This post will be a starting point to discuss PIE proposal, I have not open a PIP 4 on github yet, sorry…
This is basically an alternative take on PIP 3 which I find good, but be to much US leveraged. I really like the aggressive DEFI hedges but would like to introduce EM small cap to the pie chart.
To share my POV; I do believe we are on a brink to a new 2-3-year recession, my bet is that USD is not the safe stable currency the coming years. It’s quite obvious that stocks within DM have started to become more depleted, and overvalued IMO. And it is even more difficult initially to find undervalued companies as well in a coming recession when everything is falling. We need to look elsewhere.
I have been followed the Emerging markets for a while awaiting this moment. And IMO, we are currently in a great position to take a bet on EM, that I think is currently undervalued. Here is my reasoning & suggestion to a contrarian, yet millennial friendly PIE proposal.
The AWP+DeFi+EM Global PIE would consist of the following allotment:
- 20% Crypto Basket
- 20% EM Small Cap
- 20% DAI utilizing the DSR
- 20% Commodity Gold
- 10% Commodity broad Diversification
- 10% DM Large Cap
Motivation on EM:
Been thinking about the absolute best self-hedge PIE to my own current portfolio last 2 years:
- 40% Crypto
- 20% Real Estate
- 20% Illiquid OTC stocks/ startup shares.
- 20% stocks.
Fast reality check:
I’m from Sweden; our small caps have the last 5 years had an ~20% returns / year (last 5 years). Sweden produce a ~1% GDP growth & with ~30% of the population being under 25 years old.
Then take EM - India ie. got ~7% GDP growth & with over 50% of the population being under 25 years old.This is only projected to continue the coming years through a combination of too low values today with growth in these countries will outpace the DM. Some drivers:
- Consumption growth through increased living standards.
- Younger demographics, fast growing middle class.
- Middle class who now consume basic goods and are interested in starting to consume more luxury items, scooters, cars etc.
Let’s say P/E in 5 years is at today’s 17.0 which is the EM Small Cap index P/E (which in my opinion is still an undervaluation)In that case we will have 133% upside during the next 5 years. This is calculated with 10% profit growth per year and still the same low valuation as today.And 191% return during the next five years if EM SC would be valued as high as DM SC is today (EM has much higher growth after all)
So, you have my baseline scenario of 133% (18.4% effective return per year) during those next 5 years. And the Bull Scenario of 191% (23.8% effective return / year).
The Value gap presented in this picture:
Before the Corona epidemic, EM Small Cap was 40% cheaper than the US Small Cap. In countries where GDP grows by double, over half the population is 25 years old, EM Central banks key rates are closer to 6% than ED 0%.
From my understanding, EM investments generally tend to occur in cycles that coincide with the Fed’s policies, a cheap USD strongly benefits EM countries as they have loans in USD.
Some quick read links:
A good podcast about undervalued EM markets by young hedge fund manager
More on the discrepancy between EM & DM in recent paper by Yardeni research;
Proposed EM fund to invest in Templeton EM SMALL CAP FUND