Huddlestock Investor Brief – May 2018 – Huddlestock

Huddlestock Investor Brief – May 2018

Huddlestock Investor Brief – May 2018

To date Huddlestock* is up +8.43% versus +0.01% for the HFRX Equity Hedge Index**, +1.68% for the MSCI All Country World Index*** and +7.73% for the NASDAQ 100****. Huddlestock was up 1.70% in May.

* Estimated actual performance of all strategies/themes on the Huddlestock  platform on an unleveraged basis.
** The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies.*** The MSCI ACWI Index is designed to represent the performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 24 emerging markets. It covers approximately 85% of the free float-adjusted market capitalization in each market.
**** The NASDAQ 100 is a stock market index made up of 107 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index.

May’s performance narrative:

– There has been a long-running hypothesis that the US will normalise its balance sheet and raise interest rates before Europe does. This hypothesis came under stress in May when the ECB was caught off-side by Italy’s initial inability to form a government which led to both a flight to safety and an unnerving bout of panic selling in Italian credit.
– The trifecta of rising oil prices, rising US interest rates and a strengthening US dollar is causing a degree of chaos in emerging markets. The upheaval is the result of the Fed’s moves to normalise its balance sheet while the Treasury is issuing substantially more treasuries to pay for December’s tax cuts. As anticipated, getting this balance right without causing a crisis in the rest of the dollar bond markets is proving difficult. Emerging market central banks are urging the Fed to slow the withdrawal of its support of US debt markets so as not to choke off dollar liquidity. The uncertainty and complexity of the situation, including possible contagion, will likely continue to lead to deleveraging across credit portfolios and a general flight to safety. In addition to these external shocks, country-specific risks have also been laid bare and brought to the fore recently: Argentina was forced to secure an IMF facility to aid in its defence of the Peso, political uncertainty in Brazil is causing a significant depreciation of the Real versus the Dollar, Erdogan is injecting politics into Turkish monetary policy while countries with exposure to China, including its ‘One Belt One Road’ initiative are being affected by the ongoing tit-for-tat tariff tussle. Taken together it appears that emerging markets are not as well prepared for the tightening of dollar liquidity as was previously thought (despite Jerome Powell’s proclamations to the contrary just a few months ago). The recipients of the flight to safety, at least within equities, appears to have been US Technology companies generally and the FAANG+ stocks specifically. At Huddlestock we are deliberately underweight the FAANG+ stocks given the risks associated with their inclusion in a large number of ETFs and passive investment strategies, such as robo-advisors (see previous Investor Briefs for more detail on this).
– Credit has become disconnected from other markets indicating a lack of consensus on whether these recent developments (Italy and Emerging Markets) are transient or not. This bifurcation has led us to accentuate investment ideas that balance a spectrum of potential outcomes from US banks (that benefit from rising interest rates, deregulation and market volatility) to Non-FAANG+ US Technology stocks (which benefit from low interest rates, a near market-wide belief in a tech-driven secular bull market and (hence) flights to safety) to energy/renewables companies (that can benefit from geopolitical uncertainty, carbon emissions legislation and the electrification of transportation). We continue to believe in our buyback-driven, re-risking, melt-up hypothesis though clearly uncertainty at the macroeconomic level is somewhat troubling.

What does this mean for an investor?
Our approach, generally, is to establish positions in high-quality investment ideas given some macroeconomic context (this is de facto an exercise in saying ‘no’ to most ‘opportunities’) and then to manage any downside risk (the upside should take care of itself). Hence our emphasis of the various risks that we’re keeping an eye on in these Investor Briefs. This doesn’t however mean that there aren’t great investment opportunities. In this month’s Brief we want to highlight two major opportunities: China’s One Belt One Road Initiative and Climate-related investing.

Vendor Perspectives
Engaged Tracking

At Huddlestock we value different perspectives. This month, Engaged Tracking discusses climate-related investing:
Impact of Client Change On Returns Continues To Grow
By Jonathan Harris (Chief Analyst at Engaged Tracking)

The impact of climate change on returns is a trending topic in financial markets. The trend has been spurred on by the work of Mark Carney, governor of the Bank of England, and Michael Bloomberg on the G20 Task Force on Climate-related Financial Disclosure. Their recommendations are driving institutional investors to shift their portfolios towards stocks that are best managing their climate-related risks. In turn, this is pushing up the prices of these stocks.

Climate-related investing is the opportunity of the century because it is based on a slow-moving, unstoppable trend – this is exactly what our financial markets are not good at pricing.

As this trend develops, climate-related strategies are outperforming the market (for more information see ‘An Investor’s Guide to Climate Change’ at https://www.engagedtracking.com/guides-and-reports/). To enable you to get in front of this trend we will be sharing the best climate-related opportunities on Huddlestock.

One Belt, One Road Initiative
As China’s economy slows down and switches from being export-driven to being consumption-driven it can be difficult to keep track of its long-term goals, ambitions and initiatives. Two major initiatives are the Silk Route Economic Belt (SREB) and the Maritime Silk Route (MSR) which are jointly referred to as the ‘One Belt One Road’ Initiative. The Chinese government wants to use this initiative which comprises two physical routes, a land route running from inner China to Southern Europe, and a sea route connecting Shanghai to Venice via India and Africa, to enhance connectivity and trade flows between the Asian, European and African Continents.

The initiative is a collection of projects which focus on the development of a wide array of infrastructure assets, including ports, roads, railways, airports, power plants, oil and gas pipelines and refineries, as well as a supporting IT, telecom and financial infrastructure accompanied by a host of bilateral and regional trade agreements. These projects would stimulate demand for China’s well-developed engineering and construction capabilities, materials and equipment, and technology while allowing it to expand its influence by building financial power via concessional loans and aid including the wider international use of its currency (the Yuan became an IMF reserve currency in 2016), all with the goal of facilitating trade flows.

Clearly an initiative of this scale cannot follow the old ‘growth first, environment second’ model of the past given the amount of greenhouse gases that have already accumulated in the atmosphere. As such there are significant opportunities for both domestic and foreign businesses that focus on new technologies that help reduce carbon emissions, sustainable business models and products, cleaner sources of energy, and mechanisms for reducing the carbon intensity of output. This means a move away from coal, the most carbon intensive fuel, to renewable energy sources and cleaner forms of transportation (currently, two-thirds of global carbon emissions come from electricity generation and transportation). While opportunities abound, our view at Huddlestock is that the magic lies in the sustainable investing dimension in heavy carbon emissions industries like energy, utilities, materials/metals/mining/chemicals and industrials.

China has backed new financial institutions that are not part of the existing Western-dominated financial system. While these institutions direct and control hundreds of billions of dollars the initiative is on such a large scale that opportunities abound for external investors to work on shared projects and public-private partnership (PPP) initiatives. Many of the state-owned enterprises that companies could partner with are ‘too big to fail’ and can provide de facto subsidies which markedly improve the risk-reward profile of these projects.

While the ‘One Belt One Road’ initiative is very ambitious and subject to numerous economic, political, ethnic and military challenges before it can be fully realised, the high-level roadmap is pointing at a diverse set of very interesting investment opportunities.

New Features: The Activity Feed and your Connections
By Nick Gains (CTO at Huddlestock)

We’ve recently added a new feature – the Activity Feed. You can find it on your Dashboard on the right-hand side (it’s the big list).

It’s a historical list of events that happened to your account. It shows you when you logged in, subscribed to strategies and invested in ideas. It’s very new so it’s still a bit sparse at the moment but we are adding more to it all the time. Soon it will show you more posts including when you transfer funds, when an investment was closed and when a vendor submits a new idea. In fact, we’d like for it to be a bit like a social media feed, which means it would also show what your Huddlestock connections are up to such as which ideas and strategies they like.

We are building a process for you to add connections and testing it internally at the moment and hope to release it very soon.

For any feedback, please email us at contact@huddlestock.com.

Michel van Tol, PhD
Chief Investment Officer
Huddlestock Capital

Download this brief as a PDF File here.