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Ken Baksh December 2019 Market Report

2nd December 2019 / Leave a comment

During one-month period to 30th November 2019, major equity markets registered gains. The FTSE ALL-World Index rose by 2.8% over the period, now up by 21.3% since the beginning of the year. The VIX index fell by 8% to end the period at 12.44, a rather “complacent” level by historic standards. Most fixed interest products fell, in price terms, during the month. Sterling was stronger versus the Yen, but otherwise moves were small. The Chinese Renminbi stayed reasonably stable versus the US dollar as trade talks continued. Commodities displayed a mixed price performance overall.

The European Central Bank saw changes in leadership although the debates about reviving growth,environment,pan-European initiatives etc are expected to continue. At the time of writing Germany appears to be on the brink of a recession and calls for fiscal loosening are increasing. Political events have featured further signs of discontent in Germany(coalition split?) and France, renewed Spanish election speculation, and inevitable squabbling re the EU (ex-UK?) Budget. US market watchers continued to grapple with ongoing tariff discussions (China, and prospectively Europe), Federal Budget concerns, Iranian sanctions, Venezuela, North Korean meeting stalemate and Trump’s personal issues (impeachment?). US economic data has indicated a solid consumer trend although relatively buoyant first quarter GDP growth figures did include a large element of inventory building and more recent official figures have been mixed. Corporate results/forward looking statements have taken on a more cautious tone, especially related to tariff developments (actual or rumoured). 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 the recent meeting. In the Far East, China flexed its muscles in response to Trump’s trade and other demands, but anecdotal evidence points to a steadily weakening economy. Recent data releases pointed to 6.0% quarterly GDP growth with risks growing to the downside. Hong Kong remains still very volatile. Japanese economic growth was downgraded slightly to 0.8%, mainly on a weaker trade performance. The recent Upper House election result confirmed the LDP current strong position while at the Bank of Japan meeting, the current easier fiscal stance was reconfirmed, although the scheduled October 1st VAT increase has been applied.

The UK continued to report somewhat mixed economic data with stable developments on the labour front but poor corporate investment , volatile retail sales, inflation a little higher than expected, weak relative GDP figures and deteriorating property sentiment, both residential (esp London) and commercial (especially retail). Figures announced just yesterday (30th November) by the CBI show historic and prospective output falling by about 10%.Business and market attention, both domestic and international, is clearly focussed on ongoing BREXIT deliberations under new Prime Minster, Boris Johnson. Both the Chancellor and Bank of England Governor have made frequent references to the unsettling effects of any unsatisfactory Brexit outcome, as have a growing number of business leaders and independent academic bodies. The actual situation remains very fluid, and at the time of writing, an election looms in less than a fortnight. Political factors aside, economic and corporate figures will inevitably be distorted over coming months, and it would not be a complete surprise if UK entered a technical recession soon. GDP growth of a mere 1% or less for full year 2020 looks very likely.

Aggregate world hard economic data continues to show 2019 expansion of around 3.0%, although forecasts of future growth continue to be reduced the leading independent international organizations. As well as slowing projections in the developed markets of USA, China and Europe, a number of developing economies are experiencing headwinds for a variety of reasons e.g. India and much of Latin America There appears to be a growing chorus of further 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

Equities

Global Equities rose by 2.8% over November, the FTSE ALL World Index now showing a gain of 21.25% since the year end, albeit following the very weak last quarter of 2018. The UK broad and narrow market indices, both advanced by under 2% over the monthly period, lagging world equities in sterling adjusted terms by about 10%, since the beginning of 2019. Along with the UK, Asia and Emerging Markets lagged during the month while USA and Continental Europe showed above average gains. The VIX index fell, reflecting a greater risk-taking mood to a level of 12.44, and down 51.06% since the beginning of the year.

UK Sectors

A mixed month for Uk sectors with some of the more traditionally “defensive” sectors such as pharmaceuticals, telecoms and utilities lagging while industrial, consumer and real estate stocks rose by over 4%. Over the eleven -month period, industrial shares are showing an absolute gain of over 24% while the worst performing UK sectors, oil, banks and telcos are still in negative territory.

Fixed Interest

Gilt prices fell over the month, the 10-year UK yield standing at 0.56% currently. Other ten-year yields closed the month at US, 1.75%, Japan, -0.14%, and Germany, -0.36%. UK corporate bond prices also fell slightly over the month, and more speculative grades showed larger price falls. Floating rate bonds rose while the favoured convertible bond was redeemed, as expected, after showing a year to date return of about 10%. 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 6%) from over 10 different asset classes is also available to subscribers.

Foreign Exchange

Sterling was the main mover amongst the major currencies during November largely on political news. Since the beginning of the year, sterling has appreciated more than 5% against the Euro. As ever, FX decisions remain crucial in determining asset allocation strategy. See my recent note regarding various Japanese strategies.

Commodities

A mixed month for commodities on global growth concerns and supply shocks. The oil price advanced, while gold fell 2.5%, and industrial metals were a little firmer. Palladium advanced 2.52% taking its year to date gain to 44.3%

Looking Forward

Over the coming months, geo-political events and Central Bank actions/statements meeting, will continue to dominate news headlines and market sentiment, in my view. In contrast to previous years I would expect December to be particularly “noisy” in market terms. To some extent, the slower economic growth forecasts that are appearing, will inevitably lead to some scale-back in corporate profit projections, although there may be offsetting fiscal and monetary effects. With growing numbers of government bond yields in negative territory, calls for more fiscal action will intensify.

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, 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. Additional discussions pertaining to North Korea, Russia, Hong Kong, Ukraine, Iran, and Trump’s own position(impeachment) could precipitate volatility in equities, commodities and currencies. 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. Economic data, has, pointed to sluggish growth, with persistently low inflation and a trade war with USA has been averted (for the time being). There is increasing speculation that China may announce more stimulative measures and key $/Yuan exchange rate levels are being watched closely. European investment mood will be tested by generally weakening economic figures and an increasingly unstable political backdrop.

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 and any economic upgrade over current quarters appear extremely unlikely. The UK Treasury and the MPC have both produced rather negative economic medium-term projections, whatever the Brexit/political outcomes! 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. There could be scope for extreme sector/style/size volatility during the immediate Election period…providing risk….and opportunity.

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 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. slowing economic and corporate growth and limited monetary response levers, there are many localised events e.g. UK, election and US tariff discussions, political uncertainty, that could upset many bourses, some still relatively close to recent record levels.

I have kept the UK at an overweight position on valuation grounds. Full details are available in the recent quarterly review. However, extra due diligence in stock/fund selection is strongly advised, due to ongoing macro-economic and political uncertainty. Sterling volatility should also be factored into the decision, making process.
Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, Telco’s and Utilities have attractions relative to certain cyclicals, though watch regulatory concerns, 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. Differing electoral outcomes are likely to impact sectors,styles,size in many ways.
Continental European equities are preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments and slowing economic growth need to be monitored closely. I suggest moving the European exposure to “neutral “from overweight. 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, despite the 2017 and 2018 outperformance relative to world equities. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.FX will play an increasing role in the Japanese equity decision.
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 exhibited their defensive characteristics during 2018 and are still favoured as part of a balanced portfolio. Reference could also be made to the renewable funds (see my recent solar and wind power recommendations) which continue to outperform in total return terms. Selected infrastructure funds are also recommended for purchase but be aware of the political risk. New issues in this area e.g. Aquila and JPM are likely to move to larger premiums.
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). Subscribers may read more on this subject in my latest quarterly review. One possible exception to the sentiment above is the growing attractiveness of certain assets to overseas buyers. The outlook for some specialist sub sectors e.g. health (PHP equity and bond still strongly recommended), logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property plays e.g SERE.
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. It is worth noting that several emerging economies in both Asia and Latin America have shown first quarter 2019 GDP weakness even before the onset of any possible tariff 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. 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.

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 December 2019

Ken Baksh: August Investment Review….Stay with equities versus bonds….for the time being!

2nd August 2018 / Leave a comment

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 (2^nd 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

kenbaksh@btopenworld.com

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!

2nd July 2018 / Leave a comment

July 2018 Market Report

During the month to June 29^th, 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 16^th), 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.

Phone 07747 114 691

kenbaksh@btopenworld.com

Disclaimer

All stock recommendations and comments are the opinion of writer.

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 – Could England win?……and Russia?

25th June 2018 / Leave a comment

JP Morgan Russian Securities PLC –GB0032164732

Never a market or currency for the faint-hearted, but could possibly all the current news re volatile oil price,sanctions, questionable corporate governance and uncertain international political relations be in the RUSSIAN price? I believe that some of the more positive factors, itemised below, have been ignored and that some exposure, perhaps through the fund mentioned below could be added at this stage as part of the emerging market allocation.

Recent macro statistics have been more stable with steady increases in retail sales, industrial production, construction and corporate lending. GDP growth forecasts are in the 1.5-2.0% area for 2018
The CBR is expected to continue cutting interest rates this year and next. Inflation is retreating, from a high level, and surpluses in both current account and Budget are in stark contrast to several other “emerging markets”.
Within the banking sector, credit growth is recovering, and non-performing loans appear to have peaked.
Recent OPEC/Russia “agreement” seems likely to keep the oil price at a level highly beneficial to major oil companies and State coffers. Energy companies make up more than half of those in the MSCI Russia Index.
Earnings per share growth is exceeding expectations.
Depending on index sample chosen, a P/E ratio between 6 and 7 and Price Book ratio at approximately 0.7 puts investment ratios are at a considerable discount to the emerging market universe, let alone the global market average. Recent Bestinvest research puts the global equity PE at about 18.5, roughly three times as much as Russia
The total Russian market offers a yield of about 5.7%(2.6% global average, source:Bestinvest) as earnings and pay-out ratios continue to rise. According to VTB Bank projections in January 2018, dividends expressed as a percentage of State government revenues are expected to rise from 1% to about 3% between 2016 and 2019.
Institutional investors of Emerging markets funds are starting to carry much higher weightings In Russia, by comparison with markets which may be much more highly rated e.g. India, or in political turmoil e.g. Turkey, or have serious economic problems e.g. Venezuela.
Current emerging market volatility is being exacerbated by withdrawal of dollar liquidity, rising U.S interest rates and a resurgent dollar with Turkey, Brazil,Indonesia,South Africa and Venezuela often being cited as more “fragile”.
Prospective investors could look at individual stocks such as Sberbank and Lukoil or JPM Russian Investment Trust (detailed below). Income seekers may additionally look at the Raven Russia preference share, currently on an 8.1% annual yield, paid quarterly in sterling.

The instrument described below is speculative and can be highly volatile

The investment trust JP Morgan Russian Securities plc is a UK listed investment trust, which provides pure exposure to the Russian economy and, as at May 31^st May, held over 99% of it’s assets in Russian equities.
JP Morgan was an early investor in Emerging Europe and the Middle East, and the Russian team is led by Oleg Biryulyov who has over 20 years’ industry experience.
As at the same date, the Fund’s major holdings were Gazprom (15.3%), Sberbank (12.3%), Lukoil (10.3%), Norilsk (7.1%) and Novatek (6.5%)
Apart from some of the national champions mentioned above, the fund also holds some promising smaller cap ideas including, in the top ten,Ros Agro,a vertically integrated Russian food producer and the second largest player in the domestic pork and sugar markets.
As at 18^th June,the fund had a relatively low gearing of 2.6%.
The trust itself currently trades at 15.6% discount, close to it’s five year low and offers a yield of 4.2%, with the prospect of above average dividend growth.
Clearly the trust will be highly sensitive to ongoing geo-political developments and the oil price but might suit a more adventurous portfolio on the current rating.

http://www.hl.co.uk/shares/shares-search-results/j/jpmorgan-russian-securities-ordinary-1p

https://www.trustnet.com/factsheets/t/hx56/jp-morgan-russian-securities-plc

Ken Baksh

Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.

Disclaimer

All stock recommendations and comments are the opinion of writer.

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 – Brexit worries?…Think instead about European Property play,on a discount with dividend yield over 5%..payable quarterly in Euros,if desired

12th June 2018 / Leave a comment

Schroder European Real Estate Investment Trust-ISIN- Gb00By7R8K77

Launched in December 2015, the Schroder European Real Estate Investment Trust targets growth regions in Continental Europe and aims to provide a regular and attractive level of income together with the potential for long term income and capital growth.

With a certain degree of uncertainty surrounding the UK commercial property market (slowing economic growth, BREXIT) increasing number of investors are looking to continental Europe for their real estate exposure, and the SERE would seem to tick many boxes.

Ideal for an investor seeking above average income, with predominant exposure to European economies, and exhibiting low correlation with several other asset classes.May suit more cautious investor looking for income,paid quarterly, with lower correlation with mainstream bond and equity markets.

Following recent Interim figures published on June 12^th-Hot from Press!

Results released on Tuesday 12^th June, show Net Asset Value increasing 6.1% over the last six months to March 31^st,2018 to Euro 1.39(£1.22), and dividend pay-out moving towards the company target of 5.5% on issue price. The current LTV ratio is 28%, and the company’s weighted interest cost is around 1.3% with a duration of over 6 years. The fund is fully invested in a portfolio with a value more than Euros 237 million and is currently 97% occupied. At current price of 113.5p, the stock trades on a discount to NAV of approximately 7% with a prospective annual yield of 5.4% payable in Euros or Sterling.

Eurozone economic data continues to remain positive, growing faster than the UK over recent quarters and this relative outperformance is expected to continue. Private business surveys point to further growth and property and investment activity remains robust. A recent sample of German companies, for instance, showed rents rising between 4% and 6% over the last twelve months.
SERE invests in cities/regions characterised by large liquid real estate markets such as Amsterdam, Berlin, Hamburg, Munich and Paris where local GDP are outperforming the national averages.
The Trust is managed by Jeff O Dwyer, an experienced real estate investment manager, who is supported by nearly 100 property specialists located in key European hubs. The team see over Euro 2 billion of introductions each month, with the near-term pipeline comprising over Euros 115 million yielding between 5.8% and 7.5%.
The process/risk control involves holding the bulk of the portfolio in stable income producing developments (approx. 70%) while adding a greater capital return component to the other 30% via refurbishments, change of use, lease extensions etc. A large portion of the rents are index linked.
The purchase of a data/mixed user investment in Apeldoorn in February this year, on a very attractive 10% income yield leaves the fund fully invested.
Geographical weighting is currently Germany (22.7%), France (50%), Holland and Spain (27%) by value. Approximately 45% of the property portfolio is represented by offices and 40.3% by retail, the latter predominantly in logistics centres, smaller supermarkets and convenience stores. These figures were effective on March 31, 2018.
The top five properties were in Paris, Seville, Berlin and Biarritz.
Portfolio is almost 100% occupied with a 6.8 years average lease time and net property income yield of 6%

SERE targets a fully covered Euro yield of 5.5%(7.5 Eurocents on a Euro equivalent issue price of Euro1.37). Dividends are declared in Euros, and paid quarterly, with UK shareholders being given the option of sterling or Euro pay-outs. Lease structures vary across Europe, but most typically have some form of inflation linkage, providing support for the target dividend.

Current discount to NAV (Euros 1.347-December 31^st, 2017) represents a good level to be obtaining exposure to mainstream European property.

The portfolio seeks to enhance property returns with a relatively modest level of gearing currently 28% LTV, (35% target LTV). The blended all in debt cost is 1.3% with an average maturity of around 6.5 years.
Closed end fund structure with daily liquidity via a listing on the main market of the London Stock Exchange.

www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SERE/13675397.html

Sources (LSE,company management and Numis Securities)

Ken Baksh

Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.

Disclaimer

All stock recommendations and comments are the opinion of writer.

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: June Investment Report….never a dull moment!

4th June 2018 / Leave a comment

June 2018 Market Report

During the month to May 31st, 2018, major equity markets displayed mixed performance trends overall, and trading remained volatile on a daily basis against a background of significant geo-political, economic and corporate events. The European Central Bank appeared to become more “dovish” following some lower than expected consumer confidence indicators, affecting both equity and currency markets while political developments adversely affected investor sentiment in Italy, Turkey and Spain. US market watchers had an especially busy month with ongoing tariff discussions, Iranian nuclear/sanction friction, North Korean meeting uncertainty as well as domestic issues. In the Far East, North and South Korea made faltering progress towards a meeting while China flexed its muscles in response to Trump’s trade and other demands. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but very poor GDP first quarter figures. The data and ongoing Brexit confusion forced the MPC to keep interest rates on hold. 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 continue to play an important part in asset allocation decisions, the stronger US dollar being the major feature over May,2018, largely on relative economic developments. Bond watchers saw US 10-year yield break 3% before backing off towards the end of the period. Greater fluctuations in bond yields are likely to lead to higher equity volatility going forward. Oil continued to be a strong feature, although at the time of writing, it appears that OPEC and Russian additional supply may be used to bridge the Venezuelan and potentially Iranian shortfall.

Equities

Global Equities fell marginally over the month the FTSE ALL World Index dropping 0.37% in dollar terms and now showing a move of -0.80% since the beginning of the year. The UK broad and narrow market indices outperformed other major markets over the month in local terms. Emerging markets, Asia and Europe were the relative underperformers and declined in absolute terms. In sterling adjusted terms, Japan remains the outperformer on year to date performance amongst the major markets rising by 2.93% in sterling adjusted terms. The VIX index while still up about 50% from the year end levels, fell about 3% in May. At the time of writing, the absolute VIX level stands at 15.4, 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 remained high during the month, influenced by both global factors e.g. sanctions, tariffs as well as corporate activity and first quarter results. Mining was the stand-out sector in May on the positive side, while telecommunication stocks showed sharp declines. Corporate activity and profit warnings e.g. Dixons, continue.

Fixed Interest

Gilt prices rose over the month but are down 0.43% year to date in capital terms, the 10-year yield standing at 1.28% currently. Other ten-year yield closed the month at US 2.86% Japan, 0.01% and Germany 0.0.28% respectively, the latter receiving buying interest in the face of Italian and Spanish political uncertainty. UK corporate bonds rose marginally in price terms over the month. Amongst the more speculative grades, there continue to be mixed trends, with emerging market bonds, in local currency terms, showing price falls in absolute terms and yet the US lower grade bonds were moving in the opposite direction. 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 1.65% in trade weighted terms, largely on relative economic news The Euro was the major faller on the other hand, on largely political developments as well as some softer economic data. As mentioned above, the FX moves are becoming a growing factor in asset allocations discussions. Equity markets in sterling adjusted terms are showing marginal absolute gains year to date, apart from the FTSE 100.

Commodities

A very mixed and volatile month for commodities with significant impact from geo-political events. Oil, for example reacted positively to certain shut downs as well as impending Iranian sanction discussions and increasing US/Venezuela tensions. Gold fell slightly during May, as well as the other precious metals. Most of the major global mining groups have just reported figures and rising commodity prices, capital discipline, balance sheet transformations and higher shareholder pay-outs have been a common theme. Soft commodities have also enjoyed strong price gains since the start of the year, wheat, corn and soya for example showing price gains of around 22.95%,12.95% and 19.93% respectively.

Looking Forward

Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while first quarter company results will fade in the memory. Ongoing corporate activity will however remain at a high level. With rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern. Two areas of current debate are the level at which certain more cautious US investors switch form equities to bonds and whether value stocks will outperform cyclicals from these levels.

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 (June 12^th), 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. European sentiment will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and positioning ahead of Greek rescue package deadlines. Hard economic data (as opposed to sentiment surveys) 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. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors.

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. Interestingly, among major markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. However, 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.

UK warrants a neutral allocation after the strong relative bounce experienced in May on the back of stronger oil price, sterling weakness and corporate activity. Within the UK equity space, I suggest moving the balance of small/large cap stocks now back to neutral following both the outperformance of the former and the volatility in the currency (part post-election, part BREXIT). 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 (Carphone Warehouse- latest casualty) 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. 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. 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 second quarter is available 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 02/06/2018

Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.

Phone 07747 114 691

kenbaksh@btopenworld.com

Disclaimer

All stock recommendations and comments are the opinion of writer.

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 – May Investment Report-Lot’s going on!

2nd May 2018 / Leave a comment

May 2018 Market Report

During the month to April 30^th, 2018, most major equity markets enjoyed gains, although trading remained volatile against a background of significant geo-political, economic and corporate events. The European Central Bank appeared to become more “dovish” following some lower than expected consumer confidence indicators, affecting both equity and currency markets while quarterly corporate results were generally positively received. US market watchers had an especially busy month with tariff discussion (aluminium, steel, China, Russia), Syrian military involvement, some stock specific events such as Facebook, continuing White House “revolving door policy” as well as Donald Trump’s personal issues. In the Far East, North and South Korea made conciliatory advances, and though very early days, the largely symbolic meeting was well reported and received. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but very poor GDP first quarter figures. The probability of a May interest rate hike has been reduced and economic downgrades for for the full year seem inevitable. 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. Fluctuating currencies continue to play an important part in asset allocation decisions, the US dollar being the major feature, largely on relative economic developments. Bond watchers saw US 10-year yield hit 3% before backing off towards the end of the period. Greater fluctuations in bond yields are likely to lead to higher equity volatility going forward. It is also worth mentioning the effect of geo-political actions on commodities with disproportionate moves in alumina, aluminium, soya and oil, during April, for example.

Equities

Global Equities rose over the month the FTSE ALL World Index gaining 1.18% in dollar terms and now showing a move of -0.43% since the beginning of the year. The UK broad and narrow market indices outperformed other major markets over the month in local and sterling adjusted bases. Emerging markets were the relative underperformers and declined in absolute terms. In sterling adjusted terms, Japan remains the outperformer on year to date performance amongst the major markets although still marginally in negative territory. The VIX index while still up about 55% from the year end levels, fell about 20% in April, somewhat surprisingly in my view. At the time of writing, the absolute VIX level stands at 15.9, 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 remained high during the month, influenced by both global factors e.g. sanctions, tariffs as well as corporate activity. Oil and gas was the stand-out sector in April, helped by the 7.84% rise in the Brent price and good results and statements from both major UK stocks. Corporate activity is increasing and having an increasing bearing on sector indices e.g. Sainsbury’s 13% share price jump yesterday.

Fixed Interest

Gilt prices dropped over the month and are down 1.7% year to date in capital terms, the 10-year yield standing at 1.48% currently. Other ten-year yield closed the quarter at US 2.96% Japan, 0.04% and Germany 0.50% respectively. UK corporate bonds also dropped in price terms over the month. Amongst the more speculative grades, there continue to be mixed trends, with emerging market bonds, in local currency terms, showing price falls in absolute terms and yet the US lower grade bonds were moving in the opposite direction. Convertible bonds and 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 1.77% in trade weighted terms, largely on relative economic news The Japanese yen was the major faller on the other hand, while the Euro drifted slightly, and sterling fell quite sharply towards the end of the month on much poorer economic news and the prospect of difficult Brexit discussion over coming days and weeks. As mentioned above, the FX moves are becoming a growing factor in asset allocations discussions. It is no coincidence that last month, the major market gainers of FTSE100 and the Nikkei, both showed their largest local currency moves during periods of currency weakness versus the dollar.

Commodities

A very mixed and volatile month for commodities with significant impact from geo-political events. Oil, for example reacted positively to certain shut downs as well as impending Iranian sanction discussions and increasing US/Venezuela tensions. Alumina and aluminium prices were buffeted firstly by tariff developments and then specific Russian sanctions. There were mixed trends amongst the other precious/PGM group metals. Most of the major global mining groups have just reported figures and rising commodity prices, capital discipline, balance sheet transformations and higher shareholder pay-outs have been a common theme. Soft commodities have also enjoyed strong price gains since the start of the year, wheat and soya for example showing price gains of around 18.2% and 27.2% respectively.

Looking Forward

Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while first quarter results and many ongoing corporate events will likely add a further level of volatility. With 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, as well as fleshing out the winners and losers from any tariff developments. Additional discussions pertaining to North Korea, Iran, Venezuela, NAFTA 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, the recent yen weakness being a positive factor for equity investors. European sentiment will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian politics and positioning ahead of Greek rescue package deadlines. Hard economic data (as opposed to sentiment surveys) 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. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors.

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. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. Chartists and others are watching closely as the US 10-year flirts with 3%.

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. 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, 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.

UK warrant a neutral allocation now moved from underweight and it is tempting to rebuild some UK equity exposure on certain valuation considerations, the recent bout of sterling weakness maybe providing a catalyst. Within the UK equity space, I suggest moving the balance of small/large cap stocks now back to neutral following both the outperformance of the former and the volatility in the currency (part post-election, part BREXIT). 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, WPP being a recent example. 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. Concentrate on the major diversified although there are currently some attractive equity and fixed interest ideas in the mid/small cap area. 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. 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 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. 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. 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. 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.

Good luck with performance! Ken Baksh 01/05/2018

Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.

Phone 07747 114 691

kenbaksh@btopenworld.com

Good luck with performance! Ken Baksh 01/03/2018

Disclaimer

All stock recommendations and comments are the opinion of writer.

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

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