Third Quarter 2021 Financial Markets Review

• Office COVID-19 Status Update
• Market Update: Stock Markets Take a Breather and Inflation Continues
• Wild Ride in Emerging & Frontier Markets

Office COVID-19 Status Update

While in our last letter we wrote that we had “officially reopened” our office, we may have spoken too soon. Due to rising COVID-19 infection rates, we are encouraging clients to schedule Zoom calls with us rather than meet here in person. However, if you are comfortable doing so, we would be more than happy to have you visit our office for a meeting, provided you are vaccinated and masked. All of us are fully vaccinated.

Market Update: Stock Markets Take a Breather and Inflation Continues

The quarter ending September 30th was a volatile one, with stock markets globally notching negative returns, except for the large U.S. index measured by the S&P 500, which managed to eke out a small gain. Emerging market companies (MSCI EM) experienced the largest decline followed by small U.S. companies (Russell 2000). Large U.S. stocks (S&P 500), International Developed Stocks (MSCI EAFE), and Bonds (Barclays Aggregate Bond) remained flat.

Asset Class Index Performance
U.S. Large Stocks S&P 500 +0.6%
U.S. Small Stocks Russell 2000 -4.4%
International Developed Stocks MSCI EAFE -0.4%
Emerging Markets MSCI Emerging Markets -8.0%
Bonds Barclays Aggregate Bond +0.1%

As the Delta variant of the coronavirus surged at the beginning of the third quarter, volatility rocked global markets in the face of many unknowns. The possibility of a reversal of progress made in the world’s “return to normal” seemed to be at the forefront of investors’ minds as some gains earned in the first half of 2021 were given up. In the U.S., Democrats and Republicans squared off in negotiations involving raising the debt ceiling, worrying investors that a temporary shutdown was looming.

Meanwhile, annualized rates of inflation in the U.S. persisted at higher than 5% during the quarter. Members of the Federal Reserve and market participants are debating whether higher inflation will be brief, and therefore benign, or more sustained, but it seems to be persisting longer than the Fed had signaled in the recent past. This led the Fed to announce in September that they would begin tapering bond purchases in the fall. This practice has been used to hold short-term interest rates very low to support the bond market and the economy more broadly. As the Fed moves to reduce the stimulus, interest rates should naturally rise, a tool used to combat high inflation.

We think that your portfolio is well-prepared for an inflationary world for the following reasons:

• Stocks generally benefit from moderate inflation if it’s being driven by strong consumer demand. The energy- and natural resources-related sectors especially benefit as commodity prices tend to rise.
• Companies with strong pricing power can pass along increased costs to their customers.
• The bond funds we may be employing in your portfolio are less exposed to the risk of rising interest rates, which tend to come with higher inflation. This accomplished by investing in bonds that have shorter maturities.
• These bond funds are also oriented more toward corporate bonds rather than government bonds, which tend to have higher yields and hold up better when rates are rising.

Wild Ride in Emerging & Frontier Markets

In emerging markets, several issues became apparent in China during the quarter that led stocks to suffer losses.

• The Chinese Communist Party (CCP) continued to introduce regulations limiting companies’ collection and usage of customer data. This is expected to impact the potential earnings of large technology companies like Alibaba, Tencent and Baidu.
• The stability of the property sector was shaken as the largest private bond issuer in China fell into a debt crisis. The firm’s ability to make an interest payment was called into question, leading investors to worry about the possibility of a bankruptcy contagion in the property sector.
• The U.S. and China continued to face off regarding transparency in capital markets, with the chairman of the Securities and Exchange Commission pushing for Chinese companies to disclose more about potential risks.
The Chinese stock market is by far the largest weighting in the MSCI Emerging Markets Index, comprising 30% of its universe. We spoke to our managers who invest exclusively in emerging markets and found they are well prepared for the current environment. Each of them has had a significant underweight to Chinese stocks for many years due in part to valuation concerns of large technology companies that dominate weighting in the index, and the risk that the heavy-handed CCP could introduce harmful regulations to the market. They also have shied away from owning state-owned enterprises that are subject to the direct control of the CCP and exposed to price controls. The companies they do own within China generally target the domestic consumer, by way of retail, healthcare, real estate, financial services, etc. One manager we spoke with pointed out that these sectors could benefit from leader Xi Jinping’s new “Common Prosperity” agenda, which aims to create a system in which all citizens have a level of moderate wealth to spend on goods and services. President Xi has also taken steps to direct money to combatting climate change, creating an opening for new companies to participate in the energy transition to more renewable sources of fuel. So as the Chinese market experiences a broad-based selloff, our managers see an opportunity to sift through the noise to find companies whose stock prices have been impacted more than is warranted given the circumstances.

And in addition to China, our managers have exposure to companies in many other countries where there are interesting things happening, such as:

• Natural resource-producing companies in Russia and Brazil that could benefit from upward inflationary pressures on commodity prices
• Companies in Southeast Asian countries, which are still in the early stages of reopening their economies and getting back to full capacity
• Some Eastern European companies that are beginning to resume dividends at a faster clip
• Companies in India that are benefiting from a consumer who is bouncing back faster than expected (financially)

Frontier (pre-emerging) market stocks have many positive developments in progress as well. As a reminder, the regions of the world that comprise frontier markets include Southeast Asia, Latin America, the Middle East, Africa, and Eastern Europe. The managers we use to access companies in these parts of the world recently shared their thoughts on why they remain excited about the future prospects for their portfolio:

• Vietnam & the Philippines are still in the process of reopening their economies and have COVID-19 under control, creating a runway for business to ramp back up.
• Middle Eastern countries are benefiting greatly from rising oil and natural gas prices and other commodities.
• The market for initial public offerings (new public companies issuing stock) is incredibly strong.
• GDP outlooks and COVID-19 vaccination rates continue to improve.

If you are looking for investment in new technologies, look no further than frontier markets. Themes like e-commerce, technology education, financial technology like mobile payment systems, and software development are prevalent in our frontier markets mutual fund. A few examples include:

• A Vietnamese computer & electronics retailer
• A Kenyan telecommunications company that makes mobile phones, allows for money transfer, e-commerce, etc.
• A software development company in Argentina
• A Vietnamese outsourcing and IT services company
• A mobile payments company in Ghana

 

Who Can We Help?

For more than 28 years, we have helped guide individuals and families to their financial goals. As a result, our business now comes to us primarily through referrals. If you know a friend, colleague, or family member who could benefit from one of our many services, we hope you’ll invite them to visit our website at www.KuhnAdvisors.com to learn more about us and schedule a complimentary consultation.

Our services:
• Retirement Readiness
• Investment Allocation
• Paying for College
• Social Security Planning
• Retirement Community Consultations
• Philanthropic and Family Legacy Planning
Please remember to contact us if there are any changes in your personal financial situation or investment objectives so that we may review your long-term investment strategy. As always, we welcome your phone calls and emails should you have any questions or would like any further information.

We appreciate the opportunity to serve you and are grateful for the trust you place in us as stewards of your financial resources.

Very truly yours,

Mark A. Kuhn Scott W. Ranby Carter L. Ellis

Past performance is not indicative of future results. This material is for informational purposes only and is not financial advice or an offer to sell any product. Kuhn Advisors, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; (iii) investor suitability; and (iv) market exigencies at the time of investment. The opinions expressed are those of the Kuhn Advisors, Inc. The opinions referenced are as of the date of publication and are subject to change to due changes in the market or economic conditions and may not necessarily come to pass It should not be assumed that any of the trends or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable. All investment strategies have the potential for profit or loss.

Kuhn Advisors, Inc. utilizes best efforts that content provided is compiled or derived from sources believed to be reliable and accurate but makes no representation thereof and accepts no liability or any loss arising from use or reliance herein.

Kuhn Advisors, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Kuhn Advisors, Inc., including its advisory services and fee schedule, can be found in its Form ADV Part 2, which is available upon request. KA-21-08

Past performance is not indicative of future results. This material is for informational purposes only and is not financial advice or an offer to sell any product. Kuhn Advisors, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the trends or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable. Kuhn Advisors, Inc. utilizes best efforts that content provided is compiled or derived from sources believed to be reliable and accurate, but makes no representation thereof and accepts no liability or any loss arising from use or reliance herein. Kuhn Advisors, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Kuhn Advisors, Inc., including its advisory services and fee schedule, can be found in its Form ADV Part 2, which is available upon request.