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Conscious Capital Perspectives | July Portfolio Update

| August 04, 2021
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In one of the first material tactical adjustments we found necessary to make in 2021, we have significantly reduced our exposure to Emerging Market equities across our ETF-based portfolios. We did not make a commensurate adjustment in our ESG series portfolios, and the reason will be obvious as we explain below.

We have said numerous times in conversation and in writing, but it warrants repeating here – as goes China so go the emerging markets. As the second or third largest global economy depending on how you quantify the European Union, China has profound influence regionally across Asia Pacific, but also directly and indirectly in developing economies in Africa and Latin America, particularly where natural resources are abundant. It also has an inextricable presence in Western supply chains. China is also steadily tightening its grip on Hong Kong, which is deeply significant economically, and of course heavily influences Taiwan and to a lesser degree Singapore.

This matters because Chinese markets have been showing softness of late, retreating to the same range they found after their initial recovery almost exactly a year ago. More fundamentally though, there are reasons for concern that are not so easily expressed in market returns, at least yet. The further revision of the One Child policy signals a growing recognition that they are facing a demographic problem. Internal immigration into factory cities and urban centers was able to continue almost without limit because of the hundreds of millions of rural citizens potentially available to take newly created jobs. But, the entire population is aging because of the historical birthing policy enforced across the nation, so the available rural wellspring is running dry too. When thinking about long term allocation of capital, this is a generational headwind.

Recent revisions to regulation and policy within China provide additional uncertainty. We have ongoing concerns about governance challenges at the macro level, and a heavier hand from the central authority may tamp down some investor enthusiasm for the promise of truly free markets and private enterprise, particularly if there is a whiff of private companies getting crosswise with the CCP. There is also some sentiment among some of the managers we follow or with whom we work that getting themselves situated for a less close capitalist relationship with the developed West could create some short term discomfort.

China’s markets and economy came through, short term disruptions notwithstanding, fairly unscathed given they were the epicenter of the SARS CoV2 outbreak. Their choice to shut down hard and fast controlled the spread, and the politburo tightly controlled the narrative as it pertained to public policy and commerce. We have seen some hotspots of the pandemic erupt there and as they continue to apply the playbook to controlling it markets pick up blips of volatility that sort themselves out quickly. This is to say that over the longer term, while there are some considerable headline challenges they face, the Chinese will find a way, through sheer force of will of nothing else. In the near term though, we think the risks in Emerging Markets driven in large part by China are not being adequately rewarded, while other parts of the world are emerging from the pandemic and can resume their path to growth in a very accommodative environment. For this reason, we reduced our explicit exposure to EM, nearly half dominated by China, Hong Kong, etc. effectively to zero across our ETF-based strategies.

Within our ESG portfolios, which are principally stocked with active management, our exposure to Asia Pacific is driven by fundamentals including a strong bias to good governance and transparency, economic justice, equal access and opportunity, good environmental practices, and other sustainability factors which skew the portfolio away from China except for select opportunities. The result is regional exposure with a significant quality and more developed market bias, meaning that it is not expressly an EM strategy. As such, we did not feel the same impulse to draw down the position because many of our concerns we believe are inherently addressed in the bottom up strategy.

DISCLOSURES

Conscious Capital Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. It is important to remember that there are risks inherent in any investment and that there is no assurance that any money manager, fund, asset class, style, index or strategy will provide positive performance over time. Diversification and strategic asset allocation do not guarantee a profit nor protect against a loss in declining markets. All investments are subject to risk, including the loss of principal. The information contained herein is based upon the data available as of the date of this document and is subject to change at any time without notice.

Portfolios that invest in fixed income securities are subject to several general risks, including interest rate risk, credit risk, the risk of issuer default, liquidity risk and market risk. These risks can affect a security’s price and yield to varying degrees, depending upon the nature of the instrument, and may occur from fluctuations in interest rates, a change to an issuer’s individual situation or industry, or events in the financial markets. In general, a bond’s yield is inversely related to its price. Bonds can lose their value as interest rates rise and an investor can lose principal. If sold prior to maturity, fixed income securities are subject to gains/losses based on the level of interest rates, market conditions and the credit quality of the issuer.

Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and may follow different accounting standards than domestic investments. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems that can be expected to have less stability than those of more developed countries. These securities may be less liquid and more volatile than investments in U.S. and longer-established non-U.S. markets. An investment in small/mid-capitalization companies involves greater risk and price volatility than an investment in securities of larger capitalization, more established companies. Such securities may have limited marketability and the firms may have more limited product lines, markets and financial resources than larger, more established companies.

Portfolios that invest in real estate investment trusts (REITs) are subject to many of the risks associated with direct real estate ownership and, as such, may be adversely affected by declines in real estate values and general and local economic conditions. Portfolios that invest a significant portion of assets in one sector, issuer, geographical area or industry, or in related industries, may involve greater risks, including greater potential for volatility, than more diversified portfolios. 

Important Disclosures: Exchange-Traded Funds

Exchange-traded funds (ETFs) are investment vehicles that are legally classified as open-end investment companies or unit investment trusts (UITs), but differ from traditional open-end investment companies or UITs. ETF shares are bought and sold at market price (not net asset value) and are not individually redeemed from the fund. This can result in the fund trading at a premium or discount to its net asset value, which will affect an investor’s value. Shares of certain ETFs have no or limited voting rights. ETFs are subject to risks similar to those of stocks.

ETFs included in portfolios may charge additional fees and expenses in addition to the advisory fee charged for the Selected Portfolio. These additional fees and expenses are disclosed in the respective fund/note prospectus. For complete details, please refer to the prospectus. For additional information regarding advisory fees, please refer to the Fee Summary and/or Fee Detail pages (if included with this report) and the program sponsor's/each co-sponsor's Form ADV Part 2, Wrap Fee Brochure or other disclosure documents, which may be obtained through your advisor.

Certain ETFs have elected to be treated as partnerships for federal, state and local income tax purposes. Accordingly, investors in such ETFs will be taxed as a beneficial owner of an interest in a partnership. Tax information for such ETFs will be reported to investors on an IRS schedule K-1.

Investors should consult with their tax advisors in determining the tax consequences of any investment, including the application of state, local or other tax laws and the possible effects of changes in federal or other tax laws.

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