In June 2019, global markets rebounded strongly more than offsetting the losses in May. Major US indices were higher led by Nasdaq +7.4%. Europe major indices were higher led by CAC 40 +6.4%. Asia major indices were higher led by Hang Seng +6.1%.
We see two main drivers for the market rally in June:
- Lowered interest rate expectations – In June, central bankers around the world (US Fed, ECB and Bank of Japan) all signaled looser monetary policy ahead giving investors an all-clear signal to buy risk assets.
- Positive development on US/China trade dispute – President Trump and China’s President Jinping confirmed they will meet at the G-20 Summit in late June in Osaka, Japan.
Today, from central bankers’ perspectives, there is simply no good reason to worry about any imminent inflation risk. Around the world, inflation pressure remains muted as global growth is increasingly driven by technology advancement, productivity improvement and the service sector as opposed to product/commodity consumption and fixed asset investments.
Despite today’s uncertainty surrounding US/China trade war and slowing economic growth worldwide, we are as bullish as ever on our portfolio. As an active investor, we welcome stock market volatility as they offer rare opportunities to purchase great businesses at a discount while others worry about a potential market downturn next year.
The stocks that we like tend to be “utility-like” businesses:
- that are disrupting or gaining share from traditional industry incumbents;
- whose customers cannot avoid using/buying even in a recession;
- that sell a service instead of a physical good
We evaluate a business’ value based on long term free cash flow potential over 10+ years, instead of actual or forecasted GAAP accounting earnings for the next year. We focus on identifying “hidden” or potential earnings power that a business has yet to unleash but could down the road in the future.
Looking ahead, we believe that interest rates will likely remain low globally for a while. Under this scenario, the winners will continue to be asset owners (stocks, real estate, businesses) while the losers will be savers (in bonds, money market, bank deposits) as their returns will continue to be meager and well below other asset classes.
Ironically, today’s safest investments in the short term (bonds and bank deposit) are actually the riskiest investments for the long term.
We cannot agree more with Warren Buffett’s 2018 advice on investment in bonds:
At Invision, we do recommend bonds for clients who have specific cash needs in the short to medium term (within 5 years). But for most others with little need for cash access in the near term, an equity-focused (stocks, real estate, businesses) investment portfolio is the way to go.