What’s Going on in Turkey?

The Turkish economy has been strong the past decade so one would inherently believe this is a positive for the country. But recently a combination of issues are pointing towards a potential economic crisis in the country. The economic growth in Turkey has been fueled by too much debt, which is causing:

  • Inflation levels above 15%
  • Rising interest rates; Turkish 10-year government bonds have a 20%+ yield
  • High trade deficits; they import more than they export

The overheated economy in Turkey has also resulted in a currency crash. The Turkish lira has collapsed versus the US dollar as investors are concerned about Turkey’s debt obligations (both government and corporate) to other countries. As the lira collapses, foreign debt becomes increasingly difficult to service and manage. See the chart below illustrating the weakness in the lira:

Also, relations between the US and Turkey are at a low point. Turkey has detained a US pastor accused of supporting a 2016 failed coup in against Turkish President Erdogan. In reaction, President Trump recently announced increasing sanctions and a doubling of tariffs on Turkish steel and aluminum.  This has added to the panic around Turkey, and the world watches and worries about contagion to other regions of the world, particularly The European financial markets.

But let’s put some perspective on Turkey’s economic crisis. On a macro scale, Turkish debt levels are smaller than what Greece was during their crisis several years ago. Outside of a handful of banks, there is not a lot of Turkish bond exposure in the global financial markets. Further, Turkey’s GDP is roughly only 6% of the Eurozone. Yes the Turkish stock market has fallen a lot, but it has become extremely cheap now possibly enticing investors. What global markets are really looking for is an internal Turkish economic plan to battle rising interest rates and inflation.

As of now, the crisis in Turkey is hurting emerging markets around the world, mostly due to US dollar strength versus global currencies. The GTR (EELV only has a 1% exposure to Turkey), G40i (no Turkish holdings), and Endowment (D and E) have international stock market exposure and have been negatively affected as a result. The crisis in Turkey could last awhile longer, but we feel the financial damage to international currency and stock markets has already occurred.

The MSCI EM Index is currently trading at 11.3 times forward earnings. This is a 26% discount to developed markets.  Based on price-to-book EM stocks look even cheaper. Following a nice 2017, returns in EM are weak in 2018 and we think hold value. There are still political and currency risks in emerging market investing, but for those with longer time horizons the risk/reward ratio looks favorable.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on August 15, 2018 Read More

Two Steps Forward – One Step Back

The choppy markets of 2018 continued to move higher in July as investors reacted to the news of the day.  The headwinds were generally self-induced as Washington rolled out more tariffs in an effort to deliver a world with fewer tariffs.  The final answer here is unknown, but any long-term improvement to free and fair trade will not come without some short-term pain.  The market is handicapping this on the fly, and the days when we saw corrections seemed to correlate with escalating fears of expanding the trade wars.  The tailwinds pushing the market upward, on the other hand, have been a result of strong corporate earnings or positive economic data.

This ebb and flow of positive and negative information is evident as the second quarter earnings season hit full stride in late July.  Two of the FANG stocks were severely punished when earnings and outlooks for Netflix and Facebook fell well short of expectations. As a group, the FANG stocks are down 10% from their June highs.  On the flip side, other companies like Coca Cola, Caterpillar, Pfizer, Apple and Datawatch posted great financial results and shareholders were rewarded.  On the economic front, the U.S. generated a 4.1% GDP growth number in the second quarter which is beginning to reflect the positive effects on our economy of tax cuts, reduced regulations and a confident consumer.

Stocks had their best month since January.  International stocks, emerging markets and the U.S. stock markets all posted healthy gains for the month. The two major international indices (MSCI Emerging Markets and MSCI EAFE) were up 2.20% and 2.46%, respectively, in July.  The much followed S&P 500 gained 3.72% while the Dow Jones Industrial Average posted an impressive 4.83% return for the month.  The technology and biotechnology focused NASDAQ Composite added 2.19% as the FANG correction weighed on the index.

In the bond market, prices fell slightly after the benchmark 10-Year U.S. Treasury yield began a move back up toward the magic 3.0% point.  The benchmark 10-Year U.S. Treasury yield moved up 11 basis points to yield 2.96%. The yield curve continued to flatten: the 2-Year Treasury rose by 15 basis points to end the month yielding 2.67%, and the 30-Year Treasury rose 10 basis point to 2.98%.  While interest rates on longer term bonds are still low by historical standards, the short end of the yield curve is beginning to offer value as the 2-Year Treasury approaches 3.00%.  We still believe owning fixed income securities in your portfolio will not hurt you, nor will they help your assets grow. Their value will either be an insurance policy against a stock market correction or a source of liquidity, income or price stability.

Expect heightened volatility to continue as we move down the road on trade and into the heat of the mid-term elections.  Politics, elections, tweets and rhetoric are background noise which needs to be toned down.  Earnings, valuation and economic results will shape the degree of volatility and the direction of the market.  The latter are fundamentals which we monitor closely and ultimately drive long-term price movements.  Our current market optimism comes from the solid fundamentals of strong earnings and economic growth.  Stay invested and focus on the fundamentals, not the noise.


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on August 6, 2018 Read More

The Continued Rise of E-Commerce

One of the long term secular themes in the market over the past 10 years has been the steady rise of E-Commerce as part of US consumer spending habits. The below chart shows the consistent increase in market share of E-Commerce as a percent of total retail share.

E-Commerce share has risen from just under 4% of total sales in 2008 to over 9% in Q1 2018. Considering total retail sales was $5.2 Trillion over the last 12 months, this growth of market share in E-Commerce represents a very large dollar figure.

Also, the below chart reflects the growth of E-Commerce from Q1 2012 through Q4 2017. The yellow line shows that E-Commerce sales have grown between 12% and 17%, which is significantly faster than the 1-7% range of growth for total sales during the same period. The data clearly reflects the consumer preference to spend more of their discretionary dollars online.

Finally, the chart below indicates the estimated market share growth of E-Commerce to total retail sales out to 2021. It reflects that the share gain of E-Commerce is likely to continue as new firms enter the market, existing firms transition more business to their online platforms, and existing players continue to grow faster than the overall market.

We have already witnessed some of the ramifications of this trend within several companies and industries. Whether that has been the significant rise of Amazon, the strategic changes and acquisitions going on at Wal-Mart, or the difficult market environment for several physical retailers in industries like retail apparel, electronics, and bookstores. Logistics providers, like UPS and FedEx, have had to adjust to increasing volumes but changing price dynamics and capital needs for their businesses. Pharmacy companies, like CVS and Walgreens, have had to face a more uncertain future as mail/online pharmacies create the opportunity for much greater competition. Even companies like REITs have to understand E-Commerce trends and how it affects their existing and future clients and their changing real estate needs.

By all indications, E-Commerce is a trend that is here to stay. How companies provide value through multiple channels will be a significant indicator of their future potential and growth opportunities. Selecting investments, especially within those sectors affected by E-Commerce trends, will rely on finding business models that can survive and thrive as a result of the changing landscape.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on August 1, 2018 Read More
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