08.10.2019

The wall of worry

Let’s start this newsflash with an overview of the current state of ‘the wall of worry’. What is keeping investors awake at night?

A current hot-topic is the Democrats’ decision to open an impeachment inquiry into President Donald Trump. We make no judgement on the gravity of this case. However, this procedure could take months, it could even last up until the next Presidential elections in November 2020. The probability that President Trump will indeed be impeached is slim, to none. Remember a similar action was undertaken against President Clinton for high crimes and misdemeanors in 1998, but he was ultimately acquitted by the Senate. What most Investors seem to have forgotten is the fact that the Markets were up by approximately 30% in that same year. This only to illustrate that full attention should instead be on the strength of the economy and on corporate results.

Slow economic growth

The evidence is clear that economic growth has already been slowing over the past year. Not so much in the US, but very clearly in Europe and mainland China. This comes as no surprise, as both regions are far more vulnerable to the escalating Trade War than the US. We remain convinced that a solution will ultimately be reached. The interests for all parties concerned are just too big to be ignored. On top of that, the enduring Brexit-saga, which continues to provide a headache for the UK and Continental Europe, still has no clear outcome in sight.

Since the beginning of this year, Central Banks throughout the World have undertaken various actions in order to battle economic slowdown. In recent weeks, both the European Central Bank (ECB) and the Federal Reserve (Fed), have again lowered their interest rates. It is hereby clear, especially for Europe, that the end of the tether has been reached, as far as monetary policy is concerned. It is now up to the individual member states, such as Germany and Holland, to pick up the gauntlet and introduce strong fiscal stimulus into the weak European economy.

Negative interest rates

By now it is clear, that in Europe, we will be stuck with negative interest rates for many years to come. So far, retail investors have been shielded against these negative rates. However, it is only a matter of time how long this can last. In other words, when will savings have to deal with negative rates? The search for positive yielding assets will only become more difficult. This leads us to your assets, which at CapitalatWork, are put hard ‘at Work’.

As we write this, we can still put your fixed income portfolio at work with a positive return. How is this possible, you may ask, when, for instance, a German 10 year Bund has a negative yield of -0.5%? We achieve this by investing a large part of our fixed income portfolios in US dollars and other non-Euro currencies. At present, yields in US bonds are still 2% higher than in Euro-denominated bonds.

This strategy has, once again, proven very successful! For any investor, with an investment horizon of 5 years, or more, this strategy is still the way to go forward.

As far as our equity portfolios are concerned, know that we put tremendous effort into analyzing all quarterly results of all companies into which we invest. And here comes more good news! Most of these companies have, once again, published excellent quarterly results. It is our conviction that these results are due to the high quality of their respective business models. In technical words, this translates into ‘moats’. Just in the way a medieval castle could repel its invaders thanks to a large moat, a company can today be successful thanks to an important economic ‘moat’. Illustrations of economic ‘moats’ could be network effects whereby strong networks grow stronger by each additional user. Also industrial patents can illustrate the power of economic ‘moats’. These economic ‘moats’ ensure cash flows remain strong throughout the business cycle and economic cycle.

In a climate of negative yields, it feels reassuring to be invested in such companies. This, however, does not mean these companies are immune to stock market volatility. But they do tend to recover more quickly than poorly funded companies or companies with weak economic ‘moats’. As we clearly indicated at the end of 2018, severe market corrections lead to great buying opportunities. But who would have thought the recovery would be so strong and so quick?

When looking into the future, we remain confident! The ‘wall of worry’ will be ever-present, but knowing we put your capital at work in a well-diversified fixed income portfolio as well as a high quality equity portfolio, we can tackle most obstacles coming our way!

CapitalatWork is an active asset manager whose investment process is not built around investing in stock market indices and other risky structured financial products. We have a distinct bottom-up process in which we invest in companies that we know and have analyzed entirely. We have a geographic and sectorial diversification. We remain faithful to this philosophy that has guided us for almost 30 years through the many market turbulences we have experienced. We are convinced that our focus on healthy balance sheets and cash flow generation will be a winning future strategy.

Yours sincerely,

The management of CapitalatWork Foyer Group

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