Investing in undervalued securities worldwide

Weekly Update 6 February 2023

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Stocks rose last week as traders cheered signals from the Federal Reserve and the European Central Bank that interest rates might soon go on hold.
www.ft.com/content/2ad73949-f78c-4e0e-adf0-329fcc578f02

After a strong January, several Wall Street strategists are warning that the rally has gone far enough and stocks will soon reverse course.
www.bloomberg.com/news/articles/2023-02-03/bofa-s-hartnett-warns-investors-risk-sleepwalking-into-selloff

Bank of America’s Michael Hartnett, for example, believes that the highs in the market will be seen before Valentine’s Day and any move in the $SPX500 above 4200 should be sold.

Morgan Stanley’s Mike Wilson concurs, arguing that the bullish price action in January was due to the seasonal January effect (a well-known tendency that stocks do well in January) and short covering.

We have a more optimistic view than these strategists for the next 1-2 months, although we do agree that 2023 will be another weak year for the market on the whole, with stocks ending the year in the red. However, we believe the weakness will only start in earnest after April.

At the moment, many still expect an imminent recession. This is inconsistent with the equity market rally and the incoming economic data. After current short-term overbought conditions are resolved over the next 1-2 weeks, we see scope for the market to run higher. But this can only be a temporary rally. The revival of animal spirits, if it happens, will make people happy to spend again, which will lead to higher inflation, which will force central banks to raise interest rates again in H2, finally bringing about a recession. This will cause a second consecutive negative year for stocks.
macro-ops.com/dont-worry-the-president-is-buying-dirty-dozen/

Given the above view, the portfolio is positioned 100% long risky, economically sensitive stocks, but we expect to reduce risk exposure later in the year.

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@triangulacapital +14.2%
$SWDA.L +8.5%

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The portfolio was rotated around within the space of risky stocks. Profits were taken on the four banks $CBK.DE (Commerzbank AG), $BAC (Bank of America Corp), $HSBC (HSBC-ADR) and $WFC (Wells Fargo & Co) . They were replaced by the three banks $ISP.MI (Intesa Sanpaolo Group) (cheap, strong earnings on 3 Feb, Italy/Germany spread under control), $ITUB (Itau Unibanco Holding ADR) (cheap, Brazil political risk premium might reduce) and $CIB (Bancolombia S.A-ADR) (cheap, Colombia political risk premium might reduce) and the two auto companies $VOW3.DE (Volkswagen AG) and $STLA.US (Stellantis NV) (cheap, rates fell after last week’s central bank meetings which might benefit these companies).

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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. 76% 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.

eToro (Europe) Ltd., a Financial Services Company authorised and regulated by the Cyprus Securities Exchange Commission (CySEC) under the license # 109/10.

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, visit 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” 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.