Q2 2017 Quarterly Letter

August 2017

It has been a good year for equity investors across the board. All but four of the world’s thirty leading stock indexes were positive in the first half, an occurrence not seen since 2009. International stocks outperformed domestic stocks for the second consecutive quarter. The S&P 500 was up 3.1% in the second quarter while developed international stocks were up 6.1%, and emerging market stocks were up 6.3%. For the year-to-date period, the S&P 500 was up 9.3%, while developed international equities and emerging market equities were up 13.8% and 18.4% respectively.

One phrase we are hearing more often in calls with analysts and managers is “synchronized global expansion.” Corporate earnings have picked up, not only in the U.S. but also in Europe and Asia. Global manufacturing surveys are pointing to continued broad-based growth at home and abroad. Moreover, central bank policy remains broadly accommodative, at least for now. All these factors contributed to an unusually strong and broad-based rally for global equities during the first half of the year.

Source: American Funds

We are beginning the earnings season which kicked off in July and runs through August. Analysts are expecting earnings growth of 6.4% for the second quarter and 9.8% for all of 2017. We will be watching earnings closely and listening for forward guidance to see if companies are raising or lowering their expectations. Early indications in this regard are positive.

We will also be monitoring developments around central bank policy. The Fed has continued raising U.S. short-term interest rates, most recently raising them another 25 basis points in June, while the European Central Bank and the Bank of Japan have begun to contemplate reducing their stimulative policies abroad. It will be interesting to see how equity markets respond as the environment shifts away from central bank easing and towards policy normalization. Thus far, confidence in central bankers remains high causing very little volatility in equity markets. Longer term, a shift towards tighter policy could be a headwind for equities, but we see little evidence of that at present.

Another intriguing trend is the shrinking number of public companies.  Over the past 20 years through 2016, the number of publicly listed US companies has fallen by about half.  One reason has been corporate consolidation through merger activity, enabled by companies being able to borrow at low interest rates.  Another contributing factor is decreased initial public offering volume, with fewer companies taking on the regulatory burden of becoming a public company.  Facing a slimmer public market opportunity set, we continue to think globally and devote energy to sourcing high quality opportunities in the private markets.  When suitable, we think that exposure to nonpublic companies can be additive to client portfolios.

Investors continue to debate the elevated levels of the equity markets. The combination of strong corporate earnings, steady and thoughtful normalization by central banks, and the shrinking supply of public companies, offers bright fundamentals for stock investors. At some point a pull back is almost inevitable. The test will be whether such a pull back undermines the market’s confidence and optimism.

We are pleased to present our new quarterly reporting format which you will find enclosed with this letter. Improved reporting has been a strategic focus for us as we have worked to convert years of historical data into a new system that will enhance our analysis and reporting capabilities. We look forward to discussing the new format with you soon.

We are delighted to be working with two interns this summer. Muhozi Aimable is a rising Senior at the University of Georgia where he studies Finance and competes in Division 1 SEC cross country and track and field events. Muhozi moved to the states in 2011 from Malawi.  Zach Scott is a rising Junior at Rhodes College studying Economics and Spanish. Zach hails from Boulder, Colorado and will be studying abroad in Madrid in the Fall.

Finally, we are humbled with a sense of profound gratitude as we continue to celebrate our first ten years in business. We have endeavored to create something unique and very special here at Nicholas Hoffman & Co. None of this would have been possible except for the extraordinary families we have been so fortunate to work with over the years.

As always, we welcome your thoughts, and appreciate the confidence you have placed in our firm.  We are grateful for the opportunity to work with you and your family.

Nicholas Hoffman and Co.