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Looking back, the first half this year seems kind of inevitable now…

In the wake of last year’s momentum – possibly even euphoria (see my FY-2017 performance review) – H1-2018 was an unwelcome cold shower for investors. But such is how the market gods operate… And in reality, momentum was limited mostly to US investors (in particular, FAANG fans), who enjoyed 19-25%+ returns last year. Spare a thought for (unhedged) European investors: A weak dollar (down 14% vs. the euro) diluted away most of their US stock returns, while locally they earned a fairly pedestrian sub-8% return. So it’s clearly galling for European investors to now see their local markets down year-to-date (vs. a small US gain)…particularly when most of the ‘blame’ (if there is such a thing) for recent market wobbles arguably belongs to America.

But surveying other markets, we’ve seen more savage reversals of fortune elsewhere this year. Emerging & frontier markets investors enjoyed 32%+ returns last year, but were blindsided this year as markets plunged across the board, with negative returns exacerbated by local currency weakness (high current account deficits being targeted in particular). In fact, quite a few individual markets entered bear market territory. And yes, I mean actual 20%+ declines…not the feeble 5-10% ‘bear markets’ the financial media breathlessly reports these days!

Of course, the real disaster bear apocalypse happened in the crypto market – remember this table?

Take a moment & marvel once more…seems like an awful long time ago now, eh?! While Bitcoin peaked mid-December (rather unfortunate for all those kids who persuaded their folks to buy in over Xmas!), Ethereum & the rest of the market’s incredible momentum carried right into the first/second week of January. Since that peak, the entire crypto market has collapsed almost 70%, with its end-June market cap now barely exceeding $250 billion. Clearly, my #CryptoFOMO theory hit a brick wall: Despite noting a possible crypto-wobble (as I published this post mid-Jan), I argued that new money might not be ready to dive into crypto, but last year’s crypto gains would surely inflame & elevate investors’ risk appetite in the equity markets. Obviously, at the time, I didn’t quite envision such a horrific crypto collapse…or the subsequent schadenfreude.

However, I’d still argue there’s a significant asymmetry here, in terms of potential risk/reward: Crypto euphoria could well re-emerge & spill over into equities…but on the other hand (hopefully, I’m not being too blasé here!) the popping of an asset class/bubble that can be measured in the mere hundreds of billions isn’t all that relevant or serious in the global scheme of things.

Meanwhile, back to harsh reality: Here’s my actual H1-2018 Benchmark Return – as usual, it’s a simple average of the four main indices that best represent the majority of my portfolio (& most readers’ portfolios too, I presume):

Yup, a (0.4)% benchmark return for H1-2018…pretty disappointing, eh?!

Sure, six month returns are arguably pretty meaningless – but pondering some of the underlying drivers here may offer useful insight into the market’s continuing risks & trajectory. Most notably, the indices were down (5.0)% across the board in Q1, then basically reversed this decline with an average 4.9% gain in Q2. I suspect this round-tripping is a pretty good indicator of just how conflicted investors are right now about the market’s key drivers…

The Irish market kept a low profile in H1 – with the ISEQ down (0.8)% – remaining in thrall to European sentiment, and esp. the ongoing #Brexit soap opera farce. Both are likely over-rated, with Ireland enjoying another Eurozone-busting year (with 2018 GDP growth now expected at 5.7%), while events continue to endorse my long-standing bet that the UK was inevitably heading for a much less threatening soft (& transitional) Brexit. For the moment though, the market trades on a 16 P/E & the index is still being held back by the banks (beset by Italy & the European bank sector), the food stocks (who only have themselves to blame, as I documented here & here), and some company-specific challenges, e.g. Ryanair Holdings (RYA:ID) & Paddy Power Betfair (PPB:ID). As always, it’s a stock-pickers market – you need to dig a little deeper to find meaningful domestic exposure & real value/upside potential.

The UK delivered much the same performance – with the FTSE 100 down (0.7)% – but the outlook’s far more mixed. A 2018 GDP growth forecast of 1.5% trails Europe badly, while retail sales paint a dodgy picture…but on the other hand, unemployment at 4.2% is at levels unseen since the early-70s (much like the US), while national house prices (i.e. notwithstanding negative headlines re the London market) are still growing at a healthy clip. However, the absence of a Q2 Bank of England rate hike (vs. market expectations earlier this year) is quite telling. Brexit will continue to dominate, and I don’t expect softer Brexit plans to deliver any near-term revival in sentiment, with: i) companies more & more vocal about the potential negative consequences of any Brexit, in terms of supply chain, investment & jobs (compounded by a dawning realisation that a Brexit jobs windfall was just another Leave fantasy), and ii) God knows what political twists & turns still to come… In the end, the supreme irony is that the one country actively seeking an EU-exit is one which specifically retained its own independent currency & central bank – if the UK couldn’t thrive & dominate within the EU trading bloc, given that huge competitive advantage, there’s little reason to expect Brexit will confer some glorious new advantage.

Europe…how do you solve a problem like Europe? It racked up the worst index return in H1, with the Bloomberg European 500 down (1.9)%. This story feels all too familiar…despite European GDP growth broadly on pace with the US* over the last few years (which few investors seem to realise!?), Euro equities have severely lagged US equities post-crisis (much like value vs. growth?). [*Even this year…strip out the Trump Tax Bump & US GDP growth would likely approximate Europe’s 2.2% GDP growth forecast]. But in reality, there’s no escaping the fact that US CEOs boast a virtual monopoly – in terms of chutzpah & incentives – on delivering superior revenue growth & margins at all costs. Which suggests a stock-picking approach in Europe – as I’ve said before, hunt for (owner-operated) hidden champions! Because the macro background’s better than it sounds (per the financial media): Sure, Italy’s banks are a perennial problem, but its new populist government is just another red herring…surveys confirm Italians want to stick with the euro, and the average Italian government barely lasts a year anyway! Not to mention, the ECB isn’t done with quantitative easing & won’t even contemplate raising interest rates for another year.

Last, but never least, we have the US – which put the only positive score on the board, with the S&P 500 delivering a 1.7% gain. Of course, it’s all about Trump… I joke the only thing that astonishes & outrages the US media more than his victory, is the fact that he’s actually following through on his campaign promises. [In both instances, an important reminder Trump’s not an actual politician!] He was & is a reality TV star, and his entire life’s been leading up to his current role. I mean, just look at his career – the recurring thread of success was always his self-promotion (& aggrandizement), not his business acumen. And at heart, I suspect he’s politically agnostic…but he’s a complete natural when it comes to promising his ‘audience’ what they want, and then delivering on it for the ratings. And liberal America still isn’t close to figuring this out: Trump isn’t the problem…the real problem is that Trump ‘represents’ what half of America now appears to actually think & want!?

So we shouldn’t forget Trump (& the media) are noise-squared. Politicians ultimately have far less impact on markets & economies than they (& the media) would have us believe, and with Trump it’s compounded by the fact that most of what he says & does is simply drunk uncle bluster. But despite that, we really need to focus more on Trump’s campaign promises – and what the people ’round him & his constituencies want – and maybe adjust our handicapping of the odds accordingly on him actually delivering. Especially if he ends up with an eight-year runway…

This apparently looming global tariff war is a prime example. In reality, a (smart) high school kid could argue why tariffs were & still are (esp. in a global supply chain world) an obvious lose-lose proposition. But economic logic’s irrelevant here, this is what the #MAGA deplorables want & believe in (as does, ironically, much of the Democratic party & base)! And so what if it goes horribly wrong – Trump knows he can still blame the elites, China, Big Tech, etc. So how far does he take this? Who knows at this point… Problem is, his negotiating style is all about upping the stakes. ‘Til he finally wins…or it ends in friggin’ disaster!? At least this year, we can ignore the media – it really doesn’t matter – the Trump Bump far outweighs any tariff impact. But looking ahead, how big & how global could this get? Again, who knows…as with most politics, I suspect the bigger impact may come in terms of market sentiment & business confidence.

We also have the knee-jerk effect on the dollar. Since end-2016, the dollar’s been in a pronounced bear trend – which came to an abrupt halt in early-February, as Trump imposed his first tariffs & his trade rhetoric heated up. Since then, the dollar’s rallied in earnest – up 6% since mid-April. Emerging & frontier markets have suffered accordingly. But I question whether the trade tail should wag the dollar dog? Speculative flows swamp what are minuscule trade flows (by comparison) & tariff-related sentiment could sour unpredictably. While spill-over into investment flows may also be a real threat – already, the CFIUS is apparently becoming more belligerent, while China could obviously redirect investment flows how & whenever it pleases.

And then we have oil: The big bull market (since mid-2017) ran out of steam in Q1, but was rekindled in April with the market anticipating Trump ripping up the Iran accord & re-imposing sanctions. There’s no obvious (fresh) logic to this decision…but hey, it plays well to the crowd! Against a background of improving OPEC compliance, deteriorating Venezuela supply & the Yemen situation, this was the last straw – Brent topped $80 & closed H1-2018 up 19% (with WTI actually up 23%). Fortunately, the recent OPEC announcement to re-up supply by a million barrels started to kick in over the last week, with oil down about 7% on average. However, doubts still linger whether OPEC can achieve this production increase, and/or whether it ultimately still wants a higher price. And big picture, even when the fundamentals don’t suggest it, longer-term charts are always a reminder for traders that oil can easily spike to $100 plus…or even $140 plus!?

Finally, we have US interest rates…possibly the real gorilla in the room. Powell has enjoyed a relatively smooth transition, and is clearly a champion of the Fed’s dot plot of two more rate hikes this year, and another three hikes next year. But does the market agree? [Or Trump?!] Well, here’s a clue: Respect the futures curve…its post-crisis forecasting record has been far superior to the Fed’s (& all those highly paid talking heads out there). And is the speed & trajectory of rates more important…or is the low absolute level of (real) interest rates critical support for a continued bull market, as I’ve argued regularly? And even more important, is the current 25 bps 2s-10s spread heading to zero & into negative territory…and if so, does it actually herald a recession, or is it merely a prelude to a new growth spurt (as Kudlow just argued)? [Not to mention, are tariffs inflationary…or deflationary?!] And surely wage growth will spiral upward with unemployment close to 50-year lows at 4.0%? But the market’s still betting against that outcome – and noting the labour participation rate is now at 40-year lows, ten thousand Boomers are retiring daily & being replaced by cheaper Millennials on crap benefits packages, and even white collar professionals are starting to fear the looming AI apocalypse, maybe that’s not such a crazy bet after all.

And who’s in control here anyway…the market, or the Fed?

At this point, as crazy as it sounds, it might actually pay off for investors to yank the market down 5-10%…if the payoff’s a Fed beaten into interest rate submission. Of course, that would leave no real dry powder for the next recession. Sure, but we’re talking about a country that’s literally piling on more deficits, debt & fiscal stimulus than ever, even though the damn recovery’s already happened…clearly, the adults have left the building & nobody in America cares all that much anymore about the bills eventually coming due.

OK yeah, so that was a bit of a black parade…

But a timely one, I think: It may seem counter-intuitive…but lying by the pool, or on a white sandy beach, may just be the perfect time & place to properly contemplate today’s market & gain some valuable perspective. ‘Cos you’ve got precious little chance of ever sorting out the genuine market risks, from the opportunities, from the red herrings, when you’re trapped in the echo chamber of today’s financial media. And let’s face it, every investor has to slow down & try figure out most of this stuff for themselves – because in the end, you’re the only one who can live with your risk, your positions, your portfolio, night & day – nobody else can live ’em for you.

That being said, it’s time to relive my own performance – here’s the Wexboy H1-2018 Portfolio Performance, in terms of individual winners & losers:

[*Donegal Investment Group end-H1 price has been adjusted (marginally) to reflect the recent €9.25 share redemption. Other holdings: Gains are based on average stake size & end-H1 prices.]

[NB: ALL dividends & FX gains/losses are excluded.]

And ranked by size of individual portfolio holdings:

And again, merging the two together – in terms of individual portfolio return:

Yeah, so far it’s been a pretty good year…

First & foremost, my return was positive…always good when it comes to paying the bills! And second, it’s a +5.2% return – 5.6% out-performance vs. my (negative) benchmark return – hopefully a good sign, in terms of my ultimate FY-2018 relative (& absolute) performance. At this point, I’d normally run through each of my holdings, but since I’ve recently reviewed them all pretty comprehensively (worth revisiting, here & here), I’ll just focus on the main winners & losers here:

Zamano (ZMNO:ID, or ZMNO:LN):  11% Loss.

What about a grim reminder you can always lose more money on a bad stock? Step up, Zamano! But I can’t even thank management, as they’ve already jumped ship…literally getting paid to cart away the remains of a business destroyed on their watch. Following my last write-up, the shares delisted in early-March (pending a reverse takeover deal, or final liquidation). The board has since missed two self-imposed deadlines to update shareholders, but we now have results – and more importantly, confirmation that due diligence is well advanced on an RTO deal. [With Menolly Homes, per the press]. Presuming the deal goes ahead, shareholders can choose a cash exit, or remain invested. Judging by the recent Glenveagh Properties (GLV:ID) & Yew Grove (YEW:ID) IPOs, it may be wise to assume a fairly minimal IPO premium. But shareholders can still anticipate a significant uplift vs. ZMNO’s last quoted price (€0.04 per share), noting: i) the company’s 5.0 cents net cash/NAV per share (minus a small haircut for YTD expenses), and ii) an expectation the board will negotiate a deal to specifically extract additional premium (from the incoming investors) in exchange for Zamano’s stock exchange listings (not to mention, shareholders’ time & money expended lining up said deal).

Applegreen (APGN:ID, or APGN:LN):  15% Gain.

No change in my investment thesis since my last write-up. With interims due in September, the only news since is the June AGM statement: Some severe weather-related disruption was highlighted, while fuel margins are being impacted by higher oil prices. But otherwise, Applegreen’s growth trajectory remains as impressive as ever, with 24 new sites added to the portfolio YTD (primarily in the UK & Ireland), suggesting 16%+ organic estate growth this year. In addition, the Chairman announced a new long-term lease agreement for 43 stations in Florida, which will help to expand & consolidate the company’s footprint in the US south east (after last year’s Brandi acquisition in South Carolina). But what’s really astonishing here: Despite a 23% share price gain (as of now), vs. my original investment write-up just over a year ago, Applegreen’s even cheaper today…with reported revenue up 21% (FY-2017 vs. FY-2016), its (announced) estate expanding by 68% to 409 sites (early last year, the brokers were actually penciling in close to 400 sites by end-2019!), and underlying (maintenance) free cash flow up 78%.

Donegal Investment Group (DQ7A:ID) (formerly DCP:ID):  19% Gain.

[NB: 53.7% of my holding was redeemed in May. Subsequently, I increased my Donegal Investment Group portfolio allocation from 3.2% to 4.0%. Though in reality, I bought additional shares pre-redemption at a discount to the €9.25 redemption price, thereby increasing my post-redemption holding by 0.8%.]

Since my last write-up, Donegal completed its long-awaited share redemption – in aggregate, inc. open market buybacks, management retired almost 57% of the company’s outstanding shares since year-end! With these purchases at a premium to the latest €8.24 NAV per share, it’s important shareholders realise that (all else being equal) NAV will be diluted 15% as a result (to just over €7.00 per share). However, this is purely an accounting phenomenon…as I continue to believe Donegal’s intrinsic value per share is much higher than its reported book value, as do the directors (evidenced by their redemption pricing at €9.25 per share, not to mention their continued personal open market purchases). If/when the Nomadic speciality dairy business is sold, this will likely be rectified, i.e. we may expect to see a substantial NAV revaluation – the May AGM statement confirmed an ongoing corporate finance process re its potential sale. But obviously, I expect further value to be ultimately recognised & extracted from the rest of Donegal’s portfolio…and with a new strategic review in the works, I wouldn’t be at all surprised to soon see the entire company on the block.

And finally, despite a small YTD gain, I have to include one last winner…

KR1 (formerly Kryptonite 1) (KR1:PZ):  7% Gain.

Um, pourquoi..?! Well, subsequent to my original investment write-up just over nine months ago, you’d be surprised at the emails & comments I received…actually bemoaning what’s a 3-bagger today, and was an actual 6-bagger for one brief shining moment in January! All I heard was: Why isn’t the KR1 share price rallying more? Why isn’t management more promotional? Why aren’t they trading crypto 24/7? Etc… Blame me for my value investing goggles: In KR1, I found what I think could reasonably be described as the one safe & cheap crypto/blockchain stock pick out there…which of course, back in the middle of a crypto-frenzy, was like finding the only wall-flower at a molly-fueled naked rave weekend.

But quelle surprise…I don’t get emails & comments like that anymore!?

And frankly, there’s no better endorsement of my thesis: I invested in what more & more investors now realise is/was the antithesis of the average crypto/blockchain stock, i.e. a legitimate company trading on a cheap valuation, one boasting a great management/portfolio team, a relatively low expense ratio, an actual diversified investment portfolio, and a unique opportunity to invest in & also to flip multi-bagger ICOs. That last attribute’s critically important: To reiterate, KR1 is NOT just some me-too Bitcoin bet, it offers genuine (early-stage) diversified exposure to the burgeoning blockchain/dApp/token economy. Not to mention, the share price is also a ringing endorsement…do you remember the Crypto Trading Sardines post (worth referencing again) I published just ahead of my original KR1 investment write-up last year? After creating a new core listed crypto/blockchain sector from scratch, this table detailed its YTD gains as of CoB 20-Sep-2017:

In reality, the party was still only getting started at that point – share prices (& cryptocurrencies) continued to soar, hitting all-time highs somewhere between mid-Dec/Jan. But then came the dawn…and the hangover! [And yeah, more fool me for not bailing just as the party peaked, but (unfortunately?) I have no great desire to attempt trading in/out/around long-term growth stories]. Now here’s a somewhat different/updated version of the previous table (focusing on the same core listed crypto/blockchain sector) as of 30-June-2018:

The underlying cryptocurrency market still managed to chalk up a cumulative 88% gain since my Sep-20th post last year, despite a subsequent disastrous collapse vs. its 2017/2018 highs (down 69%), and vs. year-end (down 59%). But the listed sector’s performance is actually far grimmer – not unsurprising when a blue sky sector suffers a major setback, as equities tend to be a more leveraged bet. In H1-2018, the crypto/blockchain sector suffered a 68% loss…and after all the hype & glory, it now boasts a cumulative 1% loss since Sep-20th. But in the end, there’s no comparison – just take a look at KR1!

By far, KR1’s actually delivered the best crypto performance, right across the board. While it did suffer a significant reversal vs. its early-2018 high, overall it’s racked up a cumulative 159% gain since last year (plus an additional 18% gain to-date in H2-2018). And as I’ve previously highlighted, we can undoubtedly laud KR1 as literally the only crypto/blockchain stock globally which can boast an actual H1-2018 gain! If that doesn’t feel like a big winner, I don’t know what does…I’ll be sticking with this little beauty & expect much more to come!

OK readers, the best of luck in H2-2018. I’ll be talking to you…but meanwhile, be sure to dig up a potential new stock buy or two while you’re at the beach!