Cronyism and other investing themes for 2019
While this title may offend some, it is not meant to do so and I will clear the air by declaring myself as politically neutral. Populism has swept over the globe in the past few years, and one effect of this may be heightened levels of “cronyism”. Once again this is not a political take, my personal view on this is neither positive nor negative, simply an objective observation.
Cronyism
The movement towards populism can be seen in a variety of countries around the world and while it has been rampant in some regions for longer periods of time (Russia, Turkey, others) — it is seeing a bit of a re-awakening in other regions including the US.
Taking a step back… You may know me as a “crypto guy” — the truth is that my bread and butter is equity analysis and macro investments, and through these radars are how Bitcoin originally entered my sphere. While crypto had a year of consolidation in 2018, I diverted my efforts and focus back to investing in the equity and more traditional markets.
Some of my lasting takes from 2018 and the themes we are focused on for 2019:
THEME #1 : CRONYISM
Cronyism is a theme, a narrative, and a prefect descriptor of our times. Due to the recent rebirth of populism, it is clear that some companies whom are able to maintain professional level ties to dictator, communist, authoritarian, and populist ruled regimes may outperform due to these relationships and their vast complimentary effects. In my view, positive investment results are most often found when there is a fresh regime shift — and while these outcomes may not be lasting — they are generally good for a medium-term boost in economic activity and investment. However, whether this is a direct result or more of an indirect result is more debatable. This narrative is also a relevant factor and supplement to many of the below themes.
One recent example relates to Brazil after their most recent presidential election — a widely acclaimed populist victory for Jair Bolsonaro. Note the performance and divergence of the Brazil IBX50 vs the S&P100 after the election in October, 2018. See the chart below:
Given our thesis here, we currently have a moderate focus on stories where this theme is actively playing out. While we are not necessarily long-term bullish on this thesis, it offers lots of interesting and profitable medium term trading opportunities.
THEME #2: Active vs Passive
It is quite clear from my view and from the view of those that I speak with, that the passive vs active pendulum is beginning to fall too far into the passive space. Some results of this include less liquid markets, and a variety of market imbalances which can be exploited and capitalized on by savvy active investment managers— given this, my prediction is that skilled active managers will outperform in the next 5–10 years
THEME #3: The Financial Sector
While Financial sector valuations are deservedly cheap in some instances, there are some beyond bargain barrel deals in others instances. We are currently finding generational gems at mouth watering multiples which are beautiful robust businesses with strong balance sheets and above market growth prospects. From our view, defensive allocations are a good way to play the current economic environment, however, many of the high quality firms in this classification are quite overbought from the flood out of risky assets in Q4 of 2018. The financial sector appears to be one of the exceptions to this and although some consider this sector to be cyclical, it also has some defensive characteristics as can be seen in the table below.
Some other sectors that are attractive and generally outperform later in the business cycle include: Energy, Materials, and Health Care. See the diagram below from Fidelity:
In our view, the financial sector as a whole looks somewhat attractive, but we are more excited about some highly specific opportunities in the industry. Given the uncertainty in other sectors including tech, and other more cyclical areas — now may be a good time to re-evaluate your allocations.
THEME #4: CRYPTO
Distributed ledger technology/blockchain, and crypto are emerging themes that will be relevant for the long-term foreseeable future — these new assets and technologies have engrained themselves as a movement into our global society. New use cases, product launches, and innovation will continue to bring excitement in 2019!
Within the space, we are focused on reducing common risk vectors associated with the industry while also making sure that we have exposure to the latest developments.
I will be in Seattle this week (Jan 22nd to 25th) and SF Jan 28th to Feb 2nd. Please do reach out if you are in the area and interested in connecting / setting up a meeting to hear more about what we are working on.
