Newsletters
Headwinds ahead but still optimistic
June 26, 2014

Untitled Document

On my first newsletter in 2014 I’ve expressed my belief that 2014 would still be a good year for US stocks. My bet was that an investor could make 8% to 10% return just by being long in the US stocks as opposed to investing in the rest of the world.

In the first 3 months of the year the facts seemed to be against my claim: markets were plagued by intense volatility, the brutal winter in the north caused a slump in economic activity, and there were a revolution in Ukraine followed by an international crisis involving Russia and the USA over Crimea. On the other hand and defying all expectations,  yields  on the 10 year treasury bonds fell from about 3% in the beginning of 2014 to 2.44% in the end of May and are now at around 2.65%. Earnings were just okay, nothing spectacular and the technology stocks were hit badly with depreciation in certain cases of more than 30%. Take YELP for instance: after reaching US$ 97.25 on March, 5th, fell to US$ 52.50 on May, 9th, a drop of more than 40%. It is now US$ 75.97, which means a recovery of 50% from the lowest point.

When everybody was starting to give up on stocks for 2014 and almost following the old adage “sell in May and go away” U.S. stocks began to show modest gains. The second season   of earnings was bringing better than expected results, signs of a stronger economy were abundant in the spring and there were intense activity in merger and acquisitions. The chart below shows a steady upward trend in the S&P since May.

The truth is that, according to data compiled by Bloomberg, and despite the volatility of the first quarter, US stocks outperformed other asset class, except bonds, as it can be seen in the table below:

Asset Class

1Q performance

US Stocks

1.65%

International stocks

0.66%

Emerging markets stocks

-0.43%

Bonds

1.84%

In the beginning of 2014 I was a firm believer that you didn’t need to look for other investment alternative or diversification. You could just rely on the US and be fine. Now my vision has changed a bit because that picture is changing: first and foremost nothing is so undervalued or as inexpensive as it was up to 2012. Also, there are other economies where you find an ideal combination of undervalued assets and prospects of economic growth. Europe is a good example and let’s remember the last action of the ECB, reducing interest rates: Mario Draghi is committed to do what it is necessary to propel the European economy and European stocks might be heading to outperform in 2014.  In some emerging markets that might be the case but I am not betting on that just yet.

Let’s take a look at Brazil for instance: the international investor sees Brazil as an asset class, therefore they believe it will outperform in the future. That is because EM stocks underperformed in the past and at the same time they have low valuations. The foreigner investor doesn’t see a risk with the reelection of Dilma and thinks that if another candidate wins, it will bring better policies. In other words they are seeing the election result and the performance of the stock market almost like a win- win proposition. I do not share that view.  Firstly, it is not clear to me what will be the economic policy of the opponents and also it is not clear what will a second Dilma mandate will bring. There are too many questions for which I cannot find a good answer.  Let’s start with the President:  will she change? Is there any hope that she will go back to what we thought she would be in the first place, a continuation of Lula’s pragmatic approach to the economy and the markets? I am not convinced that that will be the case. I think she has ideas of her own and they are not market- friendly, I think that there is contempt in her attitude to the “market”. As per the others I will focus on Aecio  Neves and the possibility that he will bring the well-respected, experienced and capable Arminio Fraga to command the economy. My question is then:wll the PSDB, or whatever coalition elects the next president, be able to do what it takes to bring Brazil back to a growth trajectory? I am not convinced that is the case also. We have to wait for the end of the world cup and the start of the campaign to have more clarity about their proposals. It is also possible that we will not learn anything during the campaign and for that reason I rather stay out of the Brazilian market in 2014.How should an investor, a small investor, act in this market? Unfortunately, there are no good choices. Just wait out and hope for the best.

There are risks ahead for the overall market: the answer to the ISIS (Islamic State of Iraq and Syria) insurgence in IRAQ is puzzling analysts from different sides as it is not clear at all what should be the American answer to that. Domestically the defeat of Eric Cantor, the   leader of the majority in the Congress, combined with a real possibility that the tea party win more seats in the Congress, bring potential political conflicts and more uncertainty.

Summer in the US is uneventful: politicians are on vacation and so are important players in the market; the world cup has been drawing attention and the first match of the US against Ghana had a 13 million audience, which in the US and for soccer is significant. The earnings seasons is an ongoing event and so far it has been good. That is why I don’t see many changes in the next few months and I still believe in my base scenario of at least 8% to 10% gain for the year.

November 23, 2015
Much ado about nothing
October 27, 2015
Brazil, we can only pray (or hope)
August 18, 2015
Looking back, looking forward
June 30, 2015
Lack of good news
April 14, 2015
What if...
February 24, 2015
What to expect in 2015
November 17, 2014
The American conundrum or just plain stupidity?
October 27, 2014
What is next?
September 09, 2014
Lessons we should have learned
August 12, 2014
US and Brazil: 2014, what to expect next
April 26, 2014
Roller Coaster
March 14, 2014
Brazil in perspective
February 07, 2014
Stay the course. Change the course.
January 17, 2014
Diversification. Or not.
November 25, 2013
Who buys a US$ 500 pillow?
October 02, 2013
Disturbing
September 03, 2013
What a mess...
July 31, 2013
Of Protests and Stocks
June 19, 2013
Betting in the future
April 30, 2013
Nowhere else to go
March 26, 2013
Cyprus: not enough to stop the US market
February 25, 2013
The Sequester
January 23, 2013
2013: what is ahead for investments
December 07, 2012
Brazil: uncertainty and mixed signals
November 05, 2012
It is not about the economy!
September 20, 2012
The Country is better off
July 05, 2012
The New Normal
May 30, 2012
Half empty, half full
April 30, 2012
How to restore prosperity
April 21, 2012
Brazil became poorer
February 27, 2012
Romney, Obama and the American Imbroglio
January 25, 2012
On storms and calmness, waiting for next round
December 22, 2011
Happy Holidays!
November 23, 2011
Impasse and Paralysis
October 24, 2011
The rally has legs. Or not
September 23, 2011
Preparing for the crisis
August 24, 2011
Kicking the can down the road: is there an end in sight?
July 24, 2011
Can the politicians be rational?
June 24, 2011
Global Economy: where are the world leaders bringing us?