Atlantis Asset Management 2014 Outlook
by Michael Cohn
This letter is our 2014 Outlook. We appreciate all the support and loyalty our clients have bestowed upon us through these extraordinary times for both society and the financial markets. Many tried and true strategies that have worked through previous economic downturns have been turned upside down. As a firm we develop distinct outlooks for each of the major asset classes. Our depth of experience evaluating individual equities, fixed income, and alternatives has helped us navigate our clients wealth through these trying times.
Expected job growth and a robust economic rebound have not materialized. In this country, and through most of the “developed” world (I use that term loosely) we have lurched from crisis to crisis without much inspiration, nor devastating results. Our policy makers, who are comfortably ensconced in the pockets of the banking establishment and the leaders of the Group of 12 military-industrial complex, have engineered a soft landing temporarily for themselves, through a zero-interest rate, bailout at-all-costs regime. The cost of this policy being that status-quo is maintained for the privileged few, and not for those at the lowest rungs on the ladder. We are now 6 years into a decade long de-leveraging grind, which is, while not without historical precedent, disappointing given our exponentially greater knowledge, financial tools and flow of information.
The markets have fully recovered since the depths 2009, and have finally attained an inflation-adjusted high that dates back to the year 2000, when the tech-bubble was deflating. 2013 was a banner year for the stock market; all indexes were up over 25%, even though GDP growth and earnings growth were both in low single digits, and the pace of positive economic surprises had slowed. Equities rallied anyway, and price-to-earnings multiples rose back to their long-term historic averages. A variety of other indicators also moved back to pre-crisis levels, which, in our view, was in anticipation that in 2014 GDP and earnings growth would accelerate. The stock market took the view that, thanks to Ben Bernanke and quantitative easing, the U.S. would run at a steady pace and would likely accelerate in 2014. The Fed has explicitly predicted that the economy is going to accelerate in 2014. A note of caution, when looking back at the Fed’s predictions of economic output nine months ahead for the past 8 years, is that they have been wrong 100% of the time!
As for the rest of the major economies, China is trying to re-direct their economic priorities, and reign back on profligate bank lending. They are still moving forward economically, just much more slowly. Japan is desperately trying to monetize their debt and lower the value of their currency. The Eurozone is off the mat and is expected to begin moving forward again. The Emerging Market countries are a mixed bag and have to be evaluated based on their individual situations.
Stocks, at the end of the day, are about earnings, so record corporate profit margins and the belief that 2014 will be quite robust economically, left reason for optimism. As we enter 2014, we remind ourselves of how much has changed in the past two years. Coming into both 2012 and 2013 uncertainty was rampant. Sequesters, fiscal cliffs, debt defaults, tax uncertainty, and rising unemployment all weighed heavily on our psyche. The markets have surged through all this, despite the fact that corporate profits, employment and economic growth have slowed to a crawl.
If there’s one thing that we’ve learned from the past few years, it is that it has paid handsomely to ignore the past. Looking forward, we have built a comprehensive view of the macroeconomic landscape. In doing so, we have uncovered some potentially exciting investment opportunities, as well as some areas where we see reason to proceed with caution. So where do we go from here? Our team takes a closer look at the factors that will determine the markets’ continued progress, and most importantly the investment opportunities we can expect as a result.
This is what we know. We are in an age of exponentially accelerating change in all manner of technologies and services. The theory is that the pace of technological “progress” has been doubling every 10 years for the last 10,000 years. There are four billion people in the emerging world, where there is a growing demand for a middle-class lifestyle. There are demographic challenges in Europe and Japan which are daunting and unsolvable without either gut-wrenching change or explosive growth. The United States has a similar issue but is less vulnerable because its population is growing because of immigration policy. Over the next decade biotechnology and energy alternatives are going to transform the way we live. New delivery methods for education are going to transform the way we learn. Cyber security, data analytics, voice recognition, quantum computers and embedded systems will all be ubiquitous. The African continent is starting to and will continue to be an explosive engine of growth for the world.
Our job is to rationalize these seemingly disparate premises, and to stay ahead of the curve. Looked at in concert, as optimists, we can envision a world transformed for the better. The move to a more consumer-focused, instead of export driven economies in the emerging markets, will ignite worldwide demand growth, and thus allow the developed countries to grow their way out of their debt and entitlement dilemmas. This will enable the developed countries to devote resources to fostering new industries, incentivizing innovation. This is the opposite of our current desire to throw money away to maintain the status-quo.
Our view on the markets for 2014 is that if we get improved earnings and top line growth for the first quarter and subsequent quarters, then the markets can move forward appreciably without having to hope for more earnings multiple expansion. If the Fed and the market are wrong about a rosier picture going forward, the stock market will stall, and fixed income will have the better year. Over the past few years, some of the most consistent performing asset classes have been our investments in select private equity opportunities. Because of our expertise in evaluating the myriad of choices, and using the asset class to extend expected returns out many years, we have been able to gain exposure to specific sector investment opportunities offering high historical returns in this low return environment. Overall, our job is to stay nimble and vigilant in the short run, and to do our homework to identify the winners in the transformed world we envision.
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