Monday 31 March 2014

Reuters TV: Wealth Strategies interview

I appeared recently on a new Reuters TV segment called "Wealth Strategies", discussing Russia, Technology and peripheral Europe amongst other things...

Click on the web link below to view the 6-minute video!


Wednesday 26 March 2014

Is India the First among Emerging Market Equals? Time to buy?

Astute observers will have noticed that the Indian Sensex index has just hit a multi-year high at over 22,000 (Figure 1).


1. THE INDIAN SENSEX INDEX HITS A NEW MULTI-YEAR HIGH


Source: Bloomberg

Not only that, but the Indian rupee has also started to gain ground against major currencies such as the US dollar, the euro, and sterling.

Given the relatively poor backdrop for most emerging markets thanks largely to Russia and China, why is India bucking the trend so successfully?


New central bank governor, maybe a new government?

A widely respected central bank governor, Raghuram Rajan, has already been installed at the Reserve Bank of India. He has lent a lot of credibility to the central bank policy of attempting to control Indian inflation which is still relatively high at 8.1%, but which is finally starting to come down.

A second driver for a positive view on India comes from Indian politics. Parliamentary elections are due to be held soon in India, and current opinion polls indicate that Narendra Modi’s Bharatiya Janata (BJP) opposition party is likely to win power, ousting the long-serving Congress party in the process. This is being seen as a good opportunity to see widespread reform within India, which may remove some of the structural roadblocks to Indian growth.

Clearly, while it is not clear that tensions over the Russian annexation of Crimea are calming or that sanctions will not be intensified on the part of the US and European Union, and while it is not clear as well that China will reignite growth in the near future, nevertheless India remains a bright spot within the emerging market universe.


Please click on the web link below to read the rest of the article and see the
ETFs and investment trusts recommended:  
  
  
  
All the best, 
Edmund 

Friday 21 March 2014

CNBC Europe Squawkbox Video: French disillusioned with Left and Right parties

An interview recorded by CNBC Europe during their Squawkbox morning programme (where I was Guest Host) - Click on the web link below to watch:


ETF Investing – Why not all indices are created the same

Why not all indices are created the same

Exchange-traded funds (ETFs) based on indices are meant to be simple, transparent, cheap investment vehicles, which do not require the expertise (and thus avoid the cost) of an “active” fund manager. They instead simply buy exposure to the stocks (or bonds or commodities) in the particular index being tracked – so-called “passive” investing. And they do fulfil this role, pretty successfully in my view.

But when you delve into the indices upon which these ETFs are based, you find that there is a huge number of variations on this particular passive investing theme; it’s like opening a can of worms.

Weighting index members by market cap

For instance, the vast majority of benchmark stock indices that you will have heard of – like the S&P 500, FTSE 100 or Euro STOXX 50 – weight the stocks in their index by market capitalisation. That is to say, the more a particular company (e.g. Vodafone) is worth, the greater its weighting in the index, and thus the more of that company you will buy exposure to when you buy a FTSE 100 index ETF.

To read the rest of this article, please click on the web link below to Harriman Intelligence:


Wednesday 19 March 2014

Has the market overreacted to the Budget’s impact on UK insurers? Perhaps yes...

As I am putting metaphorical pen to electronic paper, UK life insurers are getting well and truly clobbered following the pension changes unveiled by Chancellor George Osborne in today’s UK Budget.

Insurers suffer precipitous share price falls

The annuity specialist Partnership Assurance has lost 52% so far today, while life insurer Legal & General has dropped over 13% and Standard Life over 6%. The trigger for these precipitous share price declines has been the announcement that pensioners will no longer need to take out an annuity with their private pensions when they take retirement, but will instead be take out as much from their private pensions as they like, without restriction.

The situation prior to today

Without going into too much detail, as I am not a tax adviser but rather an investor, let’s recap the situation prior to today. A prospective pensioner with a defined contribution (also called “money purchase”) private pension could take 25% of their private pension out in cash tax-free at the time of retirement – as has been the case now for many a year.

No more annuities?

The Chancellor’s pronouncement today, releasing pensioners from restrictions on their private defined contribution pensions, has been translated into a collapse in the future demand for annuities, as pensioners will now be able to withdraw as much as they like from their private pensions. Of course, this pension income will be treated as taxable income, potentially raising much-needed further income tax revenues for the HM Revenues & Customs.

This has been quickly translated by the stock market as: “There is no further need for annuities, and therefore demand for annuities is going to dry up”.

To read the rest of this article, including the two insurers where the stock market has overreacted, click on this Mindful Money link: 


Video: Have Emerging Markets Hit Bottom? What to Buy?


Wednesday 12 March 2014

On Bloomberg TV, Talking about Copper, Mining and Recent IPOs

I appeared on Bloomberg TV to talk about  a number of issues, including my favourite 3 themes right now (Technology, Oil Services, Mining) and also the over-valuation of recent UK Initial Public Offerings...


All the best,
Edmund


Monday 10 March 2014

Weekly Newsletter, March 10 2014

Is The Ukraine Question Going To Hit Markets Again?

And things seemed to be going so well for global stock markets! Mid- and Small-cap indices hitting new highs, then followed by the large-cap benchmark indices such as the S&P 500 in the US and the Euro STOXX 50 in the Eurozone. Then comes President Putin with his move into the Crimea (where the Russians maintain a strategically-important Black Sea naval port), and hey presto, we suffer a nasty, if short-lived, dose of market volatility.

But notice also that the trend in mid-term volatility (shown below) has been rising from the lows hit in early January, well before the Ukrainian-triggered flare-up in volatility over February.


1. US Mid-Term VIX Volatility Gently Rising

Source: Bigcharts.com


Whether or not this market volatility will worsen will depend on whether the US and Europe press ahead with any form of economic sanctions against Russia.


I believe that Europe in particular will not be hasty to pursue this course of action, given the value of Russian gas to the Old Continent.


A Few Energy Policy Considerations

This political instability in Ukraine underlines the fragility of European energy policy, given that one-third of Europe’s natural gas supplies come from Russia via the Ukraine (particularly important for Germany and the Netherlands). Thus, any economic sanctions against Russia are very likely to have a heavy hit for the European economy too, which is precisely why sanctions look unlikely in the near-term.


Of course, this means that European nations will not want to rely too heavily on Russia for natural gas output in the future, as this recent episode has underlined just how toothless they are in the face of volatile Russian foreign policy.


As they are committed in general to reducing their reliance on nuclear power (Germany in particular, but also France), what can they do about the precarious natural gas supply situation?

Industries That Should Benefit From This Situation

Renewables will benefit of course (solar, wind, hydro, biomass), which is one reason why clean energy funds have been performing so well (see chart below).

2. PowerShares Clean Energy ETF is Roaring Away

Source: Bigcharts.com


Algeria also benefits from French largesse as the French pay over the odds for Algerian natural gas supply for diversification reasons (and historic reasons too).


But I believe that the ultimate winner will be shale gas exploration and production in Europe, led of course by the UK. But other nations will inevitably follow…


I remain a big long-term fan of oil service companies can that enable/facilitate shale oil/gas exploration, extraction and processing/transportation. I would rather take exposure to these companies (who provide the “shovels”) rather than the exploration companies themselves, given the uncertain hit-and-miss nature of exploration activity.



The Oil Service companies have shown some excellent share price performance over the last month, with the IEZ iShares US Oil Equipment & Services ETF up 15% in a month!

3. iShares US Oil Equipment & Services ETF +15% in Feb.

Source: Bigcharts.com


UK-listed oil service companies that continue to do well on the back of this theme include: 



Kentz Corporation (KENZ.L), Petrofac (PFC.L), Wood Group (WG.L), 

KBC Technology (KBC.L) and AMEC (AMEC.L).


An Interesting Perspective on the Current Bull Market

This week, the bull market that started in 2009 celebrated its fifth anniversary. Now, there was a big correction back in 2011 at the peak of the Euro financial crisis, when the S&P 500 index lost almost 20% form peak to trough. Since then, we have surged back to hit new highs.


The chart below from www.chartoftheday.com puts the current stock market rally in to historic context. It highlights that the current rally in the US S&P 500 index is, thus far, nothing particularly remarkable or stretched when compared against previous historical bull market rallies.

4. Similar in Duration to the Average Rally, But Not As Strong!

Source:  www.chartoftheday.com

This all suggests to me that, should we navigate these choppy Eastern European without a full-scale “new cold war”, there is still further upside potential over the medium-term for developed stock markets, while economic growth momentum continues to slowly build up steam on both sides of the Atlantic Ocean.

Thursday 6 March 2014

My Model ETF/IT Model Portfolio: +2.8% after 3 Weeks...

So Far, So Good…

If we look at the performance of my 6-member portfolio of UK-listed Exchange-Traded Funds (3 in total) and Investment Trusts (another 3) which I launched on Mindful Money on Friday February 10,



I think we can say that it has been satisfactory so far, safely weathering the recent Ukrainian mini-storm (Figure 1).
1. ETF/IT MODEL PORTFOLIO +2.8% SINCE LAUNCH ON FEB. 10
 Source: Author, Bloomberg
All six funds have made ground over the three weeks since launch despite the recent bout of Russian-Ukrainian inspired volatility, which for now at least seems to be calming down as Russia and the West both back away from anything that looks like military action or sanctions.

The benchmark index (comprised of one-third UK FTSE-All Share index and two-thirds MSCI World index in sterling, to match the geographic composition of the portfolio) has risen some 2.3% over the same period – so the portfolio has eked out a small measure of outperformance so far. But in any case, this is largely irrelevant as the portfolio is designed to perform over the medium-term (think years not weeks).


To read the rest of this article, including my thoughts on Russian exposure via an equities investment trust and an emerging market bond ETF,
please click on the Mindful Money web link below:

Edmund's ETF/IT Model Portfolio Up 2.8% in 3 weeks

All the best,

Edmund

Wednesday 5 March 2014

Bail on your bank shares! Buy insurance, real estate instead

Look at the widening gap between financial sectors

I think this first chart gives you a good idea of why I am not keen on UK-listed banks at the moment – the stock market has been falling out of love with them over the last 10 months, following a series of frankly poor results (Figure 1).

If you had been invested in the UK Banks sector (HSBC, Barclays, Lloyds TSB, RBS, Standard Chartered) since January of last year, you would today have seen precisely zero price appreciation on average to today – your only gain has been in dividends paid.

Contrast this with the stellar performance of two other UK financial sectors: Insurance and Real Estate, both of which have gained around 30% over the same period. That is a big difference!

 But there are of course some very good reasons for the relative under-performance of Banks – most notably from:


  1. Their poor sets of results, generally missing analysts’ estimates for profits and earnings;
  2. The ongoing sagas of tighter banking industry regulation and also continual provisions for the costs of various mis-selling and price-fixing scandals, which seem to linger like a bad food odour and taint the industry.


Banking scandals do not go away

I haven’t got enough space in this short article to list all the “bad stuff” that the banks have been caught doing over the past few years – just note that we now have a potential Gold price scandal centred around the daily London pm gold price fix, which involves Barclays and HSBC amongst others.  So this latest scandal can potentially be added to the long list of issues that the banks are already paying for, in the form of fines and compensation to victims.

And bank results have not been good

On the results front, these have been somewhat disappointing; even today Standard Chartered has announced results, another bank undershooting analysts’ profit forecasts for end-2013 (net income reported of $3.99bn versus an average analyst estimate of $4.25bn).

UK banks, particularly those like Barclays, HSBC and RBS that still retain substantial investment banking activities are struggling to bring down costs (principally salaries) sufficiently to reach their targeted cost-income ratios (a measure of banking efficiency). Put simply, if they do not pay high salaries and bonuses to investment bankers who are performing well, these employees will simply jump ship and work elsewhere. And an investment bank is really the sum of its talented individuals – if they all leave, what value is left?

To read the rest of this article, see the charts and my UK large-cap stock recommendations in Financial sectors, click on the link below:



Monday 3 March 2014

Footsie reaches for the 7000 mark. But there are better places for your money!

A lot has been made in recent days of the fact that the iconic FTSE-100 index (that has existed since 1986) is close to breaking its 14-year high, reached during the technology bubble back in early 2000.

Will the Footsie break through to a new multi-decade high? How much further can it go if it does? These questions are all well and good, but are not really the right questions to be asking.


In the Stock Market, Size is not Everything!

Should you even be looking at the benchmark FTSE-100 index at all? The real value creation in the UK stock market has not been in these largest of companies, dominated over time by Banks, Telecoms companies and Oil majors. Instead, investors have been far better served by the mid- and small-cap segments of the UK market, not only over the past 14 years but even further back as well.
Including reinvested dividends over time, the FTSE-100 has given investors a mere 3.7% on average since the end of 1999 (the line in black on the chart – and that’s not counting management fees even in an index fund); compare this to the 6.5% pre-fees from the Small-Cap index (in green) and an impressive 10.2% pre-fees from the Mid-250 index (in red), nearly three times the average return from large-caps!

This was largely achieved through two key biases:

1. A bias towards domestic economic exposure, which is greater in the mid- and small-cap segments of the stock market. In contrast, FTSE-100 companies tend to be global by nature, and indeed often have little to do with the UK per se (look at the Miners, for example).

2. Low weightings in hard-hit sectors, such as Banks, Insurance, Telecoms and Oil Majors. All of which have come a cropper either during the recent Financial Crisis, or before that post the 1999-2000 Tech bubble.

3. Let us not forget either that smaller companies generally also post higher growth rates in sales and profits too…

Despite this superior performance record for mid- and small-caps, you can’t even make the argument that mid- and small-cap companies are now systematically over-valued with respect to their large-cap counterparts: the estimated Price/Earnings ratio for the FTSE 100 is a little lower than for the Mid 250 index at 12.5x versus 14.6x, but it is not as low as for UK Small Caps, which trade at only 11x estimated end-2014 profit.

To see the charts, and look at the ETF and investment trust selections that I think will beat the FTSE-100 going forwards, please click on the Mindful Money web link below:

Until the next time,Edmund