Investing in undervalued securities worldwide

Weekly Update 7 March 2022

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European stocks fell 7% last week as the conflict between Russia and Ukraine continued to roil global, and especially European, markets.
www.ft.com/content/7614f65b-f584-4f76-9c3e-8d0d7f211d87

There are two possible scenarios going forward.

(1) ๐‘‡โ„Ž๐‘’ ๐‘๐‘œ๐‘›๐‘“๐‘™๐‘–๐‘๐‘ก ๐‘ ๐‘ก๐‘Ž๐‘ฆ๐‘  ๐‘๐‘œ๐‘›๐‘“๐‘–๐‘›๐‘’๐‘‘ ๐‘ก๐‘œ ๐‘ˆ๐‘˜๐‘Ÿ๐‘Ž๐‘–๐‘›๐‘’ ๐‘Ž๐‘›๐‘‘ ๐‘…๐‘ข๐‘ ๐‘ ๐‘–๐‘Ž ๐‘˜๐‘’๐‘’๐‘๐‘  ๐‘ ๐‘ข๐‘๐‘๐‘™๐‘ฆ๐‘–๐‘›๐‘” ๐ธ๐‘ข๐‘Ÿ๐‘œ๐‘๐‘’ ๐‘ค๐‘–๐‘กโ„Ž ๐‘”๐‘Ž๐‘ .

In this scenario, the global economy will probably stay resilient. UBS, for example, estimates that oil at $110 for the rest of the year would lower global GDP by only 0.3 percentage points, while ING assumes that the hit to European growth from the conflict should be less than 1 percentage point. www.ubs.com/global/en/assetmanagement/insights/asset-class-perspectives/asset-allocation/articles/2022-03-macro-monthly.html think.ing.com/articles/stagflation-risk-increases-in-the-eurozone/

If so, stocks might be a good buy here. We use a rule of thumb that says markets should fall 10% for each 1% fall in GDP, while banks should fall 20%. That has already happened. โ€œEuropean equities are discounting a scenario in which war is protracted and the economic impacts are more severe than in our base case,โ€ notes UBS.

To illustrate, a chart attached to this post shows the valuation history of one our positions, $BCS (Barclays PLC) . The stock now trades at a 5.8x PE (price-to-earnings). This is lower than at any non-recessionary time during the past decade. Only in the 2011-2012 European financial crisis and the March 2020 market crash did we see lower valuations, and then only briefly. Those were great times to buy.

Itโ€™s a similar story with the rest of our positions. Valuations are low and already discount a 1 percentage point growth slowdown. If that is all that happens, good returns will be available from cyclical Value stocks from here.

The alternative downside scenario is:

(2) ๐‘‡โ„Ž๐‘’ ๐‘๐‘œ๐‘›๐‘“๐‘™๐‘–๐‘๐‘ก ๐‘’๐‘ ๐‘๐‘Ž๐‘™๐‘Ž๐‘ก๐‘’๐‘  ๐‘Ž๐‘›๐‘‘ ๐‘…๐‘ข๐‘ ๐‘ ๐‘–๐‘Ž ๐‘ ๐‘ก๐‘œ๐‘๐‘  ๐‘ ๐‘ข๐‘๐‘๐‘™๐‘ฆ๐‘–๐‘›๐‘” ๐ธ๐‘ข๐‘Ÿ๐‘œ๐‘๐‘’ ๐‘ค๐‘–๐‘กโ„Ž ๐‘”๐‘Ž๐‘ .

This scenario was recently simulated by the The Kiel Institute for the World Economy. The outcome is that in the medium term, Europeโ€™s GDP would hardly be affected, while Russian GDP would fall significantly.
www.ifw-kiel.de/publications/media-information/2022/with-these-sanctions-the-west-hits-russias-economy-the-hardest/

This means that a rational Russia will not stop supplying Europe. But what if Russia acts irrationally? In an article entitled “Preparing for the first winter without Russian gasโ€, Bruegel analysts take a look at that scenario. The conclusion is that lights would not go out, but parts of Europeโ€™s industry might have to shut down.
www.bruegel.org/2022/02/preparing-for-the-first-winter-without-russian-gas/

Central and Eastern European countries would be affected the most, while Spain and the UK would see a smaller impact, as their dependence on Russian gas is limited. Overall, European GDP might fall 3%. corporate.nordea.com/article/72663/ecb-watch-the-price-of-flexibility

In this scenario, we would expect a further hit to consumer and business confidence, and possibly a global recession. As for what would happen to the stock market, the closest historical parallel is the 1973-1974 crash, when stocks lost about half of their value. This would vindicate Bank of Americaโ€™s call for a โ€œbear era of government intervention, social & political polarization, Main Street inflation and geopolitical isolationism.โ€
seekingalpha.com/news/3805832-bear-era-begins-with-real-rates-at-crashes-panics-and-wars-levels-bofa

The Kiel Institute simulation suggests that things would get back to normal after the recession, however, so the recession would probably create good buying opportunities.

โ€”

Our bias is towards scenario 1, so we continue to maintain our European positions and wait for a recovery. Buying when others are pessimistic has been a successful strategy for us and others historically, so we are (almost) always happy to buy shares from the pessimists. Since scenario 2 canโ€™t be ruled out, though, weโ€™re not going all in for the time being and maintain a few more defensive positions as well.

๐Ÿฎ๐Ÿฌ๐Ÿฎ๐Ÿฎ ๐—ฝ๐—ฒ๐—ฟ๐—ณ๐—ผ๐—ฟ๐—บ๐—ฎ๐—ป๐—ฐ๐—ฒ ๐—ฌ๐—ง๐——
@triangulacapital -7.1%
$SWDA.L -10.2%

๐—ฃ๐—ผ๐—ฟ๐˜๐—ณ๐—ผ๐—น๐—ถ๐—ผ ๐—ฐ๐—ต๐—ฎ๐—ป๐—ด๐—ฒ๐˜€
The plan this week is to reduce (but not eliminate) Financials exposure and open positions in a few oversold European non-financials.

๐—”๐—ฟ๐˜๐—ถ๐—ฐ๐—น๐—ฒ ๐—ผ๐—ณ ๐˜๐—ต๐—ฒ ๐˜„๐—ฒ๐—ฒ๐—ธ
โ€œGlobal Investment Views – March 2022โ€
research-center.amundi.com/article/global-investment-views-march-2022

– Amundi believes that โ€œthe rotation favouring value is a medium-term trend supported by rising real rates.โ€

– They are neutral on European equities in general due to the ongoing war, but see opportunities in Financials, Industrials and Healthcare – also our preferred sectors.

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Disclosures

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.ย 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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eToro (UK) Ltd. is authorised and regulated by the Financial Conduct Authority (FCA) under the license FRN 583263.

Your capital is at risk. Other fees may apply. For more information, visitย etoro.com/trading/fees.

Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to invest in any fund or security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees”ย Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
  • trades more
  • avoids following the index

Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Higher Risks for Higher Returns

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

The strategy invests in countries and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.