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Ken Baksh – March Market & Investment Report
March 2020 Market Report
During one-month period to 29th February 2020, major equity markets registered large falls, rising initially and then falling sharply, mainly on growing coronavirus concerns. The FTSE ALL-World Index dropped by 9.62% over the period. The VIX index rose sharply (+160%) to end the period at 46.22, a level reflecting elevated investor concern. Fixed interest product displayed mixed performances with core government bonds receiving some “safe haven” buying, while more speculative issues fell in price terms. The yen strengthened while the pound dropped a little, the latter moving on more adverse Brexit news. The Chinese Renminbi was relatively stable as was the local equity market on the perception that the virus was contained locally. Commodities displayed a significantly weaker trend, the exceptions being part of the PGM complex.
Aggregate world hard economic data continues to show 2020 expansion of below 3.0%, although forecasts of future growth continue to be reduced by the leading independent international organizations. The estimates of the economic damage caused by the coronavirus, vary enormously. Demand, and supply, disruptions could cut anything from 50 bp to 400bp from an already weaker global economic estimate. Related corporate profit warnings are rapidly increasing. Compared with other “shocks”, there is debate about the actual immediate effectiveness of monetary policy in easing the situation when companies and individuals can’t / won’t conduct their normal activities.
There appears to be a growing chorus of further longer-term action on the fiscal front e.g. infrastructure spending, as other instruments e.g. interest rates, may have limited potential from current levels. Fluctuating currencies continued to play an important part in asset allocation decisions, sterling/yen being a recent example, while some emerging market currencies have been exceptionally volatile e.g. Turkey. Movements in the $/Yuan are also taking on increasing significance.
European economic indicators continue to show very anaemic growth, even before corona virus adjustments, German 2019 GDP, for instance rising at just 0.6%, the lowest rate of growth since 2013. Political events have featured further signs of discontent in Germany and France (pension and other reforms). The backdrop for the current European Budget debate is far from encouraging.
US market watchers focussing on more domestic issues have been watching the race for the Democratic leadership (Super Tuesday March 3rd), while Trump’s impeachment issues have disappeared, for now. US economic data indicated a somewhat softer than expected end to the year with provisional 2019 growth of 2.3%. Corporate results/forward looking statements so far have been mixed and the corona-virus effect on both demand and global supply chains, is being increasingly discussed. Official interest rates have been reduced three times to a range of 1.5% to 1.75%, much as expected, and a “pause” was indicated by Fed Chairman Powell at recent meetings, including that held in the last week of January, although recent events (softer US data and growing corona-virus concerns) are likely to reactivate more dovish rhetoric and action.
In the Far East, China /US trade talks dominated the headlines for the first couple of weeks of January, but this was quickly followed by news of the corona virus emanating in China, and now affecting much of the region, especially South Korea at the time of writing..
Japanese annual economic growth slowed markedly in the fourth quarter of 2019, the autumn VAT increase, typhoons and coronavirus all contributing to the reduced activity. Recent political
appointees, plus the fundamentals mentioned above, indicate a continuation of the dovish economic stance.
The UK continued to report somewhat mixed economic data with stable developments on the labour front, more buoyant January retails sales but poor corporate investment, inflation higher than expected (1.9%), and public finances deteriorating again. Business and market attention, both domestic and international, is clearly focussed on ongoing BREXIT process under new Prime Minister, Boris Johnson, where at the time of writing, the UK and their EU counterparts are starting to discuss the thorny details of the UK’s departure. The Bank of England Governor has made frequent references to the unsettling effects of any unsatisfactory Brexit outcome, as have a growing number of business leaders and independent academic bodies. Political factors aside, economic and corporate figures will inevitably be distorted over coming months. GDP growth of around 1% for full year 2019 looks likely, with a similar projection for 2020.On 30th January, Mark Carney officially reduced the Bank’s estimate of annual GDP growth to 1.1% for the next three years.
Equities
Global Equities showed very large moves over February 2020, a month of two distinct halves. The FTSE ALL World Index registered a fall of 9.62% over February to a level of 338.41 and now down 8.65% since the year end. The UK broad and narrow market indices, both fell by over 9% during February, underperforming the sterling adjusted world index by over 7.5% since the beginning of the year. Ironically, Chinese equities were one of the few areas to show a positive return over February. The VIX, now at a value of 46.22, is at a level considerable above that prevailing in recent years though down on the extreme levels see at the time of the 2008/2009 market meltdown.
UK Sectors
A very mixed month for UK sectors with oil and mining bearing the brunt of the falls on global growth concerns while utilities were relatively stable and in fact are one of the few sectors still showing a year to date positive return.
Fixed Interest
Gilt prices rose 0.8% over the month, the 10-year UK yield standing at 0.44% currently. Other ten-year yields closed the month at US, 1.16%, Japan, -0.16%, and Germany, -0.61%. UK corporate bond prices fell over the month, as did more speculative and emerging market debt prices. Interestingly, emerging market debt now yields LESS than an ETF of UK high yielding shares See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds, speculative high yield etc. A list of my top thirty income ideas (many yielding around 7%) from over 10 different asset classes is also available to subscribers.
Foreign Exchange
FX moves during February featured a weaker pound (partly on re-emerging Brexit concerns) and a stronger Yen(safe haven?),the cross rate moving 3.6%.In sterling adjusted terms both the Nikkei and the S&P,the better performing major regions, are off about 6.5% year to date versus the FTSE 100 down 12.8%
Commodities
A generally poor month for commodities on corona virus, global growth concerns. Gold, silver and palladium bucked the trend, the latter now up over 40% so far this year! Have you checked under your car recently?
Looking Forward
Over the coming quarter, health concerns, geo-political events and Central Bank actions/statements meeting, will continue to dominate news headlines while the brunt of the corporate reporting season will also add stock specific catalysts, both positive and negative. Calls for more fiscal response on the part of governments opposed to limited Central Bank monetary fire power will intensify, in some cases allied to environmental issues.
US watchers will continue to speculate on the timing and number of further interest rate moves during the 2020/2021 period while longer term Federal debt dynamics, Iran ,corona virus effects, election debate and trade” war” winners/losers (a moving target) will increasingly affect sentiment. Corporate earnings growth will be subject to even greater analysis, amidst a growing list of obstacles and over 20% of US companies have already made coronavirus “adjustments”.
In Japan market sentiment may be calmer after recent political and economic events although international events e.g. exchange rates and tariff developments, will affect equity direction. More equity specific issues e.g share buy-backs, ETF developments, TOPIX constituent changes, should also be monitored.
There is increasing speculation that China may announce more even stimulative measures, as the coronavirus effect,though moderating now, struck an economy that was already weakening, and key $/Yuan exchange rate levels are being watched closely.
European investment mood will be tested by generally sluggish economic figures, corona virus arrival, and an increasingly unstable political backdrop, now encompassing France and Germany, Spain and Italy.
Hard economic data (especially final GDP, corporate investment, exports) and various sentiment/residential property indicators are expected to show that UK economic growth continues to be lack-lustre (1% ish) and recent coronavirus concerns have soon dampened any post Brexit/election enthusiasm. It is highly likely that near term quarterly figures (economic and corporate) will be distorted (both ways), and general asset price moves will be confused, in my view, by a mixture of currency development, political machinations, international perception and interest rate expectations.
In terms of current recommendations,
Depending on benchmark, and risk attitude, first considerations should be appropriate cash/hedging stance and the degree of asset diversification (asset class, individual investment and currency).
An increased weighting in absolute return (but watch costs, underlying holdings and history very carefully), alternative income and other vehicles may be warranted as equity/gilt returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Both equity and fixed interest selection should be very focussed. Apart from global equity drivers e.g. Corona virus, slowing economic and corporate growth, tariff wars and limited monetary response levers, there are many localised events e.g. UK trade re-negotiation, US elections, European political uncertainty that could upset markets.
- I have kept the UK at an overweight position on valuation grounds and full details are available in the recent quarterly review. However, extra due diligence in stock/fund selection is strongly advised, due to ongoing health, macro-economic and political uncertainty. Sterling volatility should also be factored into the decision, making process. Be aware that global demand shocks could impact certain large FTSE sectors e.g corona virus, while domestic plays more be more correlated with Brexit statements.
- Within UK sectors, some of the traditionally defensive, and often high yielding sectors such as utilities have shown resilience during the recent market wobble and this could continue. Many financials are also showing confidence by dividend hikes and buy-backs etc. Oil and gas majors will be worth holding after the flat 2019 performance, remembering that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Indiscriminate selling for environmental/virus reasons does seem an overreaction, in my view. Small/mid- cap domestic stocks and funds received some post-election Brexit support.
- Continental European equities are preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments, coronavirus and slowing economic growth need to be monitored closely. I suggest moving the European exposure to “neutral “from overweight after the 2019 outperformance. European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully and remember that certain European and Japanese companies provide US exposure, without paying US prices.
- I have recently written on Japan, and I would continue to overweight this market within a diversified portfolio(remember FX as well as local market movement), despite the recent under-performance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well, in total return terms, have attractions e.g. preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk e.g. EnQuest,Eros. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. Bank balance sheets are in much better shape and yields of 6%-7% are currently available on related issues while a yield of 9.1% p.a., paid quarterly, is my favoured more speculative idea.
- Alternative income and private equity names have exhibited their defensive characteristics and are still favoured as part of a balanced portfolio. Reference could also be made to selected renewable funds including recent issues. Selected infrastructure funds are also recommended for purchase especially now that the political risk has been reduced somewhat and that the theme is likely to be re-iterated at the time of the imminent UK Budget.
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. The sector is starting to see more support, and corporate activity from both domestic and international sources seems bound to increase.
- I suggest a very selective approach to emerging equities and would continue to avoid bonds. The current 5.44% yield on emerging market debt still seems mean to me, compared with 6.52% on a pooled UK equity ETF. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. It is worth noting that several emerging economies in both Asia and Latin America showed first quarter 2019 GDP weakness even before the onset of any possible tariff/virus effects. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode e.g. Venezuela, Argentina or embarking on new political era e.g. Mexico and Brazil (economic recovery?). As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years, and there are currently large inflows into this area following the price weakness of 2018. One additional factor to consider when benchmarking emerging markets is the large percentage now attributable to technology. A longer-term index argument is also being made in favour of Gulf States, although governance issues remain a concern.
Full quarter report available to clients/subscribers and suggested portfolio strategy/individual recommendations will be available soon. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, defensive list, hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Holders of pooled funds should continue to switch the balance away from unit trusts to a mixture of investment trusts and ETF’s.I have written on this many times over recent years. The Woodford example and, in general, the conflicts between certain short-term fund flows and long term assets, will only increase in my view. I have regularly updated model portfolios comprising some direct investments, investment trusts and ETF’s, across different risk categories, for those interested.
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
kenbaksh@btopenworld.com
1st March 2020
Ken Baksh – Quarterly Investment Report Q1 2020
Investment Strategy /Asset Allocation-First Quarter 2020
Any reference to benchmark should be tailored to individual client preference. These could, for instance, be
1) Absolute return based.
2) Cash/ LIBOR/SONIA, or equivalent, based (0.70%).
3) Inflation based. (UK CPI 1.5% November).
4) Index based (FTSE 100, FTSE All-Share, MSCI, S&P etc.).
5) Peer group based (Private client index, Morningstar, IMA category etc.).
6)Theme based e.g. ESG.
7)Bespoke list…e.g. list of other funds held/monitored/local competitors.
8)Factor based.
The above list is not exhaustive.
Furthermore, it may be appropriate to apply differing benchmarks to differing risk categories, and or adopt internal and external benchmarks.
Further macro details and individual investment ideas, model portfolios for varying benchmarks and risk profiles are available on request. These can be in direct, OEIC, investment trust or ETF form or a combination. As ever, portfolio construction should take full account of risk, return and degree of asset correlation appropriate to the individual client. Other client assets/liabilities should also be considered.
Cash –Neutral, Higher than normal.
Where appropriate, diversify some sterling cash into major overseas currencies, especially after considering the ongoing BREXIT process. The US dollar should certainly feature amongst the alternative currencies.
UK Equities-Neutral/small overweight
Economy
After reporting 1.4% GDP growth for 2017, and a similar figure for 2018, growth in 2019 is also expected to be anaemic, with risks to the downside, at the time of writing. Most recent data showed third quarter GDP, showing a mere 0.3% expansion (1.0% annualised), the lowest annual rate of growth since 2010.More recent October and November PMI and retail sales data showed weaker than expected fourth quarter development, and BRC figures, released on 8th January 2009,show the value of retail sales falling 0.1% in 2019,the worst annual figure since 1995.. Well publicised reasons include a more uncertain domestic consumer environment, weaker business investment, slowing global trends and political uncertainty, all interrelated. There is no doubt that the “BREXIT” has and will continue to affect many areas of the economy in different ways. One relatively brighter area has been the relatively low unemployment situation (3.8% unemployment rate announced December 17th), although poor productivity remains a problem and the “quality” of the employment is open to debate.
The residential housing market is continuing to show slower year on year growth, especially in London and the South East, where many properties are now showing negative year on year price comparisons. The lower volume of activity and increased time to completion have been all too evident in the recent sector profit warnings and cautious guidance from estate agents, house builders, domestic construction companies. Commercial property has also been very sluggish, especially in the area of retail (see more detail below).
Forecasts for 2019 GDP growth span a range of 0.5% to 2.0% with an average of 1.4% (30 forecasts), with most forecaster agreeing that in the unlikely event of UK crashing out of the EU in 2020 (no or very hard deal), the country could experience a sizeable recession. It is highly likely that quarterly GDP figures will be heavily distorted by Brexit related factors.
At the mid-March “mini-budget” speech Chancellor Hammond also guided GDP forecasts towards about 1.5% and re-iterated caution over relaxing the fiscal stance despite the budget improvement referred to above. Hammond’s successor Sajid Javid, in the autumn Budget speech, laid out a more expansionary stance, no doubt strongly politically influenced! Recent poor monthly budget figures, to an extent Brexit related, surprised a few economists. A new Budget is expected on 11th March,2020
Inflation, currently 1.5% (November 2019), by the widely used CPI measure, appears to have stabilised and forecasts of around 2.4% over the next three years were made by the Bank of England, assuming an orderly Brexit departure.RPI,currently still used for a number of indexation purposes is currently running at 2.2% year on year.
The Monetary Policy Committee is currently leaning towards a more dovish mode, though wage growth and sterling could apply upward pressure to the inflation rate even though other Brexit related issues and the global interest rate trend point towards stable or lower rates.
The Conservatives decisively won the December 12th election, and it seems highly like that the Withdrawal Bill will pass, and that the country will leave Europe on January 31st, 2020.The long process of re-negotiating a trade deal, product by product, along with other issues such as financial services, fisheries etc will then begin.
Market
On a valuation basis, the UK equity market remains at a relatively “cheap level”, compared to its history and significant underperformance, versus world equities, since the Brexit vote in June 2016 continued right until the last quarter of2019. Corporate profits however, especially amongst the more international companies have continued to grow, as have dividends. The prospective PE multiple for 2020 is about 12.6 falling to an estimated 11.9 in 2021, with a dividend yield of 4.81%. (Source Morgan Stanley, December 2019). However, two notes of caution. The “E” of the PE ratio, at the time of writing, is subject to more than usual variation as company earnings are likely to be adjusted, both ways, following the BREXIT effect and related uncertainties. Income seekers should also pay extra attention to sustainability/growth potential rather than just absolute levels of dividends. Profit warnings are running at a much higher level (see recent EY note) and dividend reductions/cancellations are increasing.
| On a technical market note it should be re-emphasised that the FTSE 100 has a relatively large oil/mining weighting and that approx 2/3 of the FTSE earnings derive from overseas. The table below summarises the main differences between the three main UK indices. FTSE 100 | FTSE 250 | FT All-Share | |
| Financial | 19.9 | 32.1 | 26.2 |
| Consumer(goods and services) | 22.4 | 18.1 | 25.9 |
| Energy | 14.9 | 12.2 | |
| Health | 10.9 | 3 | 9.5 |
| Materials | 10.6 | 3.8 | 7.5 |
| Industrial | 10 | 18.4 | 12.1 |
| Telco and Tech | 5.3 | 8.7 | 3.8 |
| Utilities and Property | 4.5 | 13 | 2.8 |
Source: i-share,Lyxor.January 7th,2020.Leading sectors only
In a Morgan Stanley research note, it was estimated that 41%, 26% and 18% of FTSE 100 company sales were derived in Developed Europe, Asia-Pacific and North America respectively. The corresponding figures for the FTSE 250 were 67%, 10% and 14
At the time of writing I would recommend overweighting banks/insurance and rebuilding positions in utilities, telecoms, infrastructure etc following the decisive election result. Selectively some retail and property names may start to outperform. I would slowly rebalance towards more selective mid cap /small cap exposure after the recent outperformance of the larger more international FTSE 100 names.
These factors emphasise the need to be flexible and frequently check positioning on a see-through basis. This will be especially important as the BREXIT discussion moves from Withdrawal Bill to step-by-step trade renegotiation.
Overseas Equities–Neutral
Expect increased currency volatility to continue during 2020
Japan- overweight
US- underweight
Europe ex UK- small overweight
Other –neutral
Economic
The global recovery is set to continue into 2020, although growth estimates have been reduced in recent quarters. As recently as October 3rd, PMI data for consumption and services for UK, USA and Germany all underperformed economist estimates with the latter two falling into contraction territory.
In July the IMF predicted the world economy would grow by 3.2% this year, significantly slower than its estimates at the start of 2019.While the Fund currently sees a rebound to 3.5% in 2020,it has warned that such a recovery was “precarious” since it was premised on stabilisation in emerging markets and progress on resolving trade disputes. More recently, on September 19th the OECD produced revised figures projecting world GDP growth of 2.9%, the weakest performance since the 2008-09 financial crisis.Finally,in January 2020,the World Bank produced a more gloomy forecast of just 2.4% global growth for 2019 followed by 2.5% in 2020,stressing that any easing of US-China trade tensions is unlikely to lead to a rapid recovery. The Bank did however foresee above average growth in some of the larger emerging nations, such as Turkey, Brazil,Mexico and Russia, which had already experienced sharp slowdowns.
As well as the fading effect of US fiscal incentives, weaker indications from several European, emerging, and Asian countries, including China, point to more sluggish economic development.
Core inflation is also developing at a slower than expected pace with most leading nations experiencing price increases well below Central Bank targets.
The two factors above, in combination with certain geo-political concerns, are behind the more dovish monetary statements/actions currently being adopted. There are also wider calls for more expansionary fiscal measures e.g. infrastructure spending.
Cross border mergers and acquisitions plummeted, on average, to their lowest level since 2013, though this disguised a 6% increase by US targets and falls of 25% and 16% respectively for Europe and Asia.
Major risks could include inappropriate Fed/Trump action e.g. further protectionism, Chinese growth/deflation/management, further commodity/forex price volatility, and reaction to many political developments ( Iran,Hong Kong, Venezuela, Libya, Ukraine, Russia, Turkey, Korea being current examples).
On a global level it is also becoming increasingly important to factor climate/change/environment into investment decisions
The IMF reiterated that rising protectionism and debt levels remained the biggest global risks.
United States
After 1.6% GDP progression in 2016 US economic growth recovered to 2.3% in 2017 with 2.9% for 2018 and a figure of 2.3% provisionally pencilled in for 2019.The Federal reserve itself expects growth of about 2.3% for full year 2019, highlighting strong job gains and buoyant consumer spending and corporate investment. Better than expected first quarter 2019 growth of 3.2% included a large element of inventory build, with more recent third quarter GDP figures showing growth of 1.9% annualised. The employment situation seems to be reasonably healthy, following some strike distortions, with a November unemployment rate of 3.5%, and hourly earnings growing at 3.1%.Figures just released from Mastercard showed retail sales during the critical November 1st to Christmas Eve period jumped 3.4% compared with the same period of 2018 (on-line 18.8%,physical stores 1.25). However, business investment, trade and certain manufacturing sectors are showing negligible progress.
Most recent inflation figures (core personal consumption expenditures) show November 2019 prices rising at 1.6%, still shy of the Fed’s 2% target.
The Federal Reserve raised short term interest rates in March ,June ,September and most recently on December 19st ,taking the target rate for the Federal Funds rate to 2.25%-2.5%.However recent shorter term economic data coupled with certain current geo-political uncertainties e.g. US/China,Brexit,Europe,South America have introduced a much more dovish tone to Fed thinking. At the August Fed meeting interest rates were cut by 25 basis points, and a further cut of 25bp was made on 18th September, taking the federal funds rate to a range of 1.75% to 2%.Slowing business fixed investment and exports were cited as the main areas of economic weakness, while consumer sentiment remained relatively strong, so far.A further cut of 0.25% was made in November, while the accompanying statement suggested a “pause” in interest rate movements, a sentiment re-iterated at the December 12th meeting .
Europe
European economic growth forecasts have shown a marked decline since mid-2018 levels and most forecasts for 2019 now fall in the 1.0% to 1.5% range, with the ECB itself looking for 1.2% (December 2019). During the last quarter of 2018, Italy contracted while Germany showed negligible progress and the situation seems to have deteriorated further during 2019, the IFO recently cutting GDP growth forecasts to 0.5% and 1.2% for 2019 and 2020 respectively. Going forward, global developments in the area of trade will be particularly important for the likes of Germany while a precarious political climate (Italy, Spain,Holland,Belgium) could be another source of investor uncertainty for the region. The pan-European composite PMI for December remained at 50.6, a level consistent with negligible growth. The breakdown showed a relatively strong services component but a slide within the manufacturing sector. For 2020 the ECB expects the eurozone economy to grow by 1.1%, more optimistic than a poll of 34 economists who forecast a range of zero to 1.5%, with an average below 1%.
The ECB lowered its inflation forecast to 1.2% for this year and 1% for next year at the September 2019 meeting, while the tentative 2022 forecast for 1.6% is still below the ECB target. December inflation figures, just released, show consumer prices rising at about 1.3%, higher than forecast.
Recent MEP election have continued to show an erosion of support for the traditional central parties, and while some of the more extreme political groups fared worse than expected, the Greens and Liberal Parties showed good gains. Volatile political developments continue to plague Germany, Italy and Spain amongst the larger countries.
Incoming ECB President Christine Lagarde will face early calls for measures to revive flagging economic growth, on top of the ECB monetary injection in September 2019 and further bond-buying. The subject of fiscal expansion, particularly by Germany is being widely discussed.
Japan
Japanese growth stalled in the first quarter of 2018 after eight consecutive quarters of improvement and then rebounded during summer months, before further softness due to natural disasters and a deteriorating trade situation. Current calendar 2019 economic forecasts are for about 1% annualised GDP growth, after a surprisingly strong first quarter and recently reported third quarter, but expectations of a somewhat weaker fourth quarter following the VAT rise. The Tankan Index for large manufacturer was also weaker than expected in December 2019, although the service component remained relatively strong.
The Yen 13.2 trillion package announced in early December 2019 to repair typhoon damage, upgrade infrastructure and invest in new technologies was one of the largest since the financial crisis of 2008-2009.
At recent meetings the BOJ pledged to maintain the current negative interest rates, yield curve management and asset purchase programmes, tweaking its forward guidance as recently as early November 2019.
Politics tilted in a pro-reform direction, after the October 2017 election landslide, which should help various economic and political initiatives. The political situation was strengthened further by the leadership victory late September 2018, which would make Shinzo Abe one of the longest serving Japanese PM’s since the job was created in 1885. The initiatives will include more focus on the quantitative actions, including higher care wages, pension reform, targeted infrastructure and some moves to tweaking the pacifist constitution. The re-appointment of Central Bank Governor Kuroda was helpful to the continuation of accommodative fiscal and monetary policy, a stance reinforced in the spring.
Inflation is still well below the official target (0.5% in November 2019) although oil price strength and early signs of wage and recent price growth are expected to accelerate the upward trend. Japan’s September jobless rate at 2.4%, is the lowest since 1994, and there are labour shortages in a growing list of sectors, including construction and elderly care. The parliament recently voted to allow more than 250000 foreign workers into the country on five-year visas, and with the improved electoral mandate, it is widely expected that the subjects of female participation and pension age changes will also be studied.
Monetary policy will remain dependant on inflation developments, and currently no major changes are expected to short or long-term interest rates until at least end-2019.At the recent BOJ meetings, the Board have voted to keep the benchmark short term interest rate at -0.1% although Kuroda hinted at further easing on September19th. In early October 2019, the long-awaited rise in VAT from 8% to 10% took place, although the impact was softened somewhat by cashback reward measures.
Asia excl- Japan
Efforts to boost domestic demand, either through monetary policy, banking reform and structural issues are bearing fruit in some areas, but are also currently hindered by currency volatility, high debt ratios, disinflation, politics etc. The spectre of a tariff “war” between USA and China, could of course, impinge adversely on some of the more open economies in the area and specialist zones e.g. Taiwanese semi-conductors. Other opportunities may also arise e.g. Vietnam.
Overall estimates for growth in the region have slipped over recent months, but the aggregate figure masks large individual country differences. For example, Vietnam is currently experiencing economic upgrades, partly as a result of the US/China tariff “war”.
At the National People’s Congress held in early March 2018, Chinese Premier Li Keqiang outlined an economic growth target of 6.5%, with a minimum target of 6.3% p.a over the 2018-2020 period, in additional to a lower fiscal deficit goal. At the conference there was more emphasis on quality of growth, pollution control and risk control, property stabilisation, liberalization of the financial system than numerical targets. Recent indicators however point to slower growth, with some estimates as low as 5%. At the time of writing Chinese moves to stabilise growth through a mixture of tax cuts, infrastructure spending and bank lending support, appear to be working, although the ongoing tariff discussions impose an air of huge uncertainty.
In India, much is still riding on the “Mondi” reform programme where long-standing concerns in the areas of infrastructure, bureaucracy and fiscal inconsistency need resolution.However,the recent election (May 2019), won by Narendra Modi with a landslide victory, gives the leader power to forge on with building a “New India”, and the surprise corporation tax cuts announced on September 20th give some reasons for optimism, although the religious “priorities” have to be monitored closely. Recent economic statistics point to a slowdown nearer 5% GDP growth than the 6% /7% of recent years.
Regional Equity Recommendations
Japan remains a favoured equity market, despite the global sterling adjusted outperformance in 2017 and 2018, though underperforming in 2019. Regarding the investment arithmetic, the prospective PE (13.9 falling to 12.89 in 2021 as at December 01,2019) is still lower than the world average and the price book ratio is near the lowest of all the major regions, at a level of 1.20. Corporate results for recent periods have been much as expected and further growth is expected over the 2020/2021 period. Analysts point to further scope for Return on Equity, currently just over 8.0%, to converge on the average for developed markets over coming years. On a technical note, Japanese institutions are undergoing a longer term bond/equity switch and the market tends to be under owned by overseas institutions. Regarding domestic demand, the BOJ and other buybacks amount represent a growing percentage of market cap on an annual basis while public and private pension funds are steadily increasing their equity weightings. Regarding the former, buybacks between January and November of 2019 are up 112% compared with the previous year, currently running at over $6 billion per month. Individual households hold approximately 50% of their financial assets in cash, extremely high by international standards, another source of equity demand. Finally, corporate governance (independent directors etc), buy backs, dividend hikes and current valuations on upgraded earnings are helping sentiment. About dividends, current low pay-out ratios (around 35%), give scope for above average income gains going forward. Currency strength/weakness is of course a double-edged sword regarding Japanese portfolio strategy. I recommend that some Japanese equity exposure, currently, be hedged back to sterling and or US dollar.
Europe (ex-UK) warrants a continued small overweight in my view.
With the current accommodative monetary policy, stable consumer sentiment and a more stable Euro, the market continues to deserve longer term attention. At corporate level, earnings are being helped by nominal sales growth, margin expansion, and lower tax and interest charges. There are many situations in exporters, capital goods, financials where equities appear good value on PE and Price/ Book considerations and offer reasonable dividend yields. However, at time of writing an escalation in the tariff “war” could have adverse effects on the margins and sales volumes of certain products e.g. German cars, luxury goods, and more than usual investor due diligence will be required. On the sectoral point for example it should also be remembered that the EuroStoxx 50 weighting in oil and mining is approximately half of that in the FTSE 100. On a cyclically adjusted price to earnings ratio (CAPE) often used by longer term investors the Eurozone trades at a considerable discount to the US market. The shorter-term PE ratio currently stands at about 14.3 for2020, dropping to 13.3 in 2021, with a prospective dividend yield of 3.7%. By historic comparison the market is fairly valued on a price earnings and price cash flow basis and good value on price/book and dividend yield considerations.
Asia (ex Japan) is currently dominated by China and related China plays such as Hong Kong and Taiwan in MSCI index terms. Over the longer term, the Chinese weighting could increase significantly, when more local shares may be included in the major index benchmarks.JP Morgan estimate that the Chinese A-share weighting could move from just under 1% in May 2018 to nearly 14% by 2025.This is in addition to the approx. 25% to 30% of the index already represented by mainstream Chinese stocks. As discussed elsewhere, the consensus is for a Chinese economic slowdown to around 5%-6% per year, but possible risks could emerge from several directions including excessive credit expansion, shadow banking, currency volatility, tariff escalation and geo-political tensions aggravated by President Trump. Equity investing as an overseas investor also faces hurdles in the shape of government control (including the stock market itself), currency policy, corporate governance issues and sometimes less than ideal accounting. A well-diversified portfolio could however include some longer-term exposure to the China region, directly or indirectly (Hong Kong, overseas plays, ETF, investment trusts etc.), but shorter-term volatility is expected. Amongst other countries, India remains an investor favourite, even though valuations are becoming quite full, and, like China, economic growth appears to be slowing faster than expected. Korea looks reasonable value, but the competitive situation should be monitored, and Australia, whose economy and currency are closely tied to the fortunes of the commodity sector, offers some interesting yield situations. Finally, Vietnam warrants attention as a high growth economy and possible beneficiary of any US/China tariff war. In aggregate the region has a prospective PE of just over 14.4 with a dividend yield of 3.0%
On equity valuation, US shares look slightly overbought on current metrics including shorter term price earnings ratio (18.3 times forward earnings-2020), price book ratio and yield, and longer-term Schiller PE look a little more stretched. Corporate share buybacks, one of the significant market support factors, over the 2010/2016 period, are slowing and household ownership of equities is high relative to Europe and Japan, for instance. However, equities are not priced in the bubble territory which occurred in 2000, multiples have retreated since early 2018 and sentiment indicators remain in neutral territory. Corporate earnings growth was upgraded following certain aspects of proposed Trump policy especially in corporate taxation, but dollar volatility, weak corporate investment, and overseas supply chain disruption should also be considered. If current tariff proposals come to fruition (a big IF), several US companies expect to be affected by disruptive volume and input pricing effects late. Apart from the trade figures it is important to understand the longer term impacts of intellectual property discussions, international on-line tax debate and specific company issues e.g Huawei.
There continue to be wide divergence between the economies of the emerging universe with, for example, Russia, Brazil and South Africa experiencing much slower growth, the latter also recently experiencing a credit downgrade and new political era, and many countries suffering from disproportionate commodity exposure (Russia), unstable/changing political situations (Venezuela, Turkey, Mexico, Brazil) and or/ high dollar debt levels. The changing US political regime clearly adds more uncertainties deriving from a volatile dollar, and selective protectionist policies. India is currently one of the rare outliers with minimal commodity or deflation worries but other issues that need addressing and hopes that the recently appointed Finance Minister continues to adopt the discipline imposed by her predecessor. However, on balance, developing economies which had been detracting from global growth for several quarters are now starting to stabilise.
Investors could consider some selective exposure to the region, which currently trades on a prospective 12.0 multiple on 2020 earnings, a considerable discount to other zones. Foreign Exchange could be an important issue from both currencies of investment and individual corporate effects. However, investors should also be aware the considerable risks that are plaguing the asset class, whether commodity pricing, debt, political change etc. In terms of industry sector, earnings are expected to be strongest in consumer discretionary, healthcare and information technology, although several analysts detect more “value” in the oversold financial sector. According to recent Morgan Stanley research, aggregate 2020/2021 emerging market earnings growth currently stands at a level of around 13% p.a. It should be noted that many emerging market companies are also rapidly increasing dividends, from a low level and there are some interesting pooled vehicles to exploit this. Morgan Stanley estimate dividend growth of 8.9% and 8.1% for the region over 2019and 2020 respectively. By contrast, developed markets are estimated to have dividend growth of approx. 6% p.a over the same periods. Despite the current volatility, Russia remains worthy of speculative attention on the basis of low valuation, stable government finances, well above average dividend yield, better commodity price trends, but clearly a higher risk/return play, while Vietnam is likely to remain an Asian favourite despite the rating and recent performance, and emerging Europe may receive more attention going forward. Weightings in China and India still seem appropriate and South Korea has also moved back to the attractive zone. South American politics are playing an increasing role in investor sentiment, e.g. Venezuela, Mexico and most recently, Brazil.
Fixed Interest
Government Conventional Fixed interest-The medium-term fundamental prospects for core government bond yields (UK, USA, Japan, and Germany) continue to depend primarily on inflation and Central bank policy outlooks. External “shocks” also introduce spikes in volatility from time to time and related hunt for perceived safe havens. Over the late summer period of 2019 worries over global growth and trade tensions pushed nearly $17 trillion of government debt into negative yields. However, since then, yields have risen sharply (price falls) taking approx. $6 trillion of the above into positive territory. The Japanese bond, for example rose above zero for the first time since March.
| On the first point, current inflation, as measured by the year on year rates in USA, Continental Europe, Japan and several emerging markets has remained low and below several Central bank “targets”. Region | Updated | 10-year Govt yield | Spread versus T-Bond |
| Germany | 31/12/2019 | -0.19 | -2.11 |
| Japan | 31/12/2019 | -0.02% | -1.94 |
| UK | 31/12/2019 | 0.73% | -1.19 |
| USA | 31/12/2019 | 1.92% | 0.0 |
Other Fixed interest
It is forecast that the total returns from certain fixed interest outside the conventional core government bond space could yield relative outperformance, but allowance should be made for higher volatility liquidity, credit quality, dealing spreads etc. Some yield spreads still provide enough “cushion” versus conventional government bonds and may additionally have part equity drivers e.g. Preference shares, convertibles or be sector specific e.g. energy related.
The search for above average regular income continues, with several participants forced to move up the risk curve. A recent example was the large oversubscription for an Angolan bond issue
In general, a word of caution that using the ETF route for obtaining fixed interest exposure currently requires an extra level of due diligence regarding liquidity, spreads, degree of physical cover, tracking experience and of course full understanding of the underlying index.
Corporate Debt- Although many investment grade issues appear fully priced there may be opportunities in other grades if the risk/return/maturity/liquidity criteria suit. These may also be available in pooled form through ETF or OEIC or investment trusts. Selected US high yield (5.42% on 31/12/2019) may offer FX as well as bond spread and income gains, and it must not be forgotten that with corporate dynamics improving and a more favourable supply demand balance there is good scope for outperformance over the government sector.
| ETF | Yield p.a | OCF | Dividend payments | Physical cover |
| UK corporates | 2.44% | 0.2% | Quarterly | Yes |
| US High yield | 5.42% | 0.5% | Six monthly | Yes |
| Emerging local | 5.24% | 0.5% | Six monthly | Yes |
Emerging market Debt-higher risk but also potentially higher return but remember to analyse currency as well as income and capital. Also, available in ETF form, I-share SEML, holds over 200 securities with near 10% weightings in South African, Mexican,Thai, Brazilian, and Indonesian debt. Currently over 90% of the fund’s assets are rated A, BBB or BB and the fund yields 5.24%.Recent oversubscription for an Angolan government issue show continued “search for yield”
Preference Shares-Above average yields are still available, despite the large total return outperformance over the gilt sector over recent periods and remember the more favourable tax treatment for basic rate payers. Some of the UK bank issues look particularly interesting in this sector after recent/ongoing capital strengthening exercises and the results of the “stress tests”. Depending on risk appetite, annual yields around 5.5% to 6.1% are currently available on selected financial issues suitable for balanced accounts while, like corporate bonds, some higher yields can be found in more speculative issues.
Floating rate-provide an element of hedging against rate increases. Available in direct or investment trust structures and currently offering between 4.5% and 5.5% annual yield and priced at discount to assets. These instruments outperformed conventional government stocks during 2018 as short-term rates were increased, particularly in the USA, but have performed more in line with government stocks this year in total return terms.
Index Linked– These instruments continue to attract interest from both longer-term institutions with asset/liability issues and, more recently, from some shorter-term tactical funds. Linkers do offer some investment advantages such as low volatility(usually) and low correlation with several other asset classes and they are in relatively short supply.US investors are currently rebuilding holdings in the sector as the Fed weighs lifting the inflation target However, UK issues currently do not look particularly good value either domestically or by international comparison on most reasonable inflation assumptions or by comparison with other alternatives. The asset class suffered a shock recently following proposals to phase out/change RPI. In my view, there are other instruments that offer some degree of inflation protection/diversification at more reasonable price levels. The real yield on the UK FTSE All Index Linked Gilts is currently –1.83%
Zero-Coupons-Capital only, yields of over 3.9% p.a (annual equivalent) to November 2022, or 4.2% p.a. to November 2024 or 5.0% to November 2026 on recommended issues at time of writing. May suit event planning/higher income tax situations.
Convertibles-UK market relatively small and my favoured pooled vehicle has just been redeemed at near asset value. The sector is however worth monitoring, for the combination of a floor yield (in an era of very low competitive yielding products), with possible equity upside as well.
Corporate Bonds, UK order book-Selected issues may warrant attention. In the expanding London retail bond market, running yields between 4.0% and 5.0% on LSE quoted companies with between 4 and 7-year maturities are available on more stable underlying businesses, while much higher flat(e.g. 7%) and redemption yields apply to certain more speculative issues, especially in the energy area. A growing number of ultra-long issues are becoming available.
Property-Neutral
Following the historic decision on June 23,2016 to leave the EU, property markets, especially in London felt the aftershocks. Volume of activity and pricing were immediately affected and within days, property funds holding £15 billion of assets had closed the gate to redemptions. Over three years later, the markets have not settled, although some of the more drastic revisions and rumours have been softened. Amongst the main sectors, shopping centres are struggling with stalling consumer confidence and on-line competitors while the office sector, especially in London, is experiencing varying trends. The mergers recently announced between Hammerson and Intu,and Unibail/Westfield and recent Land Securities/British Land figures highlight the need to reduce costs in a troubled shopping centre sector. Interestingly, figures and statements from quoted company Segro PLC, by direct contrast, show the growth in logistics centres, warehousing as online shopping accelerates.
Over 2018, the MSCI IPD UK Index showed a total return of 7.5%, although this growth slowed to just 1% in the last quarter. Of the 7.5%,5.2% was attributable to income and included rental growth of 2.7%. By sub sector industrial values rose faster than retail values every single month. Over the first ten months of 2019 the Index has continued to show even slower total return. Income continues to be the positive factor as capital values decline across several categories, and Retail is still very poor, especially in London and the South-East
In the post BREXIT environment, investors in commercial property funds should be increasingly aware of “value adjustments” suddenly imposed on their unit holdings, large unproductive cash holdings, as well as perhaps a tightening of redemption procedures (see recent FCA papers), which is improving the relative attractiveness of closed end funds and direct equities. As ever however, watch location, management and balance sheets carefully! In major commercial property sectors,” tech” friendly features are increasingly demanded, while retailors juggle with the physical/online balance. In the specialist areas of student, logistics, medical, retirement accommodation and self-storage there is still good demand and in the medium term these sub-sectors are expected to become more “mainstream”. Many international investors have switched their attention away from UK towards Continental Europe, where rental levels, capital values and prospects are deemed more attractive. Remember also that property corporate bonds/preference shares may suit some client objectives.
Alternative Income / Other- Overweight
This “catch all” sector is taking on increasing significance during this current phase of volatile bond and equity performance and an expectation of lower returns, looking forward. It is noticeable that during the weaker equity periods, many renewable/private equity/infrastructure plays held their ground, and in some cases showed absolute returns. Funds which may fit the characteristic of better capital protection and above average yields and low correlation with other asset classes include
- • Infrastructure, including recent issues in the renewable sector, offering income yields around 5%- 6% p.a. Corporate activity e.g. John Laing, is an additional positive factor.There appears to be a global move towards various infrastructure related projects and this topic will be revisited during the Uk Budget statement in a couple of months.
- • By way of comparison, certain listed vehicles in the areas of private equity and specialised lending currently offer yields of 6%-8%, but careful due diligence and extra considerations of transparency, holding period and liquidity in differing market conditions should be considered.
- • Certain liquid transparent structured products, although special client permission may be required, and full understanding of the maths and counterparty risk are essential. These can be useful for hedging e.g. infinite turbo puts/covered warrants against a fully invested equity portfolio.The currently relatively low VIX level makes put option buying an interesting strategy
GOOD LUCK IN 2020
Disclaimer All recommendations and comments are the opinion of writer. Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion. All investors are advised to conduct their own independent research into individual stocks and markets before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action. You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk The author may have historic or prospective positions in any securities mentioned in the report. The material is provided for information purpose only
Ian Pollard – A Thousand Years Of History, plus #QLT, #DOM, #CCC and #SUN
Today may see the last dying days of a nation whose history was peppered with stirring speeches which matched the mood of the people just at the times when they were most needed, from Agincourt to Shakespeare, the singeing of some minor king of Spains beard, to Waterloo and to Churchill. All men with fire in their bellies who loved their country and would never think of profiteering from a cheap trick. Look at the disgraceful sight of those who now, to their shame and ours, stalk the corridors of power, always ready for the quick buck. Who won the war? Surely it can not have been us, now ready to roll over and make way for a new unelected dictatorship of European bureaucracy, a Europe which would not be recognisable to the people of all countries who fought and died, believing in vain that they were fighting for freedom.
Quilter plc QLT Despite increasingly challenging market conditions as the year progressed. Quilter report record profits with a rise of 11% for the year to the 31st December. Diluted earnings per share rose by 15% and the final dividend is recommended at 3.3p per share in line with the company’s dividend policy. On a like for like basis profit before tax came in at £5m. compared to the previous years loss of £5m.
Dominos Pizza Grp DOM Admits that 2018 was a mixed year. In the UK and Ireland, which account for around 90% of the business, the excellent record of growth continued Internationally, growing pains were experienced which hampered the overall financial performance. Total revenue rose by 14.5% but total profit before tax fell by over 22% and statutory basic earnings per share by 23.7%. The record of increasing dividends continues with a rise of 5.6%
Computacenter CCC Total revenues for the year to the end of December, exceeded over £4 billion for the first time, with Germany delivering yet another record performance as revenue grew by 8.3 per cent. 2018 was a record year for the group in revenue, adjusted operating profit and adjusted diluted earnings per share and the foundations have been paid for further growth in the years ahead.
Surgical Innovations SUN has delivered the strong rebound which was expected in the second half and revenues for the year to the end of December grew strongly by 25% andadjusted profit before tax rose by 30%
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Ian Pollard – Democracy Died Last Night
A referendum is one of the highest and truest forms of decmocracy. That is why they are absolute anathema to the unelected dictators of Brussels who would not recognise an election if they saw one staring them in the face. That is why the EU demagogues, those of them who remain sober and capable of standing up, have forced one European country after another to reverse the result of every referendum they have held. And now we have joined them in disgrace, as the destroyers of democracy. The British who have one of the longest histories of parliamentary democracies in the world, have seen their MPs refuse to accept the will of the people and overturn the common decision reached two years ago that there was a majority in favour of Brexit.
It matters not whether that majority was right or wrong. It is the principal which matters. The people were not only allowed to decide, they were asked by Parliament to decide. The government then descended into chaos as MPs began to jockey for position. Ministers abandoned their posts almost every week, looking for aggrandisement and opportunites for self advancement. Led by the weakest leader the country has ever seen since King Harold failed to turn the tide at Hastings in 1066, we became a laughing stock throughout Europe as country after country sought to avenge slights, real or imagined, such as freeing them at great cost from the horrors of fascist domination, with which so many of them happily collaborated.
The jostling for position amongst ministers over the past two years has been a disgrace. They resigned from government one day as a matter of principal, only to rejoin it the next day as they saw better opportunities to get higher up the ladder before they finally brought about the collapse of the government of which they were supposed to be such loyal members.
Ministers have never been so happy as they day on which they realised that Brexit meant the end of Human Rights legislation in the UK. Ministers could not hide their joy as they saw a possible end to the European court, little realising that before we joined Europe, we were the only country in Europe which had no statutory human rights. Did these empty headed numpties want to see Maggie Thatchers mounted police literally riding down unarmed miners fleeing from them across the fields of Orgreave, Did they really want to see Arthur Scargills hordes closing down pits, and power stations and much of British Industry as he plunged Britain into the darkness of the three day week and saw Downing Street as his weekend holiday home..Their faces lit with glee as they saw the emasculation of the European court. The very same Europan court which has just ordered thousands and thousand of judges to be restored to the positions from which newly elected governments in Poland and Hungary had illegally removed them.
There was far more to Brexit than trade and economics. The deliberate trampling down of the democratic rights of the British people in last nights embarassing farce puts those responsible on the same level as the unelected bureaucracies of Brussels and the toothless gravy trainers of Strasbourg, Brexit is now dead.
Ian Pollard: Cloud Cuckoo Land Is Never Empty
2018 was quite a good year for the self important types who could not resist making fools of themselves in the full gaze of the public. The overall group winner of the year award must go to company directors and CEOs who have provided us with endless hours of amusement as they have literally tied themselves in knots trying to convince us that the absolutely disastrous results which their companies have produced under their grossly incompetent leadership are really a good thing.
The examples are legion but a favourite is the self deluded belief that the continuing collapse in sales has been a blessing in disguise, because it led to a sharp fall in costs which enabled the company to increase its dividend.
But for the mindless contribution from the country’s boardrooms, breakfast time business news would never be the same.
Shortly before Xmas Government ministers woke up to the opportunities they were missing and the votes they were losing, with their failure to take advantage of the Gatwick airport drone scandal. There was the Essex police making a ham fisted attempt at policing Essex and arresting innocent citizens in the process, when Ministers woke up and discovered there was at last a major scandal in the country for which they had no responsibility whatsoever. What a golden opportunity. Essex police are incompetent, they screamed. Essex police are making a mess of it they brayed, even, Essex police should be removed from the investigation and Ministers be put in charge.
Now hang on a bit. Ministers put in charge of a major investigation which the police had made a mess of? Ministers? These are the people, who brought you Brexit. These are the people who wanted customs posts in the Irish Sea, the uprooting of expats who had built new lives all over Europe and of Europeans who had been happily settled in the UK for years.Turn the south of England into a lorry park? Certainly sir. That shouldn’t be a problem They could not resist jumping on a bandwagon they would fall off at the first jolt. – all for a bit of self serving political advantage. They could not run a whelk stall, never mind Brexit and they claim they should be handed such responsibility.
Fortunately cloud cuckoo land is never empty.
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Ian Pollard – A Nightmare For Europe
When will they ever learn ? This is the week when European leaders suddenly woke up to realise they had created their own nightmare situation in which they had lost the Brexit argument. The UK was back once again in charge of of Europe. You can humiliate British politicians, they fully deserve it. but what you cannot do is to humiliate the British people. for having exercised their right to hold a referendum and then dare to stick to the result. You can not bully the Brits as if they were the Danes or the Irish, or even the French.
The Eurocrats stood no chance of forcing the UK into holding a second referendum so that it produced the “correct” result, namely the one demanded by Brussels. And who are these so called leaders who strut the European stage. First and foremost there is Barnier who can not stop himself from planting sloppy wet kisses on the cheeks of men he hardly knows and then engaging in a form of bodily contact with females, he knows even less, uninvited contact which nowadays would pass in most countries as a form of abuse. His main problems are his ability to remain upright on occasions and to speak without slurring his S’s. This is becoming so bad that his office has to come to his defence and provide excuses for his outlandish behaviour because he appears incapable of providing his own. I mean it is not as if he has a drink problem is it?
The Italians most popular politician is a comedian and he is really funny unlike Barnier who is just an embarrasment.
From Ireland to Hungary the antics of Brussels are endless, Who on earth dreamt up the idea of having customs posts in the Irish Sea. Has Brussels not woken up to the reality that it can be quite seriously wet in there on occasions.
How many Euro states have adopted the latest Olympic sport of sacking their leading judges because they keep bringing in the wrong verdicts. Even Spain that hotbed of democracy has now gone as far as locking up some of its leading politicians, apparantly without a trial, so far, let alone a fair one. Poland forced ten of its top judges into early retirement during the summer until the highest court in Europe ordered their re- instatement, a decision for which they deserve much credit. The success of Viktor Orban, Hungary’ fascist leader, saw many of that countrys 3,000 judges begin to tumble and the courts being systematically packed with loyalists, loyal to Viktor Orban that is.
One weakness of the Brits position is the glee with which our politicians embraced the demise of the European court. They could not wait to start dismantling the legislation which has given us all the protections which we now enjoy. All of our human rights in the UK emanate from Europe. Before the EU we had the weakest human rights in Europe. We had no written constitution and as far as the courts were concerned they were emasculated because there was no human rights legislation for them to enforce. The welcome to the new order was a stain on our democracy for which many of our leading politicians should be ashamed.
Now however the people of the UK have woken up. It is not just a case of European leaders lambasting the UKs politicians. They have in the past few weeks chosen to humiliate the British people for the decision they took. Like her or not our Prime Minister is our elected leader carrying out the wishes of the electorate. EU leaders have deliberately chosen to humiliate her in public in the belief that she is so weak that they have already won the battle. The realisation this week that she has fought back and outwitted them, is now sending shock waves through Brussels and the capitals of Europe. .
Democracy in Europe is crumbling rapidly. Let them go their own way.
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Ken Baksh – October market report…..trickery or treats!
October 2018 Market Report
During the month to September 30th, 2018, major equity markets again displayed a mixed trend, rising by 1.19% overall and the VIX index fell. There continued to be an abundance of market moving news over what is traditionally a quieter month, at macro-economic, corporate and political levels.
The European Central Bank appeared to become more certain of removing QE over coming quarters, with more hawkish policy statements, but delaying any interest rate increase until 2019, while economic news seems to have been more upbeat than in recent months, particularly in Germany. Political events were not in short supply, and in Turkey for example, continued to affect bond and currency markets while Italian bonds and the anniversary of the Greek rescue package also attracted headlines. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Turkish stand-off, NAFTA follow up and North Korean meeting uncertainty as well as Trump’s growing domestic issues, ominously becoming higher profile, before the important November midterm elections. US economic data and corporate results so far have generally been above expectation and the official interest rate was increased again in September to a range of 2%-2.25%. In the Far East, China flexed its muscles in response to Trump’s trade and other demands while relaxing some bank reserve requirements. Japanese second quarter GDP growth appeared higher than expected and Shinzo Abe consolidated his political position, both perceived as market friendly, and the ten-year bond continues to trade near the recent yield high. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation higher than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. Recent retail data shows mixed trends, some “weather related”. Market attention, both domestic and international is clearly focussed on ongoing BREXIT developments and their strong influence on politics.
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.3% to 3.6% area, a little lower than January forecasts. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major recent feature recently, although lagging the yen year to date. Emerging market currencies have had a particularly volatile period. Government Bond holders saw small price moves over the month. Of note was the continuing rise in the Japanese Government Bond Yield, albeit from a low level. Oil was again about the only major commodity to show a price gain in September.
At the end of the nine -month period, “mixed investment” unit trusts show a very small positive price performance, with technology and most overseas equity regions showing above average performance, and bonds, Asia excl-Japan and Emerging markets in negative territory. Source: Morningstar
Equities
Global Equities displayed a mixed performance over the month of September, the FTSE ALL World Index gaining 1.19% in dollar terms and showing a small positive return since the beginning of the year. The UK broad and narrow market indices lagged other major markets over the month in local terms and have underperformed in both local and sterling adjusted values from the end of 2017 by 4.4% and 9.3% respectively. Europe ex-UK also declined while USA and Japan outperformed. The NASDAQ index, driven by technology companies, remains by far the best asset class year to date. In sterling adjusted terms, America, helped to a large degree by the tech sector, has jumped to the top of the leader board year to date, with Japan following. The VIX index fell 5.22 % over the month, and at the current level of 12.54 is up about 22% from the year end.
UK Sectors
Sector volatility remained high during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity. Banking stocks fell significantly while oil and gas gained 1.8%. Over the nine-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by around 40%.
Fixed Interest
Gilt prices fell over the month and are now down 3.55% year to date in capital terms, the 10-year UK yield standing at 1.46% currently. Other ten-year yield closed the month at US 3.06% Japan, 0.09% and Germany 0.46% respectively. UK corporate bonds fell, ending August on a yield of approximately 2.74%. Amongst the more speculative grades, emerging market bonds continued to fall in capital terms. Floating rate bond prices outperformed gilts over the month and both of my recommended funds are showing significant capital and total return outperformance of conventional gilts year to date. I continue to strongly recommend this asset class. The monthly dip in the convertible fund may provide a buying opportunity, with a stable running yield near 5% See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a slightly weaker Yen was the monthly feature largely on political and economic developments. Sterling showed just small moves against the major currencies over the month. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by over around 9.3% since the end of 2017.
Commodities
A generally weak month for commodities with the notable exception of oil, largely on supply issues. Over the year so far, oil, wheat and uranium (renegotiation of longer-term contracts) have shown the greatest gains.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will be accompanied by the onset of the third quarter corporate reporting season, resulting in an abundance of stock moving events. With medium term expectation of rising bond yields, equity valuations and fund flow (both institutional and Central bank) dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Third quarter figures (and accompanying statements) will be subject to even greater analysis after the buoyant first half year, and the growing list of headwinds. Additional discussions pertaining to North Korea, Russia, Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies, especially with the November mid-term elections edging closer. In Japan market sentiment may be calmer after recent political and economic events although international events e.g exchange rates and tariff developments will affect equity direction. European investment mood will be tested by economic figures, EU Budget discussions, Italian bond spreads, Turkish and Spanish politics, and reaction to the migrant discussions. It must also be remembered that the QE bond buying is being wound down over coming months. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal third quarter trends are closely analysed. Brexit discussion has moved to a new level, discussions, and several target EU/ BREXIT dates and the Conservative Party Conference, starting today, will inevitably lead to speculation of all sorts. The current perceptions of either a move to a “softer” European exit, or a “no deal” will undoubtedly lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations, international pressure e.g Japan, or directly e.g. Bae, BMW,Toyota, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity, particularly acute for longer maturities. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are also winding down.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Facebook and Twitter. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the current period.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 13.54 appears rather low in the context of potential banana skins.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M,BHS,Homebase- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Over recent months, value stocks have been staging a long overdue recovery compared to growth stocks. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda), leisure (Whitbread),media (Sky),mining (Randgold) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 and 2018 to date outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar (last week) reinforce my optimism for the sector. I will be writing on Bluefield shortly. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g. (Hammerson, Intu). The outlook for some specialist sub sectors e.g. health, logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
- I suggest a very selective approach to emerging equities and would continue to avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode g. Venezuela or entering an uncertain election process e.g. Brazil. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full fourth quarter report will shortly be available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. Feel free to contact regarding any investment project.
Good luck with performance! Ken Baksh 01/10/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh: August Investment Review….Stay with equities versus bonds….for the time being!
August 2018 Market Report
During the month to July 31 st, 2018, major equity markets displayed a stronger trend and the VIX index fell significantly, indicative of a preference for greater risk-taking. There continued to be an abundance of market moving news over the period whether at corporate, economic or political level.
The European Central Bank appeared to become more certain of removing QE over coming quarters but delaying any interest rate increase until 2019, while economic news was generally dull. Political events were not in short supply, and in Turkey for example, dramatically affected bond and currency markets. European leaders and policy makers are having an uncharacteristically active summer, with debates on US tariffs, immigration, Japanese trade pact and post Brexit implications just four of the more topical issues. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Iranian nuclear/sanctions, NAFTA friction and North Korean meeting uncertainty as well as domestic issues. Economic data and corporate results so far have generally been above expectation. In the Far East, North and South Korea made faltering progress towards an agreement while China flexed its muscles in response to Trump’s trade and other demands and relaxed bank reserve requirement late in the month. Chinese economic growth slowed slightly while there was a little speculation that the Bank of Japan may tweak it’s QE programme. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. The data and ongoing Brexit confusion appear to be keeping the MPC in a wait and see mode regarding interest rates, although mathematically the’ hawks’ are gaining ground. An important day for MPC policy statements tomorrow (2nd August).
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.3% to 3.6% area, a little lower than January forecasts. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major recent feature recently, although lagging the yen year to date. Government Bond holders saw modest price falls over the month. Of note was the large jump in the Japanese Government Bond Yield. Oil was the main commodity feature during the month, falling after the long rally seen so far this year. Tariffs, whether actual or rumoured, are continuing to bear on certain metals and soft commodities, the latter also responding to extreme weather conditions. The price of wheat for example has climbed nearly 30% so far this year.
At the end of the seven-month period, “mixed investment” unit trusts show a very small positive price performance, with technology and most overseas equity regions showing above average performance, and bonds, Asia-excl Japan and Emerging markets in negative territory. Source Trustnet:01/08/2018
Equities
Global Equities rose over the month the FTSE ALL World Index gaining 3.43% in dollar terms and now showing a positive return since the beginning of the year. The UK broad and narrow market indices lagged other major markets over the month in local terms and have underperformed in both local and sterling adjusted values from the end of 2017.Asia and emerging markets were the relative underperformers and declined in absolute terms while Europe jumped quite strongly, although the DAX Index is still down in absolute returns since the beginning of 2018. In sterling adjusted terms, America has jumped to the top of the leader board year to date, largely helped by the technology component (NASDAQ up 10.9%) and a recently strengthening dollar. The VIX index while still up about 30% from the year end, dropped 13% over the month, as “risk on “trades returned.
UK Sectors
Sector volatility picked up during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity and ex-dividend adjustments. Utility stocks fell over 4%, while pharmaceuticals gained 5.8 %, largely on encouraging results and lingering corporate activity. Over the seven-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by nearly 33%.
Fixed Interest
Gilt prices fell marginally over the month and are now down 1.64% year to date in capital terms, the 10-year UK yield standing at 1.39% currently. Other ten-year yield closed the month at US 2.97% Japan, 0.06% and Germany 0.33% respectively. UK corporate bonds remained broadly unchanged, ending July on a yield of approximately 2.75%. Amongst the more speculative grades, emerging market bonds fell while US high yield rose, in price terms. Floating rate and convertible bond prices showed mixed performance over the month. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger dollar was the major monthly feature rising largely on relative economic news. Sterling fell versus the dollar while rising against the Yen and Euro. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by over 3% since the end of 2017.Just over two years since the BREXIT vote, the FTSE has risen by about 19% compared with the 32% gain in sterling adjusted world indices.
Commodities
A generally weak month for commodities with the notable exception of some of the softs, the latter largely reflecting weather conditions! Over the year so far, oil seems to be stabilising over $70, while gold, falling on the month and year-to date languishes at around $1223 currently.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while early second quarter company results will likely add some additional volatility. With medium term expectation of rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Additional discussions pertaining to North Korea, Russia, Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating. It will be interesting to see if there is any follow through from recent BoJ speculation regarding bond yield policy. Recent corporate governance initiatives e.g. non-executive directors, cross holdings, dividends are helping sentiment. European investment mood will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and reaction to the migrant discussions. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. The current perception of a move to a “softer” European exit will inevitably lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations or directly e.g. Bae, BMW, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are expected to wind down later this year.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Facebook and Twitter. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the current period.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 13.23 appears rather low in the context of potential banana skins.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g(Hammerson,Intu). The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
- I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full third quarter report is available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Good luck with performance! Ken Baksh 01/08/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh: July Investment Report – Bumpy ride ahead…..Hang on to your hats!
July 2018 Market Report
During the month to June 29th, 2018, major equity markets displayed a mixed trend, dropping overall and with considerable individual market and day to day variation. There was an abundance of market moving news over the period whether at corporate, economic or political level. The European Central Bank appeared to become more certain of removing QE over coming quarters but delaying any interest rate increase until 2019, while economic news was generally dull. Political events in Germany, Italy, Spain and Turkey influenced bond spreads and Forex markets. US market watchers continued to grapple with ongoing tariff discussions, Iranian nuclear/sanctions, NAFTA friction and North Korean meeting uncertainty as well as domestic issues. In the Far East, North and South Korea made faltering progress towards an agreement while China flexed its muscles in response to Trump’s trade and other demands and relaxed bank reserve requirement late in the month. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but poor revised GDP first quarter figures. The data and ongoing Brexit confusion had forced the MPC to keep interest rates on hold at the previous meeting although the MPC appears to be turning more hawkish.
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.5% to 3.9% area although recent sentiment indicators indicate some current economic softness. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major feature over June 2018, although lagging the yen year to date. Bond holders saw modest gains over the month, largely for haven reasons, although the year to date development has seen UK and US 10-year yields rise, while those in Germany and Japan have fallen. Oil was the main commodity feature both before and after the June OPEC meeting.
Interestingly, at the half year stage equity indices, gilts and sterling adjusted world equities have essentially delivered a flat performance, a buoyant first quarter almost exactly cancelled out by a weak second quarter, and the FTSE Private Investor Index Series also shows zero or slightly negative returns for the six-month period (Source FT,30/06/2018). In topical football parlance “all to play for in the second half”.
Equities
Global Equities fell over the month the FTSE ALL World Index dropping 1.61% in dollar terms and now showing a loss of -2.40% since the beginning of the year. The UK broad and narrow market indices outperformed other major markets over the month in local terms, although underperformed in sterling adjusted values from the end of 2017. Emerging markets, Germany, and Asia ex-Japan were the relative underperformers and declined in absolute terms while the S&P and NASDAQ showed absolute and relative gains. In sterling adjusted terms, Japan and America remain the outperformers on year to date performance amongst the major markets while the UK and parts of Europe remain in negative territory. The VIX index while still up about 50% from the year end, seems to have stabilised, with occasional short upward spikes. At the time of writing, the absolute VIX level stands at 15.22, far from the 9-10 level that prevailed much of last year and reflecting a level of uncertainty but far from the extreme levels experienced during major market meltdowns of the past.
UK Sectors
Sector volatility was more muted during the month, influenced by both global factors e.g. sanctions, tariffs as well as corporate activity and ex-dividend adjustments. Oil and gas and utilities led the sectors over the month, the former also one of the top sectors year to date while banks, life assurance and property all suffered monthly relative declines. The general retail area continues to experience profit warning and downgrades and is understandably one of the weaker stock market sectors so far this year.
Fixed Interest
Gilt prices fell marginally over the month and are now down 0.98% year to date in capital terms, the 10-year yield standing at 1.31% currently. Other ten-year yield closed the month at US 2.83% Japan, 0.02% and Germany 0.26% respectively. UK corporate bonds also fell marginally in price terms over the month, ending June on a yield of approximately 2.75%. Amongst the more speculative grades, emerging markets stage a bounce in prices after several weak months. Floating rate issues continue to outperform gilts year to date in both capital and total return terms. Preference shares have recovered from the Aviva U-turn and remain attractive fixed interest alternatives. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger dollar was the major monthly feature rising 1.43% in trade weighted terms, largely on relative economic news The Japanese yen and the British pound both fell, the latter being very sensitive to ongoing Brexit discussion. As mentioned above, the FX moves are becoming a growing factor in asset allocations discussions. Year to date the Japanese and American equity markets are outperforming the UK and European benchmarks in sterling terms.
Commodities
A generally weak month for commodities with the notable exception of oil receiving a boost from the recent OPEC meeting. Gold and other precious metals fell, as did some of the softer agricultural products after previous monthly gains. At the half year stage, oil,wheat and soya are amongst the few commodities showing absolute price gains.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while early second quarter company results will likely add some additional volatility. Ongoing corporate activity will however remain at a high level, following the record deal flow reported in the first half of 2018. With medium term expectation of rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Additional discussions pertaining to North Korea, Russia (July 16th), Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating, the recent yen weakness being a positive factor for equity investors. Recent corporate governance initiatives e.g non-executive directors, cross holdings, dividends are also helping sentiment European investment mood will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and reaction to the migrant discussions. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. The current perception of a move to a “softer” European exit will inevitably lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations or directly e.g. Bae, BMW, Honda,Ryanair is becoming increasingly impatient, and vocal.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the first quarter of 2018, although EY noted that the number of UK profits warning were about 10% higher than the previous year at the nine-month stage, mostly in the home improvement, motor, government supply, restaurant and other retail areas.US earnings rising at about 22% during the first quarter, will face a slowdown once the one-off factors dissipate.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile, and holding greater than usual cash balances may be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields roughly the same as the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly). A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,H&M- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda) is likely to increase in my view.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017, and 2018 to date outperformance. Smaller cap/ domestic focussed funds may out perform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn / Carillion inspired weakness (see note).
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments. The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note, after management update last week.
- I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full third quarter report will soon be available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Good luck with performance! Ken Baksh 02/07/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ian Pollard – Old Year jottings..New Year fears
The city still slumbers on and only next week will it begin to wake up to the first of the disasters which it will have to face in 2018. That will naturally be the Nightmare on High Street as our major retailers also wake up to the fact that whilst Britain was still playing at being a nation of shopkeepers, the rest of the world had been taken over by computers which are even now threatening to close down our favourite shopping malls and turn them into huge depots for the storage and distribution of goods which you can now select from the comfort of your own home, without having to suffer the indignities heaped on the public by our ancient creaking transport systems which are as useful in transporting people as the police are in attempting to investegate crime.
The much awaited Christmas and new year sales figures look like they could be fairly horrific unless the media has yet again been trying to spread fear and trepidation as the best way it knows of increasing sales. There are even ugly rumours that the BBC is to start employing reporters to see if it can get some reasonably up to date news on to its internet pages.
The real horror story for 2018 is likely to be Brexit with the Brussels bullies heaping more insults, lies and even threats not on to our politicians but on to the British people themselves because they dared to vote in a democratically held referendum to exit Euroland by methods which were and still are completely legal. So successful has the European campaign of menace and ill will become that we have lost our stiff upper lips and started to tremble at the thought that leaving this sad and pitiable shambles may be extremely bad for our country and forgetting that for most people we voted to leave because we were fed up with dictatorial rule from bosses in Brussels who didnt know and could not care less what a ballot box was.
Much of Europe agreed with us except for the growing list of countries which were electing extreme right wing politicians determined to take Europe back to the dark ages.of the nineteen thirties, even to the introduction of so called camps for immigrants.What is the point of insisting that Greece with the longest borders in Europe must take responsibility for hundreds of thousands of illegal immigrants and then screaming at this impoverished bankrupt country for spending money it did not have in providing food and shelter for these very same immigrants. Levels of double think which make Geoge Orwell look like an amateur.
Our own politicians still hankering after the European gravy train, wobbled” and did so in a way which would have had Thatcher standing like Boadicea, routing her enemies single handed with mighty swipes of her handbag. Instead we had Teresa May and her trembling cohorts, caving in to every threat and unjustified demand emanating from Brussels. If we stay in, in the face of these odious bullies,we will deserve, everything they throw at us. Perhaps Chamberlain should be resurrected from the grave in a last desperate attempt to give us backbone and strength.
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