Transcript The Post-2008 Economic Soft Depression and Your Portfolio

ENR Global Contrarian Income:
Investment Strategy 2015
Eric N Roseman
ENR Asset Management, Inc.
Montréal, Canada
January 13, 2015
ENR Global Contrarian Income
• Contrarian Value Investing; Buys Distressed Assets near
Lows; Global Dividend Equities
• Margin of Safety is Low Price, Low Debt, High CashFlow, Strong Global Brands and Strong Management
• Looks for ‘Event-Driven’ Change; Spinoffs; Macro
catalyst for change and revaluation
• Only Buy Stocks that Pay Dividends
• Companies Grow Dividends Greater than Inflation
• Buy Near or at 52-week Low
• Diversify Currencies
• 2008 Financial Crisis: Contrarian Global -10.5% vs. -42%
MSCI World, -44% MSCI EAFE Index and -40% S&P 500
Index
Matching the Index with less Risk
Macro Review 2014
• Worst year since 2011 for overseas markets; soaring USD
strips away most foreign stock market returns when
converted to USD
• Global currencies plunge vs. USD; EUR and ¥en correct sharply
• S&P 500 Index dominates since 2009 low
• Global GDP slows on weak Europe, China and Emerging
Markets; Russian Crisis; Commodities fall again
• Commodities decline for 4th straight year; Brent Oil plunges
50% since June, Gold holds the line amid USD surge
• U.S. T-bonds lure foreign investors; higher relative rates
• German bund yields turn negative, joined by Swiss, Dutch,
Austrians, Danes; Commerzbank first German large-cap bank
to impose fees on certain client deposits
• MSCI World Index +2.9%, MSCI EAFE -7.3%, S&P 500 +13.7%
S&P 500 Dominates since 2009
US Dollar at 12-Year High
CRB Peaked in July 2008
Secular Stagnation?
• Massive debt overhang and poor demographics
challenge Western & Japanese economies
• Failure to post strong recovery post-2009
• China’s Debt Hangover and New Normal
• Why Bonds keep rallying
• Chronic weakness in most commodities
• Central banks as conduits for growth
• Inflation jolt coming but not in 2015
• Deflation or accelerated disinflation to persist
• Low interest rates in OECD, weak demand
• Depositors and ‘yield starvation’ spreading
Avoid Emerging Markets
• Strong dollar will trigger balance-of-payments
crisis in weakest emerging markets
• Budget deficits will get worse
• Commodities bear markets and correlation to
emerging markets; Russia, Brazil, S Africa
• Russia factor and contagion?
• Asian corporate credit growth exceeds 1997
peak; Chinese credit overheating
• Some currencies in region will be devalued
• South Korea and India offer best macro
Avoid most Bonds
• Secular bull market in bonds almost over
• Inflation-adjusted rates are ‘bread crumbs’ or negative
in several countries
• Investors paying Germans, Swiss, Danes, Dutch and
others to own short-term government bonds
• Bearish on most sovereign bonds and high-yield
• Biggest accident in financial markets likely tied to
leveraged credit and hedge fund borrowing
• Only buy high quality corporate bonds with low
duration (maximum 4-Year duration)
• Strip (zero coupon) bonds as deflation hedge only
Still Cautiously Bullish on Equities
• Global tumult and weak growth will deter Fed from hiking
interest rates in 2015
• U.S. economy not in consistent uptrend; services,
manufacturing and housing remain soft
• Possible EMU crisis again; Greece debates exit
• Russian contagion, Asian debt binge and high USD
• Plunging commodities, crashing oil prices, soaring USD, TIPS
surpass 2008 break-evens and T-bonds yielding below 2%
are NOT symptomatic of a bullish global trend
• Base case supports more global QE
• High quality stocks provide best relative and absolute
values compared to other assets, especially overseas
Investment Strategy 2015
• U.S. profits recession unlikely in 2015; but S&P 500 Index multinationals to
suffer currency losses on strong USD
• Higher volatility to ensue in 2015; Compared to other assets, stocks still
offer greater yields provided the interest rate backdrop remains bullish
• International equities (excluding USA) offer good value; Europe trading
48% less than S&P 500 Index based on Shiller P/E
• ECB and BoJ to offset Fed’s QE
• Bonds very expensive, heavily overbought; high-yield exposure to shale
• Stocks to outpace Bonds and Commodities in 2015
• Focus on Euro-zone as ECB Starts QE, Select US Large-Caps
• Earnings boost from sharply weaker EUR
• Consumption boost from crashing oil prices
• Shiller Euro-zone P/E at 14x earnings
• Current 20% portfolio weighting in Europe; Target 30%
• Global Contrarian now: U.S. (42%), Europe (20%), S Korea (3.5%),
Canada (1%)
• Asset Allocation Now: Stocks 66%, Cash 34%
Defensive Portfolio Characteristics
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Consumer staples @ 25% of portfolio
Dominant global brands, yield 3% +
Defensive attributes in weak global economy
Buybacks, annual dividend hikes
Dividends growing in excess of inflation
Plunge in foodstuffs bullish for input costs
Sector provides reliable free cash-flow
Top Three Staples: Nestlé (5.4%), Kraft Foods
(4%), Mondelez International (3.6%)
• Portfolio holding high cash balance (34%)
Major Themes in 2015
• Crashing commodities = bullish boost for global food
and beverage companies and other industries
• Positive for most corporate earnings (e.g. falling oil)
• Nestlé shifting impetus to nutrition & wellness
• Royal Dutch Shell and refining margins; safe dividend
• Samsung: Where Apple was in 2013?
• Divestments at Procter & Gamble
• Volkswagen in China, Audi Sales
• Dividends still Matter: Gabelli Dividend & Income
Fund, iShares DJ Select Dividend
Targeted Themes
• Follow the QE Trail in Europe and Japan
• Lessons of QE in USA (2009-2014)
• Weak currencies bearish for unhedged bonds but
very bullish for stocks (exporters)
• To hedge or not to hedge your FX exposure
• Wisdom Tree Europe Hedged Equity (HEDJ) and
Wisdom Tree Japan Hedged (DXJ)
• Wisdom Tree Europe Small-Cap Dividend (DFE)
• International Blue-Chips and Existing Book
• Targeting Q1 purchases on weakness
Portfolio Insurance in 2015
• Is it necessary to buy some portfolio insurance or tail-risk hedges to
protect your investments? Not yet, but that time is approaching
• U.S. to lead global GDP in 2015, recession unlikely amid low rates,
low inflation and ECB and BoJ Printing
• Valuations alone don’t trigger bear markets; monetary policy does
• Fed not eager to tighten; surging USD has tightened for the Fed;
import prices declining; exports slowing
• ECB and BoJ printing money to offset Fed’s QE exit
• We see excesses, mostly in credit, investor sentiment, IPOs, social
media, biotech, M&A activity, high US multiples
• Portfolio insurance hedging to remain minimal for now
• We remain cautious and defensive; still prefer global blue-chips to
bonds or other assets;
• Hedging strategy is flexible and may change under deteriorating
market circumstances (e.g. 2008)
ENR 2015 Investment Summary
• Global risk assets will grow more volatile as earnings
shift lower in the US but accelerate overseas. Both
Europe and Japan are primed for sizable gains at a time
when US profits will slow, mainly due to a strong dollar;
• We still think most emerging markets should be
avoided; previous USD surges (e.g. late 1990s) resulted
in severe economic dislocations overseas; commodities
are suffocating larger emerging markets
• Stocks should remain an overweight in 2015 with an
increasing emphasis on foreign markets and select
dividend-paying U.S. large-caps; Gold to benefit greatly,
if US growth momentum stumbles; interest rate
advantage still points to high quality common stocks
Thank you!
• Eric’s email: [email protected]
• Toll-free: 1 877 989 8027