2018 was a dark year for financial assets (see below). Virtually every major, liquid asset class declined in value. Cash became a viable alternative for the first time in many years. While many in the U.S. were shocked at the pressure on FAANG stocks in the final quarter of the year, International Equities struggled for most of the year, and ended the year with double digit negative returns.
Source: Alpine Macro
The good news is that valuations are much more reasonable now. One year ago, the S&P 500 One Year Forward P/E multiple was 18.5x. The same metric today stands at 15.3x. The forward multiple for International companies experienced similar absolute multiple compression in 2018, but it was more damaging for USD investors, because: 1) the starting multiples were lower, making the losses higher in % terms, and 2) the USD appreciated against many currencies in 2018. This suggests that if a global recession can be avoided, and 2019 will bring us a decent reflation in risk assets, International equities should stand to do quite well given the very absolute low starting point (see below).
Source: Alpine Macro
At Ballina Capital, we remain concerned about the short-term outlook for markets. We are, however, constructive on the company level valuations (see below) we are finding today in our fundamental research today. Fortescue Metals, for example, has paid down significant amounts of debt, and is investing in an integrated, more flexible iron ore product base that will make them more competitive in volatile commodity markets. YY, Inc., for example, continues to use new technologies and capabilities such as AI to grow it’s user base in the live streaming markets in China. Centerra Gold has put a stronger foundation in place by diversifying the business away from a volatile cash flow stream in Kyrgyzstan. Bar maybe Centerra Gold, given it’s exposure to the Gold price that can sometimes rise in uncertain times, none of the companies alluded to herein would be immune from a global recession. They have, however, put themselves in position to survive and then thrive in the expansion to follow.
All five of these companies share the very attractive characteristics that we look for at Ballina, but don’t always find, in that they have: a) earnings expectations in the short term that are lower than medium to long term expectations, and b) valuation multiples that are depressed relative to their own longer-term range. We believe this combination sets these stocks up to perform well, assuming management can execute. We are increasingly optimistic that good long-term equity value is currently available in Asian Large Cap stocks, and Globally in Small Cap stocks. Many of the Ballina portfolio companies are preparing themselves to be “fit to fight”, no matter what the future holds.
Strategy Performance
International All-Cap Value returned -4.68% (gross basis) in December 2018 versus -4.93% for the benchmark. Year to date performance was -15.83% (gross) versus -14.44% for the benchmark.
Global Small Cap Value returned -8.1% (gross) in December 2018 versus -8.77% for the benchmark.[1] Year to date performance was -17.96% versus -14.72% 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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