Wednesday, 26 November 2014

CNBC Europe Guest Host: Video on the Juncker investment plan

I appeared on CNBC Europe's Squawkbox programme as Guest Host this morning, discussing a range of issues including the newly-announced grand Europe investment plan, laid out by European Commission President Juncker:

Tuesday, 25 November 2014

IBT UK: With the Stock Market, the Best Things Do Come in Small Packages

Big is beautiful, so the mantra goes. But not so in the stock market. The very long-term view of stock market performance by size of company, comparing small-caps to large-caps, reveals small-cap companies have in general outperformed the broad market quite substantially.

If you had invested £100 in the UK stock market back at the beginning of 1975, and had diligently re-invested all dividends (ignoring all taxes), then you would have today an investment worth well over £15,000 (Figure 1). Very impressive, you might say to yourself.

Figure 1: Small-Caps Have Done Far, Far Better than Large-Caps

Source: Author, FTSE, Datastream, Hoare Govett

If, however, you had instead invested that £100 in an index of UK small-cap stocks in January 1975 on the same basis, you would now have an investment worth nearly £55,000.

In other words, over the very long-term (nearly 40 years) the small-cap segment of the market has delivered three-and-a-half times the performance of the overall stock market, which is dominated by very well-known stock market giants such as BP, Vodafone and HSBC.

Why would this be the case? The simple explanation is that smaller companies by and large tend to be younger companies with more innovative products or services and which can post faster growth rates, rather than massive companies that are well-established in mature markets with long-running products or services, and which therefore tend to grow at a more sedate pace.

The January small-cap effect

Not only have small-cap stocks done considerably better than large-caps over the long-term in the UK and US, a fact well-documented in the academic financial market literature, but these pint-sized gems have over time performed particularly well at the beginning of the year, the so-called January small-cap effect (Figure 2).

Figure 2: Spot the Small-Cap January Effect! 

Source: Author, FTSE, Datastream, Hoare Govett

While this effect was originally identified in US small-cap stocks, UK small-caps exhibit exactly the same tendency to outperform in January, historically averaging over 4% gains in January since 1975.

In fact, in the UK the first four months of the year have been the best historic period of performance, delivering an average of over 13% from January to April.

Small-caps: One of the few times it is worth using an "active" fund manager

Now in general, I tend to avoid investing using actively managed unit trusts, preferring instead low-cost "passive" index funds and exchange-traded funds for the simple reason that fund managers do not tend to justify their extra cost through better net performance over time.

However, small-cap funds are an exception to this general rule. There are a number of small-cap managers who have demonstrated index-beating performance over time, even after costs.

They manage to cherry-pick a number of high-potential stocks out of a huge universe and then benefit disproportionately from strong long-term performance in these names, while also avoiding a lot of under-performing small-cap "duds".

Figure 3. Strong Performance from Smaller Company ITs Since 2012 

Source: Association of Investment Companies

So, in this case, I would invest in a small-cap fund using one of a small number of investment trusts, which are listed closed-end funds which are run by a stock-picking fund manager.

Funds run by small-cap specialists with long experience and a solid investment process, resulting in a strong performance track record (Figure 3) include:

  1. The Miton Income Fund (LSE code: DIVI), run by small-cap veteran Gervais Williams;
  2. Strategic Equity Capital (LSE code: SEC), a concentrated small-cap fund run by the team at GVO Investment Management;
  3. The Henderson Small-Cap Fund (LSE code: HSL), run by Neil Hermon at Henderson. This trust trades at a 13% discount to net asset value.

Each of these three fund managers have strong long-term track records of investing in UK small-cap stocks and outperforming the small-cap index over time. I particularly like the Miton Fund as it combines small-cap investing with income investing (a 3% dividend yield), aiming for an attractive combination of dividend income and growth from small-cap champions.

Perhaps small is sexy, at least around the new year.

Friday, 21 November 2014

Ultra-Low Interest Rates Mean Your Cash Could Use a Workout

International Business Times UK Video Interview

While ultra-low interest rates are a boon for mortgage borrowers, they are a curse for the legions of savers who have seen their cash returns collapse.

Six years into supposed economic recovery after the seismic shock of the global financial crisis, the FTSE 100 index has gained 80% from the 2009 low to the present date.

You might have thought that retail investors would have been enjoying this impressive stock market performance. But in fact, not nearly as much as you might have thought, because according to the OECD, UK households have continued to hold very high levels of cash – some 29% of all their financial assets (excluding housing), in common with retail investors across Europe and Japan (Figure 1).

1: UK Households Still Have 29% of All Financial Assets in Cash 

Source: OECD, National Accounts at a Glance, 2014

Clearly, the scars of the last two bear markets in 2000 and 2008 still run deep. But instant-access cash savings rates have never been as low as they are today in post-war Britain: in fact, they have been on a steady decline really since the height of the last property boom in 1990, falling from a heady 13.6% to 1.25% on average today (Figure 2).

 2: Cash Savings Rates Have Not Been This Low in Post-War Britain


It is obvious that a 1.25% interest rate is not enough to preserve the value of your savings in real terms even when shielded from tax in a cash NISA, when average UK inflation has run at 1.8% on the CPI measure this year, and an even worse 2.5% on the old RPI measure.

If you insist in keeping some of your savings in cash, then I can recommend hunting out Regular Saver bank accounts at HSBC, First Direct, Lloyds Bank and Nationwide which all pay up to 6% p.a. on regular savings of up to £250 per month. Attractive interest rates to be sure, but only available on relatively limited amounts.

Attractive Income from the Stock Market

A second route to higher income is through the stock market, where dividend payments have in general been growing consistently since 2009. UK households are relatively under-invested in shares at 10% of total financial assets, compared to other developed countries (Figure 3).

 3: UK Investors' Exposure to Shares is Below Average

Source: OECD, National Accounts at a Glance, 2014

To identify potentially attractive income stocks, I have used Stockopedia's excellent stock screening service to identify UK large-cap companies that offer:

  • an attractive combination of good value and quality (based on a combination of different valuation, profitability and risk measures), as represented by the Stockopedia Quality Value Rank (scored out of a maximum 100), and
  • a high dividend yield (paid half-yearly or quarterly) of well over 5%.

I have picked out five different UK companies which come out at the top of this ranking from a range of different industries, including house building, insurance and oil & gas (Figure 4):

4: Five UK Large-Cap Stocks With High Yields and High Quality + Value Scores

The Benefits of Dividend Yield Plus Growth

A portfolio containing equal amounts of each of these five stocks would yield well over 5% and would also participate in any stock market advance. Remember in addition that company dividends tend to grow over time, potentially giving the income investor an even higher yield on initial investment over time.

Alternatively, if you just want to buy a single fund to benefit from this combination of high dividend yield plus future dividend growth, you could invest in the SPDR S&P UK Dividend Aristocrats exchange-traded fund (LSE code: UKDV), which invests in a diversified portfolio of higher-dividend yielding UK stocks. To qualify for inclusion in this fund, a UK stock must offer a high dividend yield and must also have grown its dividend consistently over the past 10 years. The current dividend yield on this fund is over 4%, with an annual management charge of only 0.30%.

Both of these investment solutions will give you a far better annual yield on your savings, and should see that yield rise over time too as dividend payments grow – a good alternative to leaving your money in low-yielding cash!

Wednesday, 12 November 2014

Is Today's Society Addicted to Technology?

Please click on the web link below to read the article and watch my video

International Business Times Article link (including link to 4-minute Video) 

Is today's society addicted to technology? The benefits of the tech we use on a daily basis are plain to see. But with the pervasive influence of social media applications like Facebook, Instagram and Twitter in everyday life, are we becoming slaves to the technology rather than it being just a productivity-enhancing tool for us to exploit?

People are increasingly developing unhealthy relationships with technology, particularly the mobile technology contained in our smartphones and tablet computers, to the extent that you can now seek professional psychological help for technology addiction, much as with other established addictions such as drugs or alcohol.

The Internet of Things in an Always-Connected World

The fact is that the internet is becoming increasingly easy to access, given the advent of wi-fi hotspots throughout cities and the advent of 3G and now 4G mobile phone networks designed to carry ever-larger amounts of data to and from our various mobile computing devices.

Whether you like it or not, and I personally have my reservations, mobile technology is becoming ever more pervasive, with the introduction of wearable technology such as the iWatch, technology-enabled clothing and even now shoes.

This technology growth can be clearly seen in the demand for semiconductor chips, the building blocks of all technology from PCs to mobile phones to sensor-based embedded technology found in domestic appliances, cars and in all manner of industrial automation (Figure 1), with growth in semiconductor demand from the "Internet of Things" forecast by Gartner to grow 36% in 2015.

1: The Internet of Things Semiconductor Revenues by Electronic Equipment

Healthcare Monitoring is a Huge Advantage on the Way

A new source of growth in the Internet of Things relates to health and exercise monitors, which can not only record your pulse, distance walked/run, time slept and calories burnt, but can now push users to adopt "healthy habits" by exercising more regularly throughout the day.

On the basis that in healthcare, prevention is better than cure, this wearable tech area is clearly set to grow quickly in the near future, suggesting that demand for sensors is set to explode. Already there are a wide variety of wearable watches and gadgets that serve to encourage you in a healthier lifestyle, as detailed in this CNET article.

US Technology Has Performed Very Well of Late

This strong growth in revenues as business investment in technology ramps up and as consumers continue to buy into handheld and wearable tech in ever-greater numbers has been reflected in the strong performance of US technology stocks since the beginning of last year (Figure 2) - the technology-heavy Nasdaq 100 index has gained 50% in sterling terms versus less than 10% for the FTSE 100.

2: US Technology Has Vastly Outstripped the FTSE 100

Source: Bloomberg

This outperformance looks very impressive, but needs to be set in the context of the last 14 years, where the Nasdaq index is still struggling to recapture its year 2000 highs, lagging the FTSE 100 over this longer timespan (Figure 3):

3: But the Nasdaq Still Lags from 2000

Source: Bloomberg

Best Ways to Invest in Technology

With spending on technology of one sort or another taking up an ever-larger slice of the economic spending pie, I see tech stocks maintaining this outperformance trend going forwards.

I prefer to invest in this theme using Technology-focused exchange-traded funds, such as the two I have listed below. As a side-benefit of investing in one of these exchange-traded funds, a UK or Europe-based investor also has the currency benefits of being invested in US dollars, at a time when the US dollar continues to strengthen against all European currencies thanks to its stronger underlying economy.

  • The Source Technology S&P US Select Sector ETF (code: XLKQ). This London Stock Exchange-listed fund invests in US Technology heavyweights such as Apple, Microsoft and Google and is quoted in pounds sterling.
  • The Powershares EQQQ Nasdaq-100 ETF (code: EQQQ). This London Stock Exchange-listed fund invests the constituents of the technology-heavy Nasdaq 100 index, which is comprised of 60% Technology stocks, 15% Biotech & Healthcare stocks, and 25% other sectors. The largest holdings are also Apple, Microsoft and Google, and again is quoted in pounds sterling.

All the best,

Thursday, 6 November 2014

IBT UK: Forget 'Slowdown' Worries, China is a Compelling Investment Opportunity With 7% Growth

Please click on the link below to read my latest article for the International Business Times on the investment allure of China:

You can also watch my interview on China with IBT UK editor-in-chief George Pitcher here:

There are times in investing when going against the flow can be very profitable. I believe that investing in China today is one of those times.

Conventional wisdom holds that the Chinese growth "miracle" is over after a number of years growing at a double-digit rate, with the economy now slowing rapidly. Writing recently in the Guardian, renowned economist Kenneth Rogoff highlighted the risk of Chinese slowdown, pointing out a number of key challenges that could derail the Chinese government as they seek to rebalance the behemoth that is the Chinese economy.

But, as is often said in financial markets, there is a price for everything. Moreover, money is rarely made by investing in what is comfortable – government bonds being a case in point at the moment, relatively safe but offering only ultra-low yields. China looks a compelling investment opportunity at the moment, in spite of the widespread "slowdown" worries.

China is still growing at over 7% per year...

Whatever concerns economists may have over China, let us not forget this Asian giant is still growing at over 7% per year in real terms; compare that to the sub-3% growth of the UK, and the non-existent growth in the eurozone.

World Bank Advises China to Lower 2015 Growth Target to 7%
'The Chinese stock market is one of the cheapest stock markets in the world'(Reuters)
This sounds strong to me, even if no longer a double-digit growth rate. After all, the law of large numbers makes it increasingly difficult for China to continue to grow at such a fast rate, now it is officially the second-largest economy in the world after the US when adjusting for the cost of living (according to the World Bank), more than double the size of the third-placed country, India.

Chinese Stocks Are Very Cheap

The Chinese stock market is one of the cheapest stock markets in the world, when judging by a standard metric such as price/earnings (P/E). Chinese stocks on average trade at under 9x forecast P/E, while offering a dividend yield of well over 3%. Compare this to the US stock market which trades at over 15x P/E, or the FTSE 100 which trades at nearly 13x P/E. In addition, profit growth is forecast to remain in the double digits, more than can be said for the European and US stock markets next year.

Chinese stocks are starting to outperform

The MSCI China A-Shares exchange traded fund (ETF) listed in London has gained nearly 26% over 2014 to date, already an impressive return and far outstripping a US S&P 500 ETF (+13%), a Europe-ex-UK ETF (-6%) and a FTSE 100 ETF (-4%).

But since the beginning of 2009, Chinese shares have only gained 47% in total (including dividends) in sterling terms, versus +115% for the S&P 500 and +77% for the FTSE 100, suggesting that there could be a further catch-up effect to come (Figure 1).

So in my eyes, the three factors value, growth and price momentum all line up for Chinese stocks. How might you buy into this theme in your own portfolio? I can suggest a three easy alternatives, via exchange-traded funds and via investment trusts.

  1. The CSOP Source FTSE China A50 UCITS ETF (code: CHNA). This London Stock Exchange-listed fund invests in China A-shares, which remain the best-value type of Chinese stock available and invests in large financial companies such as insurer Ping An, bank China Merchants Bank and oil company Petrochina.
  2. The Fidelity China Special Situations Fund (code: FCSS). This is an investment trust that invests selectively in a range of large- and mid-cap Chinese stocks, and which currently trades at a near-13% discount to the fund's net asset value. That means that you can currently buy 100p of Chinese stocks for just over 87p, not a bad deal!
  3. A third option is to invest indirectly in the China theme via a fund containing stocks listed in Hong Kong. This can be done with the Invesco Powershares FTSE RAFI Hong Kong China ETF (code: PSRH), which invests in the likes of property company Cheung Kong Holdings and airline company Swire Pacific (the parent company for Cathay Pacific). 

VIdeo Slideshow: Global Strategy Weekly Review

Here I have recorded a 4-minute video slideshow of key trends
in financial markets over the last week: Please click on the video to watch

All the best, Edmund

Wednesday, 29 October 2014

November 2014 Investment Outlook Preparing for a Year-End Rally

Stock Markets Set Up For Continued Rally

The six weeks from the beginning of September through to mid-October inflicted substantial damage on all major stock markets barring China (Figure 1), with developed markets falling 5-11% and the MSCI Emerging Market index losing 11% over the period. 

1. All Stock Markets Fell from Start-Sept. Except China

Source: Bloomberg

Fears over the strength of the global economy have dominated, with sanctions impacting not only the Russian economy but also those in the Eurozone, including that of the export powerhouse that is Germany. As a result, business confidence in Europe has suffered, putting the brakes on business investment and condemning the Eurozone to a no-growth economy (Figure 2). 

2. German Business Confidence Takes a Big Hit

Source: Bloomberg

However, this quick stock market correction has not taken into account a number of more positive economic trends, including the positive impact of lower oil prices on global consumers. 

Oil Price Plunge Boosts Consumption

The Brent crude oil price has fallen $30 per barrel from mid-June peak to around $85 per barrel currently. Of course, this is bad news for oil exporting countries including OPEC members and Russia. But according to The Economist, if this oil price were maintained, then oil consumers would benefit by paying an oil bill some $1 trillion lower.

The positive effects of this are already starting to be seen through rising US consumer confidence, thanks to retail gasoline prices falling 17% since the end of June to $3.14/gallon now. This should feed through to US GDP growth, heading closer to 3% annual growth based on current encouraging trends in the ISM Manufacturing survey.  

Seasonal Effects Now Turn Positive

In addition, after a turbulent month of October, seasonal trends now turn more favourable from November until the end of April. Historically, the VIX volatility index has peaked in mid-October, and then fallen until Spring-time, a pattern that it is starting to repeat now after touching a 3-year peak of 26 this month (Figure 3).

 3. VIX Volatility Index Calming Down

Source: Bloomberg

Prefer Growth to Value: Technology, Healthcare

With the US Federal Reserve edging closer to the end of the current round of Quantitative Easing (QE), this is typically a time to favour Growth as an investment style over Value. 
From an economic point of view, the Technology sector is a growth sector that should benefit from two factors: 

  1. The improving growth in business investment, particularly in IT hardware & software; and
  2. Improving consumer confidence in the crucial Christmas buying season boosting demand for consumer electronics.

Healthcare is a second Growth sector that stands to benefit from the continued growth in healthcare demand from emerging market consumers, and also from the increasing penetration of US healthcare insurance coverage as a result of Obamacare.

4. Technology & Healthcare Lead

Source: Bloomberg

Where to Focus in November

Aside from remaining convinced that both Technology and Healthcare sectors can move higher still, I believe that global bond yields will remain low for the foreseeable future given the continued savings glut, with investors seemingly unwilling to commit to risky assets and preferring the safe havens of government bonds and even cash. 

But, given that the best predictor of future 10-year returns from government bonds is the current bond yield, the 2.3% on offer in 10-year US Treasuries and the 0.9% offered by German Bunds seems very unattractive, with low-volatility dividend growth stocks more attractive in sectors such as Insurance and even Real Estate.

Finally, the US dollar seems set to continue to strengthen against most other currencies,  given that the European Central Bank and Bank of Japan seems set to do whatever they can to weaken their currencies, while the US Fed is putting an end to QE (at least, for now).

5. US Dollar Can Still Recover a Long Way

Source: Bloomberg