From the team at Freedom Asset Management
Photo of the week is the gala dinner of the Abu Dhabi Finance Week. Whenever I think I have seen it all, Abu Dhabi manages to dig deeper – here is the stunningly tranquil and beautiful setting of the Presidential Palace at Qasr al Watan.
Pictured: AD Global Investors’ David Rothon and Adrian Harris arriving early for the Abu Dhabi Finance Week gala dinner
Syria ‘explained’
On Monday last week we saw the fall of Damascus and the end of the Assad regime in Syria. I promised a write-up this week. Scanning our usual daily sources and talking to our political and security sources on the ground in Abu Dhabi, if anyone was hoping for a simple analysis a week later of where this is all going, let me disappoint you now – there isn’t one.
First of all, the Syrian rebels are not one group. There are at least 4 different groups with different agendas and gripes. Although the HTS team have taken the lead, they also seem to resemble the BREXIT team on the day after the BREXIT referendum (that they were not supposed to win), i.e.: no real idea what they are doing. And everyone else is looking on and asking “what just happened?”.
The Wall Street Journal has an excellent moving graphic on the different groups, see below:
I listened to Carnegie Endowment’s Senior Fellow Karim Sadjadpoor speaking on CNBC’s Squawkpod on 12/10/24. He said that this was a significant moment in the region that has changed the balance of power. He noted that before Israel’s incredibly effective offensive against Hamas and Hezbollah, Iran had been the region’s most powerful actor, “dominating 5 failing ‘states’: Syria, Iraq, Lebanon, Yemen and Gaza”. That is most certainly not the case now. His read out is that Turkey emerges as the real beneficiary in terms of regional power. And let us not forget that Turkey is a member of NATO, even if it is does not always act like it.
Karim went on to say that the best-case outcome for Syria is “another Turkey”. And for that I would read, moderately secular, occasionally vertical interest rates and an only slightly repressive democracy, but incredibly resourceful and resilient people where some form of capitalism works well. The worst case, however, could be “very bad – a Taliban style outcome, or a failed state and a resurgence of ISIS”. Let’s hope it is not the latter.
Another consequence is that it has potentially uprooted Russia’s power projection in the Middle East and Africa. Either Russia does a deal with the new rebels, or it needs to find a new friendly airstrip within refuelling distance of a few tricky African regimes. As of this morning, reports suggest that no deal has been done, but that the Russians are staging an organized retreat to the Khmeimim Air Base with a view to negotiating its future.
And that pretty much sums up Syria for now.
So, what does the West do here?
After the failed Arab uprisings, the West no longer has a will to transform the Middle East into a secular liberal democracy.
In his first term, Trump is reported to have said “there is nothing but death and sand in Syria… We should stay out of it”. And just last week, Trump posted, “Syria is a mess, but is not our friend. The US should have nothing to do with this. This is not our fight. Let it play out. Do not get involved!”
(Source: BBC News 11/12/24 reporting from “Truth Social”)
Biden has about 5 weeks left to run, and there is a conspiracy theory out there that he is trying to mess up the world as much as possible before Trump is back in power on 20th January 2025, but I think engaging on Syria at this stage even by Biden’s tricky history would be pretty bold.
The legacy of the former British Empire still rocks
When I travel around the world, there is obvious nostalgia about what used to be part of the British Empire (the pink bits), but I have come to think that the British were pretty smart “giving up” or “giving back” large swathes of the Empire.
Instead of gravity defying defence budgets paid for by taxes on the hard working people of Liverpool and Glasgow to defend the indefensible against angry armed militias or powerful neighbours, we Brits, instead, are free to run international businesses and repatriate money from places where we are pretty much universally welcomed for our knowledge of the system of international trade and commerce. We just stay out of the local politics. And sometimes, we even get to sell these countries very significant defence/arms contracts – an irony indeed.
The best British legacies are our language, our legal system and the system of institutions we set up. And maybe pop music. On that note, I saw Geri Halliwell in the Paddock at the F1 in Abu Dhabi the other weekend – and whilst it was great that a fellow Brit, Lando Norris, won the grand prix, nothing comes close to a chance glimpse of Geri.
Pictured: Geri Halliwell in the Red Bull Paddock at the Abu Dhabi F1, 7/12/24
Whatever ‘it’ is, Geri still has it…. and if we gave the Syrians a dose of the Spice Girls, I suspect the world would be a much happier place!
China sells FDI in Abu Dhabi
The “Invest in China” Abu Dhabi roadshow was in town last week. There is no question that China is putting on the charm offensive for foreign investment, witness our recent QFII allocation in Hong Kong as I mentioned last week. A few statistics that jumped out: China has 2,900 universities that will pump out 12m graduates next year, of which 6m are scientists or engineers. Those are very large numbers – essentially a graduate population the size of London every year.
My top tip to the Chinese delegation, however, is that next time you send English speakers – or just send Geri, both work. Nobody is expecting the delegation to speak Arabic, but of the 6 Chinese high-ranking speakers only 1 spoke English, so we were all reaching for our headphones for the translation. Needless to say, the UAE delegation spoke perfect English.
Bitcoin (“BTC”) turns $100k and is now respectable
Regular readers will know what I think of crypto. But crypto has matured a lot – and it might just bail out the European VC sector in the process.
With the incoming Trump presidency and a change in command at the SEC, I believe Bitcoin will prevail over all others, which is why we allow Cody and the team to invest in the Bitcoin ETF in the upcoming US Technology VIP strategy. But as Cody says, 99% of the rest are scams or outright criminal.
Bryce has written a piece which talks to how easy it is to set up a scam crypto – we are going to save this piece for our Christmas bumper edition next week. It is a surprisingly simple process.
At ADFW, I caught up with the management of M2 the new Abu Dhabi based and listed crypto market, which is 70% owned by the UAE government. They talked of their plans to create a new stable coin in AEDs. AEDs are UAE Dirhams – i.e. the US dollar-pegged legal currency of the UAE.
Stablecoins have 2 helpful purposes – (1) if you are a US tax payer, and you trade your crypto positions via a stablecoin, then I understand you do not trigger a tax liability (i.e. quite useful), and (2) they are also useful if you are trying to trade/clear lots of transactions intra-day. I sat down with the head of strategy at Northern Trust last year and he noted that if the US stock exchanges were moving from T+2 to T+1 settlement then this would still be possible through the existing financial architecture, but that ultimately the future of securities settlement was “atomic” settlement, i.e. instantaneous – and for that you need stablecoins, which can process transactions very quickly, reliably and at minimal cost.
What is of course potentially clever about an AED stablecoin is that you have the implicit protections of the value of the USD, but the ability to transact outside of the purview of the various US regulatory agencies. And if you run a stablecoin, then you get to keep all the interest on the stablecoin backed deposits. Clever indeed.
Fund performance
The year is coming to a close and the performance of the funds has been strong.
|
YTD Performance |
|
USD |
GBP |
|
Public markets * |
|||
|
Opus Global Freedom (Balanced) |
+12.6% |
+12.6% |
|
|
Opus Global Growth |
+15.3% |
+15.3% |
|
|
Private markets ** |
|||
|
Astro Diversified Alternatives |
+9.3% |
||
|
Institutional public markets *** |
|||
|
CIM (Asian) Dividend Income |
+27.3% |
||
Source: * Estimates Freedom Asset Management as at 15/12/24. Please note depending upon how the funds are invested a small number of underlying funds can price 1-2 days after we take our estimates above so final published NAVs may vary. Estimated GBP returns are from a $1.2622 FX rate on 2/1/24, ** as at 30/9/24, note fund prices quarterly and includes 5% discount to NAV expressed as 5% performance above for 2024, *** FT Markets as at 15/12/24, I shares.
This week, we have articles from:
Michael Griffith-Dixon, “London: Japan, Small Cap and the power of the US”
Canaccord’s Justin Oliver, “Exploring Trump’s tariffs”
Please scroll down to enjoy the articles. We are saving some articles for our Christmas bumper edition next week.
From Tuesday, I shall be in Guernsey until the New Year. I wish you a wonderful week ahead!
Adrian
Adrian Harris
Co-Founder & Chief Executive Officer
Freedom Asset Management Limited
M: +44 7781 40 11 11* // M: +971 585 050 111 // M: +852 5205 5855*
*Also WhatsApp numbers
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“London: Japan, Small Cap and the power of the US” 16/12/24
By Michael Griffith Dixon – Investment Manager
Last week, Ramon and I took a trip to London to meet with managers, some we are already invested with and others pitching their funds. It’s always good to meet portfolio managers in person, you really get a feel for the passion good managers have for their craft.
We met with the managers of the Zennor Japan Fund, which represents about 3.5% of the Opus Global Freedom Portfolio (OGF). They are a boutique manager that focus only on Japan. A big reason we chose to invest with Zennor was because their approach to investing is not a geographic play. There’s been a lot of excitement about Japan, but the growth thesis for Japan is not a rising tide that will take all companies with it. Unlike emerging markets like India or Vietnam where the whole market can be swept up – or collapse – on market momentum, Japan is a developed market that is transitioning.
The thesis for Japan is that it’s a market full of inefficiency. Lots of Japanese companies are valued below book value, have huge stores of cash and real estate, and have become bloated conglomerates. Anecdotally we were told about a family-owned casino business which had been losing money for years, it was sold and the new buyers made it profitable within a single month! They didn’t revolutionise the business, just moved advertising online along with a few other simple changes.
There were other similar examples, and much like the UK, Japan has a lot of private equity houses hoovering up businesses that they believe the public markets have mispriced. This is why active management in Japan is important – not everyone can spot the diamonds from the value-traps.
The governance improvements and increased shareholder focus being championed by the Tokyo Stock Exchange is expected to push up prices across the whole market, but there needs to be the will from management and a catalyst for real change.
No market is immune from momentum, and we heard quite a few managers expressing concerns that a correction in the US is coming, but that it could be years away. Japan wouldn’t be immune from a drawdown in the US and the yen could come under pressure if US rates stay higher for longer. A theme from managers was that Trump “could do a lot of good” or “isn’t so bad” but that his policies are inflationary – 2016 and 2024 are very different times.
The US market was a subject we could not avoid. It’s the biggest capital market in the world and it now dominates indexes which are supposed to be global. Trump is a polarising figure in his politics, but also in expected economic outcomes. He will be supportive of equities, but he will spur inflation. He’s pro-business, but could drive up costs by depriving businesses of cheap labour. He wants to stop global conflicts quickly, but he’s pushing for more defence spending from allies. He wants lower interest rates, but his spending plans may curb the Fed’s capacity to cut. All of these topics will be closely watched by all managers, even those who don’t invest in the US.
Acadian, who manage a US Small Cap fund which is also held in OGF. They some more difficult questions to answer. The US Small cap fund had initially underperformed its benchmark. Performance has been strong in the last few weeks, up around 10% since our investment in August, but still below the US small cap universe. The fund is systematic, they follow the same rigorous strategy across all their portfolios, but only US small cap was below benchmark. Acadian still have faith their strategy of targeting companies which score highly in value and quality metrics outperform in the long term – this is a temporary blip cause by irrational pricing of low quality and low value scoring stocks.
There was quite a lot of technical jargon but to keep it short and sweet, Acadian strongly believe the fundamentals will win out in the long run. As one of the managers put it “if you see 10p on the floor you may ignore it, but if you see £20 you will pick it up.”
Michael Griffith-Dixon
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“Exploring Trump’s tariffs”, 16/12/24
By Canaccord’s Justin Oliver – Investment Adviser to Opus Global Growth Fund
President-elect Donald Trump has promised to impose massive hikes in tariffs on goods coming from Mexico, Canada and China, beginning on the first day of his administration, a policy which could sharply increase costs for American businesses and consumers. While this is a danger, we tend to agree with the optimism that tariffs ultimately will be used as a negotiating tool rather than a genuine source of fiscal revenue. However, we acknowledge that the news in January and February might suggest otherwise, potentially increasing volatility within financial markets as investors reconsider the tail risks.
Trump has two incentives to hit the ground running with tariffs and even deportations:
First, Trump has greater control over tariffs, which can be enacted by Executive Order.
Second, as things stand, tariffs are supposed to play a significant role in facilitating the extension of the TCJA tax cuts (Tax Cuts and Jobs Act), making them permanent, and creating a $3.4 trillion “hole” which needs to be filled, and that’s before the further $1.2 trillion cost associated with exempting social security benefits, the $1.0 trillion needed to restore the full State and Local Tax (SALT) deduction and the $2.4 trillion required for the expansion of Child Tax Credit. As a result, unless the Republicans have a procedural trick up their sleeve – very possible – then it’s hard to escape the conclusion that debate around tariffs, at the very least, will be very intense as the Reconciliation Bill or Bills work their way through Congress.
Sources: GlobalData TS Lombard, Tax Foundation
Europe and Japan, in particular, have something to offer at the business level in the form of locating factories in the US. At the same time, in the Robert Lighthizer view of tariffs, their aim is to redress economic imbalances. The mere threat of tariffs appears already to be having a positive effect on this front. Europe is dragging its way towards greater defence spending. At the same time, there could be a silver lining to the failure of the French budget and the 1.9% of GDP contraction in the deficit that it promised. It is likely that the next government will attempt some form of consolidation, but it seems unlikely to be as significant as in this fallen budget.
Sources: GlobalData TS Lombard, Datastream
Sources: GlobalData TS Lombard, Datastream
For the bloc as a whole, the economy could well rebound ahead of consensus estimates as policymakers get out of the way on both the monetary and fiscal front. Europe has suffered a structural deterioration due to the changed relationship with China and the level shift in energy prices. But China, at least, is no longer worsening the deflationary outlook and the likely deregulation of shale counts for something. More broadly, the rumours and policies that started emanating from China in the past 2-to-3 months were an important signal that policymakers have changed tack and were not simply going to give up on their reflationary efforts at the first sign of trouble. Policymakers are dragging themselves towards coming good on “whatever it takes”. For China macro, this means growth, demand and Chinese assets (except the currency), are likely to surprise on the upside despite the coming tariff hit.
For now, the US economy itself should remain resilient. Fiscal stimulus has played a big part in the expansion so far, but with Fed cuts, the private sector should rebound nicely. The macro trajectory remains one of resilience, for now. 2026 should benefit from some degree of fiscal expansion. For Europe, the economy should rebound well as rates are cut and fiscal contraction threats recede. The Trumpian threat is bringing about changes in policy that will be supportive of European domestic demand. The worry with regard to the early part of next year is that the negative news seems likely to be front loaded as the tariff shocks are easier to deliver, negotiating requires a tough initial stance and it is hard to see how a Republicans can achieve everything on the agenda in tax cuts without some significant pencilling in of tariff revenues. The early part of the year risks tariffs by Executive Order while tariff issues will re-emerge as the Reconciliation Bill or Bills are worked though. Markets may not mind if the threat of tariffs is kept perpetually in the future, but the news might turn against equity markets and non-dollar currencies before the positives make a return.
Justin Oliver