Bitcoin – The Bull that refuses to back into its cage

Bitcoin is now trading above the ceiling predicted to be its cap – it is the bull that remains uncontrollably volatile but unashamedly confident.

bitcoin-2643159__340  In a previous post, I explored how Bitcoin worked and explained the functionality of the centralized ledger. This week I have a new question. Why do people have faith in a currency that has no tangible resource backing it? Traditional currencies use gold, what does Bitcoin have? Hope? I will supply two reasons I find particularly compelling that may explain sudden interest for Bitcoin, however bear in mind that there a multitude of factors, and there is no monocausal reason for the sudden growth of Bitcoin.

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Firstly, financial commentators have commented on the magnitude of growth Bitcoin would experience if it were to be backed by a finite resource like gold. Bitcoin is a currency that has no tangible resource dictating its value. Its value is based precisely in what people think it is worth (or will be worth). Currently, Bitcoin is not backed by gold, or any other finite resource, but what if it were?

Standpoint Research’s Ronnie Moas reported that there is $200 T tied to cash, stocks and bonds. He stated:

“I am not excited about putting my money into any of those – If 1% of that $200 trillion finds its way into crypto in the next 10 years, you will be looking at a 2 trillion-dollar valuation – 10 times what it is today”

A theme common with cryptocurrencies. People are investing on the whim that it “could be” massive.

Secondly, trading Bitcoin may become safer – and hence attract attention from more conservative hedge fund managers. The more investors, the more Bitcoin will grow. Last week, the world’s largest exchange operator by market value (CME Group) has announced it is readying plans to offer futures on Bitcoin.

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This will give momentum to cryptocurrencies’ move away from the fringes of finance. But more importantly, the Chicago–based trading venue said it intended to add Bitcoin to its stable of futures on interest rates, stock indices, commodities, and currencies by the end of the year.

If hedge fund managers can long and short different prices, they can hedge against volatility. Currently, Bitcoin does not allow this. If it were to, which the CME have suggested, then Bitcoin becomes more attractive to less risky investors – once again increasing the amount of investment, and the “normativity” of the currency.

These two points share something. Both signpost to us that Bitcoin is doing well because people think it will do even better in the future. The potentiality for the currency is very high. And, although now there is little tangibility to Bitcoin besides hope and (somewhat) empty prediction, it seems that in the near future Bitcoin could become a global phenomenon.

Market Overview: Oil Prices, Interest Rate and Emerging Markets

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This week we saw some volatility in the markets with significant impacts. We’re going to focus on three key areas – namely oil prices, base interest rate and Emerging Markets short selling – which all have systematic effects on the global economy as a whole. It’s important to keep an eye out in these areas as the volatility may continue into the future.

Oil Prices rise but still pretty low

OPEC’s deal in Algeria six months ago to offset the effects on oil prices which hit a low of around $37 has increased prices to around $50. The recent falls in oil prices have been down to both increase in supply (e.g. in the US, Iraq, Canada and Russia) as well as a fall in demand as we (especially our vehicles) become more energy efficient due to continuous technological development. To put the fall in prices in perspective, oil prices peaked at $100 in 2014. The situation has left countries heavily dependent on oil (such as Saudi, Angola, Venezuela and Gabon) with serious political and economic dilemmas.

Interest rate hike was nothing to worry about apparently

The worries of the interest rate hike last Tuesday were apparently unjustified as The Dow Jones Industrial Average, S&P 500 and the NASDAQ Composite gained 0.1%, 0.2% and 0.7% respectively. There were fears that central bank’s raising of the interest rate benchmark from 0.75% to 1% (only the third time it has occurred in a decade) will have the opposite effect.

Emerging Markets disappoints doubters

According to S3 Partners, a financial analytics firm, the main emerging markets ETF has had the largest percentage increase in bets that it will decline. The short interest rose to $5.5 billion (68%) this year – an unprecedented level since March 2014. However, the short sellers were left disappointed as the iSahres MSCI Emerging Markets ETF (ticker: EEM) increase by around 4% after the interest rate hike mentioned above.

Insights into Emerging Markets

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Interest Rate Hikes and Emerging Markets

  • As a result of next week’s virtually certain interest rate hike in the United States, emerging stocks and currencies had a second straight week loss on Friday (10th March). The move is expected to hit emerging equities and currencies. Weirdly, in this world of uncertainty, on Monday emerging markets stocks recovered by the strong showing of metals stocks, China’s economy showing new strength with Brazil and India rallying.
  • There are many reasons as to why the interest rate hike will affect emerging markets. One example is that higher interest rates could potentially decrease foreign investment

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Super Rich and Ultra Rich of the Emerging Markets

Insights from The Knight Frank’s 2017 wealth report reveals that the Emerging markets are minting new millionaires.

  • Tanzania’s ‘super rich’ reached a total of 2,400 after creating 200 new dollar millionaires in 2016 which is an increase of 9% compared to its performance in the previous year.
  • Despite its impressive performance, Tanzania came second to Kenya in East Africa which created 900 new dollar millionaires.
  • Vietnam has 200 ‘ultra-high net worth individuals (people with investable assets of at least $30 million, excluding personal assets and property). The group is growing faster than any other economy in the world and on track to continue the growth into the next decade.
  • With a 12% increase, India ranked sixth in terms of ultra-high net worth individuals but is expected to reach third within the next decade. The country currently has around 2% of the world’s millionaires (13.6 million) and 5% of world’s billionaires (2,024).

Bitcoin

Bitcoin – quick update on the previous blog

  • On 2nd March, Bitcoin’s worth was more than gold. It may seem as though much of it was fuelled by speculation that a bitcoin ETF could be approved by the Securities and Exchange Commission (SEC) as the currency’s value fell by 18% from nearly $1,300 to $1,060 after the proposal was declined by the SEC. However, the value of Bitcoin has since recovered to $1,233 as believers have taken the set back as just as another challenge.

The Run-Up to Christmas

The period running up to Christmas can be one of the most important months of the financial year. Not only can increased consumer spending help to motivate the retail sector, but it also gives a clear indicator as to how the public are feeling economically, whether they are more or less inclined to spend money.

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In Brazil this holiday season, the public’s feelings on Christmas spending are clear – this is a year to tighten your belt. According to a survey by Deloitte, Brazilians will spend 20% less this year than they did for Christmas 2015. The survey shows that, on average, people in Brazil plan on buying only four gifts this year, and intend to spend just $98. This is largely based on the country’s widespread financial insecurity, with the Brazilian GDP having shrunk by 4.4% over the last four quarters. Disappointing news for all those who were hoping Brazil was primed for a turnaround, and a much more restrained holiday season for inhabitants.

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Back in the US, the 12 days of Christmas are a little more expensive this year! This is according to PWC Wealth Management’s annual Christmas Price Index. The exercise is a humorous way to track inflation, with Maids A-Milking and Pipers Piping reflecting real labor costs and Five Gold Rings representing commodities. In the study’s 33rd year, birds, pipers and drummers have got more expensive, where everything else has remained the same or gotten slightly cheaper. This is in-line with the economy’s gradual expansion and reflects the cautiously optimistic attitude of consumers.

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This turn of optimism and expansion has triggered a move by the Federal Reserve to increase interest rates again for the first time since December 2015. The demand for labor has increased almost exactly to the level predicted by Wall Street, pave of growth has quickened and unemployment has continued to drop, now standing at 4.6% from 4.9% last month. Wage growth has yet to recover but this is not enough to stay the Fed’s hand and interest rates are set to go up before Christmas.

One industry is set to have an excellent holiday season for sure, and that is the travel industry! With an expected 3.5% boost in December holiday travellers, US airlines are set to have a record-breaking Christmas season, with a predicted 45.2 million passengers flying between Decemberwhite-male-1771597_1920 16th and January 5th. This means an average of 73,000 more passengers traveling each day in year which saw over 800 million people flying in and around the US. Major airlines are set to add 99,000 additional seats each day to accommodate the rush and this, despite the persistently low fare prices, ought to provide a healthy boost to end the year.

Trump’s Effect on the US Economy

Four weeks have passed since Americans across the country took to the polls and chose Donald Trump as the next President of the United States – but what effect has that had on the US Economy?

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The first thing of note is that, contrary to the example set in Britain post-Brexit, US stocks have soared since Trump’s election. The S&P 500 index, Dow Jones Industrial Average, and Nasdaq Composite Index have all reached record highs since November 8th. This upward swing is even being called a “Trump rally” by some.

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Experts’ feelings on Trump’s economic plan – which involves boosting public spending and introducing tax cuts and reforms – is divided, though most believe it will lead to a sharp increase of both growth and inflation. Trump’s promised corporate tax cuts will be financed largely by higher public borrowing which, although it may certainly stimulate growth, will create bigger budget deficits.

The Paris-based Organisation for Economic Cooperation and Development believe GDP growth is likely to be greater under Trump than it was under Obama, with predicted figures currently standing at 2.3% in 2017 and 3% in 2018. This compares to growth of just 1.5% this year and the 2.2% average annual rate during the current president’s second term.

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Trump’s pledge to dedicate $550bn to rebuilding crumbling infrastructure across the country is likely to push the US towards full employment. Coupled with deregulation and banks being encouraged to loosen lending standards, this growth is bound to push inflation higher as time goes on.

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One thing which remains to be seen is what effect Trump’s presidency will have on the global economy. With a general move away from free trade and globalisation – including policies such as amnesty for multinationals who repatriate foreign profits – at a time where the global economy is less than strong, the US could end up endangering a number of emerging global economies.

One country at least seems to be pleased with the election results. Trump’s views surrounding climate change and global warming has translated into promises to cut red tape for the fossil fuel industry – a move which could prove very useful for Saudi Arabia. The Saudi energy minister Khalid al-Falih believes that US oil consumption will recover in 2017 leading to a stabilisation of oil prices, though it was not explicitly stated that this would come as a result of Trump’s election and potential return to a 3% rate of growth in the United States GDP.

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Emerging Markets: The Best Is Yet To Come

Emerging markets continued their upward climb in the third quarter and now emerging market economies are back in growth mode, their currencies are recovering, and GDP growth is accelerating.  We are expecting the transition to a long-term, sustainable growth rate in China to slow to 6.7% in 2016 and slow to a little over 6% in 2018.  In the rest of Asia, we are looking for a good growth rate of 4.8% this year and over 5% in 2017.  Latin America has been dragged down by Brazil over the past two years and they appear to have turned the corner in the third quarter with a -3.8% GDP growth rate and are expecting 1.6% GDP growth in 2017.  It seems that with the impeachment trial over, Brazil is marching forward again.  With the help of this good growth in emerging markets and stable commodity prices, we are expecting a continuation of the “Low and Slow Growth” as the global economy approaches 2.4% growth.

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For the third quarter of 2016, the Emerging Markets Portfolio returned 8.73% (pure gross) and 8.29% (net) versus 9.15% for the MSCI Emerging Markets Index.  The portfolio returned 23.33% (pure gross) and 21.28% (net) for one-year versus 17.21% for the benchmark.  Stock selection and/or country weightings in Argentina, Philippines, Turkey, Chile, and Colombia aided the portfolio’s performance.  However, stock selection and/or country weightings in Russia, China, Taiwan, South Korea, and India hindered performance.  In relation to sectors, positions in consumer services, energy minerals, communications, consumer durables, and industrial services aided performance.  Sector positions in non-energy minerals, electronic technology, commercial services, retail trade, and utilities hurt the portfolio’s return.

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In the first quarter’s commentary, we stated that no matter the outcome of the Brexit vote, it would not affect the markets, and it has not; the emerging markets have done exceedingly well in this environment.  The United States has much influence in the growth of the world and globally we have seen populism arrive on the political scene in the United Kingdom, Italy, and other nations.  In this Presidential election, both candidates have promoted protectionism which Moody’s Madhavi Bokil has called harmful for global growth.  Hopefully, a congress that supports free trade will rule the day, TPP will be ratified, NAFTA will stay intact, and the “Low and Slow Growth” economy will grow at a faster pace than the projected 1.5% in 2016 and 2% in 2017 rates.

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The Emerging Market economies are back in growth mode, their currencies are recovering, and GDP growth is accelerating.  We expect that this growth mode will continue for the foreseeable future.  The portfolio’s high conviction, lower turnover investment philosophy/strategy, which combines quantitative and fundamental based analysis, should prosper in this environment.

The Emerging Markets Portfolio

It is an interesting time for Emerging Markets. 2016 is shaping up to be a good year for them in a time when many developed markets are struggling. Earlier on this week, the MSCI’s emerging markets index did better than its developed markets index over the past year, but what exactly does this mean for investors?

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Although it appears that emerging markets may finally be recovering after a long bear market, there are a range of circumstances which mean it may be too early to celebrate. To begin with, world growth has been sluggish and the US dollar is weak, distorting any clear view of Emerging Markets’ true performance. Although long-term projections for India and China are strong, both countries registered declines in the most recent period. With the performance of the two strongest Emerging Market economies shaky, the market is being carried by Brazil – whose current political and economic situation makes any prediction highly speculative – Korea and Peru. Moreover, this recovery could be attributable to Emerging Markets reliance on the materials and information technology sectors. Both sectors are performing well, but any decline in metals or oils could severely impact recovery.

 

As it stands, the greatest returns from the Emerging Markets come from the places carrying the greatest risk, making the short-term extremely volatile.

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This risk is one which we take strongly into account when compiling the Henry James Emerging Markets Portfolio. Our investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, with superior return versus risk characteristics. This is then combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the agreement team over weights highly-ranked countries and under weights those which are lower-ranked. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria and we let our winners run. The primary performance benchmark is the MSCI Emerging Markets Index.