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.

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 International Select Portfolio

As another Olympic Games come to a conclusion, questions have begun to arise surrounding what the future holds for Brazil. With a high inflation rate and an economy expected to contract by around 3.8%, the country finds itself in the worst recession since the 1930s. Add to this an atmosphere of political unrest, with Brazil’s new interim president Michel Temer being booed at the Opening Ceremony, and it is understandable that many are contemplating Brazil’s next few years as bleak. But it is not all bad news. The Games went remarkably smoothly, and have reintroduced a sense of national pride which had recently been forgotten. Brazil remains Latin America’s biggest economy and planned projects by Shell, Santander, and Goldman Sachs to invest further in Brazil mean there are reasons to feel positive about the future.

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In Hong Kong last week, a new mechanism was introduced to help mediate extreme volatility in the market. The new circuit breaker is there primarily to prevent huge swings and spikes in price arising from trading errors and the like. It restricts a stock from moving more than 10% per 5-minute period once a session. The introduction of this Volatility Control Mechanism brings Hong Kong’s stock market into line with its global peers.

Last quarter, our International Select Portfolio returned -0.58% (pure gross) and -1.04 (net) versus -1.19% for the benchmark. For three years the portfolio returned 9.47% (pure gross) and 7.49 (net) versus 2.52% for the MSCI-EAFE Index. Stock selection and country weightings in Hong Kong hindered portfolio performance, where country weighting in Brazil helped, though it remains to be seen whether this continues to be the case.

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The Henry James International Select Portfolio, is a high conviction SMID Capitalization, at purchase, international core portfolio. The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, under $10 billion, with superior return versus risk characteristics. This is combined with quarterly, top-down risk mitigating country allocation system rebalancing, in which the management team over weights highly ranked countries and under weights lower ranked countries. 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-EAFE.

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To learn more about this, or any of our portfolios, please get in touch via email at info@hj-intl.com, by telephone on 917-951-5170 or by heading to our website.

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.