Happy new year! Welcome to Montaka in 2016.
Well, many investors will be happy to turn the page on the year of 2015. It was certainly a low-returning year (with the exception of Montaka, we are proud to write). Consider that the S&P 500 returned just +1.4% including dividends during the year in the US; and more globally, the MSCI World finished the year down 0.9% including dividends. These figures are well below the average returns of the last 27 years, which were 10.0% and 6.5% per annum, respectively.
So was 2015 an anomaly? Can we expect to revert back to the positive average return levels of the last 27 years?
The short answer is: it’s unknowable. Yet, one can mount a fairly simple argument to suggest that equity returns over the coming decades may not be as high as they have been over recent decades. Why? For two reasons:
- Interest rates have been about as low as they can go. From here, they can either go sideways or up. The tailwind to equity valuations from a 30+ year decline in interest rates has likely ended.
- US corporate profit margins, which have historically mean-reverted as businesses compete with each other, are at all-time highs. One should not be surprised to see these flatten or decline from current levels, going forward.
With valuation multiples and corporate earnings both facing headwinds, we would not be surprised at all if future average equity returns were lower than they have been in recent history. And 2015 seemed to fit this narrative well.
The year of 2016 has already started with a bang. Day one of trading in Shanghai resulted in a market collapse of 6.9% and another sharp deterioration in the nation’s currency, relative to the US dollar. The sharp moves reflect ongoing fears of a significant deterioration in the Chinese economy – fears that we share, as we wrote about extensively last year (see here and here).
Despite a very challenging market environment, investors in Montaka should take solace in two key facts:
- Montaka has much lower exposure to general market movements than typical equity funds, with net exposure currently sitting below 40%. This is how Montaka protects the downside far more effectively than most typical equity funds; and
- Montaka has the opportunity (and its managers have demonstrated a unique ability) to profit from deteriorating businesses with falling stock prices.
Wishing you all a prosperous 2016!