From the team at Freedom Asset Management
There was a brief ray of sunshine on Sunday afternoon… and Hong Kong’s Kowloon waterfront sparkled, see below.
Trump takes control
There is both excitement and trepidation as Trump corals the horses ahead of his inauguration on 20th January 2025. The Wall Street Journal writes that he is preparing a large number of executive orders to issue on day 1.
The mainstream media are still licking their wounds in disbelief at being completely side-lined by the electorate – Michael’s article below explores why looking at the betting markets may be a better proxy than pollsters going forward.
One quotation, I think that sums up Trump is from Peter Thiel voiced even before the 2016 election – Thiel is the slightly reclusive, ridiculously successful billionaire investor and sponsor of Trump’s VP elect, JD Vance:
“I think one thing that should be distinguished here is that the media is always taking Trump literally. It never takes him seriously, but it always takes him literally. … I think a lot of voters who vote for Trump take Trump seriously but not literally, so when they hear things like ….the wall comment, their question is not, ‘Are you going to build a wall like the Great Wall of China?’ …. What they hear is we’re going to have a saner, more sensible immigration policy.”
Source: https://www.cnbc.com/2016/11/09/peter-thiel-perfectly-summed-up-donald-trump-in-one-paragraph.html
Ukraine – 1 day on… and no peace in sight
An example of the literal interpretation would be on Ukraine, where Trump promised he would resolve the situation “in one day”, which manifestly he has not (although I accept he is not yet in the Oval office). What is interesting is that after Trump won, and he and Zelensky spoke, Ukraine sent 84 drones to attack the Moscow area (for balance Russia sent 145 drones the other way). That would suggest to me that Trump gave Zelensky the green light to keep fighting/escalating with a view to bringing Putin to the table on better terms. And I read this morning in the FT, that this ratcheting up of pressure has gone further, with Biden authorizing Ukraine to launch limited strikes into Russia using US-made HIMARS long range missiles.
All this may have come as a surprise to Putin, given Trump’s rhetoric in the run up to the elections. But now means also that Putin will probably be taking full advantage of the window before Trump is anointed to do as much as possible to put the Ukrainians under pressure. We should expect some unpleasant intensifications, as has been signalled this morning.
We will of course be watching this space closely, but having been on the other side of a “mad, crazy person” negotiating table once before, I can say that “chaotic surprise” as a negotiating tool is not to be under-estimated at all.
The Middle East takes stock of Trump/Iran/Israel
The Middle East is concerned that Trump is much more pro-Israel than Biden. I had an interesting discussion last weekend with a well placed security analyst based in the Middle East. If you remember one of our earlier pieces talking about the prevalence of US airbases in the Middle East which essentially all point to Iran (reminder below):
US airbases in the Middle East and RAF Akrotiri
Source: Reuters, February 2024 and American Security Project, and Freedom Asset Management
It is perhaps less well known that the host countries (incl. Saudi, Bahrain, Qatar and the UAE) have specifically forbidden the US from launching offensive air strikes from those bases against Iran in support of Israel. They are purely defensive bases. An emboldened Trump might ask them to reflect on that understanding – in the sense of “you are either with us, or against us”. And if you take that to its logical conclusions, either a threat to remove US forces from the Gulf, or change that understanding, that could see interesting ramifications.
Again, this is one we will be watching closely and his choice of Defense secretary, Pete Hegseth, shows his hardline stance against Iran will start on day 1. Iran, for its part, has subsequently signalled this weekend that some negotiation is possible around a nuclear deal in return for some sanctions relief …. funny that, isn’t it? If the US were to enforce sanctions more strongly against Iran, especially on oil exports, (the majority of which go to China), Iran would be put in a much more difficult financial position. Iran may be a highly dangerous regime intent on upsetting Israel and Middle East stability more broadly… but they are not stupid.
“DOGE” – Dept of Government Efficiency!
One of the guiding lessons I have learnt is that “nothing is forever”. 20 years ago when I was at BlackRock, I used to look around the office to see how many people were over the age of 40 (not many) … and then over 50 (really not many). There was an implicit silent filter that wasn’t to be found in any staff manual. As much as I really enjoyed it, I knew that I could not plan to be there forever.
As we have built a business over the last 10 years, I have never felt the need to support office landlords in the lifestyle to which they have been accustomed – no 20-year full repairing and insuring leases for us. We are smart where we spend our fixed costs and not afraid to “up sticks” for a better deal or more appropriate office layout. We look closely at our outsourcing partners (we outsource as much as we can) to make sure we build in the maximum sensible operational efficiencies and therefore scalability in our business. Simply put, the lower the cost, the more revenue opportunities become viable.
Aside from our clients, our most important assets are (1) our people and (2) our way of doing business – it is not shiny offices, or our CSR programme. The net effect of all of this means we can redeploy excess capital into better opportunities, geographies (e.g. Abu Dhabi and Hong Kong) and technology (our new client web portal to be released shortly) – to produce better outcomes for our clients and the business. We, respectfully, let our clients plant their own trees.
Much of the money we manage for private clients and family offices is first generation wealth. They have worked hard for that money and made tough choices on the way, usually involving a sacrifice.
It’s strange that governments never see the world like this, especially given they are spending “our” money. I look forward to Elon Musk and Vivek Ramaswamy putting the US public sector through its paces.
The negative view being touted around is that if the cuts go very deep, given the size of the public sector relative to the US economy, this could be detrimental to GDP (growth). And whilst that might be a little bit true in the short term, the counter argument, much like our own above, is that if you remove underperforming assets, in this case, from the government sector and put them in the private sector (so they are actually contributing to the economy as opposed to being a tax on the economy) that has to be a good thing. It is simplistic, I know, but the only way the US is going to change the trajectory on its significant external debt is to find a new source of more, enduring “growth”. And this is one way you could get there.
It is difficult to find an exact number, but the US public sector represents about 40-50% of the US economy. Just imagine if you could re-deploy even 20% of that (i.e. 10% of GDP) to the private sector – the medium term GDP impact of that would take you to the moon!
Today, we have articles from Michael Griffith-Dixon who looks at whether betting on an outcome, makes for better predictive outcomes and Justin Oliver who looks at the relative returns of US assets since 1800 and concludes that the outlook for US equities is positive.
Please enjoy the articles.
—————————————-
“Does putting money on a decision make for better predictive outcomes?”, 18/11/24
By Michael Griffith Dixon – Investment Manager
The Economist recently ran a story entitled “The wisdom of the crowd”. The piece is looking at whether betting markets knew better than political modellers since crypto-betting site Polymarket consistently showed Trump winning despite all the naysayers. The article concludes that although betting markets called a Trump win, they did not predict the magnitude of the win nor the popular vote going his way. The central question though is “does putting money on a decision make for better predictive outcomes”?
I think intuitively, yes. If you have skin in the game, you’re more likely to think more deeply about your response. And if a pollster asks you who you intend to vote for, you are only considering your own voting behaviour. Betting on an election forces you to consider the behaviours of others. This creates a sort of enhanced estimator as individuals weigh up their own intentions with their expectations of others, potentially multiplying the significance of results. This sort of thinking is baked into financial markets. Theory suggests markets are at least partially efficient, which means they price information more correctly.
We expect the wisdom of crowds in markets to price in fundamental information. If a company is increasing its profits, then the value of that company should increase. We all know markets aren’t perfect, and US stocks especially the Mag 7 have been looking pretty expensive, but does the crowd know best? Below are some charts that Wei Li, Global Chief Investment Strategist at BlackRock, shared on LinkedIn.
The first graph shows the US market (white) against the world excluding the US (orange). The green is the gap in price normalised size 2007. The gulf is enormous but appears to be justified when we look at earnings per share on the second graph. Earnings have gone up with prices.
Source: Wei Li via LinkedIn https://www.linkedin.com/posts/wei-li-a93561b_2-takeaways-from-this-striking-comparison-activity-7262407658282872832-cIz-?utm_source=share&utm_medium=member_desktop
Wei Li’s takeaway from these data is that US exceptionalism is real, but that it is pricey, since price has gone up more than earnings. This suggests that the market expects earnings to continue to rise. Although financial markets share aspects with betting markets, they aren’t the zero-sum game of sports or politics betting. It is possible for everyone to win in financial markets, unlike a Ponzi scheme where someone is left ‘holding the bag’, equity prices can go up because the underlying asset is worth more. The company is generating more profits which it can return to investors as dividends or reinvest to generate more profits.
There is definitely wisdom in crowds, and I believe even more wisdom when people are incentivised to get the right answer. It’s one of the reasons we consider momentum when looking at investment opportunities and it also affirms our view that the US is still the best market to invest in – although we do keep an eye on the price!
Michael Griffith-Dixon
———————————-
“Looking at the last 224 years, the outlook for US equities is positive!”, 18/11/24
By Canaccord’s Justin Oliver – Investment Adviser to Opus Global Growth Fund
Every now and again in the investment world, you read an article or piece of research which makes you stop and think, “Wait. What?” That happened last week courtesy of Deutsche Bank’s famous study on market gains over the nine quarter-centuries since 1800.
As things stand right now, it’s hard to think of a better time for stock investing. The S&P 500 has been hitting record after record, AI euphoria is everywhere and even veteran strategist Ed Yardeni — one of the biggest bulls on Wall Street — is concerned he’s not quite optimistic enough.
And yet, for all this exuberance, the Deutsche Bank study has shown that US equities are actually on track to deliver their second-worst performance over a 25-year period when adjusting returns for inflation. In the most recent period, the nearly 5% annual average advance is so modest that it means US stocks are on track to underperform gold for the first time ever over this quarter-century timeframe, while precious metals, copper and wheat are among the top performers.
While the rally in US stocks has been far stronger than their developed peers, it’s not “spectacular” in absolute terms or even relative to government bonds. That’s the conclusion of Jim Reid, Deutsche Bank’s global head of macro and thematic research. US equities, since the 1800s, have seen a real annualized total return of 6.9% — far outpacing 10-year Treasuries.
All this may be hard to believe given the amazing developments the world has witnessed in the past 25 years from Apple’s invention of the iPhone to voice assistants including Amazon’s Alexa. Moreover, it was only in this century that 3 of the so-called Magnificent Seven stocks — Alphabet, Tesla and Meta Platforms — debuted in the US.
A big part of why returns have been paltry is the starting point, says Deutsche Bank. This period began, after all, at the peak of the dot-com bubble, which saw the highest price-earnings ratio in the S&P 500’s history. Valuations matter and as we have often stated, the price which you pay for something is the most important determinant of future returns. Case in point: just a little adjustment to account for five extra years (i.e. from 1995) and the returns would be the third best in the sample taken by Deutsche.
And what about the next 25 years? The bank thinks stocks will once again reliably beat government bonds, especially given ballooning deficits. “We’re unlikely to leave the current policy era behind where the authorities have a bias to reflate when the inevitable crises associated with a levered low-growth system come along,” the strategists wrote. “It’s easy to imagine periodic bursts of inflation.”
So, despite their “disappointing” 25-year performance, and regardless of the 50+ new US stock market highs made this year, the outlook for US equities until the year 2049 appears favourable.
Justin Oliver
—————————
Funds performance
It was little bit more lively out there this week, so there was some consolidation of recent gains, but still solid numbers for the year to date – and a clear runway to continued growth in equity markets in 2025. Also, the post-Trump melt down of Sterling and the Euro against the US dollar means that Sterling returns are now ahead of US dollar returns on the funds.
For our Luxembourg VC fund investors, this was a helpful week with Klarna putting its IPO documents into the SEC for a much awaited $15-20bn IPO. This should result in a 2-3x on that position if the IPO runs smoothly. That combined with a sinking EUR exchange rate against the US dollar means our EUR unit price should see a healthy boost.
Our public markets strategies are below:
- Our balanced, Opus Global Freedom fund c.+11.2% YTD in US dollars (c.+11.4% in GBP)
- Our growth fund, Opus Global Growth fund c.+12.4% YTD in US dollars
(Source: Estimates Freedom Asset Management as at 17/11/24. 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)
Our private markets strategy is below:
- Astro Diversified Alternatives c.+2.2% to 1H’24 (c.+7.2% incl. 5% discount to NAV) in US dollars – note fund prices quarterly
(Source: Freedom Asset Management, as at 29/9/24)
Our institutional public markets strategy is below:
- CIM (Asian) Dividend Income Fund (Class I) c.+22.5% YTD in US dollars
(Source: FT Markets, as at 17/11/24)
I will be happy to find the sun again in Abu Dhabi later this week. We have Justin Oliver from Canaccord in town so I look forward to those client meetings.
Wherever you are, let me wish you a wonderful and peaceful week ahead – and let’s hope the possible typhoon (again) for Hong Kong this coming week does a little swerve!
All the best,
Adrian
Adrian Harris
CEO
Freedom Asset Management Limited
M: +44 7781 40 11 11 // M: +971 585 050 111 // +852 5205 5855