2017 was a tremendous year with the global economy breaking out of the rut that it had been in for some time. Global GDP growth was just under 4%, the fastest rate of growth since 2011, and we had a synchronised upswing across the major economies which created something of a ‘Goldilocks environment’. It didn't really matter what you owned because most equities went up.
As 2018 has unfolded however, it appears that the global growth story has started to run out of steam, with investors doubting the sustainability of last year’s growth rates.
In a recent webinar, Miles Staude and Emma Davidson discussed a variety of factors currently affecting the state of world markets, including how they see 2018 finishing up, where you can buy a dollar for less than a dollar, and how activism can work to unlock value when the underlying performance has not been as expected.
We have prepared a summary of the key points below, but you can listen to the full webinar here.
How 2018 will play out
At the big picture level, it now appears that the free ride that everyone received last year is over. That doesn't mean we're heading towards a correction or a recession, it just means that the upside/downside risks are more balanced than they were 6 months ago.
While this year we've seen a lot of positive headlines coming through, they have had very little impact on share prices. In the case of the US, the S&P 500 is up 1.70% year to date, and that's despite a 20% lift in corporate earnings. There is, therefore, a strong argument to say that all the good news we are seeing this year (US tax cuts, synchronised global growth) was priced into markets last year.
Against this backdrop there seems to be two very vocal camps in the market today:
- The first continue to beat the Goldilocks drum and claim that everything is still as rosy as it was last year. To our eye this isn't the case anymore, we’ve banked the one-time gains from last year.
- The second group are looking at the recent slow-down in growth as the catalyst towards a market correction or recession. Again, our view is that we remain a long way from having any hard evidence to support the idea that there is a recession on the horizon. Things have slowed a little since the end of last year, but conditions are still much better than the recent history we have had.
Instead, we think that 2018 will be a far more ‘balanced’ year for markets.
Buying a dollar for less than a dollar
- The GVF strategy is to find discounted asset plays around the world, situations where we can buy a dollar for less than a dollar and where we are able to unlock this value.
- We employ this strategy across a wide range of different asset classes, and this is primarily how we lower our risk profile.
Source: Staude Capital 31 May 2018
- As of today, the fund is 85% invested, so we're putting the money we recently raised to work at a reasonable pace, but it will take us a few more months before we are fully invested again.
A case study on activism
Over the past few months, GVF have been involved in two relatively high-profile activist campaigns here in London. The first of these activist campaigns is an example of how we can use activism when something goes wrong.
- The investment was in Blue Capital Alternative Income Fund which invests in the global catastrophe reinsurance market.
- GVF invested into Blue Capital to take advantage of a tender offer we believed would be triggered.
- Another appeal of the investment was that re-insurance returns are largely uncorrelated to those of traditional financial markets, making any such investment a wonderful diversifier in a portfolio.
- Unfortunately for us, 2017 turned out to be one of the worst years on record for natural catastrophes.
- Blue Capital ended up being one of our worst performing positions and was quite painful to watch over the course of last year.
- So, what to do next? In these sorts of circumstances we believe our ability to engage in shareholder activism can provide us with a great ‘get out of jail free’ card.
- The discount on this fund blew out to as wide as 22% and so, we simultaneously began buying more of the position whilst also initiating a campaign to wind the company up.
- A copy of the open letter that we published to the board can be viewed here.
- We are pleased to say that we ultimately won the day. The fund has, just a couple weeks ago, announced that it would be putting forth proposals to wind itself up and return all the capital back to shareholders.
- This will obviously provide us with an uplift on the stock that we bought at 22% discount and will reduce the loss on the stock that we bought at an 11% discount.
- Once the fund has liquidated we expect to erase in full the losses suffered in 2017.
To listen to the full webinar, please click here.
The Global Value Fund is a listed investment company that provides shareholders with the opportunity to invest globally through a portfolio of securities purchased at a discount to their underlying asset value. Find out more here