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Ken Baksh – February 2023 Investment Monthly

2nd February 2023 / Leave a comment

FEBRUARY 2023 Market Report

Investment Review

Summary
During the one-month period to 31st January 2023, major equity markets, as measured by the aggregate FTSE All – World Index, rose moderately, by nearly 6%, in dollar terms, one of the best January performances in recent years. Chinese equities and related emerging markets, NASDAQ and Continental European indices led the advance. The UK and Japanese indices underperformed but still rose by 4% in local currencies. The VIX index fell, finishing the period at a level of 19.28.
Government Fixed Interest stocks also rose over the month. The UK 10-year gilt ended the month on a yield of 3.33% with corresponding yields of 3.64%, 2.29% and 0.49% in USA, Germany, and Japan respectively. Speculative and lower quality bonds, also, rose in price terms. Currency moves featured a weaker US dollar. Commodities were mixed on the month, the Chinese re-opening story prompting large moves in the industrial metals.
Monthly Review of Markets
Equities
Global Equities rose strongly in January, gaining over 5.98% in dollar terms, in aggregate, led by NASDAQ and China, and related. Amongst the major indices Japan and the UK lagged, though still each gaining over 4%. Reflecting the greater “risk on “mood the VIX index fell below 20 to a level of 19.28.
UK Sectors
Sector moves were mixed and quite large over the month, the difference between the best and worst FTA sub sectors near 20% over just one month. Travel and Leisure and retail stocks gained over 15% while non-life insurance, pharma and tobacco fell in absolute terms. Telecommunication and bank stocks were reasonably firm, partly on takeover rumours. The FTSE100 underperformed the All-Share Index for the first time in many months. By IA sectors, UK active unit trusts are matching benchmark indices, trackers etc, over the short one-month period, with small company funds about 1% behind. “Balanced” funds, by IA definitions, rose by about 3% to 3.5%, depending on the equity content.

Fixed Interest
Major global government bonds rose 2.2% in price terms over January, the UK 10-year yield for instance finishing the month at a yield of 3.33%. Other ten-year government bond yields showed closing month yields 3.52%, 2.29% and 0.49% for US, German and Japanese debt respectively. See the Bloomberg graph below to compare the “January “bond performances over the last 30 years UK corporate bonds also rose, outperforming gilts, and more speculative debt also finished the month on lower yields.
Check my recommendations in preference shares, selected corporate bonds, fixed interest ETF’s , zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes is also available to subscribers.

Foreign Exchange
A stronger pound and weaker US Dollar were the main moves, where cable (£/$), for instance, rose by 2.3%The Chinese Renminbi strengthened by 2.8% against the greenback. The Japanese Yen initially showed appreciation as a follow through from December’s yield control mechanism tweak, but more nuanced Bank of Tokyo statements during the month, reversed some of the gain. Interestingly,adjusted for FX moves,UK,Japan and USA all rose by between 3% and 4% on the month.

Commodities
Industrial metals copper, aluminium and iron ore showed the largest monthly move, while natural gas and several soft commodities declined in actual terms. Gold rose modestly but other PGM’s showed little monthly change.

News
Over the recent month, there have been few major changes to formal aggregate economic growth projections, with most commentators pointing to the “management” of the US slowdown, nature and timing of the Chinese re-opening and the Russia/Ukraine conflict as being key determinants of forward-looking estimates. At regional level however, more optimism is apparent in Continental Europe.
At the same time, key data inflation indicators (headline rates, factory gate and commodity prices, shipping rates,) suggest that headline price growth is set to slow in coming months, although labour compensation developments must be watched carefully.
US
Recently announced inflation indicators showed December headline CPI of 6.5%, lower than estimates. The November PCE,the Fed’s preferred inflation metric rose at an annualised rate of 5.5% still over double the Fed target. Fourth quarter preliminary GDP growth of 2.9% (3.2% in third quarter), annualised, while higher than estimates, concealed a slower consumers’ expenditure. This relative weakness has also been backed up by consumer sentiment indicators, retail sales, housing activity, construction figures and the Empire States Survey. The Fed’s own forecasts expect GDP growth of 0.5% for 2023, and core PCE growth of 4.8% and 3.5% respectively for 2022 and 2023.The employment situation remains relatively resilient overall, despite the headline grabbing news of cutbacks in the technology sector.
At its final 2023 meeting on 14th December, the Federal Reserve raised its benchmark policy rate by 50 basis points and signalled its intention to keep squeezing the economy next year as central banks on both sides of the Atlantic enter a new phase in the battle against inflation. The new target range is 4.25% to 4.5%. Latest Fed projections below. At this time of writing we are waiting for the latest Fed move, probably 25bp increase, and the accompanying statement.

There is growing concern (again) that the US government may hit its ceiling for debt issuance this summer and spark speculation about a looming default. This “ritual” has of course been played out many times in the past, but coming this year, when the Central Bank is trying to reduce its balance sheet, there could be reasons to expect bouts of bond market volatility over coming months.

EUROPE
The European Central Bank raised interest rates by half a percentage point on December 16th taking the deposit rate to 2%, while also warning that inflation would remain above 2% for a considerable time meaning it would have to keep up rate hikes. The simultaneous announcement that the ECB would start QT from March reinforced the more “hawkish” message from the meeting. In a more detailed presentation than previous meetings, Christine Lagarde differentiated US inflation more driven by an overheating economy and tight labour market, and the ECB price levels, more driven by soaring energy and food costs.
European GDP growth estimates have, however, stabilised over the recent period, and indeed one or two sub-country third/fourth quarter releases have been marginally above expectations e.g German 2022 GDP growth of 1.9% and various more recent indictors such as PMI confidence readings and the ZEW survey, in Germany. Warmer than expected weather, government consumer and business support and resurgent Chinese demand often being cited as the main reasons.
Current ECB staff projections foresee economic growth of 3.4% for calendar 2022 and a “shallow and short recession” over the current period., taking the likely full year 2023 figure to around +0.5%. Inflation and fuel shortages remain key determinants. Some independent economic forecasters are now attaching a non-insignificant chance that Europe may avoid a recession.
December Eurozone inflation, of 9.2% (core 5.0%) was lower than expected. At the ECB meeting (above) 2023 inflation projections were raised to 6.3%

ASIA excl JAPAN
The GDP figures, shown below (source: CLSA, CEIC) show 2022 and 2023 growth projections for the Asia excl Japan region. Growth in 2023 is likely to slow slightly amid weakening domestic and external demand after 2022, the fastest since 2012, but overall, the situation still compares favourably by international comparison The reasons include a “better” Covid experience, selective commodity exposure, tourism, continued FDI Investment (especially China related) and better initial fiscal situations (compared with late 90’s for example) and limited direct connections with the Russia/Ukraine situation. The forecasts do not assume a total easing of Chinese covid rules.ASEAN,which includes Indonesia,Malaysia,Philippines,Singapre,Thailand and Vietnam expect aggregate economic growth of 4% for 2023.
Headline inflation of around 5% currently (core 3%) also compares favourably and is expected to drop to nearer 4% by end 2023 led by commodity disinflation.
CHINA
The 5.5% official GDP growth target for 2022 was predictably missed, the actual figure emerging at around 3%. Official historic data showed weakening trends in consumer spending, fixed asset investment and construction activity while more recent (December)t “live” tracking data e.g., mobility, cement production and electricity use also showed subdued economic activity. In addition, very weak trade data was released mid-December. The major historic negative issues of a very restrictive anti-Covid policy and major disruption within the property market have now been supplemented by increasing US restrictions on the production/export of certain key electronic products.

At the time of writing however, a property “rescue” package has been implemented, while on the Covid front, various relaxation measures are taking place to alleviate some of the issues above. The removal of the quarantine requirement for inbound travellers from January 8th signalled the end of the zero-Covid system that transformed China’s relationship with the outside world. Independent medical statistics and anecdotal evidence (crematorium activity,chrysanthemum sales!) show a rapid increase in Covid cases and deaths, probably exaggerated by the Chinese New Year, but a positive economic momentum is starting to build. First manifestations are starting to appear in Chinese travel and leisure statistics while a manufacturing revival will take much longer, especially in the face of slowing US demand.
At a recent cabinet meeting, premier Li Keqiang vowed to make consumption(currently only about 40% of GDP) the “driving force” of the economy, unleashing some of the savings amassed during the Covid years.

UNITED KINGDOM
Within the UK, live activity data (e.g January Gfk data) continues to show a weaker overall trend, especially within the services sector. According to this survey, released mid-January, covering the mid-month period, consumer confidence remains very low (near a 50 year low), amid the cost-of-living crisis. This followed the publication of figures showing a drop in total 2022 retails sales of over 6%. Unemployment, however, is still at a relatively low level.
According to ONS statistics, GDP fell by 0.3% between the second and third quarters, slightly more than expected, and leaving the economy 0.8% below the “pre pandemic” level. The “increase” of 0.1% in the monthly November figure may be partly due to the “World Cup” effect. The saving ratio was 1.8% during the quarter, and banks report increases in credit card borrowing.

Inflation rose at 10.5% in December a slight improvement on the November figure, with core inflation at 6.5%. Latest earning growth around 6.5% is still a concern for BoE policy makers.
The PSBR is still hovering near all-time records, with the 2022/2023 figure expected to be about £50 billion higher than the 2021/2022 figure, already a record high.
Despite some relief with the recent energy price package, until April at least, (but not other utilities-see below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate pressure, falling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and strike activity, will continue to be headwinds and the outlook for economic growth over coming quarters is highly uncertain. The Bank of England expects recessionary conditions to last for a few quarters though a recent Andrew Bailey statement hinted at a less severe slowdown than forecast around the time of the ill-fated mini Budget.

Experts at consultancy EY-Parthenon, insolvency specialist Begbies Traynor and, more recently, data from Insolvency Services to December 2022 all point to a huge increase in the number of distressed companies, predominantly in the small and medium size company area. While consumer facing sectors continued to be most affected EY said that “stress” was deepening across all sectors.
Monetary policy has tightened from a 0.1% interest rate in December last year to the current level of 3.5% warning that further hikes are likely. Markets are expecting rates to be above 4.0% by mid-2023.One particularly worrying development is the number of fixed rate mortgages that must be renegotiated over next quarters at much higher rates.

scaling your positions according to your risk profile.
KEN’S TEN-2023
• Keep an overweight position in renewable/infrastructure.
• Favour value over growth generally-trade has further to run.
• Stay neutral/overweight in UK equities relative to your benchmark (page15).
• Overweight Far East,including China,Japan and other Asia (pages 16-19).
• Start switching large cap to small cap-valuation/performance.
13
• Start diversifying away from strong dollar.
• Overweight uranium relative to your commodity benchmark (page 21).
• Amongst UK sectors overweight telecom, health equipment, defence, tobacco and energy (pages 13-14),”not too ESG friendly,I am afraid”.
• Amongst UK sectors underweight luxury, motor related, most capital goods, consumer brands and food retail (pages 13-14).
• Within UK Fixed Interest prefer corporate bonds, preference shares, and zeroes to conventional gilts (page 21)-start rebuilding some fixed interest exposure, especially for cautious and balanced risk profiles.

For equities generally, the two medium term key questions will be when rising interest rates eventually cause equity derating/fund flow switches, government, corporate and household problems, and how the rate of corporate earnings growth develops after the initial snapback. Going forward, withdrawal of certain pandemic supports, uncertain consumer and corporate behaviour and cost pressures are likely to lead to great variations by sector and individual company. Investors will need to pay greater than usual attention to the end 2022 figures and accompanying forward looking statements.

Market Arithmetic

Overweight
By sector, Oil and Mining equities continue to benefit from above average yields, strong balance sheets, dollar exposure and secular demand e.g copper,lithium, cobalt for electronics, construction, electric vehicles etc. Current moves regarding Chinese re-opening the economy would be another positive for this sector.
Remain overweight in pharmaceuticals and health equipment, expect more corporate activity
Telecom-moving to overweight this area after many years of disappointment. Valuations are attractive, many tariffs have an element of index linking, windfall tax risk is low and sector consolidation is increasing.
Defence-a relatively small stock market sector in UK terms but increased global defence spending, negative PMI correlation, high barriers to entry and corporate activity will continue to lift this specialist area.
Tobacco-ESG factors aside, there is undoubted value in this sector (both major UK stocks yield around 7%). Negative correlation with PMI’s and emerging market volume growth still strong.
Banks may enjoy some relative strength from rising interest rates but continue to monitor the recession/loan growth and default risks. These mixed trends were very evident in the recent third quarter figures. Preference Shares as well as ordinary shares have attractions in this area.

Luxury Goods-Currently highly rated in stock market terms but could be vulnerable, in recessionary conditions and seem to have a strong correlation with property prices, which are expected to decline. However, renewed Chinese interest may help sector.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s expenditure, supermarket competition and rapidly rising costs.
In general, extra due diligence at stock level more generally will be required as I expect a growing number of profit warnings and downbeat forward looking statements.
However, takeover activity is also clearly increasing with, for example, private equity snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign takeover, stake building is also increasing, current weak sterling being a factor, with Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste management),MicroFocus(technology),Aveva(software) and RPS(professional services) have all succumbed to foreign takeovers in recent months, much by “strong dollar” American or Canadian organizations.

JAPANESE EQUITIES also remain an overweight in my view, although my recent comment re hedging may “nuanced “now following the extreme currency weakness and surprise intervention/policy change. The prospective price/book ratio of 1.2 is attracting interest of corporate and private equity buyers, while the prospective yield of 2.7% is above the world average and compares very favourably with USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of cross holding, higher dividends etc. There are clear signs that inward investment attracted by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese annual wage $30000 compared with $75000 USA) is increasing. The political agenda is likely to include a more active defence policy,and a shift in income distribution more in favour of middle-class households. Private equity stake building interest in Toshiba and growing activity in the property sector (discount on a discount in a cheap currency) demonstrate the search for value in Japan. Investors may wish to remove currency hedges.
On a valuation basis (see table above) the forward market PE multiple of 11.9 is at a considerable discount to the world, and especially US average (16.7) and certain Japanese investment trusts yield more than UK peers.

Within the emerging/frontier universe I continue to have a relatively positive view on Asia. The economic fundamentals were discussed on page 16 above, and the forward-looking multiples and dividend growth metrics appear relatively attractive in a global context. Any move by China to open more fully after their severe Covid lockdown, would of course additionally help. Exposure to the entire area can be achieved through several ETF’s and also investment trusts currently on discounts.
If a country-by-country approach is adopted, I have a longer-term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100 million, an emerging middle class, and a recipient of strong foreign direct investment. Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant) have all recently invested in new capacity in the country. Other big names moving chunks of production from China to Vietnam include Dell and HP (laptops), Google(phones)and Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7% Q2 2022) and approximately 6% in 2023 while current inflation is running at about 3.5%. One more rate hike of 50bp towards the end of the first quarter should mark the end of the tightening cycle. On a relatively low prospective PE based on forecast earnings growth over 20%, Vietnamese equities appear good value.
India, although quite highly rated and a major oil importer, warrants some inclusion in a diversified portfolio although recent corporate scandals(Adani?) require watching. Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5% inflation.

Caution is required in many South American markets with poor COVID-19 situations, deteriorating fiscal balances, weak investment, low productivity (see below) and governments in a state of transitioning e.g Brazil. However, some stock market valuations currently appear interesting in the region, which, so far, has been relatively unaffected by events in Ukraine. Commodity exposure, deglobalization beneficiary, valuation and recovery from a very low-level account for some year-to-date stock market relative out- performance. Many of these countries also raised interest rates at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.

COMMODITIES– Gold spiked to over $2000 in March 2023, a recent high, when Russia invaded Ukraine, and although currently staging a modest rebound is still only $1924. Central Banks have been aggressively topping up their holdings during 2022.The longer-term prospects for more cyclical plays, however, continue to look brighter. Increased renewable initiatives, greater infrastructure spending as well as general growth, especially from Asia, are likely to keep selected commodities in demand at the same time as certain supply constraints (weather, labour and equipment shortages, Covid, transport) are biting. Current relaxation of the Chinese Covid policy, has certainly provided a boost to copper, aluminium and iron ore.
• Wheat and other grain prices have fallen from the levels reached following the Russian invasion of Ukraine, but the current grain shipment complications, planting/harvesting schedules within the region and extreme global meteorological conditions are expected to lead to further price volatility. If the conflict is prolonged it will affect millions of people living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that could have political consequences. There has been renewed interest in agricultural funds as well as the soft commodities themselves.
• URANIUM-I remain positive on the outlook for nuclear energy (stable base load,carbon-friendly,government U-turns,high energy output) while being aware of some of the well know issues(time, cost and waste disposal).Uranium is expected to experience a material market deficit over the next few years (estimates range between 10% and 30% of global demand).Nearly half of current world mined supply comes from Kazakhstan/Russia. The current price of 50 cents per pound could easily rise to 60c to 70c,as a result of geopolitical tension and a sharply rising cost curve. Apart from capital good companies exposed to the reactor construction/maintenance, I strongly recommend some exposure to my favoured investment trust.

UK FIXED INTEREST-selective exposure now recommended, especially for cautious/balanced risk mandates.

The graph below plots the progress of the UK 10 year gilt yield, which is at 3.33% at the time of writing. The two key things to note are firstly, the extremely low yields prevailing, just a year ago, partly reflecting a prolonged QE programme, and secondly the “panic” level reached at the end of September as domestic and international investors briefly took flight at the prospect of the short-lived Truss/Kwarteng mini budget proposals. Translating this into price terms, the I share all gilt index fell over 35% from the beginning of the year to late September before bouncing about 13% to current levels. This is huge volatility for an asset class often regarded as haven quality!
Having been negative on gilts for several years, I am now recommending gradually re-introducing selected fixed interest stocks to balanced portfolios, especially for cautious and balanced risk mandates.
Gilts themselves will have to contend with huge supply issues over coming quarters. While not falling as much as gilts and having completely different supply/demand dynamics, selected preference shares also fell to reach yield levels of approximately 7%, while good quality corporate bonds now offer yields around 6%. For the more adventurous, annual income yields around 10% and the prospect of capital gains are also also offered on more speculative grades.

COMMERCIAL PROPERTY-
The MSCI/IPD Property Index showed a further fall in the total return across all properties in December, the decline of 3.3%), taking the full year 2022 decline to 10.1% (capital –14.2%, Income +4.7%). The monthly decline which started in July has affected all sub-sectors with industrial properties faring the worst over the full year. Rental growth however has been positive at with a 3.2% annualized gain in December taking the full year growth to 4.2% Several analysts are down grading their estimates for the sector following the rapid move in UK longer and shorter-term interest rates. Property asset valuations take time to materialise where there is a lag between balance sheet date and results publication in the listed area. Live traded property corporate bonds, however, have already moved sharply lower.
Quoted property giants British Land and Land Securities both reported deteriorating conditions writing their third quarter statements, expecting further valuation declines following rising yields.

Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions. Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy portfolios.
Independence from any product provider and transparent charging structure
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 February ,2023
Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions – investors should conduct their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ regulatory filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.The author may hold positions in any of the securities mentioned
The author explicitly disclaims any liability that may arise from the use of this material.

January 2023 Investment Review – Alan Green talks to Ken Baksh

5th January 2023 / Leave a comment

January 2023 Investment Review – Alan Green talks to Ken Baksh. Covering global markets, trends for 2023 and expected developments, the interview is published in conjunction with Ken’s investment report here

Ken’s outlook is best summarised with ‘Ken’s Tens’.

• Keep an overweight position in renewable/infrastructure, especially in investment trust (page 21).
• Favour value over growth generally-trade has further to run.
• Stay neutral/overweight in UK equities relative to your benchmark (page15).
• Overweight Far East,including China,Japan and other Asia (pages 16-19).
• Start switching large cap to small cap-valuation/performance.
• Start diversifying away from strong dollar.
• Overweight uranium relative to your commodity benchmark (page 21).
• Amongst UK sectors overweight telecom, health equipment, defence, tobacco and energy (pages 13-14),”not too ESG friendly,I am afraid”.
• Amongst UK sectors underweight luxury, motor related, most capital goods, consumer brands and food retail (pages 13-14).
• Within UK Fixed Interest prefer corporate bonds, preference shares, and zeroes to conventional gilts (page 21)-start rebuilding some fixed interest exposure,especially for cautious and balanced risk profiles.

Ken Baksh – January 2023 Investment Monthly

3rd January 2023 / Leave a comment

JANUARY 2023 Market Report

Investment Review
Summary

During the one-month period to 31st December 2022, major equity markets, as measured by the aggregate FTSE All – World Index, fell, by over 1.5%, taking the year-to-date loss to 19.3%, in $ terms. Chinese equities and related emerging market indices were relatively stable while the tech-driven NASDAQ dropped 5.6% on the month to finish down 33.54% on the year. The UK larger cap indices remained broadly unchanged over the year The VIX index fell, finishing the period at a level of 21.89.
Government Fixed Interest stocks also fell over the month, capping a very poor year The UK 10-year gilt ended the month on a yield of 3.16% with corresponding yields of 3.77%, 1.94% and 0.25% in USA, Germany, and Japan respectively. Speculative and lower quality bonds, also, fell in price terms. Currency moves featured a strong Yen. Commodities were mixed on the month, while over the full year energy and selected agricultural products significantly outperformed industrial metals such as copper, aluminium and iron ore.

Monthly Review of Markets

Equities
Global Equities fell modestly over December by 1.56% extending the full year decline to 19.31%. Most major indices declined although Chinese and related indices significantly outperformed. The NASDAQ index fell 5.64%, taking the twelve months fall to drop to 33.54% for this tech-driven universe of stocks. The FTSE 100 was one of the few indices to remain in positive territory over the year, for well documented reasons. The VIX index finished the year at a level of 21.89, a twelve month gain of 27.12%. This move reflects the degree of risk aversion compared with the” relative calm” of December 2021 (medical, geo-political and economic!), although the current level is far from “panic” territory.

UK Sectors
Sector moves were mixed over the month. Resources (commodity prices), insurance (solvency issues) and pharmaceuticals (corporate action) were amongst the month’s leading sectors, while telecoms, property, travel and retailers were major fallers. The FTSE100 outperformed the All-Share Index again ending the year about 4% ahead of the wider market index. By IA sectors, UK active unit trusts significantly underperformed benchmark indices, trackers etc, over calendar 2022, with small company funds about 20% behind the benchmark indices. Income based funds finished the year “just” down 1.7%. “Balanced” funds, by IA definitions, fell by about 10%, before fees etc over the full year. (Source: Trustnet December 31st, 2022).

Fixed Interest

Major global government bonds fell in price terms over December, the UK 10-year yield for instance finishing the month at a yield of 3.66%. Other ten-year government bond yields showed closing month yields 3.89%,2.56% and 0.41% for US, German and Japanese debt respectively. Special mention should be made of the Japanese Government bond where, the yield control process was “tweaked” late in the month. UK corporate bonds also fell, though finishing the year about 5% ahead of the government bond index in price terms and even more in total return metrics. Speculative bond prices also fell in December, to yields around 5% at the year end. More “cautious” UK balanced funds and so called 60/40 funds experienced very poor returns during 2022, as the period of global equity weakness was, somewhat unusually, accompanied by disappointing gilt returns.
Check my recommendations in preference shares, selected corporate bonds,fixed interest ETF’s , zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes is also available to subscribers.

Foreign Exchange
Over the month, the Japanese “policy change” was one of the major FX events, causing the Yen to appreciate by 4.5% and 5.4% against the Pound and US Dollar respectively. Elsewhere the Chinese Yuan continue to appreciate now dropping below 7 to the US Dollar. Recent currency moves have helped the sterling adjusted Japanese equity index outperform the S&P on one- and three-month bases, and finish the year, just 1.2% behind the US on a full year basis

Commodities
Apart from a sharp fall in the natural gas price, most commodities had a quiet month in seasonally low volumes. Over the full year, the Bloomberg total and ex-agric indices rose by 27.9% and 15.45%, in dollar terms, respectively substantially outperforming most bonds and equities for well documented reasons.

Oil and gas, corn soya and uranium showed above average returns, while industrial metals copper, aluminium and iron ore declined in price terms. Despite record inflation levels and geo-political volatility, gold remained virtually unchanged over the year, in dollar terms.

News
Over the recent month, there have been few major changes to economic growth projections, with most commentators pointing to the “management” of the US slowdown, nature and timing of the Chinese re-opening and the Russia/Ukraine conflict as being key determinants of forward-looking estimates.
At the same time, key data inflation indicators (headline rates, factory gate and commodity prices, shipping rates,) suggest that headline price growth is set to slow in coming months, although labour compensation developments must be watched carefully.
More volatility is expected in oil prices as western countries impose restrictions on Russian oil.

US
Recently announced inflation indicators showed November headline CPI of 7.0%, lower than estimates, while the core inflation rate rose by 6.0%. The November PCE,the Fed’s preferred inflation metric rose at an annualised rate of 4.7%,down from 5% in October, but still over double the Fed target. Third quarter preliminary GDP growth of 2.6%, annualised, while higher than estimates concealed a weaker consumer component offset by a strong trade balance. Recent consumer sentiment indicators (November composite PMI for example), retail sales, housing activity, construction figures and the Empire States Survey back this up, showing declining trends into recent weeks. Anecdotal evidence from leading retailers reported a shift of consumer behaviour spending less on discretionary items such as electronics and furniture and more on food. The Fed’s own forecasts expect GDP growth of 0.5% for 2023, and core PCE growth of 4.8% and 3.5% respectively for 2022 and 2023
At it’s final 2023 meeting on 14th December, the Federal Reserve raised its benchmark policy rate by 50 basis points and signalled its intention to keep squeezing the economy next year as central banks on both sides of the Atlantic enter a new phase in the battle against inflation. The new target range is 4.25% to 4.5%. The median estimate for the fed fund rate by the end of 2023 rose to 5.1%. Latest Fed projections below

US midterm election results showed the Republicans narrowly taking control of the House of Representatives while the Democrats retained the Senate, a situation which could minimise more extreme policies, but also thwart some of Biden’s ambitions. Donald Trump has vowed to return in 2024, although the Republican Party is far from united at the current time and the risk of personal indictment is not negligible.

December flash Eurozone PMI released on December 18th rose to 48.8, an improvement, compared with November.
Current ECB staff projections foresee economic growth of 3.4% for calendar 2022 and a “shallow and short recession” over the current period., taking the likely full year 2023 figure to around +0.5%. Inflation and fuel shortages remain key determinants
November Eurozone inflation, just released, of 10.0% was lower than expected. At the ECB meeting (above) 2023 inflation projections were raised to 6.3%

CHINA
The 5.5% official GDP growth target for 2022 will clearly be missed, with some investment banks now forecasting below 3%. Official data shows weakening trends in consumer spending, fixed asset investment and construction activity while more recent “live” tracking data e.g., mobility, cement production and electricity use also showed subdued economic activity. In addition, very weak trade data was released mid-December. The major historic negative issues of a very restrictive anti-Covid policy and major disruption within the property market have now been supplemented by increasing US restrictions on the production/export of certain key electronic products. Rising unemployment, particularly amongst younger people is becoming an economic and increasingly political issue.
At the time of writing a property “rescue” package has been implemented, while on the Covid front, various relaxation measures are taking place to alleviate some of the issues above. The removal of the quarantine requirement for inbound travellers from January 8th signals the end of the zero-Covid system that transformed China’s relationship with the outside world. However, increasing domestic
health pressures and re-imposition of certain international covid restrictions create an uncertain environment,at the time of writing.

JAPAN
The Japanese economy contracted 1.2% on an annualized basis during the third quarter of 2022, missing forecasts of 1.1% growth, and considerably weaker than the 4.6% expansion recorded during the second quarter. This was the first down quarter of the year reflecting weak domestic consumption, a slowdown in business investment and an acceleration in imports. Estimates for the full year seem to fall mainly within the 1.5%-2.0% band. Inflation, while still well below international peers, rose by 3.7% in November, the highest in 41 years, driven by currency weakness. Headline CPI is expected to remain around this level in coming months through a combination of import prices and elevated consumer expectations
The Bank of Japan changed its yield control policy towards the end of December surprising many investors and causing immediate drops in bond prices and gain in the Japanese Yen. Although denied by the BOJ,there is growing speculation that Japan may ease back on its ultra-loose monetary policy in spring 2023 when the BoJ leadership changes.

UNITED KINGDOM
Within the UK, live activity data (e.g December Gfk data) continues to show a weaker overall trend, especially within the services sector. According to this survey, released 16th December, covering the mid-month period, consumer confidence remains very low (near 50 year low), amid the cost-of-living crisis. Unemployment, however, is still at a relatively low level.
According to ONS statistics, GDP fell by 0.3% between the second and third quarters, slightly more than expected, and leaving the economy 0.8% below the “pre pandemic” level. The saving ratio was 1.8% during the quarter.
Inflation continues to rise, the November CPI and RPI readings registering hikes of 10.7% and 14.0% respectively.
Kantar and the ONS both reported food/grocery prices rising about 15% year on year as well as turkey/egg shortages. Bloomberg’s Breakfast Index has jumped more than 21% in the 12 months to November 2022!

The PSBR is deteriorating again, largely as a results of rapidly rising interest (index linked) payments and expectations of higher public sector pay and state pensions. The most recent “official” figure showed November PSBR at £22 billion, much larger than forecast and the largest since monthly records began in 1993, according to the ONS. Current tentative estimates are that borrowing will come in at £175 billion in 2022/2023 nearly £50 billion higher than the 2021/2022 total
Despite some relief with the recent energy price package, until April at least, (but not other utilities-see below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate pressure, falling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and, strike activity, will continue to be headwinds and the outlook for economic growth over coming quarters is highly uncertain. Both the Bank of England as well as the OBR and now the OECD are expecting recessionary conditions for an extended period

Experts at consultancy EY-Parthenon reported that company profit warnings had jumped from 51 to over 86 over the third quarter of 2022 citing increasing costs and overheads as the main reason, especially in consumer facing businesses. Another report from Begbies Traynor, Latest Red Flag Alert Report for Q3 2022 – 07:00:07 19 Oct 2022 – BEG News article | London Stock Exchange quoted that over 600,000 business were already in severe financial distress.
Monetary policy has tightened from a 0.1% interest rate in December last year to the current level of 3.5% warning that further hikes are likely. Markets are expecting rates to be above 4.0% by mid-2023.

Autumn Statement
On 17th November, Chancellor Hunt told a sombre House of Commons that a massive fiscal consolidation including £30 billion of spending cuts and £25 billion of tax rises was needed to restore Britain’s credibility and tame inflation. The OBR said they expected the economy to shrink 1.4% and not regain pre -pandemic levels until 2024.Inflation was expected to remain over 7% next year.
While many of the proposals had been leaked, and the market reaction was muted (first objective achieved!), there were a few positive surprises (e.g help for NHS and education) and several negatives.

Looking Forward
Given the scope for geo-political, economic uncertainty from known factors summarized above plus the “black swan” allowance for unknown developments, plus the valuation risks, more prominent in certain asset classes than others, the first message for 2023, should be diversification, and the second should clearly be scale your positions according to your risk profile.
Looking back at 2022, and comparing my view last December, published on January 1st, 2022, with the outcome.
2022 Hindsight…5 1/2 out of 7 Correct….2 very close!
• “Bonds will underperform equities”- correct .Gilts massively underperformed the FTSE100 and world equities.
• Overweight UK, correct especially FTSE 100.
• Underweight USA/overweight Japan…..correct in local currency terms..but in £ adjusted terms,I missed by 1.2%!…Moral..watch FX and use hedging where appropriate.
• Reduce “other Pacific”..correct… significantly helped by Chinese weakness.FT Asia dropped 19%.
• Overweight Europe-correct..came right towards end of year.Eurostoxx £ adj (-6.8%versus world -9.2%).
• “Avoid gold”-Gold rose by 0.47%, in dollar terms, in 2022, outperforming base metals but underperforming oil.
• Overweight renewables and infrastructure…correct…all showing absolute returns of about 15% in total return over the year compared with a 9.2% decline in sterling adjusted world equities.
Enough of the history…now looking to 2023, my strategic thoughts, ten of them, would be
KEN’S TEN-2023
• Keep an overweight position in renewable/infrastructure, especially in investment trust (page 21).
• Favour value over growth generally-trade has further to run.
• Stay neutral/overweight in UK equities relative to your benchmark (page15).
• Overweight Far East,including China,Japan and other Asia (pages 16-19).
• Start switching large cap to small cap-valuation/performance.
• Start diversifying away from strong dollar.
• Overweight uranium relative to your commodity benchmark (page 21).
• Amongst UK sectors overweight telecom, health equipment, defence, tobacco and energy (pages 13-14),”not too ESG friendly,I am afraid”.
• Amongst UK sectors underweight luxury, motor related, most capital goods, consumer brands and food retail (pages 13-14).
• Within UK Fixed Interest prefer corporate bonds, preference shares, and zeroes to conventional gilts (page 21)-start rebuilding some fixed interest exposure,especially for cautious and balanced risk profiles.

UK Equities continue to remain a relative overweight in my view, based on several conventional investment metrics (see above), longer term underperformance since the Brexit vote, style preference (value overgrowth) and international resource exposure although be aware of the numerous domestic headwinds I have highlighted above.
Value should be favoured over growth, and the FTSE 100 favoured over the FT All-Share. Apart from the style drift, remember that the non-sterling element of leading FTSE 100 companies and sectors is relatively high
Overweight
By sector, Oil and Mining equities continue to benefit from above average yields, strong balance sheets, dollar exposure and secular demand e.g copper,lithium, cobalt for electronics, construction, electric vehicles etc. Current moves regarding Chinese re-opening the economy would be another positive for this sector.
Remain overweight in pharmaceuticals and health equipment, expect more corporate activity
Telecom-moving to overweight this area after many years of disappointment. Valuations are attractive, many tariffs have an element of index linking, windfall tax risk is low and sector consolidation is increasing.
Defence-a relatively small stock market sector in UK terms but increased global defence spending, negative PMI correlation, high barriers to entry and corporate activity will continue to lift this specialist area.
Tobacco-ESG factors aside, there is undoubted value in this sector (both major UK stocks yield around 7%). Negative correlation with PMI’s and emerging market volume growth still strong.
Banks may enjoy some relative strength from rising interest rates, but continue to monitor the recession/loan growth and default risks. These mixed trends were very evident in the recent third quarter figures. Preference Shares as well as ordinary shares have attractions in this area

Underweight
Utilities- underweight in non-renewable utility stocks which may suffer from consumer and government pressures, and no longer trade on yield premia, especially against the backdrop of higher gilt yields. Infrastructure may fare better than distribution.
Housebuilders and real estate-expect depressed activity and remember that the rising interest rates have not yet been fully factored into bricks and mortar property yields. Industry data and anecdotal news from both housebuilders and REIT’s suggest further weakness to come.
Retailers are in general suffering from a combination of falling sales and rising costs and clear trends in consumers “trading down” are apparent. Anecdotal evidence shows a clear switch in consumer spending away from discretionary items such as electronics, furniture and certain clothing items. Certain on-line operations e.g Asos additionally are suffering from an element of post-Covid comparison. Food retailers are additionally facing stiff competition from discount “disruptors”. The British Retail Consortium expects another tough year for the sector looking for sales growth of just 2.3% to 3.5% i.e., volume declines.
Luxury Goods-Currently highly rated in stock market terms but could be vulnerable, in recessionary conditions and seem to have a strong correlation with property prices, which are expected to decline. However, renewed Chinese interest may help sector.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s expenditure, supermarket competition and rapidly rising costs.
In general, extra due diligence at stock level more generally will be required as I expect a growing number of profit warnings and downbeat forward looking statements. See the EY and Begbies statements on page 7 above.
However, takeover activity is also clearly increasing with, for example, private equity snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign takeover, stake building is also increasing, current weak sterling being a factor, with Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste management),MicroFocus(technology),Aveva(software) and RPS(professional services) have all succumbed to foreign takeovers in recent months, much by “strong dollar” American or Canadian organizations.

JAPANESE EQUITIES

also remain an overweight in my view, although my recent comment re hedging may “nuanced “now following the extreme currency weakness and surprise intervention/policy change. The prospective price/book ratio of 1.19 is attracting interest of corporate and private equity buyers, while the prospective yield of 2.6% is above the world average and compares very favourably with USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of cross holding, higher dividends etc. There are clear signs that inward investment attracted by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese annual wage $30000 compared with $75000 USA) is increasing. The political agenda is likely to include a more active defence policy,and a shift in income distribution more in favour of middle-class households. Private equity stake building interest in Toshiba and growing activity in the property sector (discount on a discount in a cheap currency) demonstrate the search for value in Japan. Investors may wish to remove currency hedges.
On a valuation basis (see table above) the forward PE multiple of 11.8 is at a considerable discount to the world, and especially US average (15.8) and certain Japanese investment trusts yield more than UK peers, with generally stronger balance sheets and significant cash holdings.

EMERGING MARKETS-Very difficult to adopt a “blanket” approach to the region even in “normal times”, but especially difficult now, with so many different COVID, commodity, sectoral mix, debt, geo-political and increasingly natural disaster variables. See chart below The IMF recently warned that several emerging nations could disproportionately suffer from a combination of COVID and adverse reaction to “tapering” by developed counties e.g., FX/Interest rate pressures. Six countries have already defaulted during the pandemic, and the IMF is currently in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri Lanka,Ghana,Tunisia and Egypt.

Within the emerging/frontier universe I continue to have a relatively positive view on Asia. The economic fundamentals were discussed on page 16 above, and the forward-looking multiples and dividend growth metrics appear relatively attractive in a global context. Any move by China to open more fully after their severe Covid lockdown, would of course additionally help. Exposure to the entire area can be achieved through a number of ETF’s and also investment trusts currently on discounts

If a country-by-country approach is adopted, I have a longer-term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100 million, an emerging middle class, and a recipient of strong foreign direct investment. Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant)

have all recently invested in new capacity in the country. Other big names moving chunks of production from China to Vietnam include Dell and HP (laptops), Google(phones)and Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7% Q2 2022) and approximately 6% in 2023 while current inflation is running at about 3.5%. One more rate hike of 50bp towards the end of the first quarter should mark the end of the tightening cycle. On a relatively low prospective PE based on forecast earnings growth over 20%, Vietnamese equities appear good value.
India, although quite highly rated and a major oil importer, warrants inclusion in a diversified portfolio, and is currently receiving some fund flows from “overweight” Chinese portfolios. Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5% inflation

market relative out- performance. Many of these countries also raised interest rates at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.

selected bonds.

• COMMODITIES– Gold spiked to over $2000 in March, a recent high, when Russia invaded Ukraine, but has since fallen about 10%, although of course, remaining reasonably stable in many local currency terms. Central Banks have been aggressively topping up their holdings during 2022.The longer-term prospects for more cyclical plays, however, continue to look brighter. Increased renewable initiatives, greater infrastructure spending as well as general growth, especially from Asia, are likely to keep selected commodities in demand at the same time as certain supply constraints (weather, labour and equipment shortages, Covid, transport) are biting. Current relaxation of the Chinese Covid policy, may provide a boost to base metals.
• Wheat and other grain prices have fallen from the levels reached following the Russian invasion of Ukraine, but the current grain shipment complications, planting/harvesting schedules within the region and extreme global meteorological conditions are expected to lead to further price volatility. If the conflict is prolonged it will affect millions of people living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that could have political consequences. There has been renewed interest in agricultural funds as well as the soft commodities themselves.
• URANIUM-I remain positive on the outlook for nuclear energy (stable base load,carbon-friendly,government U-turns,high energy output) while being aware of some of the well know issues(time, cost and waste disposal).Uranium is expected to experience a material market deficit over the next few years (estimates range between 10% and 30% of global demand).Nearly half of current world mined supply comes from Kazakhstan/Russia. The current price of 50 cents per pound could easily rise to 60c to 70c,as a result of geopolitical tension and a sharply rising cost curve. Apart from capital good companies exposed to the reactor construction/maintenance, I strongly recommend some exposure to my favoured investment trust.

UK FIXED INTEREST-selective exposure now recommended, especially for cautious/balanced risk mandates
The graph below plots the progress of the UK 10 year gilt yield, which is 3.66% at the time of writing. The two key things to note are firstly, the extremely low yields prevailing, just a year ago, partly reflecting a prolonged QE programme, and secondly the “panic” level reached at the end of September as domestic and international investors briefly took flight at the prospect of the short-lived Truss/Kwarteng mini budget proposals. Translating this into price terms, the I share all gilt index fell over 35% from the beginning of the year to late September before bouncing about 13% to current levels. This is huge volatility for an asset class often regarded as haven quality!
Having been negative on gilts for several years, I am now recommending gradually re-introducing selected fixed interest stocks to balanced portfolios, especially for cautious and balanced risk mandates.
Gilts themselves will have to contend with huge supply issues over coming quarters. While not falling as much as gilts and having completely different supply/demand dynamics, selected preference shares also fell to reach yield levels of approximately 7%, while good quality corporate bonds now offer yields around 6%. For the more adventurous, annual income yields around 10% and the prospect of capital gains are also are also offered on more speculative grades.

risks and opportunities in the production and storage of energy from alternative sources. My favoured vehicles {solar,wind,storage and infrastructure) in the UK investment trust space have delivered capital returns of approx. 10% and additional dividend income of between 5% to7% over 2022 and are expected to continue to deliver healthy total returns.

COMMERCIAL PROPERTY–
The MSCI/IPD Property Index showed a sharp fall in the total return across all properties in October, the decline of 6.4% (-6.8% capital values, +0.4% income), taking the year-to-date return to -1.6% (capital -5.2%, Income +3.8%). The monthly decline accelerated the downward trend started in July this year, especially in Industrial

Properties. Rental growth however was positive at +2.4% in October..or 4.4% annualised for the ten month period
Several analysts are down grading their estimates for the sector following the rapid move in UK longer and shorter-term interest rates. Property asset valuations take time to materialise where there is a lag between balance sheet date and results publication in the listed area. Live traded property corporate bonds, however, have already moved sharply lower.
Quoted property giants British Land and Land Securities both reported deteriorating conditions witing their third quarter statements, expecting further valuation declines following rising yields.

Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions. Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth

portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy portfolios.
Independence from any product provider and transparent charging structure
Feel free to contact regarding any investment project.
Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)
kenbaksh@btopenworld.com
2ndt January ,2023

Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions – investors should conduct their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ regulatory filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.The author may hold positions in any of the securities mentioned
The author explicitly disclaims any liability that may arise from the use of this material.

Ken Baksh – December Investment Monthly

6th December 2022 / Leave a comment

In our December investment review, Ken discusses the macro picture in the US, Europe, China and Japan before looking at the effects of inflation. We then look at moves over the past 2 months before moving to the UK economy and issues such as consumer confidence, the trade deficit and Govt deficit, insolvencies and recession expectations. Ken highlights the good job that PM Rishi Sunak has done in steadying the ship, before we look at how previous stock picks in October and November have performed. These include Legal & General #LGEN, Smith & Nephew #SN, Begbies Traynor #BEG, Greencoat UK Wind #UKW, Whitbread #WTB, Frontier IP #FIPP, Enquest Bond #ENQ2 and Georgia Capital #CGEO. Ken then picks out four more stocks for growth, These are:

Chemring #CHG

Lloyds Preference Share #LLPC

Asia Dragon Trust #DGN

Legal & General Cyber Security ETF #ISPY

DECEMBER 2022 Market Report

Investment Review

Summary

During the one-month period to 30th November 2022, major equity markets, as measured by the
aggregate FTSE All – World Index, rose by over 5%, reducing the year-to-date loss to 18%, in $ terms.
Chinese equities, were very strong gaining over 30% and taking the broad emerging market indices
and Asia with them. The VIX index fell, finishing the period at a level of 22.22.
Government Fixed Interest stocks also rose over the month. The UK 10-year gilt ended the month on
a yield of 3.16% with corresponding yields of 3.77%, 1.94% and 0.25% in USA, Germany, and Japan
respectively. Speculative and lower quality bonds, however,fell in price terms. Currency moves
featured a weaker US dollar. Commodities were mixed.

News

Over the recent month, the OECD has made further downgrades to world economic growth and
anecdotal evidence from several third quarter reporting companies suggests that the slowdown is
accelerating. e.g. Maersk (“freight rates peaked….decreasing demand”).
At the same time, key data indicators (factory gate and commodity prices, shipping rates, inflation
expectations) suggest that headline price growth is set to slow in coming months, although labour
compensation developments must be watched carefully .
More volatility expected in oil prices as western countries prepare to impose a price cap on Russian
crude.
FTX,a leading crypto exchange,and a sprawling network of affiliated firms filed for bankruptcy
protection dealing another blow to the crypto sector.

Recent US Federal Reserve meetings and informal comments by Jerome Powell and other Fed
governors remain hawkish and further increases are expected though calls for 50bp rather than
75bp are increasing. The latest rise took the benchmark rate to the 3.75%/4% range.At a speech at
the Brookings Institute yesterday,the Fed Chairman sent mixed signals that the fight against
inflation “had a long way to go” while also sending a strong hint that the next rate rise,mid
December, would be 50bp rather than 75bp
would be Downward projections to economic growth, and upward moves to inflation forecasts
were also released.
Recently announced inflation indicators showed October headline CPI of 7.7%, lower than estimates,
while the core inflation rate rose by 6.3%. First quarter negative GDP growth followed by second
quarter of -0.9% signals a “technical recession”, although labour/employment trends still seem
reasonably robust. Third quarter preliminary GDP growth of 2.6%, annualised, while higher than

estimates concealed a weaker consumer component offset by a strong trade balance. Recent
consumer sentiment indicators (November composite PMI for example), retail sales, housing
activity, construction figures and the Empire States Survey back this up, showing declining trends
into recent weeks. . The Fed’s own forecasts expect GDP growth of 0.2% and 1.2%, and core PCE
growth of 4.5% and 3.1% respectively for 2022 and 2023
US midterm election results showed the Republicans narrowly taking control of the House of
Representatives while the Democrats retained the Senate, a situation which could minimise more
extreme policies, but also thwart some of Biden’s ambitions. Donald Trump has vowed to return in
2024, although the Republican Party is far from united at the current time

EUROPE

The European Central Bank raised interest rates by half a percentage point on July 22nd, and a further
75bp in September also pledging to support surging borrowing costs from sparking a eurozone debt
crisis. The ECB raised interest rates by another 75bp, to their highest level since 2009, on 27th
October, pledging to continue increasing borrowing costs in the coming months to tackle record
inflation, despite a looming recession. On 29th November, Christine Lagarde, the ECB president,
warned that the bank was “not done” raising interest rates, saying that inflation “still has a way to
go”.
First quarter 2022 GDP for the Eurozone showed a weaker than expected trend especially in
Sweden, Italy and Germany and more recent indicators show a continuation of this trend,
exacerbated by the Russia/Ukraine conflict, supply chain issues, and rapidly increasing costs. The
“flash” PMI figure for October, released on the24th October, fell to 47.1 the lowest since November
2020, although German quarterly GDP growth figures, just released, were marginally ahead of
expectations.
Current ECB staff projections foresee economic growth of 2.8% for 2022, a sharp reduction on the
previous forecast, and further downgrades could be likely in the wake of the ongoing Ukrainian
conflict and related gas shortages.
November Eurozone inflation, just released, of 10.0% was lower than expected.with slower gains in
energy and services ,and faster growth in food prices.

ASIA excl JAPAN

The GDP figures, shown below (source: CLSA, CEIC) show that 2022 and 2023 growth
projections for the Asia excl Japan region compare favourably with those of other developed
regions. The reasons include a “better” Covid experience, selective commodity exposure,
tourism, continued FDI Investment (especially China related) and better initial fiscal
situations (compared with late 90’s for example) and limited direct connections with the
Russia/Ukraine situation. The forecasts do not assume a total easing of Chinese covid rules.
Headline inflation of around 5% (core 3%) also compares favourably.
Geo-political concerns must be taken into account, especially In Taiwan.

CHINA

The 5.5% official GDP growth target for 2022 looks clearly unachievable, with some investment
banks now forecasting below 3%. Official data shows weakening trends in consumer spending, fixed
asset investment and construction activity while more recent “live” tracking data e.g., mobility,
cement production and electricity use also showed subdued economic activity. Official data for the
third quarter, just released shows growth of 3.9%. The major historic negative issues of a very
restrictive anti-Covid policy and major disruption within the property market have now been
supplemented by increasing US restrictions on the production/export of certain key electronic
products.
At the time of writing a property “rescue” package has been implemented, while on the Covid front,
tens of thousands of people have taken to the streets protesting strict coronavirus controls and
suppression of freedom of speech, triggering clashes with police and security forces.While nothing is
certain in Xi’s approach to the Covid Pandemic, there is a growing feeling that certain measures will
be relaxed/increase in vaccination.

JAPAN

The Japanese economy contracted 1.2% on an annualized basis during the third quarter of 2022,
missing forecasts of 1.1% growth, and considerably weaker than the 4.6% expansion recorded during
the second quarter. This was the first down quarter of the year reflecting weak domestic
consumption, a slowdown in business investment and an acceleration in imports. Estimates for the
full year seem to fall mainly within the 1.5%-2.0% band. Inflation, while still well below international
peers, rose by 3.6% in October, the highest since 1982, driven by currency weakness.
Recently the Japanese government unveiled a $197 billion stimulus package to ease the impact on
consumers of soaring commodity prices and a falling yen, while the BoJ stuck by its ultra-loose
policy, maintaining very low interest rates and re-affirming it yield control policy.

UNITED KINGDOM

Within the UK, live activity data (e.g November Gfk data) continues to show a weaker overall trend,
especially within the services sector. According to this survey, released late November, covering the
mid November period, consumer confidence remains very low, amid the cost-of-living crisis.The

retail sales figure for October did however show a slightly better than expected reading but this may
have been distorted by the Queen’s mourning period . Unemployment, however, is still at a very
low level, although recent official figures did show a tentative slowing in hiring intentions.
Inflation continues to rise, the October CPI and RPI readings registering hikes of 11.1% and 14.2%
respectively. Kantar and the ONS both reported food/grocery prices rising about 15% year on year as
well as turkey/egg shortages.Happy Christmas!
The PSBR was starting to deteriorate again, largely as a results of rapidly rising interest (index linked)
payments and expectations of higher public sector pay and state pensions. The most recent “official”
figure showed September PSNB at £20 billion, much larger than forecast and the second largest
since monthly records began in 1993, according to the ONS.

Despite some relief with the recent energy price package, until April at least, (but not other utilitiessee below), shop price inflation, greater Council Tax “freedom”, upward interest/mortgage rate
pressure, stalling house prices, accelerating rents, insolvencies/evictions, legacy Brexit issues and ,
strike activity, will continue to be headwinds and the outlook for economic growth over coming
quarters is highly uncertain. Both the Bank of England as well as the OBR and now the OECD are
expecting recessionary conditions for one to two years.

Experts at consultancy EY-Parthenon reported that company profit warnings had jumped from 51 to
over 86 over the third quarter of 2022 citing increasing costs and overheads as the main reason,
especially in consumer facing businesses. Another report from Begbies Traynor, Latest Red Flag Alert

Report for Q3 2022 – 07:00:07 19 Oct 2022 – BEG News article | London Stock Exchange quoted that
over 600,000 business were already in severe financial distress.
Monetary policy has tightened from a 0.1% interest rate in December last year to the 1.25% rate set
in June and a further 50bp at the August, meeting, followed by 50bp in September, taking the
benchmark rate to 2.25%. Markets are expecting rates to be above 4.0% by mid-2023.

Autumn Statement
On 17th November, Chancellor Hunt told a sombre House of Commons that a massive fiscal
consolidation including £30 billion of spending cuts and £25 billion of tax rises was needed to restore
Britain’s credibility and tame inflation. The OBR said they expected the economy to shrink 1.4% and
not regain pre -pandemic levels until 2024.Inflation was expected to remain over 7% next year.
While many of the proposals had been leaked, and the market reaction was muted (first objective
achieved!), there were a few positive surprises (e.g help for NHS and education) and several
negatives.
From an investor point of view the reduction in tax free allowances for investment income and
capital gains, was higher than expected. Make full use of ISA etc while can!

Monthly Review of Markets
Equities
Global Equities rose over November (+5.02%) extending the quarterly recovery and reducing the
year to date decline to 18.04% in dollar terms. All major indices climbed with especially large gains
registered in China, which also benefited Emerging Market and FT Asia-excl Japan bourses.

Continental European indices were also relatively strong, while the NASDAQ and Nikkei lagged in
relative terms. The VIX index fell over the month to end November at a level of 22.22. The ten –
month gain of 29.04% reflects the degree of risk aversion compared with the” relative calm” of last
December (medical, geo-political and economic!)

UK Sectors
Sector moves were again very mixed over the month although most ended in positive territory. The
few losers included telco’s and tobacco On the other hand, miners, utilities, life companies,
financials,retailers and food were relatively strong. The FTSE100 outperformed the All-Share Index
and is about 3% ahead of the broader index since the beginning of the year. By IA sectors, UK active
unit trusts are underperforming benchmark indices, trackers etc, so far this year, with small
company funds even more so. Income based funds, by contrast, are significantly outperforming the
averages. “Balanced” funds, by IA definitions, are falling by about 8%-10% so far this year (Source:
Trustnet November 30th).

Fixed Interest
Major global government bonds rose in price terms over November, the UK 10-year yield for
instance finishing the month at a yield of 3.16%. Other ten-year government bond yields showed
closing month yields of 3.77%,1.93% and 0.25% for US, German and Japanese debt respectively. UK
corporate bonds also bounced strongly, up approximately 4% on the month in price terms.
Speculative bonds, however, bucked the trend falling in price terms.
Year to date, the composite gilt index has fallen approximately 22% underperforming UK higher
quality corporate bonds in price terms and more so in total return.
Check my recommendations in preference shares, selected corporate bonds,fixed interest ETF’s ,
zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes
is also available to subscribers.

Foreign Exchange
Currency moves featured a sharp fall in the US dollar, largely following the better-than-expected
inflation rate. Sterling rose against the US dollar but fell against the Japanese Yen and Euro. Currency
developments during November also included modest strength in the Chinese Yuan.

Commodities
A mixed performance by commodities during November with weakness in Oil and many agricultural
commodities and strength in copper, Iron ore and the precious metals. Year to date, uranium and
the energy complex are strongly up in price terms while industrial metals copper, aluminium and
iron have all shown price declines of over 13%. Gold has also dropped in dollar terms by about 3% so
far this year.

Looking Forward
Major central banks have remained hawkish with reducing QE/commencing QT and accelerating the
timing and extents of rate increases as the main objectives, especially where inflation control is the
sole mandate. In a growing number of smaller economies where US contagion, politics, commodity
exposure inflation/fx are also issues, several official increase rate increases have already taken
effect. Japan, however, has continued to adopt stimulative measures, up to now.
Global Government Bonds have stabilised somewhat although differing inflationary outlooks and
supply concerns could lead to continued volatility in the sector.
For equities, the two medium term key questions will be when rising interest rates eventually cause
equity derating/fund flow switches, government, corporate and household problems, and how the
rate of corporate earnings growth develops after the initial snapback. Going forward, withdrawal of
certain pandemic supports, uncertain consumer and corporate behaviour and cost pressures are
likely to lead to great variations by sector and individual company. The third quarter reporting
season produced several negative surprises e.g large American technology companies and UK
building and property companies.

Observations/Thoughts
ASSET ALLOCATION
As well as maintaining an overweight position in UK equities, it may be worth initiating or adding to
Japanese positions within an international portfolio. The US market has fallen about 19% so far this
year (NASDAQ -30%) but remains a relative underweight in my view. Margin pressure headwinds,
political uncertainty, prospective dollar weakness and technology sector volatility must be balanced
against the current stock market ratings. Continental European equities appear cheaply rated in
aggregate, but great selectivity is required. Within the Emerging market space I currently favour
exposure to the Far East.

Another major asset allocation decision would be to keep part of the conventional “fixed interest”
portion in alternative income plays in the infrastructure, renewables, and specialist property
areas. Many instruments in this area provide superior capital growth, income, and lower volatility
than gilts for example. Recent stock market volatility has brought several renewable stocks back to
attractive levels.
I am also adding selected preference shares to the “fixed interest” allocation, where annual yields
of approximately 6% are currently available.

UK Equities continue to remain a relative overweight in my view, based on several
conventional investment metrics (see above), longer term underperformance since the
Brexit vote, style preference (value overgrowth) and international resource exposure
although be aware of the numerous domestic headwinds I have highlighted above.
Value should be favoured over growth, and the FTSE 100 favoured over the FT All-Share.
Apart from the style drift, remember that the non sterling element of leading FTSE 100
companies and sectors is relatively high
By sector, Oil and Mining equities continue to benefit from above average yields, strong
balance sheets, dollar exposure and secular demand e.g copper, cobalt for electronics,
construction, electric vehicles etc. Any moves regarding Chinese re-opening the economy
would be another positive for this sector.
Remain overweight in pharmaceuticals and underweight in non-renewable utility stocks
which may suffer from consumer and government pressures, and no longer trade on yield
premia, especially against the backdrop of higher gilt yields.
Construction materials, especially cement will benefit from growing
infrastructure/renewable initiatives., although rising cost pressures and falling housing
activity must also be considered.
Banks, may enjoy some relative strength from rising interest rates, but continue to
monitor the recession/loan growth and default risks.These mixed trends were very
evident in the recent third quarter figures. Preference Shares as well as ordinary shares
have attractions in this area
Housebuilders and real estate-expect depressed activity and remember that the rising
interest rates have not yet been fully factored into bricks and mortar property yields.
Industry data and anecdotal news from both housebuilders and REIT’s suggest further
weakness to come.

Retailers are in general suffering from a combination of falling sales and rising costs and
clear trends in consumers “trading down” are apparent. Certain on-line operations e.g
Asos additionally are suffering from an element of post-Covid comparison.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s
expenditure, supermarket competition and rapidly rising costs.
Airlines may suffer as a result of large dollar costs, uncertain foreign travel outlook and
often high debt levels
Extra due diligence at stock level more generally will be required as I expect a growing
number of profit warnings and downbeat forward looking statements. See the EY and
Begbies statements on page 7 above.
However,takeover activity is also clearly increasing with, for example, private equity
snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign
takeover, stake building is also increasing, current weak sterling being a factor, with
Vodafone under scrutiny by a French (who already have BT interest!) investor. Biffa (waste
management),MicroFocus(technology),Aveva(software) and RPS(professional services)
have all succumbed to foreign takeovers in recent months, much by “strong dollar”
American or Canadian organizations.

JAPANESE EQUITIES also remain an overweight in my view, although my recent
comment re hedging may “nuanced “now following the extreme currency weakness and
surprise intervention. Unlike most other major economies, Japan is expected to continue
its easy money policy. Exporters have benefitted from the plunging Yen although higher
input costs and more “off-shoring” also must be considered. The prospective price/book
ratio of 1.19 is attracting interest of corporate and private equity buyers, while the
prospective yield of 2.6% is above the world average and compares very favourably with
USA (1.7%). Corporate governance is rapidly improving with diverse boards, reduction of
cross holding, higher dividends etc. There are clear signs that inward investment attracted
by the pro-growth, pro-deregulation agenda and relatively low costs (average Japanese
annual wage $30000 compared with $75000 USA) is increasing. Private equity stake
building interest in Toshiba and growing activity in the property sector (discount on a
discount in a cheap currency) demonstrate the search for value in Japan. Investors may
wish to adopt a partially rather than fully hedged FX position following recent
developments
On a valuation basis (see table above) the forward PE multiple of 12.9 is at a considerable
discount to the world, and especially US average (18.0)

pressures. Six countries have already defaulted during the pandemic, and the IMF is currently
in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri
Lanka,Ghana,Tunisia and Egypt.
Within the emerging/frontier universe I continue to have a relatively positive view on Asia.
The economic fundamentals were discussed on page 16 above, and the forward-looking
multiples and dividend growth metrics appear relatively attractive in a global context. Any
move by China to open more fully after their severe Covid lockdown, would of course
additionally help. Exposure to the entire area can be achieved through a number of ETF’s and
also investment trusts currently on discounts
If a country-by-country approach is adopted, I have a longer term positive view on Vietnam
where, the nation is supported by positive demographics, with a population of near 100
million, an emerging middle class, and a recipient of strong foreign direct investment.
Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant)
have all recently invested in new capacity in the country. Other big names moving chunks of
production from China to Vietnam include Dell and HP (laptops), Google(phones)and
Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7%
Q2 2022) and current inflation is running at about 3.5%. On a relatively low prospective PE
based on forecast earnings growth over 20%, Vietnamese equities appear good value. India,
although quite highly rated and a major oil importer, warrants inclusion in a diversified
portfolio, and is currently receiving some fund flows from “overweight” Chinese portfolios.
Indonesia, the last of my current Asian ideas benefits from a commodity boom, strong
domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5%
inflation

Caution is required in many South American markets with poor COVID-19 situations,
deteriorating fiscal balances, weak investment, low productivity (see below) and
governments in a state of transitioning e.g Brazil. However, some stock market
valuations currently appear interesting in the region, which, so far, has been relatively
unaffected by events in Ukraine. Commodity exposure, deglobalization beneficiary,
valuation and recovery from a very low-level account for some year-to-date stock
market relative out- performance. Many of these countries also raised interest rates
at an earlier stage, allowing relative currency strength, compared with say the Euro,Yen or Sterling.

Certain areas within Central Europe are starting to receive more attention, mainly on
valuation grounds, but the lingering Covid effects and indir
ect effects of the Russia/Ukraine invasion should be borne into account. Regarding the
latter, a reduction/termination of Russian gas supply could have a serious recessionary
impact in certain countries. Large refugee influxes e.g Poland are also starting to
create budgetary/social issues.

Comments re great selectivity above also apply to emerging market debt. For the
more adventurous fixed interest investor combinations of well above average yields
(sometimes caused by pre-emptive moves last year), stable fiscal and FX situations
and, diversified economic models could provide outperformance from carefully
selected bonds.

• COMMODITIES– Gold spiked to over $2000 in March, a recent high, when Russia invaded
Ukraine, but has since fallen about 12%, although of course, remaining reasonably stable in
many local currency terms . The longer-term prospects for more cyclical plays continue to
look brighter. Increased renewable initiatives, greater infrastructure spending as well as
general growth, especially from Asia, are likely to keep selected commodities in demand at
the same time as certain supply constraints (weather, labour and equipment shortages,
Covid, transport) are biting. Anecdotal evidence from reporting companies RTZ, BHP and
Anglo American appear to suggest that the industry is enjoying a bumper time, and with
disciplined capex programmes, extra dividends and share buy-backs are commonplace!
Current rumours of a cautious relaxation of the Chinese Covid policy, may provide a boost to
base metals.
• Wheat and other grain prices have fallen from the levels reached following the Russian
invasion of Ukraine, but the current grain shipment complications, planting/harvesting
schedules within the region and extreme global meteorological conditions are expected to
lead to further price volatility. If the conflict is prolonged it will affect millions of people
living in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that
could have political consequences. There has been renewed interest in agricultural funds as
well as the soft commodities themselves.

my view, combining well above average yields and low market correlation with low
premium to asset value. The recent volatility in natural gas prices has highlighted both
risks and opportunities in the production and storage of energy from alternative
sources. However, increasing levels of due diligence are required, in committing new
money to the area overall. Financial watchdogs across the world are sharpening their
scrutiny of potential “greenwashing” in the investment industry on rising concerns that
capital is being deployed on misleading claims.
• However, in the shorter term, the Russian invasion of Ukraine has precipitated a global
energy crisis, that has forced countries, especially in Europe to look for ways to quickly
wean themselves off Russian oil and gas, and reconsider timelines of commitments to
cut the use of fossil fuels. At the time of writing, it seems highly likely that USA will
increase oil and gas output, UK North Sea may see further investment and EU coal
consumption could increase.
• Another area currently in the ESG purist cross hairs is “nuclear”. Ignoring the fact that
nuclear weapons have not been used in anger since 1945, and the fact that some deterrent is
needed, (now?), where should the confused investor stand when it comes to nuclear power
substituting coal power? Japan, UK and Germany are all studying proposals to revive their
nuclear power capacities. I have some interesting “uranium play” ideas for those interested.

• ALTERNATIVE ASSETS-this group, encompassing private equity, private debt, hedge
funds, real estate, infrastructure, and natural resources is expected to continue growing both
in actual and relative terms over coming years.
Traditional asset management groups are racing to expand offerings in alternative
investments as they seek to boost profitability and head off competition from private
equity groups (see graph below).
I have, for a while, recommended some exposure to this area maybe as part of the
former “gilt allocation”. With strong caveats re liquidity, transparency, dealing
process, I still adopt this stance, continuing to use the investment trust route. So far
this year, gilts have declined approximately 24% while my favoured UK renewable
closed-end funds have appreciated by around 6% in capital terms and delivered about
6% in annual income. Please contact me directly for specific ideas

COMMERCIAL PROPERTY The MSCI/IPD Property Index showed a sharp fall in the total return across all
properties in October, the decline of 6.4% (-6.8% capital values, +0.4% income),taking
the year to date return to -1.6% (capital -5.2%,Income +3.8%).The monthly decline
accelerated the downward trend started in July this year, especially in Industrial
Properties. Rental growth however was positive at +2.4% in October..or 4.4%
annualised for the ten month period
Several analysts are down grading their estimates for the sector following the rapid move
in UK longer and shorter-term interest rates. Property asset valuations take time to
materialise where there is a lag between balance sheet date and results publication in
the listed area. Live traded property corporate bonds, however, have already moved
sharply lower.
Quoted property giants British Land and Land Securities both reported deteriorating
conditions witing their third quarter statements, expecting further valuation declines
following rising yields.

Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions.
Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth
portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas
can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy
portfolios.
Independence from any product provider and transparent charging structure
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 ,2022
Important Note: This article is not an investment recommendation and should
not be relied upon when making investment decisions – investors should conduct
their own comprehensive research. Please read the disclaimer.
Disclaimer: Opinions expressed herein by the author are not an investment
recommendation and are not meant to be relied upon in investment decisions.
The author is not acting in an investment, tax, legal or any other advisory
capacity. This is not an investment research report. The author’s opinions
expressed herein address only select aspects of potential investment in
securities of the companies mentioned and cannot be a substitute for
comprehensive investment analysis. Any analysis presented herein is illustrative
in nature, limited in scope, based on an incomplete set of information, and has
limitations to its accuracy. The author recommends that potential and existing
investors conduct thorough investment research of their own, including detailed
review of the companies’ regulatory filings, and consult a qualified investment
advisor. The information upon which this material is based was obtained from
sources believed to be reliable but has not been independently verified.
Therefore, the author cannot guarantee its accuracy. Any opinions or estimates
constitute the author’s best judgment as of the date of publication and are
subject to change without notice.The author may hold positions in any of the
securities mentioned
The author explicitly disclaims any liability that may arise from the use of this
material.

October 2022 Investment Review – Alan Green talks to Ken Baksh

20th October 2022 / Leave a comment

Former fund manager and market analyst Ken Baksh has over 30 years experience in the markets, and is widely respected for his insightful analysis and investing ideas. In the first of a series of monthly interviews with Alan Green, Ken offers his view on global economies before moving closer to home and asking whether the Karteng budget and Truss Government farce has damaged our international reputation as a financial powerhouse. Ken then provides an in depth look at the UK economy and what he sees as the difference between UK equities and the UK economy. Ken then provides his four stock picks for October, which include Legal & General #LGEN, Smith & Nephew #SN., Greencoat Wind #UKW and Begbies Traynor #BEG, and then provides potential action points for the cautious investor and options for income investors.

OCTOBER 2022 Market Report

Investment Review

Summary

During the one-month period to 30th September 2022, major equity markets, as measured by the
aggregate FTSE All – World Index, fell sharply 9.6%, taking the year-to-date loss to 26%, in $ terms.
All major equity declined with the UK, Europe and Japan marginally outperforming while China and
Emerging Markets fell over 12% during the month. The VIX index rose sharply, finishing the period at
a level of 31.62. Key equity market drivers were continued concerns over global economic growth, inflation, food crises, rising interest rates and political uncertainty. Government Fixed Interest stocks also fell over the month largely on inflationary, supply and specific UK related issues. The UK 10-year gilt ended the month on a yield of 4.13% (2.8% one month ago) with corresponding yields of 3.73%, 2.11% and 0.25% in USA, Germany, and Japan respectively. Speculative and lower quality bonds also mostly fell in price terms. Currency moves featured a weaker pound and stronger US dollar. Commodities mostly fell in price terms on revised economic
growth forecasts.

News

Over the recent month, there have been further significant official economic growth downgrades (graphs above) and growing anecdotal corporate evidence of difficult trading conditions. Central Banks have become more hawkish in battling stubbornly high inflation announcing interest rate hikes both sooner and higher than expectations in many cases.UK macro news was dominated by a ” mini budget”which was anything but…
All organizations highlight the considerable regional variation, the IMF for example talking of “severe recession” in parts of Eastern Europe and Italy on various natural gas scenarios, while the World Bank has speculated on the” possibility” of a global recession in 2023.The World Bank explores the possibilities of three world growth, per person, outcomes between +1.5% to -0.4% crucially dependant on the extent of Central Bank tightening, to tackle inflation.

US
Recent US Federal Reserve meetings and informal comments by Jerome Powell and other Fed governors have clearly become much more hawkish and several interest rate increases are expected over coming months. At the September 21st meeting the Fed raised the benchmark rate by 75 bp, for the third time in a row and signalled its intention to keep policy tight. Downward projections to economic growth, and upward moves to inflation forecasts were also released. Recently announced inflation indicators showed August headline CPI of 8.35%, higher than estimates, while the core inflation rate rose by 6.3% led by services. First quarter negative GDP growth followed by second quarter of -0.9% signals a “technical recession”, although labour / employment trends still seem robust. Recent consumer sentiment indicators, retail sales, housing activity, construction figures and the Empire States Survey, however, show declining trends into August/September. Independent economic forecasts are now expecting very low GDP growth for full year 2022 with the unemployment level rising to about 4.4%. The Fed’s own forecasts expect GDP growth of 0.2% and 1.2%, and core PCE growth of 4.5% and 3.1% respectively for 2022 and 2023

EUROPE
The European Central Bank raised interest rates by half a percentage point on July 22nd, and a further 75bp in September also pledging to support surging borrowing costs from sparking a eurozone debt crisis. Co-ordinated moves to help mitigate the gas crisis, including windfall taxes and energy pricing reforms are also being urgently discussed. First quarter 2022 GDP for the Eurozone showed a weaker than expected trend especially in Sweden, Italy and Germany and more recent indicators show a continuation of this trend into August and September, exacerbated by the Russia/Ukraine conflict, supply chain issues, and rapidly increasing costs. A technical recession seems inevitable.

Current ECB staff projections foresee economic growth of 2.8% for 2022, a sharp reduction on the previous forecast, and further downgrades could be likely in the wake of the ongoing Ukrainian conflict and related gas shortages. September Eurozone inflation, just released, of 10.0% (Holland15%) was higher than expected. Political events have included the election in Italy of Giorgia Meloni to the position of prime minister and head of a three-party right-wing alliance.

ASIA excl JAPAN
Unlike other major economic zones there have been no major economic downgrades within this region, (maybe a lagged effect) but there are a wide range of possible outcomes depending on commodity exposure, tourism, debt, Chinese linkages, US dollar effects, etc. Recent FT analysis shows that in four of the six biggest countries in ASEAN (Vietnam, Malaysia, Indonesia and Philippines), GDP is rising faster than inflation (see graph below) in contrast to the majority of the G10 countries. A sharp bounce back from the pandemic (Philippines), commodity exposure (Indonesian palm oil and coal), (Malaysian palm oil and rubber), and Thai (rubber) and shifting supply chains away from China (Apple iPads from Vietnam) are all factors behind the region’s resilience. The World Bank estimates that the Pacific ex China are could grow at 5.3% in 2022,higher than China.

CHINA
Chinese economic data over past months has cast strong doubts on the 5.5% official growth target for 2022, with some investment banks now forecasting below 3%. Official data covering the period
to end August showed weakening trends in consumer spending, fixed asset investment and construction activity while more recent “live” tracking data e.g., mobility, cement production and electricity use also showed subdued economic activity. Of note were the precipitous drops in real estate and related construction activity, where, at the time of writing, government and quasi government rescue packages are being put urgently into place The zero tolerance Covid policy has of course also had depressing effects on several economic sectors (see below). Various government
“economic support” measures have recently been introduced to soften these headwinds and the

2022 National Congress this autumn, starting on October16th, will be closely monitored for economic and political pointers. Further reinforcement of “common prosperity” and “anti corruption“ themes could lead to unpredictable government interference at short notice. “China’s most locked-down city exemplifies the perils of endless Covid Zero. Ruili’s residents saw seven lockdowns from March 2021 to April 2022 and have spent a total 119 days barred from leaving their homes for any reason—other than to test for Covid. Even today when they go out, all movements are tracked, partly by facial recognition cameras. And a once-porous border is now patrolled by thousands of guards, equipped with heat-seeking technology” -source Bloomberg

JAPAN
After fourth quarter GDP 2021 growth of 5.4% annualised, led by more buoyant consumer spending and a tentative manufacturing recovery, the first quarter 2022 figure showed a decline of 1.0% annualised, somewhat higher than some estimates, then followed by 2.2% in Q2 2022, largely consumer driven. Estimates for the full year seem to fall mainly within the 1.5%-2.0% band. Inflation, while still well below international peers, rose by 3.0%(core 2.8%) in August, led by fuel and food and the weakening Yen. Fiscal policy remains loose, and the BOJ recently reaffirmed its yield control policy, while keeping key interest rates at -0.1%. However recent verbal and actual intervention (see below-one day trading) suggest that Yen weakness (on relative interest and divergent policy grounds), is no longer a one-way bet!

UNITED KINGDOM
Within the UK, live activity data (e.g September Gfk data) shows a weaker overall trend, especially within the services sector. According to this survey, released late September, consumer confidence dropped to another new level (–49) amid the cost-of-living crisis. To put this into perspective, the low point during the height of the pandemic was -34!..people really are gloomy. Other data has also been uninspiring with flat GDP and industrial production to end July and poor August retail sales.Second quarter official GDP,just released ,show a gain of 0.2% rather than a previously announced decline of 0.1%. RICS and Nationwide have reported a definite slowing in housing activity and there are doubts that the tax cuts/ stamp duty/first time buyer, changes announced in the “so called”! mini budget will offset the inevitable mortgage effect going forward. Unemployment, however, is still at a very low level, although recent official figures did show a tentative slowing in hiring intentions and there could be other adjustments due to some working age people leaving the
work force permanently (health?).

Inflation continues to rise, the August CPI and core readings registering hikes of 9.9% and 6.3% respectively led by fuel and food prices. The British Retail Consortium reported on September 27th that prices hit a record high in September, rising 5.7% on the month, with food bills up 10.6%. The recently announced energy support package will at least take the heat out of some of the more extreme inflation forecasts as well as provide some financial relief. The PSBR was starting to deteriorate again, largely as a results of rapidly rising interest (index linked) payments and expectations of higher public sector pay and state pensions. Projections following the
September 23rd mini budget and energy support packages have ballooned, the Institute for Fiscal Studies for example expecting public borrowing to top £190 billion this financial year taking the Debt/GDP forecast near 100%. Official gilt sales were scheduled to start this month, although the BOE statement on 28th September, regarding “providing stability” actually calls for a short period of gilt buying!

The current account deficit for Q1 was the worst on record at 8.3% of GDP, another worrying sign. It will be interesting to see if sterling weakness since then has changed the aggregate figures. Despite some relief with the recent energy price package (but not other utilities) and budget related tax/NI cuts, shop price inflation, merchandise availability, upward interest/mortgage rate pressure, stalling house prices, accelerating rents, insolvencies/evictions, pension triple-lock suspension (22/23), legacy Brexit issues, strike activity, covid revival will continue to be headwinds and the outlook for economic growth over coming quarters is highly uncertain.

Experts at consultancy EY-Parthenon reported that company profit warnings had jumped over 65% during the first half of 2022 citing increasing costs and overheads as the main reason. The same consultancy also issued a worse case inflation forecast of 15%, even higher than that of Bank of England governor Bailey. Another report from Begbies Traynor quoted that 600,000 business were already in financial distress. Anecdotal evidence from reporting quoted companies at the interim stage show a very mixed trend, and in my view, the just announced mini-Budget will create another batch of winners/losers.

Monetary policy has tightened from a 0.1% interest rate in December last year to the 1.25% rate set in June and a further 50bp at the August, meeting, followed by 50bp in September, taking the benchmark rate to 2.25%. Markets were expecting rates to be above 3.5% by mid-2023, but following the mini-Budget, the feeling is that the Bank of England will need to be more aggressive and figures of 5.0% for both shorter term rates and the 10-year Government bond yield are not totally unrealistic.

Monthly Review of Markets

Equities
Global Equities fell sharply over September, extending the year-to-date decline to 26% in dollar terms, with large variation between countries and sectors. The major UK equity indices and Japan, while still declining, outperformed in relative terms while China and Emerging Markets registered price falls in excess of 10%. The VIX index jumped over the month to an end September at a level of 30.32. The nine- month gain of 75% reflects the degree of risk aversion compared with the” relative calm” of last December (medical, geo-political and economic!).

UK Sectors
Sector moves were very mixed over the month although virtually all ended in negative territory. Mining, oil and pharmaceuticals proved to be relatively defensive while real estate,telco’s, household goods and food fell sharply. The FTSE100 continued to outperform FT ALL-Share on the month and is outperforming on a year-to-date basis, by around 4% largely due to the international/resource bias of the former and the low expectations for the UK domestic economy. By IA sectors, UK active unit trusts are underperforming benchmark indices, trackers etc, so far this year, with small company funds even more so. Income based funds, by contrast, are outperforming the averages. “Balanced” funds, by IA definitions, are falling by about 12% so far this year (Source: Trustnet September 30th). Due to the unprecedented fall in gilt and related prices, defensive funds
are falling as fast as growth funds so far this year

Fixed Interest
Major global government bonds collapsed, in price terms over September, the UK 10-year yield for instance finishing the month at a yield of 4.13%. Other ten-year government bond prices showed closing month ten-year yields of 3.73%, 2.11% and 0.25%for US, German and Japanese debt respectively. The very sharp move in longer gilts, prompted by the “surprise” Budget caused some immediate stresses amongst pension funds, which was the major reason for the BoE to initiate some “emergency measures” and defer the scheduled gilt sales. Year to date, the composite gilt index has fallen approximately 26% marginally underperforming UK
higher quality corporate bonds. Check my recommendations in preference shares, selected corporate bonds,fixed interest ETF’s, zero-coupons, speculative high yield etc. A list of my top ideas from over 10 different asset classes
is also available to subscribers.

Foreign Exchange
Currency moves featured weakness in sterling and strength in the dollar, the actual cross rate between the two moving by over 4%. Currency developments during September also included verbal and actual intervention by the Japanese and Chinese authorities as well as the well-publicised UK FX volatility which at one stage saw the pound heading for parity to the dollar. The strength of the dollar largely on the increasingly hawkish US Federal Reserve is creating many distortions in developed and emerging markets alike.

Commodities
With the exceptions of corn, palladium and wheat, commodities were weak across the board. Year to date, some soft commodities, uranium and the energy complex are still showing good gains, but industrial metals such as copper, iron ore and aluminium are nursing losses of 23%,24% and 25% respectively.

Looking Forward
Longer term investment concerns regarding variable economic recoveries and inflation, with related interest rate/fiscal implications have superseded Covid worries, even though the latter is “far from over” in a global perspective. Further rounds of autumn vaccination are already underway in several Northern Hemisphere locations. Shorter term, Ukraine issues are adding to equity, bond, currency and significantly, commodity, variability while UK assets, following the election and recent mini Budget seem likely to remain volatile for several weeks (currency, bond and equities).

Major central banks have turned much more hawkish with reducing QE and accelerating the timing and extents of rate increases, especially where inflation control is the sole mandate. In a growing number of smaller economies where US contagion, politics, commodity exposure inflation/fx are also issues, several official increase rate increases have already taken effect. Japan, however, has continued to adopt stimulative measures, up to now. Global Government Bonds have started to weaken again in price terms, with longer maturity debt now falling significantly as well as shorter term paper. Absolute yield levels, however, still look low when inflation, government supply and quantitative tightening are considered, especially regarding the UK, where new government policies, seem likely to fuel inflation, increase government borrowing, weaken the currency and possibly lead to greater than expected interest rate hikes. For equities, the two medium term key questions will be when rising interest rates eventually cause equity derating/fund flow switches, government, corporate and household problems, and how the rate of corporate earnings growth develops after the initial snapback. Going forward, withdrawal of certain pandemic supports, uncertain consumer and corporate behaviour and cost pressures are likely to lead to great variations by sector and individual company.

Observations/Thoughts
ASSET ALLOCATION
As well as maintaining an overweight position in UK equities, it may be worth initiating or adding to Japanese positions within an international portfolio. The US market has fallen about 24% so far this year (NASDAQ -31%) but remains a relative underweight in my view. Margin pressure headwinds, political uncertainty and technology sector volatility must be balanced against the current stock market ratings. Continental European equities appear cheaply rated in aggregate, but great selectivity is required. Current Ukraine tensions have opened new opportunities within the emerging market space, but extreme caution warranted. Latin America and parts of Asia, for example, have enjoyed economic rebounds, revived tourism, some commodity exposure, and little negative Ukraine spill over and this has been reflected in some indices e.g Latin America.

Another major asset allocation decision would be to replace part of the conventional “fixed interest” portion with alternative income plays in the infrastructure, renewables, and specialist property areas. Many instruments in this area provide superior capital growth, income, and lower volatility than gilts for example. I am also adding selected preference shares to the “fixed interest” allocation, where annual yields of approximately 6% are currently available after the recent bounce in prices.

UK EQUITIES/GILTS
At this time of writing, with so many political, economic unknowns (and rapidly moving developments), there will be a high degree of error in any forward looking economic/investment strategy/sector/stock projections, but I would heroically attempt to present the current picture as I see it.

• The historic “hard data” is poor up to the end of September, and remember that these are the “facts”that the OBR will use in their base case not to be overly distracted by current political noise and spin.
• Several headwinds I outlined on page 7, are still very appropriate, (though forgotten by several commentators), and importantly, predate issues of energy prices….and then interest rates/mortgage payments.
• Short and long term interest rates were abnormally low until recent months…still a global QE effect, plus slow Central Bank reactions to inflation
• Biting my tongue to avoid any political comment, the first attempt (I will call it that) at the budget of the new government proposed tax cuts, with very little information on revenue raising…. immediate cue for UK asset volatility.
• Understandably, international observers (important gilt holders and the IMF) want to know more, as does the OBR, who seem to have been side-lined (or worse).Kwarteng will have to convince a sceptical OBR that his 2.5% medium term growth plan can be achieved through supply side reforms, while still remaining fiscally responsible. Remember that the OBR was predicting only 2.0% sustainable growth in March when the economy was much stronger.
• The Bank of England, with its main remit of price stability, would be inclined to put-up short-term interest rates even higher than originally planned. One of the IMF objections to the proposed fiscal package was the likely conflict with the Bank of England.
• My best guess now is that there may be some behind the scenes conversations between OBR and government, possibly some back tracking or even personnel moves and further detail on Govt spending/saving before the rather too distant date of November 23rd
• BoE will temporarily put gilt selling on hold, but expect volatility, both during after the stated time period (14th October).

The recent (September 23rd) budget and subsequent chain of events has reinforced my long standing view that equities should currently be favoured over gilts, despite the large outperformance already this year with a loss of just 6.7% for the FTSE 100 versus a 26% decline for the All Gilt Index. Both figures exclude income, which would in fact show UK equities in an even better light. Holders of “balanced funds” should assess whether their current asset mix is appropriate. However, it feels rather late to open new short positions in Fixed Interest and some more conservative/income oriented may start looking more closely at certain fixed interest products, that have fallen to sustainably attractive yield bases

Equities continue to remain a relative overweight in my view, based on several conventional investment metrics (see above), longer term underperformance since the Brexit vote, style preference (value overgrowth) and international resource exposure although be aware of the numerous domestic headwinds I have highlighted above. Value should be favoured over growth, and the FTSE 100 favoured over the FT All-Share. Apart from the style drift, remember that the non sterling element of leading FTSE 100 companies and sectors is relatively high By sector, Oil and Mining equities continue to benefit from above average yields, strong balance sheets, dollar exposure and secular demand e.g copper, cobalt for electronics, construction, electric vehicles etc

Remain overweight in pharmaceuticals and underweight in non-renewable utility stocks which may suffer from consumer and government pressures, and no longer trade on yield premia, especially against the back drop of rapidly rising gilt yields. Construction materials, especially cement will benefit from growing infrastructure/renewable initiatives.
Banks, may enjoy some relative strength from rising interest rates, but continue to monitor the recession/loan growth and default risks. Preference Shares as well as ordinary shares have attractions in this area

Housebuilders and real estate-expect depressed activity and remember that the rising interest rates have not yet been fully factored into bricks and mortar property yields. Some property company corporate bonds however have shown some immediate weakness.
Weak sterling and changes re Duty Free rules should positively affect certain tourism/luxury good companies.
Domestic Breweries/pubs etc are having a hard time with stalling consumer’s expenditure,supermarket competition and rapidly rising costs. Airlines may suffer as a result of large dollar costs, uncertain foreign travel outlook and often high debt levels

Extra due diligence at stock level more generally will be required as I expect a growing number of profit warnings and downbeat forward looking statements. Takeover activity is also clearly increasing with, for example, private equity snapping up UK-listed companies at the fastest pace for more than twenty years. Foreign takeover, stake building is also increasing, current weak sterling being a factor, with Vodafone under scrutiny by a French (who already have BT interest!) investor.Biffa(waste management),MicroFocus(technology),Aveva(software) and RPS(professional services) have all succumbed to foreign takeovers in recent months, much by “strong dollar” American or Canadian organizations.

Gilts

It is difficult to see value in conventional gilts now against the current inflation and debt/GDP ratios, and the supply expected over coming months. At some stage however, institutional asset/liability considerations, and equity to bond switching may reappear. Ten-year gilt yields of 4.13% do appear more attractive now against
a current FTSE 100 yield of 3.9% than the 0.97% gilt yield at the beginning of the year.

JAPANESE EQUITIES

also remain an overweight in my view, although my recent comment re hedging may “nuanced “now following the extreme currency weakness and surprise intervention. Unlike most other major economies, Japan is expected to continue its easy money policy. Exporters have benefitted from the plunging Yen although higher
input costs and more “off-shoring” also must be considered. The price/book ratio of 1.20 is attracting interest of corporate and private equity buyers, while the prospective yield of 2.8% is above the world average and compares very favourably with USA (1.8%). Corporate governance is rapidly improving with diverse boards, reduction of cross holding, higher dividends etc. Private equity stake building interest in Toshiba and growing activity in the property sector (discount on a discount in a cheap currency) demonstrate the search for value in Japan.

On a valuation basis (see table above) the forward PE multiple of 12.1 is at a considerable discount to the world, and especially US average

EMERGING MARKETS– Very difficult to adopt a “blanket” approach to the region even in “normal times”, but especially difficult now, with so many different COVID, commodity, sectoral mix, debt, geo-political and increasingly natural disaster variables. Interestingly the rush into Emerging Market assets, both bonds and equities, at the start of 2021 moderated through the year and into 2022 as many dramas have unfolded e. g South Africa, Turkey, Ukraine, Chinese regulation. This latter factor has special relevance to those using Emerging Market Benchmark Indices. The IMF recently warned that several emerging nations could disproportionately suffer from a combination of COVID and adverse reaction to “tapering” by developed counties e.g., FX/Interest rate pressures. Six countries have already defaulted during the pandemic, and the IMF is currently in various stages of bail-out discussions with Pakistan,Argentina,Zambia,Sri Lanka,Ghana,Tunisia and Egypt. However, within the emerging space, I continue to have a relatively favourable longer term view on Asia, where relative COVID success, stable FX,inward investment, lower relative inflation and export mix help investor sentiment

Vietnam, for example, is supported by positive demographics, with a population of near 100 million, an emerging middle class, and a recipient of strong foreign direct investment. Qualconn,an Apple supplier, Intel(semi-conductors),Lego and Samsung(mobile phone plant) have all recently invested in new capacity in the
country. Other big names moving chunks of production from China to Vietnam include Dell and HP(laptops),Google(phones)and Microsoft (Games Consoles) The economy is expected to grow at around 6.5% this year (7.7% Q2 2022) and current inflation is running at about 3.5%. On a relatively low prospective PE based on forecast earnings growth over 20%, Vietnamese equities appear good value. India, although quite highly
rated and a major oil importer, warrants inclusion in a diversified portfolio, and is
currently receiving some fund flows from “overweight” Chinese portfolios.
Indonesia,the last of my current Asian ideas benefits from a commodity boom, strong
domestic market, low debt, relatively stable currency, forecast 5% GDP growth and 5%
inflation

Caution is required in many South American markets with poor COVID-19 situations,
deteriorating fiscal balances and inefficient governments, many of which are up for
change. However, some stock market valuations currently appear interesting in the
region, which, so far, has been relatively unaffected by events in Ukraine. Commodity
exposure, deglobalization beneficiary, valuation and recovery from a very low-level
account for some year-to-date stock market relative out- performance.
Certain areas within Central Europe are starting to receive more attention, mainly on
valuation grounds, but the lingering Covid effects and indirect effects of the
Russia/Ukraine invasion should be borne into account. Regarding the latter, a
reduction/termination of Russian gas supply could have a serious recessionary impact
in certain countries. Large refugee influxes e.g Poland are also starting to create
budgetary/social issues.
Comments re great selectivity above also apply to emerging market debt. For the
more adventurous fixed interest investor combinations of well above average yields
(sometimes caused by pre-emptive moves last year), stable fiscal and FX situations
and, diversified economic models could provide outperformance from carefully
selected bonds.JP Morgan is sounding out big investors on adding India to its
emerging market bond index with an announcement due in October. This could have a
dramatic effect on inflows into Indian debt.

COMMODITIES- Gold spiked to over $2000 in March, a recent high, when Russia
invaded Ukraine, but has since fallen about 17%. Global gold ETF’s continue to
experience outflows) with other inflation “hedges” available, this zero yielding asset
seems likely to remain friendless. The longer-term prospects for more cyclical plays
continue to look brighter. Increased renewable initiatives, greater infrastructure
spending as well as general growth, especially from Asia, are likely to keep selected
commodities in demand at the same time as certain supply constraints (weather,
labour and equipment shortages, Covid, transport) are biting. Anecdotal evidence from
reporting companies RTZ, BHP and Anglo American appear to suggest that the industry
is enjoying a bumper time, and with disciplined capex programmes, extra dividends
and share buy-backs are commonplace! In the short term there could be additional
supply disruption in the areas of natural gas, palladium, nickel, aluminium, potash and
certain foodstuffs. It should be remembered that commodity investment is inherently
volatile.

• Wheat and other grain prices have fallen from the levels reached following the Russian
invasion of Ukraine, but the current shipping “truce”, planting/harvesting schedules
within the region and extreme global meteorological conditions are expected to lead to
further price volatility. If the conflict is prolonged it will affect millions of people living
in such places as Egypt, Libya, Lebanon Tunisia, Morocco, Pakistan and Indonesia that
could have political consequences. There has been renewed interest in agricultural
funds as well as the soft commodities themselves.

GLOBAL CLIMATE CHANGE remains a longer-term theme, and will be built into
the many infrastructure initiatives, being pursued by Europe, USA, and Asia. The
Russia/Ukraine conflict is accelerating the debate, and hopefully the action. There are
several infrastructure/renewable investment vehicles which still appear attractive, in
my view, combining well above average yields and low market correlation with low
premium to asset value. The recent volatility in natural gas prices has highlighted both
risks and opportunities in the production and storage of energy from alternative
sources. However, increasing levels of due diligence are required, in committing new
money to the area overall. Financial watchdogs across the world are sharpening their
scrutiny of potential “greenwashing” in the investment industry on rising concerns that
capital is being deployed on misleading claims.
• However, in the shorter term, the Russian invasion of Ukraine has precipitated a global
energy crisis, that has forced countries, especially in Europe to look for ways to quickly
wean themselves off Russian oil and gas, and reconsider timelines of commitments to
cut the use of fossil fuels. At the time of writing, it seems highly likely that USA will
increase oil and gas output, UK North Sea may see further investment and EU coal
consumption could increase.
• Another area currently in the ESG purist cross hairs is “nuclear”. Ignoring the fact that
nuclear weapons have not been used in anger since 1945, and the fact that some
deterrent is needed, (now?), where should the confused investor stand when it comes
to nuclear power substituting coal power? Japan, UK and Germany are all studying
proposals to revive their nuclear power capacities. I have some interesting “uranium
play” ideas for those interested.

ALTERNATIVE ASSETS-this group, encompassing private equity, private debt,
hedge funds, real estate, infrastructure, and natural resources is expected to continue
growing both in actual and relative terms over coming years.
Traditional asset management groups are racing to expand offerings in alternative
investments as they seek to boost profitability and head off competition from private
equity groups (see graph below).
I have, for a while, recommended some exposure to this area maybe as part of the
former “gilt allocation”. With strong caveats re liquidity, transparency, dealing
process, I still adopt this stance, continuing to use the investment trust route. So far
this year, gilts have declined approximately 20% while my favoured UK renewable
closed-end funds have appreciated by around 15% in capital terms and delivered
about 6% in annual income. Please contact me directly for specific ideas

COMMERCIAL PROPERTY- The most recent MSC/IPD UK Property Index up to the
end of July 2022 showed a monthly total return of -0.6% across all properties, 9.0%
total return year to date, thus building on the 21.9% return experienced for full year
2021.This was the first monthly fall in capital values since October 2020.Capital values
of Industrial properties in both the Southeast and Rest of UK decreased 1.9% over the
month. Rents grew on average at an annualised rate of 3.7% p.a in July with Gains in
Industrial rents broadly offsetting rents in the Office and Retail sectors.
Several analysts are down grading their estimates for the sector following the rapid move
in UK longer and shorter-term interest rates. Property asset valuations take time to
materialise where there is a lag between balance sheet date and results publication in
the listed area. Live traded property corporate bonds, however, have already moved
sharply lower.
Full asset allocation and stock selection ideas if needed for ISA/dealing accounts, pensions.
Ideas for a ten stock FTSE portfolio. Stock/pooled fund lists for income, cautious or growth
portfolios are available. Hedging ideas, and a list of shorter-term low risk/ high risk ideas
can also be purchased.
I also undertake bespoke portfolio construction/restructuring and analysis of legacy
portfolios.
Independence from any product provider and transparent charging structure
Feel free to contact regarding any investment project.

Good luck with performance!
Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)

To receive Ken’s views on daily market moves, macro and stock ideas, and of course launch offers for his upcoming subscription service please submit your details here:

1st October ,2022
Important Note: This article is not an investment recommendation and should
not be relied upon when making investment decisions – investors should conduct
their own comprehensive research. Please read the disclaimer.

Disclaimer: Opinions expressed herein by the author are not an investment
recommendation and are not meant to be relied upon in investment decisions.
The author is not acting in an investment, tax, legal or any other advisory
capacity. This is not an investment research report. The author’s opinions
expressed herein address only select aspects of potential investment in
securities of the companies mentioned and cannot be a substitute for
comprehensive investment analysis. Any analysis presented herein is illustrative
in nature, limited in scope, based on an incomplete set of information, and has
limitations to its accuracy. The author recommends that potential and existing
investors conduct thorough investment research of their own, including detailed
review of the companies’ regulatory filings, and consult a qualified investment
advisor. The information upon which this material is based was obtained from
sources believed to be reliable but has not been independently verified.
Therefore, the author cannot guarantee its accuracy. Any opinions or estimates
constitute the author’s best judgment as of the date of publication and are
subject to change without notice. The author may hold positions in any of the
securities mentioned
The author explicitly disclaims any liability that may arise from the use of this
material.

Ken Baksh – March Market & Investment Report

3rd March 2020 / Leave a comment

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

10th January 2020 / Leave a comment

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

Ken Baksh January 2020 Market Report

3rd January 2020 / Leave a comment

During one-month period to 31^st December 2019, major equity markets registered strong gains. The FTSE ALL-World Index rose by 2.18% over the period, up by 23.9% since the beginning of the year. The VIX index fell by 1.45% to end the period at 12.26, a rather “complacent” level by historic standards. Most fixed interest products continued to fall, in price terms, during the month. Sterling strength and Yen weakness were the main currency moves, while the Chinese Renminbi stayed reasonably stable versus the US dollar as “phase 1” of the trade talks continued. Commodities displayed a mixed price performance overall.

The European Central Bank saw Christine Lagarde,the new President, present at her first official meeting, and recent economic indicators signalled a stabilisation, although growth is still very anaemic. Political events have featured further signs of discontent in Germany (coalition split?) and France (pension and other reforms), renewed Spanish coalition concerns, and inevitable squabbling re the EU (ex-UK?) Budget.

US market watchers saw some “progress” with Phase 1 Chinese tariff negotiations, while certain European barriers were introduced! Federal Budget concerns, Iranian sanctions, Venezuela, North Korean tensions and Trump’s personal issues (impeachment?) were still very much in the news as the 2020 election draws closer. US economic data still indicates 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 recent meetings

In the Far East, China /US trade talks dominated the headlines, while official and anecdotal evidence point to a steadily weakening economy. Recent data releases pointed to 6.0% quarterly GDP growth with risks growing to the downside, although the move on 2^nd January 2020 showed signs of continued financial support/concern. Hong Kong remains still very volatile. Japanese annual economic growth was downgraded slightly to 0.8%, mainly on a weaker trade performance, although 3^rdquarter GDP, recently released, surprised to the upside. 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 1^stVAT increase was 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 as expected, weak relative GDP figures and poor property sentiment, both residential (especially London) and commercial (especially retail).Figures announced on 30^th 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 process under new Prime Minster ,Boris Johnson, where at the time of writing, the Withdrawal Bill has been passed, but the long process of renegotiating new trade arrangements has yet to start. 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. 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.

Aggregate world hard economic data continues to show 2019 expansion of around 3.0%, although forecasts of future growth continue to be reduced by 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 2.18% over December, the FTSE ALL World Index showing a gain of 23.9% since the year end. The UK broad and narrow market indices, both advanced by around 3% over the monthly period, but lagged world equities in sterling adjusted terms by about 6%, since the beginning of 2019. Along with the UK, Asia and Emerging Markets outperformed during the month, but lagged over the twelve-month period, while USA and Continental Europe showed above average gains for the year. The VIX index fell, reflecting a greater risk-taking mood to a level of 12.26, and down 51.77% since the beginning of the year.

UK Sectors

A mixed month for UK sectors with oil for example bouncing strongly in December but amongst the lagging markets over the full year, while telecoms were some of the weakest names in December. Over the full year, industrial shares, pharmaceuticals and real estate showed the largest gains all over 20%, while telco’s, banks and oil companies were amongst the relative losers.

Fixed Interest

Gilt prices fell over the month, the 10-year UK yield standing at 0.73% currently. Other ten-year yields closed the month at US, 1.92%, Japan, -0.02%, and Germany, -0.19%. Since June 2019, over $6 trillion of government debt has moved back into positive yield territory. UK corporate bond prices also fell slightly over the month, while more speculative grades rose. 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 again the main mover amongst the major currencies during December largely on political news, while the dollar weakened. Since the beginning of the year, sterling appreciated approximately 4% against both the US Dollar and the Euro. The dollar stayed reasonably stable versus the Chinese Renminbi as tariff discussions continued. As ever, FX decisions remain crucial in determining asset allocation strategy. As an example, largely on the back of the December UK election result, sterling adjusted FTSE outperformed the world index by about 3% in December.

Commodities

A mixed month for commodities on global growth concerns and supply shocks. The oil price advanced, and gold also rose, while coal and natural gas showed large price declines. Over the full year Brent Oil showed a respectable gain of over 20% but the largest gain amongst the major commodities was enjoyed by palladium up over 53%

Looking Forward

Over the coming quarter, geo-political events and Central Bank actions/statements meeting, will continue to dominate news headlines and market sentiment, in my view. Regarding corporate earnings/statements, it will be interesting to see if the recent “relief” factors of US/China truce, UK election, European and Japanese stabilisation, lead to a more optimistic tone. 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, impeachment progress, 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. 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 stimulative measures and key $/Yuan exchange rate levels are being watched closely. Europeaninvestment mood will be tested by generally sluggish economic figures and an increasingly unstable political backdrop, now encompassing France and Germany.

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 it is too early to see if any post-election euphoria feeds into consumer sentiment. The election result has however had a more immediate effect on certain utilities, infrastructure project plans etc. 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. 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,Asian poitical “hotspots” 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 despite the recent post-election relief bounce. 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 traditionally defensive, and often high yielding sectors such as utilities and telecoms may bounce against a more “friendly “political backdrop. 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.Small cap domestic stocks are currently receiving post-election support.
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 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, despite the 2017 and 2018 outperformance and 2019 underperformance 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. 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 especially now that the political risk has been reduced somewhat. 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 showed 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 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.

Feel free to contact regarding any investment project.

Good luck with performance!

Ken Baksh Bsc,Fellow (UK Society of Investment Professionals)

kenbaksh@btopenworld.com

2^nd January 2020

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.

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 October 2019 Market Report

1st October 2019 / Leave a comment

During one-month period to 30th September 2019, major equity markets registered reasonable gains. The FTSE ALL-World Index rose by 2.25% over the period, now up by 14.71% since the beginning of the year. The VIX index fell by 10.3% to end the period at 16.55. Fixed interest products displayed a mixed performance with riskier products outperforming conventional government stocks. Sterling was stronger while the Yen dropped, and the Chinese Renminbi stabilised versus the US. Commodities displayed a mixed price performance overall.

The European Central Bank continues to err on the cautious side regarding economic projections, Mario Draghi following up on his promise of further easing measures at the recent ECB meeting. At the time of writing Germany appears to be on the brink of a recession and calls for fiscal loosening are increasing. Very recently, some indicators e.g. unemployment dropping to a multiyear low, have suggested a degree of stabilisation Political events have featured ECB appointments along with further signs of discontent in Germany and France, renewed Spanish election speculation, renewed Austrian grouping and further Italian coalition division. 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 were reduced 25bp on July 31st to a range of 2.0%-2.25% much as expected and a further 25 bp in September. The accompanying statement left the door open for further adjustment. In the Far East, China flexed its muscles in response to Trump’s trade and other demands and anecdotal evidence points to a weakening economy. Recent data releases pointed to 6.0% quarterly GDP growth with risks growing to the downside. Hong Kong 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 , inflation a little higher than expected, weak relative GDP figures and deteriorating property sentiment, both residential (esp London) and commercial (especially retail). 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 many options are still possible at the time of writing, including a time extension, while there remains a non-zero probability of a “no-deal”. 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 by the end of the third quarter.

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 2.25% over September, the FTSE ALL World Index now showing a gain of 14.71% since the year end, albeit following the very weak last quarter of 2018. The UK broad and narrow market indices, both advanced by approx. 2.8% over the monthly period, lagging world equities in sterling adjusted terms by about 8%, since the beginning of 2019. Germany and Japan both showed the largest monthly moves rising by 4.1% and 5.1 % respectively while the NASDAQ, S&P and emerging markets lagged. The VIX index fell, reflecting a greater risk-taking mood to a level of 16.55 and down 34.89% since the beginning of the year. According to recent Morningstar figures, managed funds have delivered average performance of between 8% and 13% so far this year depending on risk category.

UK Sectors

Apart from oil and gas, an obvious beneficiary of the Arabian oil facility damage, there were further signs of moves to more defensive “value” stocks in the area of telco’s, utilities etc and financial sectors also enjoyed above average gains, while consumer stocks declined in absolute and relative terms. Over the nine -month period, pharmaceuticals are showing an absolute gain of nearly 20% while the worst performing UK sectors, banks and telcos are still in negative territory.

Fixed Interest

Gilt prices rose marginally over the month, the 10-year UK yield standing at 0.39% currently. Other ten-year yields closed the month at US, 1.66%, Japan, -0.28%, and Germany, -0.52%. UK corporate bond prices fell slightly over the month, but more speculative grades showed yield declines/price gains. Floating rate bonds rose while the favoured convertible bond play advanced over 2.2%. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (many yielding around 6%) from over 10 different asset classes is available.

Foreign Exchange

Sterling was the main mover amongst the major currencies during September advancing on speculation that a “no-deal” BREXIT could be averted by key October deadlines, while the yen fell in trade-weighted terms. Since the beginning of the year £/Yen has been one of the more volatile cross rates and illustrates the need for factoring the FX decision into the asset allocation process. See my note regarding various Japanese strategies.

Commodities

A mixed month for commodities on global growth concerns and supply shocks. The Brent oil price advanced 2.0% over the month, largely as a result of the drone strike, while gold fell a little, and palladium soared in price terms, now up over 31.5% since the beginning of 2019.Soft commodities were generally firmer while iron ore jumped 8.6% after recent sharp falls.

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. Third quarter earnings releases will also provide more colour and stock specific volatility. 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 2019/2020 period while longer term Federal debt dynamics, election debate and trade” war” winners/losers (a moving target) will affect sentiment. Corporate earnings growth will be subject to even greater analysis after a buoyant 2018, amidst a growing list of obstacles. Additional discussions pertaining to North Korea, Russia, 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, if anything, been better than expected, a rare event now and a trade war with USA 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.

At the time of writing, options such as revised Brexit deal (Ireland changes), caretaker government and Withdrawal Extension, No-deal (legal gymnastics), Second Referendum and General Election (after extension) all have nonzero probabilities. All these possibilities inevitably point to further political mayhem although there may be some economic/business relief in certain cases.

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 outcome! 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, 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. Brexit, US elections, tariff discussions, political uncertainty, that could upset many bourses, 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. Mining stocks remain a hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson, Intu), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda), leisure (Whitbread, Greene King), 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 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). Both stocks registered positive capital returns over 2018 on top of income payments of approx. 5%. And are still strongly recommended as is the new issue. 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.

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 October 2019

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