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Weekly Manager Views

7 February 2020

At GAM Investments’ Weekly Investment Meeting held on 5 February, the speakers were Kimura Capital’s Mark Wright, who discussed opportunities in the commodity trade finance market, and Ali Miremadi from GAM Investments, who commented on the outlook for global equities.

Commodity Trade Finance

Mark Wright

  • Traditional bank finance continues to be constrained and, in many cases, unavailable for small and medium-sized enterprises due to regulatory changes. This has resulted in a substantial structural funding gap for non-bank lenders to fill. Moreover, data from the Asian Development Bank suggests the current USD 1.5 trillion global trade finance shortage is expected to increase over the next two years.

  • As the credit lines of large global banks remain curbed, active investment opportunities continue to open up in select high quality trade finance transactions across regions and multiple strategic commodities (i.e. cocoa, copper, sugar, metals). There is a clear demand for funding throughout the supply chain spectrum from producer, processor / refiner to distributor / merchant trader.

  • Trade finance remains a market segment with high barriers to entry for non-specialised outside investors. We believe success depends on selecting self-originated, tailored, ring-fenced commodity trade finance lending while retaining full control over deal cash flows, assets and contracts.

  • Data from the International Chamber of Commerce (ICC) confirms trade finance default rates from 2008-2018 were low (0.02%) across all products and regions. Even so, we believe it is important to mitigate that risk further by only investing in commodities, regions, counterparties and transactions that satisfy very strict risk and credit parameters.

  • Importantly, for investors, returns from this asset class are independent and largely uncorrelated to wider public or private financial markets. This offers access to a unique, differentiated income stream to an efficient investment portfolio, providing there is no heavily-weighted individual commodity or transaction risk.

  • The long-term sustainable returns of companies and the wider global economy are dependent on stable, functioning and well governed social, economic and environmental systems. In this context, we are strong supporters of bringing responsible investment into the mainstream for commodity trade finance and expect this to be a major industry theme going forward.

Global Equities

Ali Miremadi

  • The prevailing very low long-term interest rate environment has perpetuated the outperformance of ‘growth’ over ‘value’ strategies and propelled some stock markets to levels that infer low returns from here. As value investors, we have adapted our approach to avoid value traps and focus on a concentrated list of good companies trading at deep discounts to long-term intrinsic value. We strongly believe there will be a shift from growth to value. Bearing this in mind, investors who focus on value-orientated asset classes will likely benefit in the long term. Even as we encounter unusual companies with extraordinary multiples, such as Tesla, we feel value traps can be avoided by searching for companies that can be supported by strong cash flows and balance sheets.

  • We feel asset-allocation will continue to shift into equities as the least overvalued major asset class; however, in our view it is vital to be selective. It is possible to take advantage of the inefficiency of equity markets at valuing the long-term prospects of a small number of businesses by building a concentrated portfolio. Consequently, a core part of our process and risk management is to constantly monitor both developments in the underlying business and amplify or reduce position sizes depending on changes in the discount of share prices to long-term intrinsic value.

  • We feel that a crucial indicator of the aforementioned shift from growth to value will be long-term interest rates. As and when German bund yields turn positive and US treasury yields increase, we believe this could translate to a pick-up in inflation and surge in value stocks. The question of timing remains, but we believe that this shift should happen.

Important legal information
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or advice. Reference to a security is not a recommendation to buy or sell that security.
February 2020