The ACE Fund finished November up 2.7% and has gained 4.2% year to date in 2016. Gains in the portfolio were led by the energy sector, as the 3 companies that make up the Fund’s energy “book” accounted for about one-third of the Fund’s gain during the month. Also helping performance were the Fund’s positions in industrials, our largest sector weight.
Powering the energy sector was OPEC’s November 29th announcement of a deal to curb the group’s crude oil production by roughly 1.2 million barrels. While this news didn’t officially come until the end of the month the market had been marching energy names higher for several weeks as a negotiated supply cut had become the most probable outcome. Notably, this was the first coordinated OPEC production cut since the depths of the 2008-09 crisis and with widespread participation (11 of the 13 member states) we believe that this heralds a significant shift for oil markets. It’s an important psychological milestone that likely represents the cartel’s “Whatever It Takes” moment, referencing European Central Bank President Mario Draghi’s famous speech in defense of the Euro currency in 2012.
While there are many elements of the deal which come under fire from skeptics – production cuts are from record levels, expectations for quota cheating, fuzzy time-frame for implementation, etc. – an organized move towards price stability is something that the market should view positively overall. OPEC should realize by now that technological advancement will continue to drive the global marginal cost of production lower, weakening its degree of influence over pricing in future years. OPEC is making hay while the sun shines and so are we, with roughly 15% of the Fund invested in assets that benefit from rising oil prices (at the time of writing).
There was something else in November that may have caught your attention – the US Presidential election. While the entire election cycle was a media spectacle of ridiculous proportions, it is tough to say that it hasn’t changed the nature of American politics in a major and perhaps lasting way. Moreover, the impossibility of its aftermath is even more mystifying: Donald Trump, whose election was universally viewed as a would-be catastrophe for stocks back in October, has sent markets leaping to all-time highs with his pro-business, anti-regulation cabinet appointments, commitment to significant tax reform and fiscal stimulus proposals. With a great American “reflation” apparently underway, expectations for both growth and inflation in 2017-18 are being raised by economists and strategists everywhere.
As an asset class, equities are generally benefiting from the economic upgrade, although new highs at the index level are masking major sector rotations taking place underneath. While we wrote about the potential impact of Trump’s likely policies in our commentary last month, the improvements haven’t been limited to just the U.S. Global economic data has jumped across the entire developed world, giving this market the legs to continue moving higher. The charts below highlight a few things we are watching in this regard. First is Citigroup’s G-10 Economic Surprise Index, which illustrates the degree to which economic performance in the developed world is coming in better or worse than expectations. The second chart shows the relationship between an improving Global PMI Composite (a key leading indicator) and positive revisions to earnings per share, both of which bode well for the ACE Fund’s current positioning.