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Jyske Bank Advisory Extra:
Investment Strategy 2015
Eric N Roseman & Thomas Fischer
ENR Asset Management, Inc.
Montréal, Canada
January 13, 2015
Jyske Bank Advisory Extra Portfolio
• Advised by ENR in Montréal
• Seeks capital growth from a diversified portfolio of
global common stocks, including large-cap, mid-cap
and small-cap equities; also includes ETFs & Funds
• Mostly dividend-paying equities
• No borders, no restrictions on stocks
• Stocks are typically contrarian and value-based; seeks
growth catalyst (macro change, tax reform, FX trends,
event-driven change)
• Strategy is bottom-up (individual securities) worldwide
• Major focus on non-US companies and foreign
currencies
• High volatility is a prevalent theme
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 Most 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
• Some currencies in region will be devalued
• Our favorites: China & South Korea
Emerging Danger?
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
• Investors advised to stay short-term
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, not less
• High quality stocks provide best relative and absolute
values compared to other assets, especially overseas
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; Advisory Extra Under-weighted USA
• USD to remain strongest currency this year; best ‘drunk’ at the bar, again
• S&P 500 Index will lag in 2015; USD strength, weaker exports
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Higher volatility to ensue; 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
Seasonal trends bullish; 3rd year Presidential cycle
ECB and BoJ to offset Fed’s QE; Follow the QE Trail in 2015
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
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;
EPS declined 3.8% for Euro Stoxx 50 in 2014
• Not vital to hedge USD exposure; valuation discount assures big stock
gains
• Crashing commodities & oil = bullish boost for global exporters; Japan and
Euro-zone highly dependent on oil pricing; Japan biggest beneficiary
• Volkswagen and China Sales, Audi Division Booming
• Knight Therapeutics joint-ventures and patent purchases
• Easyjet plc and struggling legacy carriers
• Turnaround at Wendy’s as McDonald’s struggles
• Adidas: Buybacks, selling Reebock, Restructuring
• Samsung: Where Apple was in 2012?
• Royal Philips: Spinning-off lights division; focus on health & wellness
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
Thank you!
• Eric’s email: [email protected]
• Thomas’s email: [email protected]
• Toll-free: 1 877 989 8027