Reviews. Commentaries. Opinions.

2018 Half Year Review

2018 Half Year Review

2018 half year summary & predictions

Our first thoughts after seeing Germany’s early exit from the FIFA world cup was that we place too much reliance on Germany for the strength of the Eurozone and maybe we should exercise more caution when allocating money to Europe. The FIFA World Cup has many positive messages for the global economy and we must not be too quick to focus only on the negatives.

2018 so far has been a difficult year for asset allocators, like Pioneer. Across the industry, returns have been difficult and disappointing in absolute terms. In this review, we will try to explain what is happening.

2018 Summary – Breakdown in Correlations

The principle of asset allocation is based on the inter-correlation of different asset classes. That means when some assets do badly we expect to make money on other assets. There is a lot of statistical and academic work, which proves the robustness of the asset allocation approach over the longer term. However, every now and then in the short term, the correlations break down and when that happens we experience small losses. This happened in Q1 2018 and I discussed it in my article: Seaweed and the Savvy Sailor. Does this mean our process is flawed? No. Do we abandon ship? Not at all. We are well within the range of “normal”.

Asset Class / Index


Total Return

Government Bonds 


Investment Grade Corporate Bonds


High Yield Bonds


Emerging Markets Bonds


US Equity


European Equity


Emerging Markets Equity


Hedge Funds


Looking at the markets for 2018, the global world equity index YTD (year to date) is close to flat. The main USA stock index is slightly positive however, the small cap index has done well. Almost all other stock markets are negative YTD, led with emerging markets countries showing the biggest minuses. The major hedge fund indexes are negative between flat and minus 6%. Emerging market bonds and longer-term bonds would also have brought your portfolio down in 2018. Ironically, some of the most conservative long bonds are showing some of the biggest losses. Gold is slightly negative and is no match for the collapse of Crypto-currencies, especially Bitcoin that is down to 6,300 USD from touching nearly 17,500 USD (discussed at length in the 2017 annual review).

Trade Wars

The most significant economic news item of 2018 so far is probably the implementation of Trump’s election campaign promise of trade tariffs. Most of us were taught that economies must maximize their relative advantage. This in fact happened, more or less, and from WWII there is a very positive trend towards globalization. The 2008 financial crises however, may have been the start of the end. Leaders around the world realized that the result of globalization was an inter-dependence, which does not bode well for the politically minded. Since then we have seen various attempts by different countries to assert their economic independence. The main measure of this interdependence is called the “balance of payments”, which is made up of a capital account and a current account. The current account is an important indicator of an economy's health. Basically, a current account surplus is good and therefore it is much better economically to be an exporter than an importer. The USA as a consumption-based economy is a big net importer compared to China, which historically has used cheap labor to make competitive exports. The definitions get much more complicated and therefore the consequences of a change in the status quo become extremely difficult to predict, especially in the short term. Further, since it is likely that whatever newspaper you are reading will have a political slant, it is difficult to collect real data. For example, you may read that Trump wants to impose trade duties on Canadian Milk products, but you are unlikely to read about the extent that the Canadian government subsidizes its dairy farmers. Subsidies are another form of trade barrier and have the similar effect as tariffs, which make it difficult for one country to compete with another.

What has actually happened?

In January 2018, Trump imposed tariffs on solar panels and washing machines; from June 1, 2018, a 25% tariff on imports of steel; and a 10% tariff on aluminum, from the European Union, Canada, and Mexico. China said that it would retaliate for the tariffs imposed on Chinese goods that come into effect on July 6. India is also planning to hit back to recoup trade penalties of $241 million on $1.2 billion worth of Indian steel and aluminum. How did the market react? Some volatility but really nothing major at this point. One reason could simply be that the market does not know how to price these impacts. Another reason could be that the market is becoming more resilient to Trump political moves.

The bottom line is that the global interdependence is unavoidable and a protectionist approach is more about political maneuvering than real economic fundamentals. When Trump threatens tariffs, he scares the more vulnerable countries and gets them to do what suits his policy ideas. I suspect this is how he got North Korea to sign a policy document toward denuclearization. He pressured China and others through trade threats to put onward pressure on North Korea. Arguable point I accept.

Morgan Stanley surveyed 104 economists about Trump’s policies and none said they were good for the USA. Most said it would have a net negative effect and some said these tariffs would have no effect. Certain industries will be more affected than others will. Our primary concern lies with emerging market countries, ironically where we see more value that is fundamental.

How to choose a hedge fund

Hedge funds have been around for a very long time and Pioneer has been using different hedge funds throughout. We offer our clients managed portfolios with or without hedge funds. The performance of the two options has been remarkably similar. My default recommendation, for a less sophisticated and less experienced investors, is no hedge funds, at least initially. Interestingly in Israel, we have seen an explosion of new locally run funds. The trend we have seen is that "USD thinking investors" have increased their appetite for alternatives, but have decreased their desire for hedge funds. On the other hand, "shekel thinking investors" have increased their appetite for alternatives including hedge funds. Many of these new funds are being marketed to High Net Worth individuals in Israel and some caution in selection is required. You may want to refer to our latest video discussing our view on how to choose a hedge fund.

Outlook for 2018

Given the sharp rise in long and short term rates so far in 2018, our view is that the Fed will raise short rates but longer rates would stay relatively range bound. Therefore, we will continue to hold our bond exposure to recover some of the minor losses of 2018. We do not expect any sort of economic crises in 2018 as the banking sector is strong. We worry about the technology sector as it has had perhaps too good a run led by Amazon and Netflix. Both of whom are aggressively priced. We will remain fully invested in equities and hopefully enjoy the value bias in our portfolios. Rising oil prices are a concern, as is the widening credit spreads. This means that the market is saying companies will have more problems refinancing their debt and the price of risky bonds is going down. We are expecting a quiet summer on the markets with no major gains or losses.

Israel at a glance



 Total Return

TA 35


TA 90


TA 125


SME 60


TA Real Estate


Economic indicators in Israel are extremely strong. The annualized growth is over 4% and unemployment is at 3.6. Despite this, we have seen the Shekel weaken slightly against the USD, which leads us to believe that there is a "natural floor" of about 3.40 NIS to the USD. The stock market does not reflect the above positive news for the opposite reason of 2017. In 2017, we saw that most companies were positive and large stocks, like Teva, drew down the index. This year we see that most of the index components are negative and the index has been pulled up by the likes of Teva. Teva is up 35% YTD under the new leadership.

Another interesting component is that we have seen significant increase in new IPO’s on the Tel Aviv stock exchange – 9 new companies listing in 2018 compared to a yearly average of 1 or 2. This reflects the positive economy.

On the cautionary, side we see a few controlling shareholders selling their stakes in listed companies. E.g., Discount Investments sold their 15% stake in Shufersal. This is clearly a signal that the market prices are high not low. We expect interest rates to start increasing late 2018 or in 2019.


The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.



About the Author

Mike Ellis

Mike Ellis

Director and Chief Investment Officer

Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.

Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.

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