Q4 2018 Commentary – Mackenzie Cundill Team | Mackenzie Investments

Q4 2018 Commentary

Mackenzie Cundill Team

Market Review, Outlook & Strategy

  • 2018 was a tumultuous year of performance in global markets, with volatility dominating the first and fourth quarters. The year started with concerns over Trump’s tariffs on aluminum and steel imports, U.S. - North Korea tensions and rising worries over China-U.S. trade as well as the fear of a Federal Reserve policy mistake. That culminated in panic out of risk-on assets in the fourth quarter.
  • The disappearance of risk appetite and tax loss selling in markets during Q4 particularly of holdings in Cundill funds is akin to holding a beach ball under water. Once the selling pressure eases and shares begin to reflect fundamentals again, the beach ball pops right back above the water, as demonstrated by the significant outperformance of Cundill funds in the first weeks of the new year, recapturing a big portion of Q4 underperformance.
  • The fourth quarter was characterized by investor worry, panic and capitulation. The panic engulfed many cyclical sectors including energy and financials which are overweights in our portfolios. The selling pressure was further exacerbated by technical, algorithmic and short selling especially in the energy space. This happened against a backdrop of trade war concerns, relatively weak economic data, and an inversion in the 2-5 year segment of the US government bonds yield curve. As a result, there was a sudden and dramatic disappearance of risk appetite in the marketplace. Deep value stocks, which trade at substantial discounts to intrinsic value because they tend to be in various stages of operational improvement, financial deleveraging, business turnaround or restructuring, were indiscriminately discarded by the market as market risk appetite hit an “air pocket”.
  • Under such a scenario, stocks that Mackenzie Cundill team owns didn’t do well in the short term, as “re-rating stories” take time and execution. At the time of writing, we can look back and see that the sell-off was way overdone as Cundill funds recaptured both absolute and relative performance in early January.
  • Countries such as China, German and Italy, have decelerated growth recently. In China’s case, the economy is shifting toward being more consumer-centric and consumer spending is still growing at high single digits. The Chinese government is now considering fiscal stimulus measures such as tax cuts to counter weaknesses in the economy related to trade war. In addition, the central bank there has been cutting the Required Reserve Ratio since mid-2018 to improve financial conditions. In Germany, we believe the weakness is mostly related to the delays in factory production caused by Worldwide Harmonised Light Vehicle Test Procedure (WLTP). This testing requirement has delayed auto production significantly but the issue is temporary. Once the testing procedures are caught up, vehicle production should normalize. In the case of Italy, the newly elected Italian government has finally struck a budget deal with Brussels to avoid EU sanctions after the months-long row.
  • In the UK, at the time of writing, the Parliament has rejected the Brexit deal that Theresa May negotiated. However, Theresa May has won the confidence vote and remains as Prime Minister. At this juncture, May could try to tweak her deal to get it approved at a later date, she or the Parliament could ask for an extension of Article 50 beyond the original deadline of March 29th, they could annul Article 50 or even call a second referendum. However, the risk of a Brexit with no deal is highly unlikely as that will be detrimental to both the EU and UK. Our portfolios have small exposures to the GBP. In addition, our UK holdings are global companies with extensive operations outside of their home country.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of December 31, 2018 including changes in unit value reinvestment of all distributions and do and not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.

This document includes forward-looking information that is based on forecasts of future events as of December 31, 2018. We will not necessarily update the information to reflect changes after that date. Risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.