March 5th, 2020

Latest news from OWM on products

Omega Wealth Management (OWM) strives to identify alternative funds from standard stock and bond markets. Market returns have considerably diminished in the past years, hence OWM’s policy to diversify investment vehicles.

Since inception of our investment policy, we found and invested in various funds to reap profits bearing four factors:

  • Decorrelated solutions
  • Niche proven alternatives
  • Self-liquidating products
  • Low volatility

The funds introduced in the portfolios during 2019 were:

  • Cairn Capstone Special Opportunity fund
  • Carlisle Life Settlements
  • Bootstrap Venture Debt
  • Barak Structured Trade Finance fund
  • JC Opportunity fund
  • In 2020: TransAsia Asian Trade Finance fund

A new comer: Transasia, Asia Trade finance fund

Transasia, the latest comer is in the short-term commodity trade finance bracket.

We chose this fund for several reasons:

  1. Historical depth: Fund created in 2014
  2. 50 days tenor short cycle financing (Shortest cycle of all the funds managed by Transasia)
  3. Very stable monthly historical return with a YTD 6.28% in 2019
  4. USD 500M AUM, 79% loan to value
  5. 0.36% loss incurred versus total financing, very low losses

 

The fund convinced us for the above reasons. It is also an opportunity to complete our commodity finance diversification in Asia, an area where our portfolios were not exposed so far. Furthermore, the background of the investment team, the variety of the various trading players (see below) and high visibility given the shortness of the cycles convinced us. We were already on the commodity bracket with Barak Structured Trade Finance fund, Transasia completed this niche. Liquidity is standard for this type of product with a monthly quote and 60-day notice.

Originally, we had no access to this fund for it had been closed. One of our banking partners had a slot that we seized. Our network of investors and analysts confirmed the historical curriculum and excellent fund management references.

Our consistent diversification policy, market analysis, banking network, market confirmation views and very low historical losses in the fund were all aligned to convince us to feed our portfolios with Transasia.

 

For the weeks to come, we shall be studying various impact investment products such as infrastructure finance, real estate equity participations in Europe and the US, Short term SME project financing in the UK, Swiss high-tech investment funds, Short term mid-size loans to southern US corps.

More than ever, given market volatility and unchartered situations such as CovID 19, our policy to diversify investments on spaces left by the bank retreat combined by capitalizing on investment managers who have proven their capacities in specific niches is, to our point of view, the track to follow.

Our alternative product policy is a way to diversify and temper potential downside situation.

OWM Market opinion

The past week (Feb 4th week) turned out to be one of the quickest downhills since 2008. However, of 5 reasons explaining the situation, only1 is CovID19.

Here are the points to consider….and the pronostic we believe will happen.

  1. Market devaluation is due to “in the nearer term…we believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices”. This quote from Peter Oppenheimer (Goldman Sachs) was right before the market downslide of 10%. Since, the correction has taken place.
  2. Election perception: Uncertainty about the U.S. 2020 presidential election’s outcome is also starting to drive markets, strategists and analysts argue. A number of them think that if Sen. Bernie Sanders, an independent from Vermont who characterizes himself as a democratic socialist, wins the Democratic presidential nomination, and possibly even the presidency, stocks would take a hit as he is perceived by some as an antibusiness candidate.
  3. High PE’s. Even before the market slump this week, the value of stocks has been viewed as rich. One measure of stock-market values showed that the S&P 500 index was trading at 18.9 times the weighted aggregate consensus forward earnings estimate among analysts polled by MarketWatch. That is up from 16.2 a year ago, and, aside from a brief point early in 2018, it is the highest forward price-to-earnings ratio for the benchmark index since May 2002. Said differently, the correction we have experienced was bound to happen.
  4. The bond market. Government bonds yields have been sliding steadily as investors seek havens, and thus drive up bond prices, amid doubts about global economic growth in the wake of the coronavirus outbreak.

The 10-year Treasury note yield TMUBMUSD10Y, -5.52% fell to a record low below 1.24% on Thursday at one point.

  1. Recession fears. Bond investors fear that the coronavirus might result in a global economic slowdown that might wash up on U.S. shores as a full-fledged recession. MarketWatch economics writer Rex Nutting explained the potential for an uncontained outbreak of COVID-19 this way: “Much of the immediate economic impact of a pandemic can be traced to the efforts to contain it, rather than from the effects of the disease itself. As we attempt to quarantine those who might spread the disease, we shut down a lot of economic activity.”

 

The coming future

  1. We believe the market has returned to its long term base, i.e. 2750. It is clearly an opportunity to buy, particularly that 74% of stocks are below their 200 day moving average.

2. Central banks will provide liquidity, the bank of Japan has already done so.

 

3. Investors have finally started to hedge (see above), a very good contrarian sign

  1. The bull market is not over. Long term indicators are not pointing to this so far.

 

Despite the turmoil, we are still in acceptable levels with long term valorizations. Historically, we have seen similar (not identical!) situations with the SRAS in 2003 where markets rebounded once the fear had been digested. As mentioned in the opinion section above, we believe the correction has been synchronically fed by other factors than the CovID19.

OWM is however fully conscious that statistics to be published in April 2020 on first quarter results will most probably confirm very bad figures due to the quarantine effects. The rebound will take place at the end of the second quarter and full third quarters. It is estimated that 1% of world GDP growth will be swept by the present CovID 19 effects.

Our diversification policy is the most efficient way to straddle the present agitation.

 

Emmanuel Rytzell