How long will the Music Play this Time?

• Markets continued their rally in December 
  • Global Developed Markets were up 4.2%, Global Small Caps gained 7.2% and Emerging Markets advanced 7.4%
  • For the full year 2020 global equity markets were up 16% (Developed Markets) to even 18% (Emerging Markets) despite pandemic and lockdwons
• Artico stock selection for the full year was negatively affected by large cap growth stocks significantly outperforming small caps
• The valuation gap between small and large cap stocks has considerably widened
• Equity markets are driven by apparent over-optimism 
  • Enthusiasm has reached retail market (usually not a good sign)
  • Tesla has performed over 1000% in just over one year and Airbnb’s IPO was exuberant. Just two of many warning signals that markets are overheated
• Valuation approaching or exceeding all-time highs
• Markets are climbing on thinner ice as they have entered the danger zone
• However: Unlimited money supply functions as a safety net, providing plenty of oxygen for this climb to go further
• Meanwhile government debt levels keep rising and central banks finance it while keeping interest rates ultra-low
• How long can such governmental Ponzi scheme last? Nobody knows really.
  • Economic growth alone is unlikely to resolve the problem
  • Debt restructuring or even monetary reform are very ugly scenarios
• Stay focussed on real assets, avoid nominal assets
• Artico Sustainable Equity Funds are well positioned for such a unpredictable future  for three reasons:
  • First, Artico is invested in companies with fundamental characteristics of highest quality
  • Second, Artico funds have no style bias (growth versus value) and are not exposed to one particular style
  • Third, Artico funds cover the full spectrum of market capitalization. So, any normalization of valuation between small and large cap stocks will tend to benefit our funds due to their small cap exposure

Prepare to enter the Danger Zone

• Markets sky-rocketed in November fueled by optimism on vaccines, further stimulus packages and sustained economic recovery 
• Global Developed Markets were up 12.8%, Global Small Caps gained 14.3% and Emerging Markets advanced 9.2% in one month!
• Artico stock selection for the full year was behind markets, as the performance was mainly driven by large cap segments of the market, while small caps underperformed
• This has significantly increased the valuation of large cap stocks and considerably widened the valuation gap between small and large cap stocks (feel free to contact us for our research on this matter)
• Equity markets show now too many similarities with 1999 (value out of favor, over-concentration on few large caps, exuberant valuations, retail euphoria, margin-debt levels record-high) to fully ignore these warning signs
• Also, the same discussion has started, whether or not „this time, it is different“
• Indeed, some aspects are clearly different: First, several of the hyped companies have become money-making machines and secondly, the unprecedented monetary and fiscal stimulus is of a size not even imaginable 20 years ago
• So, while markets have become exuberant, they can also stay extreme for much longer. Given valuations and over-confidence, we need to prepare to enter the danger zone. That does not mean a collapse is imminent, but it requires a disciplined investment approach
• Artico Sustainable Equity Funds are well positioned for such unpredictable future for three reasons:
  • First, Artico is invested in companies with fundamental characteristics of highest quality
  • Second, Artico funds have no style bias (growth versus value) and are not exposed to one particular style
  • Third, Artico funds cover the full spectrum of market capitalization. So, any normalization of valuation between small and large cap stocks will tend to benefit our funds due to their small cap exposure

Turbulences could offer interesting opportunities

• Markets were bifurcated in October: Continued weakness in developed markets, while Emerging Markets benefitted from economic recovery and better control of the pandemic 
• Global Developed Markets were down 3.1%, Global Small Caps lost 1.3% and Emerging Markets were up 2.1%
• In the short term markets could have to deal with chaotic developments, political paralysis and legal disputes and maybe even serious civil conflicts 
• The development of the pandemic across Europe and the US could also add more short term stress to markets
• Nevertheless, the outlook for equity markets is positive due to global fiscal and monetary stimulus and the prospect of very low interest rates for a very long time
• Therefore – if markets show more signs of short term stress in the near future it may be a good time to seize such opportunities
• In the current environment, it is a smart strategy to be invested in a diversified portfolio of companies with high growth rates, high profitability, a low valuation, an excellent ESG ranking and very low carbon footprint

Quo vadis?

• Market recovery took a breather in September amongst rising concerns about a second wave and political uncertainty (US elections, Brexit)
• Global Developed Markets were down 3.4%, Global Small Caps lost 1.4% and Emerging Markets were down 1.6%.
• Artico stock selection contributed positively, particularly in Global Small Caps 
• There are many reasons for investors to become more cautious in the short term:
  • Following faster than expected recovery, valuations have reached historically high levels
  • Uncertainty surrounding US presidential elections and the potential for a disorderly transition of power
  • The recent surge in COVID Cases and the related more restrictive measures result in fear of slowdown of economic recovery
• Global Equities however will continue to benefit from the current fiscal stimulus and monetary conditions in the foreseeable future
• The investment opportunities in cash or bonds look much less attractive in relative terms.
• In the current environment, it is a smart strategy to be invested in a diversified portfolio of companies with high growth rates, high profitability, a low valuation, an excellent ESG ranking and very low carbon footprint

Sustainable Investing: Encouraging Evidence for Investors!



Is sustainable investing a positive or negative contributor to outperformance? And how patient do investors need to be to capitalize on any positive effects? Our published research results answer these questions and our conclusions on the required time horizon may come as a surprise for investors hesitating to introduce sustainable investing.