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The Bull Market that keeps going

Updated: May 21, 2019

March 2019 Letter

The Bull Market that keeps going

Late last year, as the market whipsawed, opportunity began to abound in public equity markets. Ballina took advantage of these opportunities and expanded attractive positions in well understood companies (see December highlighted company performance below). My, how things have changed in just a few months? First quarter 2019 brought explosively positive performance for equity markets. Major equity indices across all regions achieved returns in the low double digits. The main reason for this performance is that central banks, most importantly the U.S. Federal Reserve, are now all aligned in a dovish posture.

The turn by the U.S. Federal Reserve in late January of this year was most significant. The market began to become comfortable that the stance of the U.S. Fed would shift, and they delivered. The policy statement provided the most significant about face, dropping previous language alluding to “some further gradual increases.” The balance sheet runoff was also scheduled to be halted. Essentially all previous approaches toward policy normalization were called to a stop. This was just what the market wanted to hear. The S&P 500 moved an additional 6% higher from the time of the Fed statement until the end of Q1.

With policymakers seemingly back to firmly supporting risk assets again, it has led many to question whether the bull market has much longer to run than previously speculated. We do know that the rally that happened in Q1 was described as “flowless”, i.e. money was not pouring into equity strategies to drive the buying. This lends further support for the belief that the current rally is still consistent with previous descriptions as “the most hated rally of all time.” Such a line of thinking leads many to believe that with so many doubters, and so much money on the sideline, irrational exuberance and the end of the rally cannot be close at hand. Together with the support of central banks, the rally will keep steadily steaming forward.

This kind of thinking is troubling because it ignores so many risks. The central banks are turning more dovish because the economy is either slowing or barely growing, depending on where you are in the globe. Corporate earnings are not being revised upward sharply from their elevated levels. Debt levels are extraordinarily high for many corporate entities around the globe. Not having to fight the Fed on tighter monetary conditions helps, but it is not the only influence on the seas to come.

We at Ballina believe that for the rest of this cycle we may have entered a “self-regulating” phase. When market fundamentals appear weaker, softer asset prices will drive central banks to accommodate. Once volatility has abated, returns will moderate. The potential canary in the coalmine remains China, where all market participants may be too slow to appreciate the scale of a slowdown. We will stay the course with concentrated portfolios built of well understood, undervalued companies. Our bottom up process continues to find the more attractive opportunities down the market cap scale, and by industry in Financials, Industrials and Technology.

Strategy Performance

International All-Cap Value returned -0.56% (gross basis) in March 2019 versus 0.77% for the benchmark. Year to date performance was 13.5% (gross) versus 10.27% for the benchmark.

Global Small Cap Value returned -1.37% (gross) in March 2019 versus -0.90% for the benchmark.[1] Year to date performance was 14.33% versus 12.35% for the benchmark.

[1] Benchmark for Global Small Cap Value comprised of 50% weight iShares Russell 2000 Index (IWM) and 50% weight Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

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