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.

Economic Activity in the First Quarter and the Results of the International Select Portfolio

With the first quarter of 2017 over, we are reviewing the progress of our International Select portfolio. Over the past ten years (ending 3/31/2017) North American markets have seen an average of over 7% a year, while the MSCI EAFE has averaged only 1.53% per annum. Furthermore, over the past year, also ending 3/31/2017, the North American markets have increased by 17.34% with MSCI EAFE only rising by a little over 12.25%. Despite these differences between North American and European, Australasian, and Far Eastern markets, we believe that non-US markets will become market leaders over the coming few years. The outlook for the global economy is affected by Trump’s presidency, and the effect of this on US GDP growth rate back up to 3% per year. If this level of growth can be met, it should ensure long-term, positive effects on a global scale.

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In terms of the International Select portfolio, it has returned 9.75% pure gross, and 9.28% net while the MSCI EAFE Index has seen returns of 7.39%. Several factors have influenced the performance of this portfolio. Stock selection and country weightings in Switzerland, France, Belgium, the UK, and China have all proved beneficial, while the same processes in Canada, India, Norway, the Netherlands, and Panama have had hindering effects. Other factors that aided the portfolio’s return were positions in technology services, electronic technology, health technology, energy minerals, and retail trade. Hurting performance were positions in producer manufacturing, consumer non-durables, and transportation. However, portfolio activity was primarily in an upward direction, trailing one-year (ending 31/3/2017) and returning 19.21% pure gross, and 16.38% net versus the 12.25% result of the MSCI EAFE.

In terms of global growth, The US has been an influential presence and, on the political scene, populism has arrived in the UK, Italy, and various other nations. The hope is that the best characteristics of this doctrine will combine with proven economic activities, resulting in the resumption of global economic growth. This growth will hopefully occur in several sectors, including a period of rising GDP, corporate earnings growth, and a rising tide for economies in general. If this comes to fruition, it may open the door for non-US markets to come to the fore, where, up to the present, their currencies have underperformed the US dollar. In an environment of stronger non-US markets, the International Select portfolio, with a strategy of high-conviction, low-turnover which blends both quantitative and fundamental-based analysis, should thrive.

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The Rise of the ESG Fund.

In recent years, the popularity of, and demand for, ESG funds has increased due to a combination of ethical concerns and the additional risk mitigating benefits attached to taking ESG factors into consideration.

In fact, many have said that failing to consider the risk posed by poor environmental, social, and governance practices could lead to losses, both for clients and for financial advisors. Multi-asset portfolios with integrated ESG stocks are an easy way to make sure client portfolios are as diverse as possible with manageable investment risk and reduced portfolio volatility.

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Not only are ESG factors an excellent way to assess risk, ESG funds have been shown to perform just as well as conventional ETFs for the same risk. Last month, ESG funds had risen to $3.4bn – nearly 45% over the previous 18 months, with assets in ESG funds linked to MSCI indexes growing by 50% over 2015. The trend shows no sign of slowing down, with the majority of institutional investors taking ESG risk factors into account when making investment decisions.

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Last month, Morgan Stanley announced that they would be introducing two new ESG multi-asset funds, mirroring the strategy of their current Global Balanced Risk Control fund, which they believe is the best way to participate in rising markets while still providing strong downside protection. These new funds – the Global Balanced Fund and the Global Balanced Defensive Fund – are the first at Morgan Stanley to incorporate ESG factors into the process and promise to both improve returns and enhance risk management at the same time, an important consideration particularly amidst the post-Brexit uncertainty which still reigns.

money-1017463_1920In response to this growing popularity, MSCI has introduced a new suite of fund metrics, scores and rankings on FactSet to help institutional investors and wealth managers better judge the ESG characteristics of their portfolios. FactSet, which provides integrated financial information and analytical applications, will now offer a new level of transparency on the ESG quality of over 23,000 mutual and exchange-traded funds. These will be ranked or screened based on their sustainable impact, their values alignment and any other ESG risk, such as their carbon footprint, making it even easier for managers and financial advisors to respond to a client’s interest in sustainability.

To learn more about ESG funds and how Henry James International Management could help you, please get in touch via email at info@hj-intl.com or by telephone on (646) 722-2739

The International Equity Portfolio

The big story in the news this week was the extraordinary loss reported by BHP Billiton. The Anglo-Australian mining giant recorded the worst loss in its history to the tune of around $6.4 billion annually. Along with an unavoidable dam collapse in Brazil, the company has suffered due to the continued slump in commodities prices.

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Also in the news, further stories keep trickling in detailing post-Brexit fall-out. Although the UK economy appears to be dealing with the situation far better than had been predicted by some, many sectors – such as IT, Finance, and Corporate Property – have been feeling the heat, with the pound still on shaky ground, international deals being pulled out of, and jobs being cut.

 

Last week, RBS announced that a large IT project originally due to be undertaken by Indian tech firm Infosys would no longer be going ahead triggering an “orderly ramp-down” of around 3000 employees. Banks and Finance firms are creating significantly fewer jobs too, moving roles to outside of the UK, according to recruiters Morgan McKinley.

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Despite this, our International Equity Portfolio performed reasonably well last quarter, returning 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Although stock selection and country weightings in India and Australia hindered performance, weightings in Spain, Germany and Japan boosted it, as well as selections in the communications, health technology and consumer durables sectors.

 

The Henry James International Portfolio is a large capitalization international portfolio; it takes advantage of the international economy while seeking long-term capital appreciation. As with all our Emerging Markets Portfolio  The 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 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. 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.

 

(Please note: Henry James International does not currently holds a position in RBS.  Henry James International does currently own BHP and INFY for client portfolios).

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.