David Gallacher, Author at C.J. Lawrence
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17 Oct Europe – Unified Growth

Welcome back Growth! It’s been too long and we sure have missed you. Real GDP growth stands at 2.3% in the Eurozone slightly taller than the U.S. at 2.2%. Follow the Money and you’ll find Eurozone M3 supply up 5.0% years-on-year, 7% in the UK. Unemployment in Germany and UK has broken through multi decade lows, in France below pre-crisis 2011 levels and falling. Industrial Production across the region has surged above 2008 levels and climbing, same for retail sales and housing starts. The Euro is up 14% and Sterling 7% versus the USD. Did I mention European Equity markets? The STOXX600 is up 21% year-to-date in dollar terms. Great news? Well yes terrific if you owned sufficient European exposure, you had great kicker in your portfolio strategy. But, unfortunately, no if you have zero or minimal exposure which judging by fund flows is the more likely answer.

Investors should be forgiven their skepticism for European equities, recent history has proven treacherous for asset allocators leaving the homeland for anywhere outside of U.S. Treasuries and Large Cap. stocks. But 2017 has thus far proved significantly different, at least in terms of relative market returns, from the preceding half dozen. Europe and Emerging markets have finally awoken, supported by an economic recovery that has shifted from theory to reality, joining what is now a measured synchronized global expansion. Investors with a foothold in international markets should reap the benefits of a highly constructive macro backdrop. For those still with reservations and minimal exposure, tread wisely but tread. Accumulating exposure is our preferred path rather than chasing what remain risk on/risk off markets. However, if we watch and listen to the data isn’t this what you have been waiting for?

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Terms and Conditions

24 Feb Inflating European Expectations

The Wall Street Journal reported yesterday that for the first time in almost 4 years none of the Eurozone’s 19 member countries was in deflation during January.  Aggregate Inflation across the region is now 1.8%, approaching the ECB’s target of 2.0%.  The data is a notable marker that may be the signal for the ultra-accommodative ECB to reign in its QE program a little over two years since the Fed ended QE3 in the fall of 2015.  Such a move would have a profound effect on European currency rates with the U.S.  Fund flows follow real interest rates over the long-term.  With real interest rates higher in the U.S. than almost any Developed economy it is a no brainer that money should flow into the dollar.  As the fed began raising rates at the end of 2015 it is no surprise that European currencies correspondingly declined substantially over the course of last year. The Fed’s most recent hike has put further pressure on the value of GBP, EURO, CHF and Kroners. 

Enter the natural beauty of self-correcting global economics.  Between 2011 and 2015 global fx markets were mind numbingly boring.  During, what on the surface, appeared as a turbulent period in global economic history Sterling and the Euro traded within a very narrow range with the USD.   With virtually all central banks aligned behind hugely stimulate actions, transatlantic currencies traded largely in unison.  In such circumstances with the US ahead of the curve in terms of post crisis economic recovery the competitive advantage lay in North America.  The turn in Fed policy at the end of 2015 broke that trend and 2016 served as a corrective year in terms of currency equalization. 

The downdraft in European currency valuations has had the twin effect of boosting Europe’s competitive position and pushing up inflation as import prices increased.  European markets have quietly taken note.  Despite European equity performance in dollar terms once again falling behind U.S. in 2016, in local terms European equities had a strong year with aggregate performance reaching high single digits.  For U.S. based investors the benefits of increasing exposure to Europe are sweetened by the weak currencies and the opportunity to shop around for stock at attractive discounts.  Wow, even a Big Mac in London is now 6% cheaper than the U.S., in London! 

In the post crisis-era international markets have morphed into risk-on trades.  Despite positive U.S. based market returns, investors have remained jittery in recent years preferring assurance over risk.  As global economic growth increases and a reflation trade gets underway the irony of a successful Trump economy could very likely be that international markets begin to outperform as risk appetite re-emerges and investors seek higher returns at reasonable valuations–sounds like Europe to me. 

19 Sep The Opposite

Buy low sell high, it sounds simple enough but most investors avoid this anxiety ridden route at all costs.  Indeed, stocks are the one purchase item on the planet that buyers feel happier paying more for than less.  Such a paradox pervades global financial markets of every stripe.  Investors the world over continue to pile into bonds trading at all-time, never seen before, negative interest rates.  Utilities, which offer relatively zero underlying growth have been the shining stars of this year’s equity market.  Real Estate prices continue to rocket in London despite relentless warnings of Brexit fallout and it remains cheaper for me to fill my car with gas than my fridge with water. 

These trends are not new, in fact they have been stubbornly the conundrum of financial markets for what feels like an age.  Such persistence has led many to abandon time honored investment disciplines as if the world truly has turned on its axis.  At C.J. Lawrence we enjoy the benefit of a library of investment history that dates back well over a century and principals that while not stretching back that far have navigated more cycles than most.  To satisfy the regulators we avoid making explicit recommendations in our published work but with the weight of history behind us we can make bold predictions that are obvious but do not appear to be consensus.  Ready: Interest rates are going to rise, energy prices will recover, economic growth will return to trend (likely higher for periods of time) and real estate yields will normalize i.e. increase.  Of all of these events we are certain but time is the cruelest adversary and it is easy to go broke waiting to be right.  However, we do suggest that we are closer to the end than the beginning of these trends and their turn will be monumental for asset prices. 

So with a nod to George Costanza; investors who are frustrated and scared about global growth, fed policy, the upcoming election would be wise to bear hug fundamentals and survey what would happen should they take the opposing point of view that bonds prices look highly vulnerable at these levels, utilities are trading at unsustainable multiples, energy supply will be engulfed by demand in the coming years and should GDP increase to trend (3%) the stock market is going materially higher.  We may continue on the same course for some time to come but the end of this particular low growth, low inflation, zero interest rate, zero earnings growth road will come and you had better make sure you are positioned for the right road when we reach that intersection.  Time tested investment principals will reemerge and those investments that present true growth for the right price will always prevail in the long-term. 


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David Gallacher, CFA is a Partner and Senior Managing Director at New York based C.J. Lawrence.

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