Posts tagged: KNG International Advisors

Monday 2nd of September 2024

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Over the past decade, many emerging economies have struggled, while developed countries like the United States experienced solid economic growth. However, a major shift is now underway. Emerging economies are starting to outpace developed nations in terms of growth. In fact, the percentage of emerging economies where per capita GDP (a measure of economic output per person) is expected to grow faster than in the US is set to rise dramatically. Over the next five years, this proportion is projected to reach 88%, a level not seen since the 2000s boom in emerging markets.

This new wave of growth in emerging markets is different from the last one in several important ways. Back in the 2000s, much of the growth in these countries was driven by China’s rapid economic expansion, a sharp rise in commodity prices, and easy access to money provided by Western central banks. Many believed that as long as China continued to grow, other emerging economies would follow suit. But this assumption proved overly optimistic. By 2012, it became clear that the previous decade’s growth was unsustainable, and many emerging markets struggled to maintain their momentum.

Fast forward to today, and many emerging economies are in a much stronger financial position than before. In contrast, the United States, which has been relying heavily on large deficits to fuel its growth, is on a less stable path. Emerging economies, on the other hand, have much lower budget deficits and current account deficits, giving them more room to invest in future growth. Even countries that were previously known for poor financial management, like Turkey and Argentina, have returned to more responsible economic policies.

Another key difference in the current revival of emerging markets is that their success is no longer so dependent on China. China is facing several challenges, including a shrinking population and high levels of debt, which have made it less of a driving force for global growth. Moreover, China’s increasingly nationalistic policies and tense relationships with Western countries have led many global investors to move their investments elsewhere.

This shift has benefited other emerging economies. Many of these countries are expected to see strong export growth in areas like green technologies and the raw materials needed to produce them, such as copper and lithium. These resources are primarily found in emerging markets. Additionally, the growing demand for AI-related technologies is boosting exports from countries like Korea and Taiwan, which produce chips used in AI, and from Malaysia and the Philippines, which manufacture electronics. Investment is also flowing into emerging markets that offer unique strengths, such as India’s large domestic market, Malaysia’s favourable environment for data centres, and Mexico’s proximity to the US.

As economic growth accelerates in these countries, corporate profits tend to follow. Excluding China, corporate earnings in emerging markets are currently growing at an annual rate of +19%, compared to +10% in the US. For the first time since 2009, companies in emerging markets (excluding China) have exceeded earnings expectations by a wider margin than their US counterparts. Additionally, profit margins in emerging markets have been improving.

Despite these positive trends, global stock market investors have been slow to respond. Many are still focused on large American tech companies, and as a result, trading volumes in emerging stock markets have declined significantly, reaching 20-year lows in some cases. However, there are some exceptions, such as India and Saudi Arabia, where strong and growing domestic investor bases have led to competitive gains in their stock markets.

After years of being overshadowed by the US, emerging markets are now looking like an attractive investment opportunity. Even though these countries are seeing faster earnings growth, their stock valuations are still at record lows compared to the US. For the past 15 years, the US has been delivering superior earnings growth, largely driven by big tech companies. But this trend is now shifting.

While emerging markets have faced challenges in the past decade, they are now potentially on the verge of a major resurgence. With stronger financial positions, reduced dependence on China, and growing opportunities in key industries, these economies are poised for significant growth. Investors who recognize this shift early may find themselves well-positioned to benefit from the next big wave of economic expansion in the emerging world.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 24th of Aug 2024

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As earnings season draws to a close, Walmart, one of the last US retail giants to report its quarterly results, will provide a final feel of the pulse of the American consumer. By analysing the earnings reports of major US consumer focussed companies, several key trends appear to emerge this quarter, shedding light on how the consumer landscape is evolving.

In the food industry, the demand landscape is highly nuanced, with significant variations depending on where a product falls on the price and quality spectrum. Interestingly, this doesn’t imply that the cheapest option always wins. Instead, consumers are making more discerning choices about value, even if it means spending more.

Chipotle, for example, the mid-tier fast food chain, has been thriving, despite being pricier than fast-food giant McDonald’s. This suggests that for higher-income consumers, Chipotle represents a ‘trade-down’ from even more expensive dining options, rather than a trade-up from cheaper alternatives. This highlights a crucial distinction in consumer behaviour: people are not merely looking for the lowest price but are seeking the best value within their perceived quality threshold.

Mondelez, the snack manufacturer (owner of Oreo, Cadbury and Philadelphia), emphasised this point in its earnings release by noting a shift in consumer purchasing patterns. Two to three years ago, consumers gravitated towards larger, family-sized packages, which were seen as offering better value. Now, particularly among lower-income shoppers, there’s a move towards smaller basket sizes that fit tighter budgets. The key takeaway here is that if a product can meet the consumer’s price expectations within these constraints, it will sell; if not, it will be left on the shelf.

Pepsi echoes a similar sentiment, noting that a segment of US consumers is becoming more value conscious. This shift is forcing companies to adapt, offering more value-oriented products to retain brand loyalty.

The travel and leisure sector, meanwhile, continues to see robust demand. During the immediate post-pandemic years, there was a rush to book vacations well in advance, driven by pent-up demand and fears of rising prices. However, this behaviour has now shifted, with companies like Booking.com and Airbnb reporting that consumers are now booking trips with much shorter lead times.

Despite this change in booking behaviour, the US consumer is still prioritising vacation spending. Booking.com notes stability in the types of accommodations and the length of stays, with only a slight indication of consumers trading down in the US.

Cruise lines, such as Royal Caribbean and Norwegian Cruise, have had particularly strong quarters, with expectations to maintain pricing power, indicating that for certain experiences, consumers are still willing to spend.

Big consumer product brands are holding their ground remarkably well too, despite concerns about a weakening consumer. Procter & Gamble’s CEO remarked that, contrary to expectations, they have not seen a significant shift towards private label products, which typically gain market share during times of economic stress. Instead, brand loyalty remains strong, with consumers continuing to purchase established brands even as they face economic pressures.

Colgate experienced a positive response when it cut some prices in the US, seeing a notable improvement in volume and household penetration. This suggests that while consumers are price-sensitive, they are not abandoning trusted brands; rather, they are waiting for the right price point to make their purchases.

Similarly, Kenvue, the maker of Band-Aid and Tylenol, observed that consumers are still willing to pay a premium for brands that are perceived as science-backed, indicating that trust and perceived efficacy play crucial roles in consumer decisions, even in a tighter economic environment.

The overarching theme from this earnings season is that the American consumer is still spending, but with a more discerning approach. Impulse buys are out, and value is being redefined, with consumers carefully considering each purchase. This behaviour is likely driven by a combination of low unemployment, the depletion of excess savings accumulated during the pandemic, and the lingering effects of a significant rise in price levels, even as inflation cools.

For investors, this means that consumer spending patterns may be shifting somewhat, but they are not declining rapidly. The consumer remains in good health overall, and this is good for the economy and a positive signal for equity markets.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 12th of August 2024

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Two weeks ago, two critical reports — the Manufacturing ISM report and the employment report — were released in the US. These reports indicated potential signs of a slowing in the US economy.

The market, which had been optimistic about a soft landing, reacted strongly. Stocks fell sharply. The initial shockwaves were felt on Thursday and Friday, with the S&P 500 experiencing a 5% drop, followed by a historic sell-off in Japanese markets last Monday, which cascaded across much of Asia.

Despite the market turmoil, not all sectors performed equally. The best-performing sectors were staples, healthcare, utilities, and real estate. These sectors typically benefit from lower interest rates and are considered defensive plays in times of economic uncertainty. In contrast, the worst-performing sectors were information technology and consumer discretionary. The poor performance in these sectors, especially those dominated by Big Tech, highlights the market’s current anxiety. Amazon, Tesla, and Nvidia were notably among the hardest hit, with specific factors such as earnings reports and speculative trading contributing to their declines.

The VIX, which measures the cost of hedging against short-term volatility in the S&P 500, spiked sharply on Monday after a mild rise on Friday. This increase indicates heightened fear among investors, driven by concerns over potential cascading losses due to position limits and margin calls.

Interestingly, while the stock market continued its downward trend on Monday, US Treasury yields remained flat. This stability in the bond market suggests a complex interplay of factors at work. Notably, the move into US government bonds, a typical safe-haven reaction, did not accelerate in tandem with the stock sell-off.

The recent market rout can be attributed to several intertwined factors. Recession worries are clearly a contributor, but perhaps not a huge one. The relatively moderate moves in Treasuries, corporate bond spreads, and rate expectations suggest mixed economic data rather than outright panic.

The unwinding of the yen carry trade could well have contributed to the wider sell-off, as investors were forced to sell off assets they had bought with borrowed yen. It makes sense that this would be happening, but it is difficult to prove the scale of the effect — we have not seen hard data on the trade.

But there is reason to believe the carry trade unwinding was a bigger deal than previously thought. The Mexican peso and the Brazilian real, two higher-yielding currencies commonly bought with borrowed yen, fell to multiyear lows yesterday despite maintaining high interest rate differentials with the US.

Might equities have been swept up as well? Of course, it is possible that the direction of causality went the other way: that it was the sell-off in equities that turned the carry trade upside down, by erasing gains earned on assets paid for with increasingly expensive yen loans.

The Big Tech stock sell-off has been violent and the value changes are immense, at least in dollar terms. It has echoed in Asia in the form of selloffs of big semiconductor companies. This was a trade that funds hoping to beat the index had little choice but to join. And those funds had big profits this year they would have been keen to lock in.

If you must point to a single perpetrator of recent equity price declines, point at Big Tech. Despite the recent volatility, however, there are signs of potential stabilisation. The services ISM index showed continued expansion, albeit modestly. Earnings reports, such as those from Tyson Foods and Palantir, offered some positive surprises. The VIX cooled somewhat, and the stock market did not close at its lows on Monday. Stability in the bond market and a recovery in Asian markets suggest a potential easing of immediate pressures.

While the market remains on edge, it’s important to remember that volatility is a natural part of investing. An expensive market in a slowing economy doesn’t need a specific reason to fall, just as a cheap market in a growing economy doesn’t need a particular catalyst to rise. As always, maintaining a diversified portfolio and staying informed are your best tools for navigating these uncertain times.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 29th of July 2024

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Imagine a world where investors have only two investment options: an aggressive portfolio or a well-diversified one.

The aggressive portfolio is characterised by high-risk, high-reward assets such as Bitcoin or hyper-expensive tech stocks. This portfolio holds the promise of extraordinary gains but also harbours the peril of dramatic losses. On the other hand, the well-diversified portfolio spreads investments across a variety of asset classes, mitigating the risk of catastrophic loss and ensuring more stable, albeit potentially lower, returns.

Alice, a bold and ambitious investor, chooses the aggressive portfolio. She is enticed by the potential for monumental returns and is willing to accept the risk that comes with it. In some scenarios, Alice’s portfolio may skyrocket, yielding immense wealth. However, this strategy is akin to walking a financial tightrope; one misstep can lead to a plunge that might be impossible to recover from.

Bill, in contrast, opts for the well-diversified portfolio. He seeks steady growth and prioritises the preservation of his capital. While Bill’s returns may not reach the astronomical heights that Alice occasionally achieves, his investments are more likely to weather market downturns. Over time, Bill’s portfolio grows steadily, benefiting from compound interest and the stability provided by diversification.

The question arises: which investment strategy is the right one?
The answer lies in understanding the concept of survivorship bias and the critical importance of avoiding catastrophic losses.

Imagine running a simulation with millions of Alices and Bills. Each Alice invests in the aggressive portfolio, and each Bill in the diversified one.

Over time, the richest individuals are likely to be Alices, as their aggressive strategies yield phenomenal returns in rare, favourable scenarios. Imagine a ‘top 10 rich list’ in this imaginary universe… we can show mathematically that they would all be Alices.

These success stories would likely become highly publicised, reinforcing the allure of aggressive investing. The way to get rich is ‘to invest like Alice!’.

However, if we examine the broader population in our model, a different picture emerges. While a few Alices achieve extraordinary wealth, many more suffer significant losses from which they never recover. Their stories are often overlooked in favour of the spectacular successes.

The average Bill consistently outperforms the average Alice over the long run, despite the very top performers being more heavily skewed to Alices. The average Bill’s well-diversified strategy ensures that he avoids catastrophic losses and benefits from steady, compounding growth.

The parable of Bill and Alice underscores a crucial lesson for retail investors: surviving as an investor, by avoiding catastrophic losses, is just as important as achieving high returns.

While the aggressive approach may offer higher expected returns, it also comes with a higher risk of irreversible losses.

While aggressive investments can lead to extraordinary wealth for a few, they carry significant risks that can result in irreversible losses for many. On the other hand, a well-diversified strategy provides more consistent returns and safeguards against catastrophic losses.

In the world of investing, surviving and thriving often go hand in hand. By emulating Bill’s balanced approach, investors can achieve steady growth and financial stability, ensuring they remain on the path to long-term success. So, when faced with the choice between aggressive and diversified investing, remember the wisdom of the parable: be more like Bill, not Alice.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 15th of July 2024

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The recent UK general election, where Labour secured a landslide victory with a relatively centrist and technocratic leader at the helm, has sparked an interesting conversation about the relationship between politics and market stability. The Labour Party’s leader, known for his pragmatic policies, has brought a sense of predictability and stability to the political landscape in the UK, which in turn has had a positive impact on UK markets. This highlights why ‘boring’ politics can be good for markets, providing a compelling case for investors to consider the UK as a promising investment destination in the coming years.

Markets thrive on stability and predictability. Investors seek environments where they can anticipate policy directions and economic conditions, allowing them to make informed decisions with a degree of confidence. Boring politics, characterised by a lack of dramatic shifts and a focus on technocratic governance, often leads to such stability.

Political stability reduces the risk of abrupt policy changes that can disrupt markets. When a government is perceived as predictable, businesses can plan for the long term, and investors are more likely to commit capital, knowing that sudden shocks are less likely. This sense of security is crucial for market confidence and overall economic growth.

Technocratic leadership involves a focus on expertise, data-driven decision-making, and pragmatic policies rather than ideological fervour. This approach can lead to more effective governance and economic management. In the UK’s recent context, the Labour Party’s leader has emphasized sound economic policies, fiscal responsibility, and steady progress rather than radical reforms. This has resonated positively with the markets.

Technocratic leaders also tend to prioritise policies that support economic stability, such as maintaining fiscal discipline, encouraging investment, and promoting sustainable growth. By avoiding populist measures that might offer short-term gains but create long-term uncertainties, technocrats help in creating a conducive environment for markets to flourish.

A less volatile political environment also minimises the risk of political upheavals that can destabilise markets. The clear mandate given to the new Labour government reduces the likelihood of coalition politics and associated uncertainties. The UK’s new government has stated it will focus on creating a conducive environment for businesses and investors, and this has been well received. Policies aimed at fostering innovation, supporting infrastructure development, and ensuring a stable regulatory environment are attractive.

As a result, the UK presents a promising opportunity for investors in the coming years, with stable economic policies, a strong regulatory framework, and ample growth potential. Embracing boring politics could be the key to a sustained period of economic prosperity and strong investor returns for those willing to make a call on the UK’s success.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 8th of July 2024

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Over the past 18 months, the stock market has been buzzing about the rise of artificial intelligence (AI) stocks. While these AI companies have driven much of the market’s upward momentum, there’s another less flashy but equally interesting story unfolding among consumer staples companies in 2024.

These are companies that produce everyday goods like food, beverages, and household items. Despite the market’s focus on AI, consumer staples have shown impressive performance, providing a safe haven for investors seeking stability.

Consumer staples are companies that make products we use daily. Think of brands like Walmart, Costco, Colgate, and Procter & Gamble. This year, these companies have seen remarkable performance in their share prices. Unlike the tech giants riding the AI wave, these consumer staples are not typically associated with rapid innovation or high growth. Instead, they are known for their steady, reliable performance.

What makes this noteworthy is that these companies have outperformed the broader market, especially when you exclude the AI stocks. For instance, while the S&P 500 has risen about +16% this year, many consumer staples have posted significant gains, many of them higher than the index. This is surprising because some of these companies haven’t even kept up with inflation in terms of revenue growth. Yet, investors are flocking to them. Why?

One major reason is safety. Consumer staples are considered non-cyclical, meaning their performance is less tied to economic cycles. People need groceries, toothpaste, and cleaning supplies regardless of the economic situation. This makes these stocks attractive, especially when there’s uncertainty about the future.

For example, companies like Walmart and Costco started the year with high valuations compared to the overall market. Despite this, investors continued to buy their stock, seeking refuge from the volatility seen in other sectors.

AI has been a hot topic this year. Technologies like large language models (think advanced chatbots and automated systems) are expected to revolutionise many industries. The market is betting that the big winners in this AI revolution will be familiar tech giants like Apple, Alphabet (Google’s parent company), Amazon, Meta (formerly Facebook), and Microsoft. Nvidia, known for its graphics processing units (GPUs), is also a key player.

For retail investors, while the excitement around AI has delivered strong price performance in tech names, this can be balanced with the stability offered by other sectors, like consumer staples. While it’s tempting to chase the latest tech trends, having a portion of your portfolio in steady, reliable stocks can provide a buffer against market volatility.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 17th of June 2024

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I was recently lucky enough to spend a week cycling in the Outer Hebrides. We camped every evening along the coast of some of the most beautiful islands anywhere in the world, cold winds from the North Atlantic Ocean washing crystal blue waves onto brilliant white beaches. As a recommendation for a unique and special place to visit in one’s life, these islands are highly recommended.

This trip was most certainly supposed to be a break from the ‘day job’ of investing. But surprisingly, I came back with a valuable story about the core principles investors should be thinking about when allocating capital.

One evening, our intrepid group of adventurers were on a beach on an island called Barra. The evening sun bathed the wide natural harbour in warm orange light. Some members of our team were heating up the coals on a barbeque to cook our dinner. One of the team, a professional musician with no experience of working in financial markets, asked me a simple but excellent question: ‘if you had to sum up the most important lesion you have learned in your investing career, what would it be?’

I stopped for a moment, and then for another. I’ve never been asked to simplify it all into one answer before. And I wanted to give an accurate answer.

After thinking for a moment, I said one word: ‘patience’. My friend nodded and asked me to elaborate, ‘what do you mean… how does patience help you make money as an investor?’

I explained to him that patience, above all other factors, is fundamental to investment success over the long-term. There is no consistent way to ‘get rich quick’ when investing in financial markets. Some people may get lucky, just as there are some who get lucky in the casino. But this is not a model for the average investor.

Patience is what works consistently. Owning businesses as an investor in equities for the long-term, refusing to sell during bad times when markets are declining, avoiding taking profits when share prices rise. Sticking with your strategy and letting your investments compound… this is what works consistently.

What my friend had done was ask exactly the right question from the perspective of a retail investor with minimal knowledge of investing. What is the one thing I need to know.

The question forced me to simplify a career spent in investing into one simple answer. And the answer was the right one. Patience above all is what earns investors exceptional returns over the long-term. Owning equity in high quality businesses growing profits at, say, 10% to 15% per year will compound over time at those rates (all else equal).

This means in year 1 you will see a 10 to 15% rise in value of your investment. Then the following year another 10 to 15%. Stock markets are volatile, so in year three you may see the value decline if markets are weak. Many investors (professional and retail) will trade this stock through that cycle, maybe selling at the end of year two, booking in a +21% to +32% return (10 to 15% compounded over two years). Others may sell during the weak year in year three.

Few investors hold out and just keep on owning the stock, with a true long-term ownership mindset. But if we model that same stock earning (let’s be conservative) 10% growth in earnings each year out to year 15, a buy and hold investor would be sitting on a return of +417%. By year 20 it would be a +673% return. An initial $200,000 investment would, by year 20, be worth close to $1.5 million.

Patience means letting compounding returns do its thing.

Don’t get in the way.

Buy and hold!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 10th of June 2024

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There have been growing rumblings in the financial media about the possibility of a weakening US consumer. Despite signs of strong economic growth, some narratives and data recently have pointed towards a possible slowing in the US economy as a result.

The Atlanta Federal Reserve’s GDPNow tracker, which measures real GDP growth, showed a very high forecast for the rate of growth in the US economy at over +4% for the second quarter of 2024 back in April. That figure has come down sharply however, now closer to +2.5%.

This is a significant change in expectations for US economic growth in a short period of time.

One key factor in this decline is the decrease in the real personal consumption expenditures (PCE) component of the tracker. PCE measures consumer spending on goods and services. It dropped from an expectation for growth of +3.4% to +2.6. This supports what we have been seeing in some corporate earnings for companies exposed to the consumer, there is evidence of some slowing in demand growth trends. This is not uniform however, while some specific sectors or companies are seeing slowing growth in demand from consumers, in other sectors like experiential and travel demand has remained robust.

Forecasts for the US economy are now factoring in this reduced spending on goods, with a slight slowdown in services spending also showing up. Some market commentators are suggesting that the engines of US consumer spending could be losing steam, but it’s important to note that this data reflects just one month of information. Looking at a three-month average, the trend appears more stable, though there is somewhat of a slowdown in disposable incomes due to slower wage growth.

It’s also worth noting that during an economic expansion it is perfectly normal for forecasts to fluctuate and for consumer spending to cycle up and down, to higher and then lower levels of growth. The decline in forecast for the US economy we are referring to in this article still, on its new lower level, predicts a good rate of growth for the US.

So… consumer spending might be slowing, but not drastically. Recent reports from companies like Walmart and Dollar General show no significant change in consumer behaviour. While Dollar General noted an increase in same-store sales, indicating people might be opting for more affordable options, they emphasised consistent consumer behaviour rather than a shift in spending patterns.

For investors, the key question is whether this slowdown in consumer spending is good or bad. If the slowdown is enough to prompt several interest rate cuts this year, it could be beneficial to stock prices. However, if it sparks talk of a recession, it could be detrimental in the short-term. That said, talk of recession could result in rate cuts too, which again would be beneficial to stocks. The only scenario which would be bad for stocks in the medium-term would be an actual realised recession, and there is little evidence in economic data that we are close to such an outcome.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 3rd of June 2024

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What is the current situation?

Today the US economy is experiencing a profound transformation, driven by three major trends that are fundamentally reshaping its landscape and propelling a sustained rally in US equities. The magnitude and interplay of these trends are reminiscent of the historical booms of the 1920s and 1950s, yet distinctively modern in their scope.

For the first time in decades, the United States is enacting a comprehensive industrial policy, underpinned by significant fiscal stimulus to support the decarbonization of its energy grid. This policy is not merely an abstract commitment but a tangible, multi-trillion-dollar investment in sustainable infrastructure. The Biden administration’s Inflation Reduction Act (IRA) exemplifies this commitment, allocating hundreds of billions of dollars towards energy security and climate change initiatives over the next decade. This act aims to catalyse private investment, potentially driving $1.2 trillion in total investment in clean energy and related sectors by 2030. The US Energy Information Administration (EIA) projects that renewable energy will account for 42% of US electricity generation by 2050, up from 21% in 2020. This transition necessitates substantial capital inflows into energy technologies, grid modernization, and energy storage solutions.

Meanwhile, the technological innovation renaissance spearheaded by artificial intelligence and large language models is reshaping the investment landscape too. AI and LLMs are not mere buzzwords but are driving tangible economic value through unprecedented advancements in computing and automation.

The surge in demand for AI capabilities is precipitating a boom in the physical infrastructure needed to support these technologies, notably in data centres and semiconductor manufacturing. According to a report by McKinsey, the AI industry could deliver an additional 1.2% in annual GDP growth rates for the next decade in the US (remember trend growth has been 2-3% for decades, so an increase of 1.2% points is equivalent to a doubling of the trend rate of growth).

The semiconductor industry, a critical enabler of AI, is projected to double in size by 2028, according to Fortune Business Insights. Tech giants like Google, Amazon, and Microsoft are investing billions in expanding their data centre capacities. These investments are creating ripple effects throughout the supply chain, boosting sectors from real estate to advanced manufacturing.

The third major trend is the strategic re-shoring and near-shoring of manufacturing, a trend accelerated by the disruptions of the COVID-19 pandemic. The vulnerabilities exposed by the pandemic have prompted US firms to reduce their reliance on distant, fragile supply chains by bringing manufacturing closer to home. This shift is manifesting in increased capital investment within the United States and its neighbour to the south, Mexico, which is itself experiencing an economic boom. Mexico’s stock market, the Bolsa Mexicana de Valores, has outperformed many global indices over the past three years.

These three transformative trends; the implementation of a serious US industrial policy, the technological leap forward with AI and LLMs, and the reconfiguration of global supply chains, are collectively driving a powerful economic revival in the US and driving a bull market in equities. The parallels to past investment booms, such as the Roaring Twenties and the post-war boom of the 1950s, are striking.

As these trends continue to power ahead, the case for long-term investment in US equities is compelling. The structural changes underway promise sustained economic expansion, enhanced corporate profitability, and robust market performance. For investors, the opportunity to participate in this transformative era is unparalleled. Investors should own and continue to hold US equities for the long-term!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Martes 28 de Mayo del 2024

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Political Assumptions and Economic Realities

When examining the interplay between politics and the economy, one might assume that political stability and consensus are prerequisites for economic prosperity. However, the evidence suggests that the economy and stock market are often quite resilient to political turbulence.

The United States serves as a prime example. Over the past two decades, and especially in the last five years, the US has been the standout economy in the developed world, with a rate of GDP growth and innovation that has far exceeded Europe and other developed nations. This economic performance has occurred amidst a backdrop of highly polarised politics, marked by the rise of the Tea Party movement, the presidency of Donald Trump, and the most extreme political divisions seen in the US in a century.

Despite this intense political drama, the US economy has continued to thrive. Technological innovation has been a significant driver, with American companies like Apple, Google, Amazon, and Tesla leading in innovation in electronic products, cloud computing, AI, and electric cars. These companies have not only revolutionised their respective industries but have also contributed significantly to GDP growth in the US and job creation. The stock market has also reflected this economic strength, with major US indices like the S&P 500 and NASDAQ reaching record highs this year and significantly outperforming European and other developed world markets.

The experience of the United States suggests that the economy and stock market are influenced more by underlying economic fundamentals than by political events. Factors such as technological innovation, consumer spending, corporate profits, and global economic conditions play a more crucial role in determining economic performance than political headlines.

The situation in Germany offers a contrasting example. Germany has experienced relatively stable politics over the last decade, characterised by centrist leadership and a broad consensus on many economic policies. Despite this political stability, Germany has lagged behind other developed nations in terms of economic growth. The German economy has struggled with issues such as an aging population, a reliance on traditional industries like automotive manufacturing, and a slower pace of technological innovation. More recently its strategic blunder in relying on Russian supplied natural gas to power its economy was revealed as folly. Unlike the US, Germany has not produced many globally dominant tech companies in recent years, highlighting that political stability alone is not a guarantee of economic dynamism.

History provides other examples that underscore the limited impact of political conditions on economic outcomes for many economies. Post-World War II France experienced extreme political upheaval, including mass protests, the war in Algeria, and frequent changes in government. Despite these challenges, France enjoyed exceptional economic growth during this period, often referred to as the “Trente Glorieuses” or “Thirty Glorious Years”. This era of rapid economic expansion was driven by industrial modernisation, infrastructure development, and increased productivity, illustrating that economic fundamentals can often override political instability.

Of course, politics does matter to some extent. Political decisions can shape economic policy, regulation, and public investment, which in turn can affect economic performance. Very poor political leadership can indeed harm an economy, as evidenced by Argentina’s struggles with hyperinflation, debt crises, and economic mismanagement. In such cases, political dysfunction directly undermines economic stability and growth.

However, in developed economies with strong institutional frameworks, the economy and stock market can often weather political storms. The key is that political leaders do not severely mismanage the economy. Even seemingly extreme political events like Brexit or the election of Donald Trump have not derailed the overall trajectory of the economies involved. In the case of Brexit, while there have been significant economic challenges and uncertainties, the UK economy has not collapsed and continues to function, adapting to new trade realities and opportunities. Similarly, the Trump administration’s tenure saw significant policy shifts, but the US economy continued to grow, driven by the same underlying strengths that have propelled it for decades.

So, while politics can influence the economy, it does not necessarily dictate economic outcomes. The resilience of the economy and stock market in the face of political turbulence is a testament to the strength of underlying economic fundamentals. Technological innovation, consumer behaviour, corporate performance, and global economic trends often have a more significant impact than political events.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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