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The first occasion that Luiz Inácio Lula da Silva (Lula) won the presidency of Brazil in October 2002 set off one of the biggest 'sell the rumor, buy the news' rallies in financial markets ever. From September 2002 to June 2008, the Brazilian equity index (Bovespa - BVSP) rose just over 20 times in US dollar terms - yes, you read that correctly (20x). Brazil did not default on its foreign debt - as many colleagues told me at the time would happen. (In full disclosure, I did not agree as I had just recommended that investors buy Brazilian equities.) By the end of June 2008, supported by the 'opening-up' of China and India, the global economic recovery and, above all, the resultant commodity ‘super-cycle’ of 2003-7, Brazil was briefly the biggest market in the MSCI Emerging Markets equity index with a weight of 17.6%[1]. As so often, however, Brazil flattered to deceive. Since mid-2008, Brazilian assets have had a very difficult time, with the Bovespa falling by 51% in US dollar terms.  The familiar comments about Brazil were dusted off in this period: ‘the country of tomorrow and always will be’ and ‘the giant awakens – again’.Now that Lula...

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Going into Nuclo’s new investment year with plenty of market turmoil Nuclo’s investment year runs from February 1 through January 31 of the subsequent calendar year. Our investment year is certainly off to a rocky start! Calendar 2021 turned out to be sort of a transition year. The increasingly rapid rollout of vaccines to deal with the COVID-19 pandemic, particularly across the so-called advanced economies, contributed to significant shifts in the economic and investment outlooks, in our view. The Omicron variant of the virus has quickly become dominant, supplementing the relatively large number of vaccinations, to encompass what may become a critical mass of the global population now having been exposed to the once-called novel coronavirus. It is now becoming increasingly clear that herd immunity as such cannot be reached with such a rapidly-mutating virus, but that the conditions are being set for the pandemic to turn endemic, possibly during this year yet. This is the way policymakers in countries such as Spain, Sweden, Denmark and Norway (among a growing list of countries) are increasingly viewing what was once a global health crisis. We expect (or at least hope!) to be able to focus ever less on virology and epidemiology...

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2020 turned out to be a very eventful year. As the year got started, the consensus was that a strong 2019 for equities would be followed by a positive first half, after which meaningful volatility would kick in due to the US presidential election. In the spirit of our preference for a contrarian stance, we had expected somewhat the opposite: some profit-taking in the first half of 2020, followed by a rally that would result in a positive balance at year-end. But in the way of the markets – which always tend to catch the largest number of participants off guard – we had what some would argue was one of the strangest years in recent memory. The global virus crisis (GVC) brought about by the coronavirus COVID-19 pandemic was something no serious market observer had anticipated as 2020 got started. Volatility had been all but nonexistent early in what we call ‘the new 20s’, which had led us to expect the few remaining volatile asset classes, such as cryptocurrencies, to benefit from the search for more extreme price swings. We had expected volatilities across asset classes to show some convergence. The markets delivered, but not in the direction we...

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Introduction The global virus crisis (GVC) brought about by the coronavirus COVID-19 pandemic has, as anticipated, had a myriad of consequences. There is plenty of coverage worldwide of the many negative repercussions, so we will here focus on just a couple of the positive ramifications which appear to be emerging as well. Using Tesla as an example, we aim to highlight some of the lessons not only from the ongoing GVC, but also from decades of experience investing and trading global equities. We can probably agree that some of the emerging (at least indirect) consequences of the pandemic could hardly have been imagined at the time the global crisis engulfed most of us. Trading of individual stocks by the retail public, let alone the Millennial generation, was definitely not an important trend prior to the pandemic. The fact that work-from-home (WFH) took hold around the world in professions that allowed it contributed to the acceleration of many trends which had already been in place prior to the crisis. Active trading of individual stocks by a growing segment of the population of countries such as the US, let alone ‘equity-averse’ Germany, had not been a trend in place already before WFH...

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At Nuclo Independent CIO, our investment year runs from February 1st through January 31st of the subsequent calendar year. Thus, now is an optimal time for our mid-year note. This 2020 has turned out to be a far more tumultuous and eventful year than we envisioned. We have thus gotten much wrong. We have also gotten quite a few things right, although some of them for the wrong reason. For instance, we expected some convergence in the volatilities of various asset classes, and expected assets such as Tesla (TSLA), cryptocurrencies and other relatively exotic investments to be bid up as investors searched far and wide for volatility in a world whose markets had become uncharacteristically stable. Alas, volatilities did experience meaningful convergence, but in the ‘wrong’ direction, as newly stable currencies, let alone stocks, saw their volatility spike way higher at the height of the global virus crisis (GVC) brought about by the coronavirus COVID-19 pandemic. At the time of publishing of our year-ahead report on January 30, the pandemic was not yet called that, and most observers (we included) did not realize how big a deal it would turn out to be. That said, we did write “one should...

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Introduction Odds are, the majority of us living in the Western world at present never thought we'd see the day when we made our way to the local grocery store only to be greeted by a gaping void; shelves swept bare, flour, pasta, canned soup, cleaning supplies and toilet paper gone, lines of people gathering outside and cashiers looking ready to collapse from fatigue and overwork. Be that as it may, the COVID-19 -- 'SARS-CoV-2' or the illness caused by the novel coronavirus -- pandemic made this horror-scenario an all-too-real phenomenon for us all, thrusting the world's population into a common 'boat' of uncertainty and fear while also leaving elected leaders clueless and scratching their heads as to their next move. Never before in our history as a species had the entirety of humanity been subjected to a collective crisis which every nation-state would have to grapple with (to some degree or another). Sure – we as humans have undoubtedly gone through our fair share of significant crises, with two World Wars, the Great Depression, the Cold War and the 2008 Financial Crisis having affected large swathes of Earth's population, as well as other epidemics including the 2015-2016 outbreak of...

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The intense ongoing debate regarding the ‘decoupling’ of stock prices from ‘fundamentals’ does not cease to amuse me. Interest rates – and the resulting discount rate, which should be used to calculate the net present value (NPV) of any investment -- constitute a key fundamental factor. I have long believed that interest rates influence economic activity broadly, investing generally, and stock valuation specifically in many ways, as I will attempt to explain in this article. Some of the areas we will discuss, while not an exhaustive list, will cover some of the ways in which the level and trend of interest rates affect stock valuations. They include: (1) Interest rates (and changes in them) affect the general level of economic activity (and thus the capacity of companies to generate cash flows). (2) Interest rates affect the borrowing costs of companies, thus impacting their ability to create shareholder value. (3) Interest rates are a key determinant in the calculation of the discount rate used to ‘bring back’ to present value the future cash flows expected from a company (or any other investment, for that matter). Interest rates and economic activity Central banks, through their ability to influence interest rates prevalent in...

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February saw a complete stop in economic activity worldwide and has been followed by a cataclysmic fall in the level of global GDP. The NBER, which is responsible for defining turning points in the US economy, announced last week that a new ‘recession’ did, indeed, begin in February 2020 after a record 128 months of ‘recovery’. This announcement was made just four months after the start of the ‘Covid-19 recession’ well below the average recent ‘announcement lag’ of 11 months; this is confirmation of the consistency of the sharp downturn in economic data points that began in March. However, with some economies now beginning to ‘open up’ and economic activity bouncing off its lows - including (perhaps) in the US - we argue here that this is likely to be the shortest US recession on record (back to 1850) and yet the sharpest since WW2. The equity market seems to agree. The 34% drop in the S&P 500 in five weeks to March 23rd was the fastest bear market on record. The subsequent rebound (45% to the recent interim high on June 8th) was also stunning and was consistent, in my view, with an early bounce in the economy, some...

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In the face of the eruption and rapid spread of coronavirus (COVID-19), total panic hit global financial markets in the first quarter with emerging markets (EM) being particularly badly hit. Record capital flight, debt worries, a rising dollar and plunging oil prices all contributed to the very sharp falls in EM equities. In response, supra-national lending to low-income countries has increased; there is talk of widespread debt relief; fiscal and monetary policy have been eased where possible. Where fundamentals are notably weak (e.g. Turkey), there are fears of capital controls.However, I believe these concerns over the outlook for EM are considerably overdone. Why?First, once the (overvalued) dollar falls significantly, these outflows from emerging markets will reverse. Funding pressures will ease, EM FX will rally and fiscal and monetary policy room will increase. Secondly, EM equities are trading at very low valuations (forward P/E of 12.3x) versus Developed Markets (18.5x); the current EM/DM discount of 34% is far above its long-term average of 22%. Thirdly, and the main focus of our new work in this report, is that many structural factors appear to favor EM and developing economies in general over DM in the current battle against COVID-19: The median age...

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All bubbles do eventually burst, but balloons may or may not I have written before that cycles, which can be depicted in many different ways, occasionally do grow to become bubbles. Another analogy that comes to mind is that of balloons and bubbles. Bubbles, like those out of soapy water, may grow rather large, but sooner or later pop. Balloons, on the other hand, as air is blown into them, simply become likelier to burst; just letting some air out significantly lowers the odds of them popping. The current economic and market cycles remind me of balloons that periodically get the air let out of them, preventing their premature demise. It seems that, whenever the US economy has shown signs of potential overheating since the aftermath of the global financial crisis (GFC), something comes up that cools it off. When the US equity market appears to be getting ahead of itself, something triggers the proverbial pause that refreshes, sending cash rushing back to the sidelines. The new decade (what I now call the new 20s) had barely gotten started when geopolitics became a more important factor again in financial markets.  A couple of weeks later, the spread of the coronavirus...

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