Investing in undervalued securities worldwide

Weekly Update 16 May 2022

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Stocks fell for a sixth week in a row as investors continued to worry about a possible recession in the US, high inflation, lockdowns in China and the war in Ukraine.

We turned more constructive on the market last week because:

1. Markets rarely fall more than 20% outside recessions. We do not expect a recession in 2022.

2. We believe the US central bank will act patiently this year as it assesses the effect of higher interest rates on the economy. Long-term interest rates could thus consolidate around current levels for the rest of the year.

3. Value stocks ($VTV) have not moved up as much as the move in interest rates implies, so they should have additional upside relative to Growth stocks ($VUG) if interest rates stay at current levels.

This more positive near-term outlook does not change our strategic view, which is that 2022 and 2023 are going to be weak years for the markets. However, we think that the market could trade sideways for much of the rest of the year, perhaps with a slight downward bias, before declining more in 2023 as interest rates resume their march higher and a recession becomes an inevitability.

Given our more constructive near-term outlook, the risk level of the portfolio has been increased by buying Financials ($XLF). The Financials sector usually benefits from higher interest rates. This year has been an exception as worries about an upcoming recession have outweighed any benefit the sector derives from rates.

If we are correct that there will be no recession this year, we think the sector could rally 10-15%. Valuations of many stocks in the sector are at record lows. An example is $SAN.MC (Banco Santander SA), which trades at a 5x forward PE (price-to-earnings). Similar valuations were last seen in the 2008 Global Financial Crisis and the 2011-12 European debt crisis. There is no crisis right now, so the valuation seems out of place. Analysts following the stock believe it has 40-50% upside.

There are risks with these Financials positions – notably, if interest rates increase rapidly, the solvency of Italy and many other highly indebted borrowers (public and private) will be questioned, causing financial instability. Our general approach is to accept higher risks for higher returns, so we accept this risk and manage it by diversifying into banks in different geographies (US, EU, UK, S Korea), not putting all of our eggs in one basket.

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@triangulacapital -2.1%
$SWDA.L -15.9%

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$NVS (Novartis ADR), $MRK (Merck & Co.), $ROG.ZU (Roche Holding Ltd), $AT1.DE (Aroundtown SA) and $CAPC.L (Capital & Counties Properties PLC) were replaced by $EQR (Equity Residential), $BAC (Bank of America Corp), $EQH (Equitable Holdings Inc.), $AMUN.PA (Amundi SA) and $LLOY.L (Lloyd’s Banking Group PLC) .

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.

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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.

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

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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

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

Cheap Stocks in Cheap Sectors

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

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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.