Is this an unusual bull market?

There have been half a dozen "great" bull markets since WW2.  Without getting into a lot of specifics about valuation, earnings growth, different interest rate environments etc, it is useful to compare the length and scope of each bull run.  Surprisingly, the current market run is not an outlier.  It's long, but not as long as the longest bull market, and its been a good per annum return, but not as high as the highest.

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Where the "smart money" invests!

Family offices (the private wealth and investment arm of ultra-high net worth families) are often regarded as the "smart money".  They typically have the scale to hold a wide range of assets directly, the connections to access investments that retail investors don't see and the skill to construct globally diversified portfolios.  So how will a family office allocate across its portfolio?

A recent Wall Street Journal article showed a family office "model portfolio" - the surprise is around the size of alternative asset holdings.  Private equity, venture capital, direct property, commodities, hedge funds and art total up to 50% of the model portfolio.  The more conventional stocks, bonds and listed property come in at 41% (with cash making up the balance).

The particularly high allocation to private equity and venture capital shows the benefit of being a well capitalised investor with a long term horizon. They can exchange liquidity (the ability to quickly sell an asset) for the higher returns that unlisted assets like private equity often bring.  

An NZ equivalent long term investor is the NZ$44 billion NZ Super Fund which has a lower (but still significant) 17% allocation to similar assets - infrastructure, commodities, property, private equity and "private markets".  Alternative assets are a key focus of well diversified investors with a long term time frame.

Source:  NZ Super Fund Annual Report 2016

Source:  NZ Super Fund Annual Report 2016

John Berry,  Director

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Positive vibes in the USA?

In a consumer driven economy what matters is how people actually feel. Despite reports by political commentators and the media generally, since Trump’s election the US economy has had a postive vibe.  Consumers in the post-election US continue to be more confident than their counterparts in Europe, the UK and Japan. A Capital Economics survey (see the graph below) highlights the different sentiment in the UK and US after “shock” results from both the Brexit referendum and US election.

Why the divergence between the UK and US? Even though both results were unexpected, the economic outcomes are completely different. Trump has proposed tax cuts, deregulation and a significant increase in infrastructure spending.  These are all expansionary economic policies. By contrast Theresa May is faced with the potential downsizing of big banks and multinationals, renegotiating trade and less economic integration with the European Union.  These are all contractionary scenarios.

It all comes down to growth prospects. For Trump, tax cuts and increased spending encourage consumers to be more confident about the economy. They expect more job choice, higher pay, and thus more spending power. This should lead to greater growth through the multiplier effect. Theresa May, on the other hand, is facing an economy expecting low growth over the medium to long-term due to truncated trade and lack of European integration – essentially UK consumers are becoming less confident about their jobs and more hesitant to spend.  In this environment Sterling is likely to remain weak.

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2017: investment risks to keep you awake...

Investors must always consider high level "macro" risks.  These are essentially events, influences or trends that can have a material impact on a country or region's economy. Macro risks are one of the factors that influence prices in financial markets.

Below we set out key 2017 risks from a couple of sources - Bank of America Merrill Lynch and Deutsche Bank.  Firstly BofA - their recent fund manager survey shows how from December 2016 to January 2017 concerns  shifted from EU disintegration and a bond market crash to protectionism and US policy error.  This very fast and significant shift in risk perceptions coincides with the new Presidential appointment (source: Daily Shot):

Deutsche Bank recently set out 30 key issues for 2017.  That's a lot of risks to digest, so we have summarised some of the main ones below. Any of these could trigger significant market volatility:

Global relationships: US/China, US/Mexico, US/Russia

Elections: Dutch, German, French, Catalonia (and possibly Italy)

Key appointments: Change of Fed Chair and new FOMC members

Europe: higher inflation, ECB tapering, Brexit fallout

US: infrastructure spending, Dodd-Frank changes, higher wages, higher inflation, 3 Fed rate rises, corporate & border tax reform, spreading industry deregulation

China: corporate debt levels, deficit increases

Rest of the world: house prices in Australia, Canada, Norway and Sweden (but no mention of NZ??!!)

In our view China continues to add significant  risk to global markets. Its foreign currency reserves are at a 6 year low (down 25% from 2014) reflecting capital flight and central bank support of the yuan. China's financial system also has a growing reliance on structured transactions such as debt for equity swaps by banks. This doesn't fix the problem - swapping a bad debt asset for equity still leaves you with a bad asset.

All investors must learn to assess and mitigate (or live with) risk -  in 2017 there's no room to be complacent.

John Berry, Pathfinder

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Deutsche Bank House View 2017: Summary

Deutsche Bank has recently published “The House View” on the economy and markets for 2017. We have summarised some key takeaways.

Economic outlook

  • Global growth to improve to 3.5% in 2017 (from 3.1%).
  • US economy set for upside especially from H2-2017. Forecast 2.5% growth in 2017, 3.6% in 2018.
  • Eurozone: political pressure will continue to be a drag on growth, forecast 1.3% in 2017.

Key global themes

  • Political risk – Trump and Brexit uncertainty remains. Also, keep an eye on Italy and France.
  • Normalisation – Inflation is back! Albeit slowly. Rates look to creep off the bottom.
  • De-globalisation – Widespread anti-globalisation rhetoric, spurred on by the Trump administration and Brexiteers.


  • US – Bullish, recovery improves on the back of strong US and Global growth, Financials and Energy well positioned to bolster the market.
  • Eurozone – Potential for upside, earnings outlook is beginning to improve due to global growth, strong commodity prices and a deflated euro.
  • Emerging markets – Cautiously optimistic global growth will be supportive. Keep an eye out for India with growth forecasted to outpace China by half a percent in 2017.


Source: Deutsche Bank.

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