Increasing turbulence as headwinds become tailwinds…

A combination of Jerome Powell's first major public appearance, and a typically Trumpesque announcement on steel tariffs, managed to further unsettle jittery markets overnight. As a result on the first day of March the US market declined for the third straight session,with the Dow falling 1.7%, and the S&P500 having declined 3.9% in February and when it moved more than 1% on 12 out of a total of 19 trading days, interestingly more often rising than falling when doing so.

Taking Powell's comments first - after all, they are likely to be somewhat more rational and considered than those of his Commander-In-Chief's. His comment that headwinds have become tailwinds set the tone, and as a result created headwinds for the market. Acknowledging that the FED's role was to create a balance between inflation ("expect to see it" increasing towards trend) and growth, Powell noted that while there was no evidence of overheating in the economy, US unemployment has fallen from 10% post GFC to its current level of 4.1%, with wages growth at only 2.5%, although he's also expecting that figure to increase.

What's always curious for those with grey (or no) hair amongst us, and those with memories of the '70's and 80's, is that the FED is actively trying to encourage inflation.

The market has little doubt that interest rates in the US will increase over the course of the year, with most analysts expecting at least three hikes, and possibly four, over the next 10 months. All eyes therefore will be on Powell's next major test, namely the FOMC meeting scheduled for 20th and 21st of March. Markets dislike uncertainty, and with the 10 year bond rate having climbed to within five basis points of the psychologically important 3% mark, the view remains that volatility will continue and the risk for both equities and bonds will remain on the downside. It is well worth remembering that for the last eight times when the FED has moved to a tightening cycle, lower P/E's have been the result.

Never one to be outdone, Trump (we'll resist any further "hair" comments as being a cheap shot) added fuel to the recent volatility by announcing a 25% tariff on steel imported into the US, and 10% on aluminium, each for "a long period of time". Even though steel and aluminium represent only a little more than 1% of overall US imports, the fear is probably greater than the fact. Trump is signalling, threatening or risking a trade war, or a response, particularly from China.

Watch this space.

INSYNC GLOBAL TITANS FUND

Attached is our most recently updated Fund Review on the Insync Global Titans Fund.

We would like to highlight the following:

• The Global Titans Fund invests in a concentrated portfolio of 15-30 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection.

• Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets.

• Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - January 2018 (pdf format)

Goldilocks' equity market - the beginning of the end?

Overnight the S&P500 closed at 2,703 - and after the recent volatility, posting a 52 week high of 2,872 and a 52 week low of 2,322 for a range of 550 points, and a rise over one year at one point of 24%.

Even though there's been some volatility over the past 3 weeks, the broader US market is less than 6% off its all-time highs, and is still much closer to its recent highs than lows. Volatility, which had been dragging along at less than 10% for much of last year, has doubled to around 18% after spiking to over 40% earlier in the month.

US company earnings and profitability have been underpinned by super low interest rates, low inflation, and low wages growth, (albeit that low wages growth is not that great for consumer spending or confidence) which we recently heard described as a "Goldilocks" environment - not too hot, and not too cold.

So the stronger economy is good for corporate health and earnings, which in turn is good for the economy. So what's the problem? The high equity multiples and valuations might be justifiable based on the above fundamentals, but higher bond yields are not good for equity prices if the result is a shift out of equities.

The US economy will continue to improve because the above "lows" are not going to reverse overnight even if they're on the move upwards. Goldilocks is still happy! But careful of bond rates. The US equity market is yielding dividends circa 2.4% - 10 year bonds are now yielding 2.9% and heading over 3% sooner rather than later.

The question is when? Next week sees Jerome Powell's first real outing as Fed chair - and markets will be watching that closely, even if another 3 rate rises are already expected before the end of the year. However, watch the bond market more closely. It is not that the US economy is not improving. Markets are driven by supply and demand, and if overall demand (asset allocation) is shifting from equities to bonds, maybe this signals the begining of the end of the Goldilocks era for equities?

On the local front one of Australia's most highly respected investors and fund managers, Platinum's Kerr Neilson, announced his intention to step down in June as MD and from day to day portfolio management duties. While some observers may fear "key person risks" may come into play given he has run the shop since inception in 1994, Hedge Clippings is not amongst them, partly as he'll remain a director and major shareholder.

Neilson has not only been a major contributor to the actively managed and absolute return sector, but he has created a business with $27 billion in FUM, and in doing so a culture and process which over the past 15 years has helped build Australia's global fund's management reputation. Modest, and lacking the ego often found elsewhere in the sector, we doubt much will change in style at Platinum as neither the culture, process nor people will change much at all. If that view is correct, neither will performance.