Investment Letters

Investment Letter dated 30th July 2020 – Looking round corners

By |2020-07-30T09:05:39+00:00July 30th, 2020|Asset Allocation, Asset Classes, General Investment, Investment Letters, Passives & ETFs, Strategy|

In the first quarter of this bizarre year we suggested to investors that we will need to speak of three curves or data sets within the world: those of the pandemic, the markets and the economies. An although it would have been convenient to think of these as closely related, even coincident, it has not proven to be the case. Bar the first few weeks when epidemic flourished into pandemic, not all markets have neither followed the spread of the disease nor the major economic variables. At the date of writing, 7 of the world’s 34 largest equity markets have risen in index terms since the beginning of the year. The distribution of returns has been highly uneven as the NASDAQ has risen 21.6% but the median return on the 34 was -8.8%. Source: Bloomberg/Cerno Capital So why have US financial assets offered positive returns if a two to three year economic recovery is a relatively optimistic prognosis? The notable US economist Paul Krugman has suggested that financial markets have done well precisely because the real economy is so weak. Liquidity is fungible and it seeps into tradable assets as the call on productive assets is lessened. This raises the [...]

Investment Letter dated 29th January 2020 – Camus and all that

By |2020-02-05T12:43:40+00:00January 29th, 2020|Asset Allocation, Cerno Capital, General Investment, Investment Letters, Regions|

The outbreak of Novel Coronavirus (2019-nCoV) in Wuhan revives memories of the 2002-3 SARS virus which broke out of Guangdong province and was responsible for 648 deaths in Hong Kong and China and 127 deaths elsewhere in the world. It should not be forgotten that more deadly epidemics have taken place between these two viral outbreaks, namely H1N1, Ebola and MERS. The writer was a resident of Hong Kong in 2002 and can recollect the palpable fear that beset the territory at that time. Even when its lethal nature was acknowledged (following several months of attempted cover up by the central authorities) protocols at hospitals remained inadequate in the rush to treat patients. Doctors, nurses and orderlies worked in the knowledge they were at great risk of contracting the virus which at that time was a great deal more fatal than the eventual, overall fatality count. We remember them. Before SARS came along, Hong Kong was betwixt the horns of two deflationary events: falling property prices and an equity bear market – in sync with the rest of the world – following the Tech stock boom of the 1990s. Just when things couldn’t seem to get worse, one of Hong [...]

Investment Letter dated 19th June 2019

By |2019-06-19T16:21:40+00:00June 19th, 2019|Cerno Capital, General Investment, Investment Letters|

The approaching half year mark is a good time to gauge the health of world financial markets. 2019 has been better than 2018. World equities fell -7.4% in 2018 in local currency terms and have risen +15.9% YTD in 2019. World Bonds (in aggregate, using the JP Morgan composite) fell 1.0% in 2018 but have returned +4.7% so far this year (data to 18th June). It therefore appears that 2018 was a pause for consolidation, permitting the full-bore late cycle rally that has since transpired. If we have enjoyed rising bond and equity prices in this most recent period, how rare of an event is this? Looking back over the last 35 years to 1984, we observe that, in 26 of those heady years bonds and equities have risen in tandem. There have been no years in which they both fell, six years in which equities fell and bonds rose, the rarest instance being the three years in which equities have risen and bonds have fallen, the last one of these being 2013. We can see, at a glance, why balanced investment (a non-determinate mixture of bonds and equities) has been such a hoot. There is considerable and understandable anxiety [...]

Investment Letter dated 6th February 2019

By |2019-02-06T11:38:44+00:00February 6th, 2019|Cerno Capital, General Investment, Investment Letters, Other Posts|

The MSCI EAFE Index is an index of performance of world shares, ex US. EAFE stands for Europe, Australasia, Far East. This index is often used as a benchmark for US pension fund allocators whose traditional view of the world is divided by US allocations and International allocations. EAFE Equity mandates are granted to invest in shares anywhere in the world, excluding the US. Performance is measured against the MSCI EAFE Index. US$2.2tn is managed this way. The reason for displaying this is to understand the trend in global equity markets, outside the US. The Index, captioned below by the blue line, achieved a recent peak on the 25th of January 2018 and has fallen 16.7% from that peak until the time of writing. The wider All Country ex US (the green line which includes Emerging Markets) peaked on the same day and has fallen 16.3% since then. This data includes the January rally. In simple terms, the world, ex US, has marginally escaped the bear market territory (defined as a 20% fall in an index) which it entered on 17th December. The bigger picture is that the world is slowing, although not abruptly and not currently in the US. [...]

Internals: The Study of Market Conditions

By |2018-11-23T12:28:01+00:00November 22nd, 2018|Investment Letters|

It has been our view for some time that the biggest issue confronting financial markets has been the markets themselves. The change in mood in equity markets has been both sudden and impactful. This Letter unpicks some of the terminology used in shorthand to identify causal factors in the correction. The study of and commentary on market conditions is sometimes called internals or dynamics. We field a number of technical terms and explain each as we go. When financial markets break-down the finger tends to be first pointed at fast money. Fast money was once loosely approximated to hedge funds where the dominant investment style is assumed to be short term and twitchy. In truth, fast money is a much broader amalgam of investment styles. It also includes quantitative investment. These strategies use powerful computer driven analysis to jockey on trends, mainly price trends. Quantitative strategies hop onto positively performing price trends whilst simultaneously shorting negatively performing price trends and when the variables change, the model buys and sells accordingly. There is a general suspicion, not fully proven, that the growth in quantitative styles amplifies market moves at points of stress. Curators of quantitative funds will counter-argue “Ah, but we’ve [...]

Investment Letter – September 2018

By |2018-09-10T13:27:54+00:00September 10th, 2018|Cerno Capital, Investment Letters|

The current economic and stock market cycles are unusually long in duration and this leads to obvious questions about what will be the cause of its ending. There are several oft mentioned candidates: protectionism, a fall in historically high margins, a strong dollar and interest rates or some combination of these factors. Students of stock market valuation over time are liable to point to how highly valued equities are and this is hard to dispute. To our minds, the biggest threats to the US stock market lies within the international (non-US) outlook combined with shifts in demand for equities and their valuation. The valuation observation is notoriously difficult to narrow down in a causal sense and apply to time frames. Current high valuations are a pointer to sub-normal returns over the medium term but not the short term. Specifically, they tell us something, in a probabilistic sense, about how returns will pan out over a seven-year time frame, not a one-year time frame. (This is what our own testing has shown). Considerations of the net-demand for equities is thinly trampled terrain for the equity market analyst. It is common place in bond circles to speak of such things – they [...]

A short Investment Letter from Rome – May 2018

By |2018-06-01T08:27:41+00:00June 1st, 2018|Cerno Capital, Investment Letters|

The writer first visited Italy in 1983 and experienced the ochre strade of Florence on a tight budget. Caffè was taken al banco non al tavolo. A fruit cake from home served for lunch so an evening meal could be taken in a restaurant. It did no harm and sparked a deep affection for the place that will last this life. Italy is an effervescent place to visit but a deeply frustrating place to be a national of. It took many years and the wry books of Tim Parks to realise this. With more acquaintanceships, especially that of young Italians, the disfunction of the place became apparent. The narrowness of opportunity is a shock when compared to, for example, the UK. The most recent plot of youth unemployment was 31.7%, the second worst in the G20. Italians themselves will often point out that they have not been a country for long and in many respects the place still aligns to stati della città (city states). The preminent of which being Rome, where dark arts are practiced. Given the institutional stasis, ossified professional cabals and general sense that politics is a game for the rich played by the rich, it is [...]

Investment Letter from Hong Kong March 2018

By |2018-05-15T09:39:40+00:00March 27th, 2018|Cerno Capital, Investment Letters|

At the National People’s Congress in Beijing, 2,958 of 2,963 cowed delegates approved the change in China’s constitution to allow the Presidency to be extended beyond the two-term limit set by Deng Xiaoping in 1982. Deng’s then reform was promulgated to prevent the repeat of the Maoism’s attendant madness. In a very large country, disastrous policies have terrible effects on millions. Back then in was murder and starvation, what might be the longer-range effects of a resuscitation of one-man rule in China? For surely all dictatorships go bad, even the ones that start out well? The possible outcomes need to be understood in a modern context. In today’s world, even in China where an invisible blanket of surveillance and censorship wraps its citizens, it is possible to lampoon the leaders. Xi’s avatar is Pooh Bear: the tubby fellow attaching himself to a pot of honey. “Find the thing you love and never let go.” When you rule by fear you do not know what your friends let alone your enemies think. All the problems that bestow China from the 12th of March onwards are Xi’s to own. Cadre may be fired, booksellers disappear, businessmen and women interned with impunity but [...]

Investment Letter Feb 2018 Cobras in the Basket

By |2018-05-15T09:41:15+00:00February 5th, 2018|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Investment Letters, Strategy|

Cobras in the Basket: Bonds, their curves, their relationship with equities and market tops In the last two months, we have seen a meaningful rise in bond yields. Key maturities in the US curve have crept up. The 2Y US Treasuries now stand at 2.15%, the 5s (5 years maturity) have moved up to 2.53% and the 10s to 2.73%. This has not been accompanied by any visible change in central bank policy or rhetoric. It is our belief that investors should take heed and begin to adjust their portfolios, if they have not already done so. This is not the first time in the post crisis period (a period that will soon be 10 years long) that bond yields have fluttered. During the so called “taper tantrum” that occurred between February 2013 and January 2014, those same maturities ran up considerably: 5s went from 0.63% to 1.86% and 10s 1.62% to 2.80%. There were other noticeable sell offs after the post 2008 low. The 10s moved from 2.0% points in early 2009 only to crest at 4.0% in 2010. As we can see, in those previous periods, yields then proceeded down, with the curve compressing to new lows. [...]

Investment Letter – January 2018

By |2018-01-09T11:43:05+00:00January 9th, 2018|Investment Letters, Other Posts|

2017 was a decent year for the firm’s investment strategies, all of which delivered against their objectives. A little more information can be found here: With the books closed on 2017, we reserve the rest of this short letter to matters pertinent to the near and far futures. It remains our somewhat paradoxical view that investors should be more concerned about good economic news than bad. Somewhat against the general habit of doubting the underlying forces that have been moving economies and markets, our view is that that more concern should be directed toward the consequences of the recovery being too good, too wholesome and too universal. For, the more widely accepted that conditions are positive, the more universal the bullishness and the quicker the central bank response to normalise liquidity and interest rates. The economic world is running counter to that of politics. For most folks with an international outlook, whether owed to their origins, migrations or mindsets, global politics have become stinky. Far from advancing toward the End of History suggested by Francis Fukuyama, we are snaking off in another direction. It has all been a reminder that life, especially the life of nations, is not an [...]