huge boost to Euro-zone and Japan
Weak currencies bearish for unhedged bonds but
very bullish for stocks (exporters)
To hedge or not to hedge your FX exposure
Wisdom Tree Europe Hedged Equity (HEDJ) and
Wisdom Tree Japan Hedged (DXJ)
International Blue-Chips and Existing Book
Targeting Q1 purchases on weakness
Portfolio Insurance in 2015
• Is it necessary to buy some portfolio insurance or tail-risk hedges to
protect your investments? Not yet, but that time is approaching
• U.S. to lead global GDP in 2015, recession unlikely amid low rates, low
inflation and ECB and BoJ Printing
• Valuations alone don’t trigger bear markets; monetary policy does
• Fed not eager to tighten; surging USD has tightened for the Fed;
import prices declining; exports slowing
• ECB and BoJ printing money to offset Fed’s QE exit
• We see excesses, mostly in credit, investor sentiment, IPOs, social
media, biotech, M&A activity, high US multiples
• Portfolio insurance hedging to remain minimal for now
• Hedging strategy is flexible and may change under deteriorating
market circumstances (e.g. 2008)
ENR 2015 Investment Summary
• Global risk assets will grow more volatile as earnings shift lower in the US
but accelerate overseas. Both Europe and Japan are primed for sizable
gains at a time when US profits will slow, mainly due to a strong dollar;
• In the four times since 1970 when the S&P 500 Index ran away from
international stocks (as is the case currently since 2009), the MSCI EAFE
Index (ex. USA) climbed the following year, outpacing the S&P 500 Index
by 14%, according to Bloomberg. EAFE includes Europe, Australia, New
Zealand and the Far East
• We still think most emerging markets should be avoided; previous USD
surges (e.g. late 1990s) resulted in severe economic dislocations overseas;
commodities are suffocating larger emerging markets
• Stocks should remain an overweight in 2015 with an increasing emphasis
on foreign markets and select dividend-paying U.S. large-caps; Gold to
benefit greatly, if US growth momentum stumbles; interest rate advantage
still points to high quality common stocks
• Bonds and some cash serve as important buffer to rising volatility
Thank you!
• Eric’s email: [email protected]
• Thomas’s email: [email protected]
• Toll-free: 1 877 989 8027