Reviews. Commentaries. Opinions.

Q1 2016 Review

Q1 2016 Review

Q1 2016 has been a rollercoaster ride on the global markets and therefore disciplined thinking has paid off well. The overall mood of global markets at the end of March was considerably different to January, however, it is interesting to think that the reasons quoted for the January sell off have not been solved. An Asset Allocation approach demands that we buy when asset prices fall so at the end of January we bought equities in our discretionary portfolios. This means that the recovery experienced in late February and March was quicker for these clients. This is much easier said than done as buying in January was hardly an easy decision. More on this below.

Common Reporting Standards

On a recent trip to South Africa, I was confronted with a 20-meter billboard at the airport sponsored by the South Africa Revenue Authorities, which said “If You Hide It, We Will Find It”. This type of advertising is seen in the UK and other jurisdictions too. This is not an idle threat – they mean it and they have the means to do it too. Investors from any of the OECD or G20 Countries (including but not limited to Israel, South Africa, Switzerland, Luxembourg, Mexico, Argentina, Brazil, Singapore, Latvia, Lithuania, Australia, France and the United States) need to understand what is happening. These countries have come up with what is called “Common Reporting Standards” and they plan on actively share information about cross border investors. Financial institutions (Banks, Trustees and Investment Firms) will be forced to share information. The sharing of information will start in either 2017 or 2018 with reference to the prior years' information depending on the countries involved. What will be reported? pretty much everything: name, date and place of birth, account number, balance, sale proceeds on investments, etc. Accounts over $250 000 will be particularly in focus.

From a strategic point of view it means that governments have become very “big brotherly” on the wealthy and it will be extremely difficult to structure international transactions without paying taxes somewhere. Clients must be prepared to sign documents confirming their tax residency. As an investment manager, I see tax as a good thing because it means we are making money! However, the complexity will require greater and greater responsibility for the wealth. We are not tax advisors, however tax planning is an integral and inseparable part of wealth management so we are happy to help clients plug into our highly resourced and skilled network to reduce planning and admin costs, thus avoiding very expensive mistakes. No international investor should have any doubt that we are in a fully transparent world and peace of mind is sometimes worth more than money.

Alternative Investments

We have written about this before but it is becoming more and more of a topic as many investors are frustrated with the low returns and high volatility of public liquid markets. In the pursuit of higher yields, investors often assume alternative investments have the same risks as liquid investments. That is, of course, not true. Alternative investments have a very different risk reward paradigm. It's not necessarily better or worse, just different and this difference means that alternative investments do not suit all investors.

Investors who chase returns without fully understanding the risks may someday wish for the relatively low returns of the public markets because as low as they are, we still expect a reasonable USD portfolio to produce positive returns over a certain period.

Examples of some alternative investments we are using are: a consumer loan-lending fund, physical property in the USA or Europe, and of course certain types of hedge funds. To learn more about relevant Alternative Investments for you, please contact your personal financial planner.

What is Wealth Management?

Frequently in conversations with clients and potential clients, I find myself explaining the difference between various types of investment firms. For example, providers of Alternative Investment solutions compared to Wealth Managers. Both the Alternative solution provider and Pioneer are ultimately seeking returns but that does not mean we can be compared as similar. Providers of Alternative Investments position themselves as selling an investment. Their business or commercial interest is for an investor to invest or buy their product, thus their sales process tends to highlight the positives of the investment. Detailed understanding of the product requires investment skill, experience and understanding beyond the gut feeling of the investor. The Wealth Manager on the other hand is looking at a much larger segment of the investor’s wealth and not only one component of it. The crucial difference between the Alternative Investment provider and a Wealth Manager starts with the business model.

Pioneer agreements with its Wealth Management clients say that we will not earn any retrocessions, nor front-end commission, nor any transaction fees, nor any mark ups. This means we are 100% aligned with investors and our recommendations represents our genuine best advice. Too often in this industry, there are conflicts of interest which are less obvious and which potentially can hurt investors. We believe that once you have the right model combined with an exceptionally robust investment approach and organizational depth, only then you can provide a truly holistic wealth management service. This is what we do.

Has the USD reached the end of its run?

During March, we saw a change by Fed Chairperson Janet Yellen, which surprised many. Previously Yellen and most of the committee members were predicting a faster increase in short term rates. Yellen announced that they expect fewer increases over the rest of 2016. The market took this as a sign of USD weakness and the USD lost value against a basket of other currencies. I have always maintained that the USD has many flaws, however, the currency game is all about relative strength and the USD has lots of relative strength still. Having said that, I would say that there is a greater probability of this weaker USD trend continuing than the opposite.


European project will face a key test on 23rd June as British voters will decide whether to remain a part of the European Union or to start a process of withdrawal. The polls now are too close to call. An Exit vote would introduce a lot of unwanted instability for both the pound and for the Euro. Actual implementation will take years and no one knows now exactly how the withdrawal will be implemented. Should the UK follow the exit route it would be an ominous precedent, as other countries will push for exemptions. The STG has already weakened quite considerably and the fundamentals appear to us that this will continue. Faced with a major challenge such as waves of refugees, countries will fiercely protect their national interests at the expense of the European integration. The consequences of this move go far beyond the pure trade numbers.

Market Performance in Q1 2016

To understand Q1 markets just think about a V shape. Almost every risky asset class you can think about went down sharply in January and early February, and was fully or almost fully recovered by the end of March. The extent of this V shape for a single quarter is actually staggering.

Asset Class

Low point

around early Feb

Recovery since

low point

S&P -10.5% +12.84% 0.98%
EuroStoxx 50 -17.97% +12.46% -7.88%
Russel 2000 -15.54% +16.38% -2.04%
Nasdaq -13.69 +13.27% -2.23%
HY Bonds -6.15% +7.92% +1.24%
Amazon Share -28.28% +24.19% -10.8%
India -13.65% 14.01% -1.78%
Brazil -12.44% 52.0% +29.88%
Russia -15.99 +35.72% +14.02%
Apple -11.25 17.28% +4%

The table highlights the cost of not being disciplined. Markets behave irrationally. Since we expect this, we must have a disciplined approach. Any investor who got scared and sold in January, would have missed the rebound. The cost of this would have far outweighed the transaction of advisory cost the investor tried to save. Regarding what I explained above in terms of a pure wealth management service, I believe that the transaction-based model employed by private banks has a lot to do with the herd mentality of the market as banks can easily profit of the fear in the market and exasperate the problem. Any private banking client who exited the market in January out of fear and did not re-invest would have suffered exceptionally losses for Q1.

Outlook for rest of 2016

Our base case is that we do not expect anything fundamentally different. We still expect volatility, perhaps not as sharp as January but volatility none-the-less. Given that European banks have started charging negative interest on Euro cash held, it would make sense that there will still be plenty demand for risky assets and we expect this money to flow partially into equities. The currency effect is too difficult to call so we prefer to be hedged back to your base currency.

From a macro point of view, we expect the low growth numbers of the developed world to continue and we only expect one rate increase at best by the end of 2016. We expect longer-term rates (USD 10yr) to remain range bound between 1.7% and 2.2%.

Japan is now beginning to expand its monetary policy even further, which could be good for equities in the short term at the expense of an expected weakening Yen.

Bonds yields are expected to stay low so we are moving more and more to direct bonds and away from actively managed bond funds and using ETFs where it makes sense for us to do so. This is in the safer part of the bond space, e.g. Investment Grade bonds. In the Emerging Markets space, we prefer Mexico and Brazil to Russia and China.

Israel at a glance

The Israeli equity market largely followed the V shape pattern of the global markets experiencing a low point of -10% on about the 10th of February and then recovering by about 6% to finish the quarter at -5%. This puts Israel equities somewhere between European and American major index performance. Israeli government bonds went up by 1.5% from the demand following the flight to quality. As always, Israeli markets are affected by global issues like low oil prices and Chinese fears etc. However, the Israeli market had additional volatility introduced due to the ever-changing gas deal as the government tries to juggle the many varied interests. The ultimate irony for us was when the Israeli High Court cancelled the so-called “Stability paragraph/section”. The volatility also provided some buying opportunities, e.g. the banking sector traded attractively below its NAV.

Investors may be interested to know about planned changes in the construction of Israel’s main equity indexes. In order to address the insufficient liquidity in smaller companies, the Tel Aviv 25 Index will become the Tel Aviv 35 and the Tel Aviv 100 Index will become the Tel Aviv 125. In addition and most importantly, the previous 10% capping of the very large companies (e.g. Teva, Perigo) will be reduced in both the indexes. In the TASE 35 the capping of will be 7% and in the TASE 125 it will be around 4%. We view this as a positive move as the lack of liquidity is a real problem in the Israeli market. We believe that even more action is required as the Israeli equity market is shrinking. The regulator is well aware that people will try to create an arbitrage profit from these changes and will implement the changes slowly over time. We feel this is one of the reasons why the price of Teva has fallen even more than the health care sector in the last few months. In terms of rates, we expect inflation and interest rates in Israel to remain low in the near future.


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.

  • This email address is being protected from spambots. You need JavaScript enabled to view it.

Leave a comment

You are commenting as guest.