Capture the Knowledge Effect in your portfolio

Transcription

1 Capture the Knowledge Effect in your portfolio Mid-Quarter Update and Commentary Knowledge Leaders Strategy Steven Vannelli, CFA September 8, 2017

2 Back to the Future: A US Dollar Bear Market? Section 1 History does not support the view that the USD is propped up by a monetary tightening cycle. The US Dollar s moves are more fundamentally based on aggregate savings, which have been declining for a couple years. The President s falling approval rating and normalization in the energy markets may be the catalyst for the USD to enter a bear market. Section 2 While it is hard for investors to comprehend how possibly interest rates can fall while commodities rise and foreign equity markets outperform, one need only look back to to see the dynamics. We have been in a USD bull market since 2008, but in we were in a USD bear market, and things are different depending on which regime we are in. If the US Dollar has indeed begun a bear market, we would expect to see the late cycle sectors (energy and materials) meaningfully outperform for the medium term, commodity prices to rise, and at the same time we think US Treasury rates can work meaningfully lower. We would also expect sectors like technology, health care and consumer discretionary to underperform. Regionally, the emerging markets and ex-us developed markets should be well situated. Section 3 On the fixed income side, we think commodity linked currencies should do well. Australian and Canadian bonds performed well in the period. The recent turn up in the AUD and CAD may be presaging a turn in the relative performance of the government bonds of each country (in USD terms). 2

3 Section 1: US Dollar Bear Market 3

4 Do monetary tightening cycles support the USD? Historically, not really United States Dollar Nominal Trade-Weighted USD Shaded Areas Indicate When US Monetary Policy Is Tightening USD '74 '76 '78 ' '82 '84 '86 '88 ' '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: Factset, as of 9/4/17 4

5 The business cycle drives the US Dollar. When the combined savings of the business, household and government declines, the US Dollar falls. United States Dollar Nominal Trade-Weighted USD Compared to the Total US Net Savings as a % of Nominal GDP 8 Nominal Trade-Weighted USD Net Savings as a % GDP 60 '88 '89 ' '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Nominal Trade-Weighted Exchange Rate Index, Major Currencies (Left) Net Savings as a % GDP (Right) Recession Periods - United States -4 Source: Factset, as of 9/4/17 5

6 The other reserve currencies are cheap. The Euro is undervalued by about 6% using our basic purchasing power parity (PPP) model over the last 20 years. 1.7 Eurozone Euro Relative to US Dollar Purchasing Power Parity: CPI Differential Rate PPP 0.7 '98 '99 '00 '01 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Over/Under Value - % (Right) Spot Rates USD/EUR, Close Daily - Euro Zone (Left) Trendline: Average (hidden) with 1st standard deviation -40 Source: Factset, as of 9/4/17 6

7 The Japanese Yen is undervalued by about 18% using the same basic PPP model over the last 20 years Japanese Yen Relative to the US Dollar Purchasing Power Parity: CPI Differential JPY Percent '98 '99 '00 '01 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Over/Under Value - % (Right) Trendline: Average (hidden) with 1st standard deviation Spot Rates USD/JPY (Left) -30 Source: Factset, as of 9/4/17 7

8 Normalization in the energy market seems to be pressuring the USD in the short-term. USD United States Dollar USD Index Compared to Commercial Crude Days of Supply Days 75 '13 '14 '15 '16 '17 United States Dollar Index - Price (Left) Weekly US Crude Oil Excl. SPR Days Of Supply, Number Of Days - United States (Right) 18 Source: Factset, as of 9/4/17 8

9 The US Dollar is sinking on the drop in the President s approval rating. Source: Strategas, as of 9/4/17 9

10 Section 2: Memories of the bull market 10

11 In , the US Dollar fell while US interest rates fell at the same time. Yield US Treasuries 30Y Treasury Yield and USD Index 12/31/ /31/2007 US Benchmark Bond - 30 Year - Yield United States Dollar Index - Price USD Source: Factset 11

12 In the , oil prices rose while interest rates fell at the same time. US Treasury US Treasuries 30-Year Treasury & Oil 12/31/ /31/2007 US Benchmark Bond - 30 Year - Yield (Left) Crude Oil, Brent, Global Spot, ICE ($/bbl) - Close (Right) Correlation: Oil Source: Factset 12

13 During the period gold prices almost tripled while interest fell at the same time. US Treasury US Treasuries 30-Year Treasury & Gold Prices 12/31/ /31/2007 US Benchmark Bond - 30 Year - Yield (Left) Gold (NYM $/ozt) Continuous Contract - Futures Price Close (Right) Gold Source: Factset 13

14 For equity investors, the period was not favorable for the relative performance of US equities. KLSU DM AMERICAS INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: Relative Pirce USD Index (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) Source: Factset. An investor cannot invest directly in an index. 14

15 US stocks underperformed in while oil prices almost quintupled. KLSU DM AMERICAS INDEX Price Relative to KLSU DM Index Compared to Oil 10 Relative Price (INDEX) Price Relative to KLSU DM Index (Left) (MOV 5D) Crude Oil Brent Global Spot ICE ($/bbl) - Price (Right) Oil Source: Factset. As of 12/31/07. 15

16 US stocks underperformed while gold prices almost tripled. KLSU DM AMERICAS INDEX Price Relative to KLSU DM Index Compared to Gold 12/31/ /31/2007 Correlation: Relative Price Gold (INDEX) Price Relative to KLSU DM Index (Left) Gold London PM Fixing ($/ozt) - Price (Right) Source: Factset 16

17 Developed Europe and Asia outperformed in the period. Relative Pirce KLSU DM EMEA INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: USD Index Relative Pirce KLSU DM ASIA INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: USD Index (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) 95 (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) Source: Factset 17

18 DM Europe and Asia outperformed alongside rising oil prices. Relative Price KLSU DM EMEA INDEX Price Relative to KLSU DM Index Compared to Oil Oil Relative Price KLSU DM ASIA INDEX Price Relative to KLSU DM Index Compared to Oil Oil 95 (INDEX) Price Relative to KLSU DM Index (Left) (MOV 5D) Crude Oil Brent Global Spot ICE ($/bbl) - Price (Right) (INDEX) Price Relative to KLSU DM Index (Left) (MOV 5D) Crude Oil Brent Global Spot ICE ($/bbl) - Price (Right) 10 Source: Factset. As of 12/31/07. 18

19 DM Europe and Asia outperformed alongside rising gold prices. Relative Price KLSU DM EMEA INDEX Price Relative to KLSU DM Index Compared to Gold 12/31/ /31/2007 Correlation: Gold Relative Price KLSU DM ASIA INDEX Price Relative to KLSU DM Index Compared to Gold 12/31/ /31/2007 Correlation: Gold (INDEX) Price Relative to KLSU DM Index (Left) Gold London PM Fixing ($/ozt) - Price (Right) (INDEX) Price Relative to KLSU DM Index (Left) Gold London PM Fixing ($/ozt) - Price (Right) 200 Source: Factset 19

20 Across the developed world in , late cyclicals sectors, like energy and materials, were leadership KLSU DM ENERGY INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: KLSU DM MATERIALS INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: Relative Pirce 140 USD Index Relative Pirce 140 USD Index (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) Source: Factset 20

21 Technology and health care lagged badly setting these sectors up for outperformance in the current cycle KLSU DM INFORMATION TECHNOLOGY INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: KLSU DM HEALTH CARE INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: 0.84 Relative Pirce USD Index Relative Pirce USD Index 60 (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) Source: Factset 21

22 Global consumer related sectors also underperformed in the period. 105 KLSU DM CONSUMER DISCRETIONARY INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: KLSU DM CONSUMER STAPLES INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: 0.64 Relative Pirce 95 USD Index Relative Pirce USD Index (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) Source: Factset 22

23 The emerging markets were big winners in the period, outperforming our KLSU DM Index by 185%. 300 KLSU EM INDEX Price Relative to KLSU DM Index Compared to USD Index 12/31/ /31/2007 Correlation: Relative Pirce USD Index (INDEX) Price Relative to KLSU DM Index (Left) United States Dollar Index - Price (Right) Source: Factset 23

24 Section 3: Resource related currencies and bonds look interesting 24

25 The Australian Dollar is tightly linked to industrial commodity prices Australia Dollar Relative to US Dollar Compared to Copper Correlation: Australia Dollar Relative to US Dollar Compared to Crude Oil Correlation: Rate '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 FX Rate - Spot Mid - US Dollar per Australian Dollar (Left) Copper, NYMEX Near Term ($/lb) - Close (Right) Copper Rate '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 FX Rate - Spot Mid - US Dollar per Australian Dollar (Left) Crude Oil, WTI /Global Spot, NYMEX - Close (Right) Oil Source: Factset. As of 9/4/17. 25

26 On the fixed income side, Australian bonds did well alongside the falling USD in period. Index Australia Treasuries JP Morgan GBI Australia Index (TR USD) Compared to USD Index 12/31/ /31/2007 (INDEX) JP Morgan GBI Australia (Traded) - Index Total Return Level (Left) United States Dollar Index - Price (Right) USD Source: Factset 26

27 It is early, but it looks like the performance of Australian bonds relative to global equities is stabilizing and turning up. Australia Treasuries JP Morgan GBI Australia Index (TR USD) Relative to KLSU AC Index (TR USD) Compared to AUS/USD Index AUS/USD '13 '14 '15 '16 '17 JP Morgan GBI Australia Index (TR USD) Relative to KLSU AC Index (TR USD) (Left) FX Rate - Spot Mid - Australian Dollar per US Dollar (Right) Source: Factset. As of 9/4/17. 27

28 The Canadian Dollar is also tightly linked to industrial commodity prices Canadian Dollar Relative to US Dollar Compared to Copper Correlation: Canadian Dollar Relative to US Dollar Compared to Crude Oil Correlation: Rate Copper Rate Oil '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 FX Rate - Spot Mid - US Dollar per Canadian Dollar (Left) Copper NYMEX Near Term ($/lb) - Price (Right) '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 FX Rate - Spot Mid - US Dollar per Canadian Dollar (Left) Crude Oil WTI /Global Spot NYMEX - Price (Right) Source: Factset. As of 9/4/17. 28

29 Canadian government bonds performed almost identically to Australia s in the period. Index Canada Treasuries JP Morgan GBI Canada Index (TR USD) Compared to USD Index 12/31/ /31/2007 (INDEX) JP Morgan GBI Canada (Traded) - Index Total Return Level (Left) United States Dollar Index - Price (Right) USD Source: Factset 29

30 In Canada also, the turn up in the currency may be leading a turn in the outperformance of Canadian government bonds relative to global equities. Canada Treasuries JP Morgan GBI Canada Index (TR USD) Relative to KLSU AC Index (TR USD) Compared to CAD/USD Index CAD/USD '13 '14 '15 '16 '17 JP Morgan GBI Canada Index (TR USD) Relative to KLSU AC Index (TR USD) (Left) 1 / U.S. Dollar per Canadian Dollar - FX Rate - Spot (Right) 1.5 Source: Factset. As of 9/4/17. 30

31 Disclosures The Knowledge Leaders Selection Universes (KLSU) are the property of Knowledge Leaders Capital, LLC. The publication of the Index by Knowledge Leaders Capital, LLC is not a recommendation for capital investment and does not contain any assurance or opinion of Knowledge Leaders Capital, LLC regarding a possible investment in a financial instrument based on this Index. For full information on the indexes, please visit the document Terms and Conditions available at An investor cannot invest directly in an index. The information contained herein is provided for informational purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy the securities or products mentioned. The strategies discussed in the presentation may not be suitable for all investors. Knowledge Leaders Capital makes no representations that the contents are appropriate for use in all locations, or that the transactions, securities, products, instruments, or services discussed are available or appropriate for sale or use in all jurisdictions or countries, or by all investors or counterparties. 31

32 Capture the Knowledge Effect in your portfolio For investors interested in the Knowledge Leaders Strategy, please contact Shawn Paulk, Head of Distribution, at or Knowledge Leaders Capital, LLC 3 17th Street, Ste Denver, CO 202