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

Tuesday, 28 October 2014

With Foxtons in a Tailspin, Keep Your Finger Off the Housing Trigger

Here is my latest weekly article for IBT UK:

International Business Times Article link - Click Here

International Business Times Video Link

I have to admit, I did chuckle when I saw the profit warning lurking within Foxtons' recent results. I have long detested "flash" Foxtons, a London-centric estate agent chain with ultra-trendy offices and its distinctive green and yellow-liveried Minis.
It has been a big beneficiary of the recent London property price bubble. But now, it is beginning to display the hangover-like signs of "the morning after the night before", with housing transactions slowing sharply, sending Foxtons' top-line into a tailspin and its share price to 158.5p now, versus a peak of nearly 400p (Figure 1).

Figure 1: Foxtons down more than 50% from peak

According to the latest Royal Institute of Chartered Surveyors (RICS) market survey, surveyors are now expecting prices to fall in London and to decelerate elsewhere in the UK. Already, London buyer demand has fallen for the last five months in a row and new buyer enquiries have also collapsed.
So, are cracks finally appearing in the UK's housing boom? I should at this point declare a personal interest: my wife and parents have been badgering me to buy a pied-à-terre in London where I work for many months now. My protestations about how expensive and dangerous the London property market is have rung hollow as the capital's property prices have continued to climb month after month.

Earning income from buy-to-let in a zero interest rate world

With private sector rents increasing repeatedly by more than the rate of inflation, cash deposits earning virtually nothing in the bank and house prices enjoying a steady climb, the incentive to own your own home is clear. Vast swathes of people in this country swear by the mantra that house prices never go down over the long term.
So of course I see the argument for owning your own home, even if economists such as Danny Blanchflower and Andrew Oswald maintain high home ownership worsens labour mobility and thus represents a long-term drag on the economy.
It is where a buy-to-let housing investment is concerned that I have my objections. Yes, there are times when buying a flat or house to rent it out makes sense, typically when prices have fallen or have been stagnant for a number of years, throwing up value opportunities as we saw last in 2008-09 after a 20-30% drop in house prices nationwide.
Contrast that with the prevailing situation: house price inflation over the last five years has far outstripped both the general rate of inflation and also wage increases, making housing progressively less affordable to the average UK household even with two salaries. 
It is certainly difficult to call this value for money in a long-term context.
This is not to mention the myriad costs and risks a new buy-to-let investor faces, such as:
  1. transaction costs, most importantly stamp duty when buying a property, 3% or more on properties worth over £250,000;
  2. refurbishment costs, typically underestimated by new home buyers by £3,000 on average;
  3. initial furnishing costs, if letting on a furnished basis;
  4. the vacancy risk, where there is no rent coming in but costs to bear;
  5. default risk, where the tenant does not pay rent owed on time but refuses to move out;
  6. maintenance costs;
  7. annual service charges and ground rent on leasehold flats;
  8. managing agents' fees for finding tenants, higher if also managing the property;
  9. income tax to pay on rents received (less allowable costs) and potentially capital gains tax too on gains when reselling the property hopefully at a higher price.

While this list is non-exhaustive, it is an important checklist for any budding buy-to-let investor to consider before bringing out the cheque book.

So when to buy? Not just yet...

A number of sources such as RICS, Hometrack and Nationwide point to slowing national price growth and outright price declines in London (Figure 2).

Figure 2: Have UK house prices peaked for now?

Add in a negative seasonal effect too - UK house prices grow much faster during spring and summer, and often fall back over winter. Given these facts, now is a good time to sit on your hands and let sellers sweat pushing up average discounts of achieved to asking prices, while spring 2015 could be a better time to find properties at more reasonable prices, especially in and around London.


Monday, 27 October 2014

IBT Video: No Need to Panic over Tumbling Stock Markets

To watch this International Business Times video interview with the UK editor George Pitcher, please click on the web link below:

Stock Markets May Be Tumbling But Do Not Join the Rush to Make a Hasty Exit

When you work in financial markets, as I do, it is easy to sense the pervading air of panic as stock markets tumble.

Newspapers and websites broadcast sensationalist headlines such as "Countdown to Panic Grips World Markets" and 24-hour news and business TV channels report on a minute-by-minute basis on the immediate loss of paper wealth that the world's investors are suffering – "£46bn lost on the FTSE 100 today".

Luckily, I have a little experience to fall back on, as I have worked in financial markets for the last 20 years now – and have the grey hairs to show for it. What this experience, and a cursory scan of financial market history, tells me is that we now seem to be heading into an overshoot mode.

To read the rest of this article on International Business Times,
please click on this web link:


Saturday, 18 October 2014

Long-term investors: Time to Fill up the Tank with Energy Exposure

To read the article on Stockopedia, click on the link below: 

Yes I know, the Oil & Gas sector has been a horrible place to be, really since mid-year. Trust me, my portfolios have suffered thanks to a sizable exposure to this sector.

But I believe that there are good reasons for expecting the oil price to rise, lifting the oil & gas sector with it:

  1. There is an OPEC meeting on November 26, and with Saudi Arabia as the official swing producer not wanting to be the only country to cut production, is turning up the heat on other OPEC nations to participate in coordinated cuts. Bear in mind that OPEC are producing a lot more crude today than in previous months/years thanks to recovery in Iraq crude production to near to 3m barrels/day, and more recently Libya which has raised production from very little to 750,000 barrels/day over the last 2 months. But no other OPEC producers, who had increased production originally to cover the Iraq + Libya shortfalls, have cut back meaningfully - yet.
  2. US oil refineries have been running at lower capacity rates as is normal for this time of year, of the order of 84% vs. 92% previously, as they go offline for scheduled maintenance. So as they come back online, US demand for crude should pick up again, helping to correct the unusual contango situation (where spot crude is cheaper than dated futures, whereas normally it is the other way around).
  3. Global demand for energy will continue to grow, most notably from emerging markets as they start to catch up with Western-style energy-consuming habits, and if anything, lower crude prices will encourage greater consumption, with a lag...
  4. There is still a risk of a cold winter hitting Northern Europe and the Northern part of the US - Siberia is seeing lots of snow, there is even snow already in Moscow! This often presages a hard winter in the North of the US, which would mean more oil and gas consumption for heating. 

Even with a small bounce today in Brent crude oil price to $86/barrel, it is still a very far cry from the $115/barrel touched back in mid-year. I would not expect necessarily to get back to these heady levels, but I would not be surprised at all the see Brent back above $90/barrel sooner rather than later. 

Wishful thinking, perhaps. But we shall see... In the meantime, I am increasing my holdings in a number of junior oil companies with exposure to US shale such as Caza Oil & Gas Inc (LON:CAZA), and also increasing my holdings in oil- and gas-focused ETFs in the US. 


Wednesday, 15 October 2014

VIDEO: Sky Business News Appearance on Global Stock Market Slump

This evenng (Wednesday), I spoke to Ian King about the scale and reasons for the current stock market slump. I also touched on why Initial Public Offerings are being pulled, the latest withdrawn IPO issue being Aldermore (the challenger bank). 

Click on the web link below to view this short video: