Prior to Tuesday’s US Presidential election, Clime’s Head of Investments, Anthony Golowenko, penned a letter to our investors outlining Clime’s viewpoint on potential election outcomes and the respective market implications. As well as our recent portfolio positioning, he describes how you might use a value based investment strategy to take advantage of any opportunities created by volatility following market reactions to election results. See below:
US Election Perspectives & Portfolio Positioning
On the eve of the United States of America going to the polls in the 45th US Presidential Election, we provide an overview of Clime’s perspectives on the election and, perhaps more importantly, resulting portfolio positioning. Similar to what we saw following the UK’s decision to leave the European Union, we view volatility created by market uncertainty as creating opportunity to selectively build positions in attractively priced securities.
US Election Perspectives
In what can only be described as a truly extraordinary US election campaign, the contest has descended into the realms of a modern day pantomime where both presidential candidates fundamentally lack the trust of the American people. The collective voice of a growing number of disgruntled Americans is demanding to be heard and in the process the very foundations of the American political system are being shaken.
Our view that Clinton will very likely prevail has firmed in recent days, however we still maintain that the odds of a Trump victory (while declining) are currently being underestimated by market participants.
Expect to see continuing volatility and some oscillation in financial markets over the coming days. Under a Clinton victory we’d expect to see an extension of the modest relief rally, but certainly not bursting through to establish new highs.
We encourage investors to use the opportunity created by volatility to selectively build positions in quality businesses trading at attractive valuations. Markets hate uncertainty. It is this uncertainty can create the opportunity to find value in great businesses.
Clime is a value based investor. We have a clear framework to assess what we believe a company is worth based on rigorous investment analysis. Our investment approach requires an appropriate ‘margin of safety’ when entering into a position and our team-based approach ensures both discipline and conviction in pursuing those most attractive opportunities.
Australian Growth Portfolios
We have used the US election uncertainty to make the following changes in portfolio positioning over the past two weeks.
Large-cap sub portfolio: Added to Seek Limited (SEK) and incrementally built on the QBE Insurance (QBE) and CSL Limited (CSL) positions.
Mid-cap sub portfolio: Added to APN Outdoor (APO) and established a new position in Automotive Holdings Group (AHG).
Small-cap sub portfolio: Added to RCG Corporation (RCG) and incrementally built on the Elders (ELD) position.
Cash allocation: Across the Australian Growth Portfolios, between 2.5% and 3% of capital was deployed from 25th October to 7th November.
Portfolio protection: Having cushioned the portfolio against recent volatility, the BetaShares Strong Bear Fund (BBOZ) risk position was reduced from 3% to 2%.
With the exception of BBOZ, all of these selective opportunities have been sold down to attractive levels for investment. We see value, we apply discipline and rigour in our investment process and we apply this process with conviction.
Clime International Fund (From the Sanlam Investment Team in London)
We believe that stocks will likely enjoy a short term relief rally if Clinton wins but will struggle to exceed previous highs. The relief rally seems to have already started on Monday 7th November with the S&P up by 2% as news emerged that Clinton’s chances of becoming the next US president improved markedly over the weekend. Beyond the near-term relief rally, we are unchanged in our view that (measured in US dollars) global equities will struggled to make meaningful headway.
On stock specific areas we note that a democratic alignment of the presidency and Congress in the US would increase the likelihood of drug pricing regulation, with negative implications for Pharmaceutical and Biotechnology sectors. These sectors seem to have priced in a continuation of the status quo, and the stocks hence face an asymmetric risk to the downside from an unexpected outcome. Healthcare has been a weak performer over the past two weeks.
That being the case, we are of the opinion that select companies like Johnson and Johnson and Medtronic still offer good long term value and have used this opportunity to add to these positions in the fund.
Drawing parallels between the US election and upcoming European elections, a growing area of concern to us is the migration of voters away from the centre to the more radical right movement and the disgruntled voice illuminating their perceived ineffectiveness of established political regimes.
In our view the financial community’s seeming complacency in the short term in light of these political concerns is not fully reflecting the potential for a worsening risk-reward for equities. The Clime International Fund currently holds around 30% cash, the majority being held in USD. We continue to seek out opportunities to selectively deploy capital in periods of heightened uncertainty and resulting volatility.
As active value investors, we believe US election volatility brings with it selective opportunity. We are utilising the current volatility to add to our most attractive investment opportunities across portfolios.
If you would like to speak to us about any of this, please don’t hesitate to contact us and arrange a conversation.
Head of Investments