Brexit and Trump’s election as US President in 2016 once again proved that we cannot predict macroeconomic events. With earnings growth at a low, we will continue to look for mispriced bargains.
Read the transcript of this video below
The world in 2016
2016 was certainly one of the more interesting years for anyone working in the investment industry. One of the lessons that fund managers have once again learned in 2016 is that it is pretty much impossible to try and predict macroeconomic events. Almost everybody thought that the vote in the UK would be for remaining and not leaving the European Union, and yet it was Brexit that prevailed. The second interesting event was that not too many people in the run-up to the US election thought that Trump would become president, yet he did. The most interesting part is possibly that even those who thought Trump might become president also thought that the market would fall quite sharply once he did become president. However, we all now know that there was a sharp rally after it became clear that Trump was going to be in the White House for the next four years.
How we have positioned our funds
For Denker’s global funds, there are two strong market themes that we can exploit. The first one relates to financial stocks, where we see that even though there was a bit of a rally in December, financial stocks are generally still quite beaten up following the financial crisis. The Best Ideas Fund, for instance, is overweight this sector. The other area where we feel that our stock picking can work well is in emerging markets. Our emerging markets fund therefore also holds companies that still appear to be quite cheap. From a geographic perspective, the Best Ideas Fund is only overweight the UK. That is because you always find bargains where news seems to be bad. After Brexit, we have seen many bargains in the UK that we believe are still not properly priced into the market, which is why we have an overweight position in UK stocks.
So where does this leave us after the political and economic events of 2016? Markets have rallied quite sharply. If we look back over the last five years global markets are up 70%. Earnings on the other hand have only grown by about 5%. In the long run, prices should follow earnings and therefore markets look a little stretched to us. That means we have to be even more careful about our bottom-up stock picking decisions and look for bargains where we can find them.