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Q3 2020 Market Update: Dreaming of an Electric Future

Q3 2020 Market Update: Dreaming of an Electric Future

The 3rd quarter provided strong returns for risk assets across the board. In spite of continued investor anxiety about COVID and the upcoming elections, the S&P 500 finished the quarter up 8.9%, the Russell 2000 up 4.9%%, and the broad global markets up 8.1%. In the fixed income space, the US 10-year rate rose 3 basis points to 0.69%, while the US dollar continued its softening trend versus other currencies, with the DXY index down 3.6%. The Bloomberg commodity index rose 9%.

While market commentators have focused their attention on COVID and the elections, if price action is any guide, investors have their sight set on a much loftier concern: clean energy.

One of this year’s biggest market stories has been the seemingly unstoppable rise of Tesla, but the latest clean energy craze also benefited much less glamorous names such as Sunrun (up 290% in Q3), Enphase Energy (up 73% this quarter) or Vestas Wind Systems (up 52%…) . What these stocks have in common is their involvement in the production of solar, wind and other renewable energy sources. The entire sector has been on a tear: S&P Global Clean Energy Index, which tracks a basket of 30 clean energy names and can be seen as a proxy for investor sentiment, is up 47.6% in Q3 alone, outperforming even the red-hot technology sector year-to-date:

Clean energy, the new tech?

The contrast is most striking when compared to the traditional energy sector (oil and gas), which is down 20.8% in Q3 alone:

Keeping it clean.

Looking at the chart above, one might almost get the feeling that a true energy revolution is unfolding before our eyes, but that’s not quite the case: the S&P Global Clean Energy Index remains a small, niche, segment of the market. That said, the enthusiasm is real, and so is the market’s disdain for the traditional, “dirty”, energy space. 

Goehring & Rozencwajg, an investment firm specializing in the natural resources space, highlighted in their recent market report [1] that the share of energy stocks as a proportion of the total market has been declining for years and even decades. In 1980, the energy sector peaked at around 35% of the S&P 500’s market capitalization. In 2008 it was about 15%. After this year’s rout, oil and gas now represents a measly 2% of the index. 

For such a key strategic resource, it’s amazing to think that oil and gas are now little more than a rounding error in the average investor portfolio. I asked Adam Rozencwajg if they had ever seen a time when oil was this hated in their team’s 30-year experience of energy investing “no, never” he said, “I don’t think it’s been this hated since Colonel Drake drilled the first American oil well in 1858”.

The energy transition theme is not new, and could be one of mega trends that will shape the future of the global economy. Electrification (and “decarbonization”) is the idea of replacing traditional petroleum-based energy sources with clean electric alternatives: Imagine leaving your solar-powered home in the morning and driving your electric car to go work in a wind-turbine-powered office building. As far removed as it may seem from our daily realities, this is the dream of a successful transition to cleaner energy. Some have even made the case that, with a bit of help from nuclear power, America could be fully electrified right now [2][3]

The market has seen clean energy crazes before. In the heyday of the pre-2008 bull market, clean energy was one of the hot sectors. At the time, a massive influx of government and VC money sent valuations soaring. Eventually, misallocation of capital and technological shortcomings brought the “green bubble” to an abrupt end (see Juliet Eilperin’s 2012 article on the topic “Why the Clean Tech Boom Went Bust” [4], for a good post-mortem on the topic). Today, the prospect of a Biden presidency and his ambitious “Plan for an energy revolution” [5] is without a doubt contributing to the sector’s renewed hope, but real-life solutions, beyond campaign promises, will be urgently needed to sustain the trend, or the dream of an electric future will remain just that. 

Syl Michelin, CFA

[1] Goehring & Rozencwajg – Top reasons to consider oil related equities

http://info.gorozen.com/top-reasons-to-consider-oil-related-equities

[2] America Could Go Fully Electric Right Now – Irina Slav

https://oilprice.com/Energy/Crude-Oil/America-Could-Go-Fully-Electric-Right-Now.html

[3] Mobilizing for a zero carbon America – Saul Griffith, Sam Calisch

https://static1.squarespace.com/static/5e540e7fb9d1816038da0314/t/5f209173294b6f5ee41ea278/1595969952405/Jobs_White_Paper_Compressed_Release.pdf

[4] Why the Clean Tech Boom Went Bust – Juliet Eilperin

https://www.wired.com/2012/01/ff_solyndra/

[5] The Biden plan for a clean energy revolution and environmental justice

https://joebiden.com/climate-plan/

Disclosure: The charts and any returns illustrated on this blog post are for informational purposes only. This is not a solicitation or offer to purchase any of the securities listed above. Before making any investment decisions, including buying any stocks listed above, you should consider your risk tolerance  and objectives. Check with a licensed professional before you act. Past performance is not an indication of future results.

Syl Michelin and Stan Farmer Join Walkner Condon

Syl Michelin and Stan Farmer Join Walkner Condon

Walkner Condon Financial Advisors is pleased to announce that Syl Michelin and Stan Farmer are joining Keith Poniewaz on the International Advisory Services Team at Walkner Condon. Syl and Stan join our team after serving as financial advisors at Thun Financial in Madison, managing over $250 million in assets for clients in the United States and around the world. Their extensive expertise in working with expats and familiarity with acting as fiduciaries in a fee-only capacity made the two of them great cultural fits for our organization.

Prior to his time at Thun, Syl, a native of France, worked as an advisor for Citigroup in London and New York City. In addition to joining the International Advisory group, Syl, a CFA® charter holder, will be serving as Director of Portfolio Strategy for the firm as a whole.  

Stan, who will also be serving as Director of International Planning, worked at Morgan Stanley and Merrill Lynch in the United States prior to Thun. He previously worked in private equity in Dubai, Portugal, and Angola. A former lawyer and a CFP®, Stan is an expert in mixed nationality couples planning and has appeared in International Investment and Investment News.

Creative Planning LLC to Acquire Thun Financial Advisors

Creative Planning LLC to Acquire Thun Financial Advisors

In a letter sent to clients on 6/15/2020, Thun Financial indicated that they are in the process of being sold to Creative Planning, L.L.C. Creative Planning will be purchasing the assets of Thun, effectively folding Thun into the larger entity.

What Does this Mean for Thun Financial’s Clients?

According to the letter, the transaction will close in the third quarter of 2020. Relationships will be moved to the new firm and assets will transfer over under Creative Planning’s management.  Clients are being asked to sign a letter consenting to the changes, though it is a “negative consent” letter, meaning that assets will transfer if no explicit refusal to transfer assets is made.

Who Does This Benefit?

In many cases when firms move, they will change custodians or leave a more onerous broker/dealer with antiquated technology or a captive situation (such as an insurance company or a focus on proprietary products). In this situation, however, it is not the case. It appears the custodians will remain the same, with advisors also expected to be maintained. Resultantly, it is likely that the owner of the firm will benefit the most from this transaction. It is almost certain that a large payment will be made, often spread over multiple years depending on the clients that stay with the new company. Advisors may be also compensated with bonuses, although in many cases a bonus will come with strings attached such as non-solicit and/or non-compete arrangements.

OK….So Will I Benefit?

Great question, and a fair one to ask your current advisor as well as the owners (or senior management) of both firms. Items you may choose to inquire about include the current pricing for the new firm, the technology changes you may face, and how your experience may be improved. It is also not out of bounds to ask about advisor and owner compensation in this transaction as well as if your advisor will now be tethered to a new firm through an employment agreement. There is nothing wrong with an owner cashing in their proverbial “chips”, but as a client you have a right to know. Additionally, you should vet the new firm by checking out their website and the SEC public disclosure website and firm ADVs to educate yourself on any past regulatory issues and if you are comfortable with them. 

What Are My Options?

You should take your due diligence seriously, particularly if you feel the new firm does not have a firm commitment to expats. You should certainly speak to those at Thun that you feel will help you make this decision, as well as other firms that work with expat investors. In being blatantly transparent, it’s what we do, and we would like to discuss how we can improve your wealth management experience. Find our more on our expat website, or schedule an appointment.

Clint Walkner

Can I Buy Life Insurance as an Expat Post-COVID?

Can I Buy Life Insurance as an Expat Post-COVID?

A crucial part of financial planning for many families is constructing an effective insurance solution to ensure that their long-term goals can be met, even in the tragic case of an unexpected death. However, as we’ve mentioned in a previous blog, such solutions are often complicated by living abroad, particularly when it comes to underwriting insurance.

As a firm, we do not sell insurance, but we do work with a variety of brokers to discuss insurance options for our clients, and all have indicated that right now, insurance companies are having a harder time pricing the risk of life insurance for their clients in a post-COVID world– particularly where those clients have international exposures.  

Before examining the expat specifics, one should note that this has changed insurance not just for Americans abroad, but also for Americans in the United States. Insurance is – essentially –  math and actuarial tables. Insurance companies using demographics, general country mortality, health and other factors, calculate your expected life expectancy based on actuarial tables in order to calculate your monthly premium in a way that will ensure the insurance company does not go out of business. Unfortunately, the inputs for general country mortality and “other factors” have been skewed by the global pandemic and currently insurance companies may not necessarily “trust” their own actuarial tables. Consequently, the insurance market may tighten as insurance companies either charge more to protect themselves against an unexpected and unquantifiable risk, or simply limit the policies they are underwriting or issuing.

In the past, many insurance companies were happy to underwrite Americans abroad in certain cases: for instance, they were able to come to the United States to submit to the policy health exam or could physically take delivery of the policy in the United States. As a result of the underwriting policies changes in the wake of COVID-19, many insurers may not be as worried about the expat angle than the issues of travel and generalized risks such as increased exposure to viruses or other communicable diseases. Consequently, we likely will see a drop in the number of companies who are willing to issue policies to Americans outside of the United States (particularly whole life policies) along with an increase in costs and restrictions (sometimes underwriting policies will require the insured to stay in the United States longer or not travel for a defined period of time).  

Unfortunately, there aren’t easy solutions to these problems at the moment. The general principles from a financial planning perspective remain the same and at the heart of our decision making process is weighing the needs for insurance versus the costs both in terms of health and any additional “hoops” required to obtain a policy. Additionally, we find that working with a broker that can quote a variety of companies rather than just a select few (or only one!) is very important, especially for expats. Ultimately, like so many things in our post-COVID world, we must wait and see, proceed cautiously, and be creative in our solutions.

Keith Poniewaz

How Does The CARES Act Impact American Expats?

How Does The CARES Act Impact American Expats?

The most important item to note for American expats is that being abroad will not disqualify you from eligibility for the Coronavirus Aid, Relief, and Economic Security (CARES) Act, should you meet the requirements. 

Americans who filed taxes abroad in 2019 (or if those have not yet been filed yet, 2018) are eligible for the tax credit. For those that earn under $75,000 in adjusted gross income for singles and $150,000 for married filers, they will receive direct payments from the government in the amount of $1,200 (single) or $2,400 (married).This will be sent via direct deposit for those that have set up ACH with the IRS, and a check can be sent to those that do not have that established. There is a phaseout for those earning above $75k/$150k, ending at $99k for single filers and $198k married.  

There are a couple of other lesser known provisions in the bill that may impact Americans abroad and we’re happy to discuss for how these changes may apply to your situation:

Required Minimum Distributions

For 2020, Required Minimum Distributions (RMDs) have been waived for all retirement accounts, including IRA, 401(k), 403(b), and 457 plans. This includes beneficiary IRAs as well. If you were in the category where you were required to take two RMDs in one year due to delaying your first RMD, you happen to be in luck – no RMD is required. 

No 10% Penalty For Early Retirees

For early retirees that qualify for “coronavirus-related distributions” (an intentionally broad definition), if you took out money prior to age 59 ½ or 55 depending on the type of retirement account, you were potentially subject to a 10% penalty. For 2020 you may now take up to $100k out of your pre-tax retirement accounts without penalty. You are still subject to reporting your distributions as income, though you are allowed to stretch the recognition of this income over three years. 

Additional Resources

As noted by our friends at American Expat Finance, a number of groups have hosted webinars discussing the various ways to apply or tax considerations involved in these “checks” from the US government.  Perhaps the most universally applicable is one hosted by the American Citizens Abroad, or ACA. As part of their newly announced Tax Cast series, President Mary Louise Serrato speaks with accountant Glen Frost to discuss the specifics of these benefits for Americans abroad from a tax perspective. The AARO (Association of Americans Resident Overseas) also hosted a webinar for its members

Keith Poniewaz