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Ken Baksh January 2020 Market Report
During one-month period to 31st 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 2nd 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 3rdquarter 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 1stVAT 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 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 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
2nd January 2020
Ken Baksh October 2019 Market Report
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.
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)
1st October 2019
Ken Baksh: August Investment Review….Stay with equities versus bonds….for the time being!
August 2018 Market Report
During the month to July 31 st, 2018, major equity markets displayed a stronger trend and the VIX index fell significantly, indicative of a preference for greater risk-taking. There continued to be an abundance of market moving news over the period whether at corporate, economic or political level.
The European Central Bank appeared to become more certain of removing QE over coming quarters but delaying any interest rate increase until 2019, while economic news was generally dull. Political events were not in short supply, and in Turkey for example, dramatically affected bond and currency markets. European leaders and policy makers are having an uncharacteristically active summer, with debates on US tariffs, immigration, Japanese trade pact and post Brexit implications just four of the more topical issues. US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Iranian nuclear/sanctions, NAFTA friction and North Korean meeting uncertainty as well as domestic issues. Economic data and corporate results so far have generally been above expectation. In the Far East, North and South Korea made faltering progress towards an agreement while China flexed its muscles in response to Trump’s trade and other demands and relaxed bank reserve requirement late in the month. Chinese economic growth slowed slightly while there was a little speculation that the Bank of Japan may tweak it’s QE programme. The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. The data and ongoing Brexit confusion appear to be keeping the MPC in a wait and see mode regarding interest rates, although mathematically the’ hawks’ are gaining ground. An important day for MPC policy statements tomorrow (2nd August).
Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.3% to 3.6% area, a little lower than January forecasts. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major recent feature recently, although lagging the yen year to date. Government Bond holders saw modest price falls over the month. Of note was the large jump in the Japanese Government Bond Yield. Oil was the main commodity feature during the month, falling after the long rally seen so far this year. Tariffs, whether actual or rumoured, are continuing to bear on certain metals and soft commodities, the latter also responding to extreme weather conditions. The price of wheat for example has climbed nearly 30% so far this year.
At the end of the seven-month period, “mixed investment” unit trusts show a very small positive price performance, with technology and most overseas equity regions showing above average performance, and bonds, Asia-excl Japan and Emerging markets in negative territory. Source Trustnet:01/08/2018
Equities
Global Equities rose over the month the FTSE ALL World Index gaining 3.43% in dollar terms and now showing a positive return since the beginning of the year. The UK broad and narrow market indices lagged other major markets over the month in local terms and have underperformed in both local and sterling adjusted values from the end of 2017.Asia and emerging markets were the relative underperformers and declined in absolute terms while Europe jumped quite strongly, although the DAX Index is still down in absolute returns since the beginning of 2018. In sterling adjusted terms, America has jumped to the top of the leader board year to date, largely helped by the technology component (NASDAQ up 10.9%) and a recently strengthening dollar. The VIX index while still up about 30% from the year end, dropped 13% over the month, as “risk on “trades returned.
UK Sectors
Sector volatility picked up during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity and ex-dividend adjustments. Utility stocks fell over 4%, while pharmaceuticals gained 5.8 %, largely on encouraging results and lingering corporate activity. Over the seven-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by nearly 33%.
Fixed Interest
Gilt prices fell marginally over the month and are now down 1.64% year to date in capital terms, the 10-year UK yield standing at 1.39% currently. Other ten-year yield closed the month at US 2.97% Japan, 0.06% and Germany 0.33% respectively. UK corporate bonds remained broadly unchanged, ending July on a yield of approximately 2.75%. Amongst the more speculative grades, emerging market bonds fell while US high yield rose, in price terms. Floating rate and convertible bond prices showed mixed performance over the month. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.
Foreign Exchange
Amongst the major currencies, a stronger dollar was the major monthly feature rising largely on relative economic news. Sterling fell versus the dollar while rising against the Yen and Euro. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by over 3% since the end of 2017.Just over two years since the BREXIT vote, the FTSE has risen by about 19% compared with the 32% gain in sterling adjusted world indices.
Commodities
A generally weak month for commodities with the notable exception of some of the softs, the latter largely reflecting weather conditions! Over the year so far, oil seems to be stabilising over $70, while gold, falling on the month and year-to date languishes at around $1223 currently.
Looking Forward
Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while early second quarter company results will likely add some additional volatility. With medium term expectation of rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern.
US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Additional discussions pertaining to North Korea, Russia, Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating. It will be interesting to see if there is any follow through from recent BoJ speculation regarding bond yield policy. Recent corporate governance initiatives e.g. non-executive directors, cross holdings, dividends are helping sentiment. European investment mood will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and reaction to the migrant discussions. Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. The current perception of a move to a “softer” European exit will inevitably lead to pressure from many sides. Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations or directly e.g. Bae, BMW, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.
On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity. Price declines are eroding any small income returns leading to negative total returns in many cases. On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are expected to wind down later this year.
Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Facebook and Twitter. Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the current period.
Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 13.23 appears rather low in the context of potential banana skins.
In terms of current recommendations,
Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.
- UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
- Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
- Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
- Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
- UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
- Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
- Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g(Hammerson,Intu). The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
- I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.
Full third quarter report is available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.
Good luck with performance! Ken Baksh 01/08/2018
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Phone 07747 114 691
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
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