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Weekly Update 8 July 2024

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A number of indicators suggest that inflation has been brought back under control, so central banks can lower interest rates over the coming months.

In the US, trend inflation has fallen closer to the Federal Reserve’s target. After a brief rebound at the beginning of the year, trend inflation has fallen to 2.4%, which is close enough to 2% that the Federal Reserve can start to decrease interest rates later this year. Many analysts expect the first cut to take place in September.
www.newyorkfed.org/research/policy/mct

In Europe, inflation trends are similar. The European Central Bank’s measure of trend inflation, Persistent and Common Component of Inflation (PCCI), has fallen to 1.7%. This is not far from what it was before the pandemic and it explains why the ECB has been able to start lowering interest rates.
data.ecb.europa.eu/data/datasets/ICP/ICP.M.U2.N.PCCI00.3.3MM

Driving trend inflation lower is a weakening labour market. Wage growth is down, the quits rate has returned to pre-pandemic levels and the unemployment rate is inching higher.
www.atlantafed.org/chcs/wage-growth-tracker
fred.stlouisfed.org/series/JTSQUR
www.hiringlab.org/2024/07/05/june-2024-jobs-day-report-moderate-but-getting-chillier/

Most analysts believe this is nothing to be worried about. The economy is still healthy, private debt levels are low, and there are no major imbalances visible anywhere. Stocks, while a little expensive, can climb higher in this benign environment, as central bank rate cuts boost valuations.

A nice soft landing for the economy is entirely possible and it is why I continue to hold stock exposure in the portfolio. I do not want to become too pessimistic too early: that is a sure way to underperform in the long run.

Economic momentum remains positive, investors are not too optimistic, while stocks, in particular value stocks, are trading far from bubble valuations. According to Morningstar, for example, European Value stocks are 15% undervalued.
www.oecd.org/en/data/dashboards/oecd-short-term-indicators-dashboard.html
uk.investing.com/economic-calendar/sentix-investor-confidence-268
www.morningstar.com/en-uk/lp/europe-equity-market-outlook

Because I have gained confidence that interest rates are going down next, the portfolio has been re-positioned into sectors that benefit from lower rates. There is now plenty of Telecom, Real Estate, and Utilities exposure in the portfolio.

One thing I like about these sectors is that they have done poorly this year. European Utilities and Real Estate are unchanged for the year. Telecommunications is up 8%, but it too has underperformed the +10% return of the STOXX Europe 600.

If interest rates go down, these sectors may catch up to the rest of the market.

2024 performance
@triangulacapital +25.3%
$SWDA.L +14.0%

Portfolio changes
Siemens was replaced by Carrefour.

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 2024 | All rights reserved.

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. 51% 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.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies 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.

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

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.