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The question being asked is whether we are now heading into a bear market? The answer is not very certain at this point and hinges on the stock market factoring in the possibility of higher US interest rates. The behaviour of the US bond market however indicates that a sharp increase in interest rates is not very likely. Higher interest rates are here to stay but the rise in policy rates especially at the long-end is likely to be more muted. Thus what we are seeing now is more likely a correction rather than a reversal.

The major trigger for this correction, I believe, is the recognition that growth stocks that have driven the market higher for the past year and a half are significantly overvalued, especially in the technology sector. Investment strategies focused on value have not done well in comparison to strategies based on growth. In fact some quantitative studies have shown that value strategies have underperformed growth by the widest margin since the financial crises years of 2008-09. A large contributor to this phenomenon has been the hyper profit growth in the tech sector, which has made them irresistible irrespective of their valuation levels. But the tide may now have turned, Exchange Traded Funds (ETFs) invested in the technology sector have seen 5.0% of their assets withdrawn in just a few days.

At Vulcan, being deep value investors we have been cognizant of this long-term trend and also more recently the volatility inducing events since early 2018. As a portfolio hedge against rising instability (trade, currency and interest rates) since 1Q 2018 we began to build out investments in precious metals comprising investments in gold and gold and silver producing companies. Our investments in precious metals along with investments in preferred shares are expected to balance out the noise in the common equity component of our portfolio. Our portfolio allocation currently stands at 60.0% equities, 20.0% preferred shares, 10.0% precious metals and 10.0% in money markets and is positioned to ride out the volatility.

Aaron Chaze

Vulcan Investments