October 2013 Portfolio Outlook

By The Sizemore Letter

To everything there is a season.  After trailing the market for the first half of the year, the Sizemore Global Macro Portfolio has come roaring back with a vengeance.  According to returns data compiled by Covestor, the portfolio was up 17.0% in the 90 days to October 1 vs. a gain of 4.9% on the S&P 500.

The reason for the reversal of fortune?

Our allocation to social media stocks via GSV Capital (GSVC) was certainly a contributing factor. GSV Capital is up 80% year to date, and it is one of the portfolio’s largest holdings.

But the biggest contribution came from the portfolio’s allocation to Europe.  10 of the portfolio’s 22 current holdings are domiciled in Europe.  This overweighting was a major drag on performance during the first half of 2013, as the U.S. markets massively outperformed virtually all others.  But as investors rediscover the investment merits of the Old World, the gap is closing fast.

I expect to see Europe outperform the U.S. markets for the remainder of 2013 for the following reasons:

1. Continent wide, European shares are significantly cheaper than their American counterparts, particularly when you consider that European earnings have been depressed by years of crisis.  By Societe Generale estimates, European stocks trade at a 36% discount to their American counterparts.
2. The bond markets in Europe have stopped reacting to bad news.  The Italian government teetered on the brink of collapse this week due to the shenanigans of former prime minister Silvio Berlusconi…and yields barely budge.  A calm bond market creates the conditions of stability that a stock market rally requires.
3. European companies have better indirect exposure to emerging markets than their American counterparts.  This was a negative earlier this year when investors were fleeing the asset class.  But as China looks to be stabilizing, I expect to see emerging market growth surprise to the upside.

Disclaimer: All returns data is for informational purposes only; past performance is no guarantee of future returns.   

This article first appeared on Sizemore Insights as October 2013 Portfolio Outlook

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