Dear Investors and Friends,
Over the last two weeks, we have seen the U.S. dollar rally like the currency hasn't done in a long time. In-line with the significant losses in equity markets, U.S. investors have been pursuing a sell-off across the globe and many have steered their proceeds back into the Greenback, alongside international investors looking for short-term shelter in the world's most powerful country's currency.
However, we believe the latest dollar strength will be short-lived. By now, it is clear that the current U.S. administration is not going to tackle their inflationary economic policies but are likely to accelerate the trend with additional spending packages. Also, and once again, the Federal Reserve seems to have acted way too slow and way too late. And despite the hawkish tone by the Board of Governors at America's central bank, it is highly unrealistic in our opinion that the Fed will be in a position to follow through with all the announced rate hikes. After the latest decline in U.S. GDP growth for the first quarter of this year, it has become very likely that the U.S. economy is headed towards a recession. Companies across the board have either presented disappointing Q1 numbers or given a highly uncertain outlook for the remainder of the year, which has caused the latest sell-off in the stock market. Combined with high inflation, that is mainly driven by out-of-control government spending, a lack of supply due to failed energy policies in the United States as well as in Europe, the latest disastrous Covid-lockdown in China, and the war in Ukraine, there is not much reason for optimism in the near future. One must understand that the U.S. federal debt was at USD 20 trillion when President Trump left office and will have surpassed USD 30 trillion by the end of 2022; in other words, the U.S. government will have added more than USD 10 trillion in FIAT money within 2 years, while it took the country almost 75 years to accumulate USD 20 trillion in overall national debt. Anyone who believes that the system can absorb this shock without experiencing a major economic downturn with high inflation, high unemployment, and a substantial number of citizens falling into poverty, is not realistically assessing today's situation. Hence, we believe that the Fed has backed itself into a corner where the announced rate hikes would push the U.S. economy off the recession cliff even sooner and lead the government to the brink of insolvency, as it will become impossible to even serve the interest on the existing debt if rates should be going past the 4 - 5% mark. Based on this assessment, we expect the U.S. central bank to reverse course sooner than later and see the American economy drifting towards an environment that we first got to experience in Japan in the early 1990s. There, too, the Bank of Japan hiked rates too late and too fast to past 6%, before the Japanese economy collapsed and rates went back down to almost zero - where they still are today and with an ever-expanding balance sheet of the Bank of Japan since then.
Obviously, the effects of such a scenario for the United States would be much more dramatic compared to Japan; a small country, with a positive or at least relatively balanced export- import ratio, and most of the country's debt owned by the Japanese themselves. We believe that such a development for the United States would ultimately end its dominance as the world's reserve currency nation and commodity trading haven, lead to a dramatic loss of purchasing power for the average American citizen and crush the value of the dollar for years to come.
Therefore, we recommend exchanging U.S. dollars for commodity- driven and safe haven currencies of countries with relatively solid balance sheets and an overall more positive - or at least stable - economic outlook such as:
- Norwegian kroner (NOK)
- Australian dollars (AUD)
- Swiss francs (CHF)
Furthermore, we recommend investments in the following stocks related to more defensive, value-based, and commodity-strong sectors (energy, mining, pharma, food & beverage):
- Flex LNG (FLNG.OL): Flex LNG is the worldwide largest shipping company for liquid natural gas and operates one of the most modern fleets of tankers available. The company has significantly increased its order volumes due to the latest spike in demand for natural gas from European and other countries, due to the sanction policies against Russia and its allies. Flex LNG pays an annual dividend of currently 9.84%.
- Equinor (EQNR.OL): Equinor is Norway's largest energy company and probably one of the most profitable companies in the world. The company generated about $11.3 billion cash flows from operations in Q4 2021 despite a greater than $1 billion increase of working capital. Strength in Brent oil helped (average of ~$77/ barrel in Q4 versus ~$65/ barrel for the previous nine months and ~42.50/ barrel for Q4 2020). But the spike in natural European natural gas prices in Q4 really drove the massive spike in profitability. Given the current prices with no realistic expectations of weakening any time soon, the company is bound to have another record year. Equinor already has an extra $.20/ quarter special dividend for the 4 quarterly dividends paid this year. They also have a $5 billion share buyback program in place. Given this quarter alone more than funds both initiatives, we would expect increases in both. Otherwise, the company would build billions of cash on its balance sheet. And with the implications of the Ukraine invasion, we believe the company is a major beneficiary from the disruption of Russian oil and gas into Europe and that they are likely going to exceed an already incredible Q4 from last year. While the company shares have rallied, we still believe that there is more room to go.
- Woolworths Group (WOW.AX): Australia’s number one food retailer, Woolworth Group specializes in the operation of supermarkets and general consumer stores, along with engaging in the procurement of food, liquor and other products. The company also has interests in other consumer goods and services, ranging from pubs, accommodation-, and gaming operations. Valued by market capitalization at nearly $40 billion, Woolworths is considered by investors as one of the ASX’s 'defensive' consumer staples sector stocks and the company’s 12-month gross yield for FY 2017/18 was 4.87%.
- Wesfarmers (WES.AX): The tenth largest company on the ASX, with a market capitalization of almost $37 billion, is Perth’s Wesfarmers, Ltd. Specializing in several different commercial areas. Wesfarmers owns retail chains, operates mines, writes insurance, produces industrial products, and distributes liquefied petroleum, amongst other activities. Having driven EPS growth of over 5% in 2017/18, Wesfarmers is generally a high-yielding defensive stock, delivering last year a gross 12-month yield of 9.82%.
- Newcrest Mining (NCM.AX): Newcrest is one of the world's largest gold mining companies and operates a portfolio of predominantly low-cost and long-life mines, with a strong pipeline of brownfields and greenfields exploration projects. The company offers a strong operating cash-flow with sound balance sheets and a focus on mines in Australia, Canada, and Papua Niugini.
- Nestle (NESN.SW): Nestlé, together with its subsidiaries, operates as the world's largest food and beverage company with its global market valuation at $230 billion and annual revenues of $100 billion. It has over 328,000 employees and more than 2000 brands ranging from global icons to local favorites, presenting in 191 countries around the world, including its water segment brands. It offers baby foods under the Cerelac, Gerber, and NaturNes brands; bottled water under the Nestlé Pure Life, Perrier, Poland Spring, and S.Pellegrino brands; cereals under the Fitness, Nesquik, cheerios, and Lion Cereals brands; and chocolate and confectionery products under the KitKat, Nestle L'atelier, Nestle Toll House, Milkybar, Smarties, Quality Street, Aero, Garoto, Orion, and Cailler brands. The company also provides coffee products under the Nescafé original, Nespresso, Nescafé Dolce Gusto, Nescafé, Nescafé Original 3 in 1, Coffee-Mate, Nescafé Gold, and Nescafé Cappuccino brands; culinary, chilled, and frozen foods under the Maggi, Hot Pockets, Stouffer's, Thomy, Jacks, TombStone, Buitoni, DiGiorno, and Lean Cuisine brands; dairy products under the Carnation, Nido, Coffee-Mate, and La Laitière brands; and drinks under the Nesquik, Nestea, and Milo brands. In addition, it offers food service products under the Milo, Nescafé, Maggi, Chef, Nestea, Stouffer's, Chef-Mate, Sjora, Minor's, and Lean Cuisine brand names; healthcare nutrition products under the Boost, Peptamen, Resource, and Nutren Junior brands; ice cream products under the Dreyer's, Mövenpick, Häagen-Dazs, Nestlé Ice Cream, and Extrême brands; and pet care products under the Purina, ONE, Alpo, Felix, Pro Plan, Cat Chow, Fancy Feast, Chef Michael's, Bakers, Friskies, Dog Chow, Beneful, and Gourmet brands. The company was founded in 1866 and is headquartered in Vevey, Switzerland.
- Roche (ROG.SW): Roche Holding AG is one of the world's largest and sustainably successful research healthcare companies. It operates through the following segments: Diagnostics and Pharmaceuticals. The Pharmaceutical segment refers to development of medicines in the field of oncology, immunology, ophthalmology, infectious diseases, and neuroscience. The Diagnostic segment refers to diagnosis of diseases through an in vitro diagnostics process. The company was founded by Fritz Hoffmann-La Roche on October 1, 1896 and is headquartered in Basel, Switzerland. The company has played a leading-role in developing Covid-19 antibody tests and has received praise for its quick and innovative pharmaceutical response to the latest crisis by the Trump administration. The company generated USD 72 billion in revenues in 2021 and booked a net-income of almost USD 15 billion for the same time period. It employs almost 100,000 employees around the world.
Please let us know if you have any questions and whether you are interested in any of the above recommendations for further advice and evaluation.
Oliver E. Hohermuth, Principal & Chief Investment Officer