Half-time Review of our 8 Investing Themes for 2017

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I’m sitting here at home, at the beach in Santa Monica, in mid-August ,and feeling the cool ocean breeze wafting into our apartment. Finally, it’s getting back to normal after such a heat wave. We just had the solar eclipse earlier this week and everyone has been talking about the moon, the stars and all of the uncommon astrological events happening. We are well into the second half of 2017 and in this time of reflection, I thought I would take a moment to evaluate how some of my initial investment themes are doing so far this year. You can see the original post, here.

I outlined and recommended several great investment opportunities for 2017. Many of these investment themes are global in nature and are looking to take advantage of some of the global circumstances of low rates and low inflation. The rise of China and the growth in China has played a role this year, along with the continued printing of money in most developed nations. So how do these opportunities look right now? Let’s go through each of the eight investment theme recommendations and cover it.

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China

The first theme focused on China. China has had amazing growth and if you look at its growth in the second half of the year, there’s more to come. We had some more good investing news related to Chinese equities. The MSCI index added Chinese “A-shares” to their Emerging Markets Index. That means that in the coming months and years, billions of investing dollars will be flowing into Chinese equity shares. We will continue to take advantage of this with simple indexed investments in Chinese companies.

China Index ETF, Performance YTD: 23% (above market returns)

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Japan

Japan was the second investing theme we outlined in the beginning of the year. The idea was to invest in Japan based on its negative interest rate policy and growing their monetary base. We forecasted that their equities would be rising in price. This outcome has not come to full fruition, though this theme did beat the S&P 500 index, YTD. We will continue to watch this unfold in the second half of 2017 and see if we see a return to the mean. Right now, Japan is not beating the US market for the 2nd half of the year. Part of the reason this overall investment theme has worked, has more to do with the weak dollar than the rise in Japanese equities.

Japan Index ETF, Performance YTD: 12.8% (above market returns)

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Europe

Europe was the third investing theme recommended at the beginning of the year. Europe is increasing their monetary supply, just like Japan, by implementing quantitative easing. The EU was buying their own bonds and pushing down interest rates. We see this as beneficial for European equities. Europe has outpaced the US in terms of stock appreciation. An average index ETF invested in Europe is up 19.4% YTD. Compare that with a 11% increase in the US, and there is still relative value in Europe. We see this investment trend continuing.

Europe Index ETF, Performance YTD: 19.4% (above market returns)

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Protectionism

The next investing theme was Protectionism. We surmised that because of President Trump’s policies, that small-cap US-based stocks may do better than their large-cap counterparts. In the first half of the year this has not been the case. The small-cap index has generated a return of 5.7% while the large-cap US index has gained 11% YTD.

This is a governmental policy bet, and if Trump’s policies continue not to be reconciled in Congress, then this investing theme will not come to fruition. So far, Trump has been ineffective at getting his legislative agenda enacted. Because of that we are removing this as an effective investment theme for the second half of the year. Out of our eight investing themes, this is one of two that is not beating the broader S&P market.

US Small Cap Index ETF, Performance YTD: 5.7% (below market returns)

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Precious Metals

Our next investment theme was in precious metals. Our investing thesis is that precious metals will outpace the market because of the central banks continuation of quantitative easing. So many of the global banks in the developed countries are still manipulating the currency markets, resulting in opportunity for precious metals in the first half of the year. Gold is up 10%, which faired about the same as the broader US stock market. Gold is up for its second year in a row. We see this investing theme continuing and still plan to be invested in gold and precious metals.

Gold ETF, Performance YTD: 10% (market returns)

Best of Both Worlds — Value and Growth from Big-Cap Tech

Our next investing theme was a “best of both worlds” trade to get value and growth. In our approach to invest for value and growth we looked at big-cap technology companies. You’ve heard of FANNG stocks, and in the first half of the year the stocks did very well. If we look at large-cap tech, they returned 14% in the first half of the year, and we see continued gains for these large players as their growth prospects continue. These companies will still outpace the market in the second half of the year. So, we should continue with this investing theme for the back half of the year.

Technology Sector ETF, Performance YTD: 19% (above market returns)

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Rising Interest Rates

Our next investing theme was rising interest rates. In the first half of 2017, we did not experience rising interest rates and therefore this investing theme did not pan out. In looking at the three reasons why interest-rates could rise, we believe this is still an option for the back half of 2017. However, this investing theme delivered below average market return so far this year.

Financial Sector ETF, Performance YTD: 8.7% (below market returns)

Insurance Sector ETF, Performance YTD: 9.7% (below market returns)

Reflation Trade

Our eighth and final investing theme was the “reflation” trade. This theme still was not realized in the first half of the year. The question is, “Do we see inflation in the back half of 2017?”

I always like to look at three factors to predict whether we will see inflation. The first is the money supply. If we look at M1 and M2 of the Money Supply, we will notice that we have seen an uptick in the last two consecutive months. That gives us the potential for a rise of inflation. The second factor I like to look at is the price of copper. If we look at the spot price of copper, we will notice that we have put in the bottom and that the price has been rising steadily the past three months. The third and final factor that we like to look at for whether we are going to get inflation is the 10-yr treasury interest rate. If it is rising, then we are getting the anticipation of inflation. However, inflation has not risen in the past few months. With two of the three factors on the rise, I would guess that we have a better than 50% chance of some inflation in the back half of the year.

Copper ETF, Performance YTD: 15% (above market returns)

Metals & Miners ETF, Performance YTD: 20% (above market returns)

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Conclusion

Six of our eight investing themes meet or beat the market YTD. None of them produced negative returns. Averaged together, their combined return was 14.5% (YTD) versus the S&P 500 which was up 11%. We are getting rid of one theme for the second half and that’s the “Protectionism” investment theme. Going forward, let’s see how we do!

Disclaimer — The above references an opinion and is for information purposes only. It is not intended to be investment advice.

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