Archive | November, 2012

Start of A Stock Market Rally Into Spring 2013?

26 Nov

Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.

This is a tricky situation. On the one hand, stocks are oversold and due for a bounce.  On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.

The bullish case is bolstered by this weeks positive results, which stopped the previous declines.  The market’s previous fall of 8.8% from the September high is right around the normal bull market correction.  So, the reversal clue materialized right where it theoretically should have.

The bearish case:  There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining  and still not snap the losing streak ( as compared to September’s highs).

Any additional clues from the CBOE Volatility Index?  No, not really.

Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling.  Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point.  Then again, the VIX is clearly hitting a ceiling at its 52-week moving average.  Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).

So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed? 

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.

The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.

If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.

We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.

As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.

This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.

ECJ Judgement and the effect on Discounted Gift Trusts

26 Nov

This article summaries the judgement provided by the Court of Justice of the European Union (ECJ) regarding gender discrimination in relation to insurance premiums and its effect on Discounted Gift Trusts (DGT).

The Decision

On 1 March 2011 the ECJ issued a judgement that stated that the insurance services sector will no longer be able to offer gender specific premiums or benefits from 21 December 2012.

How does this impact Pensions, Annuities and Insurance?

This ruling is expected to affect these areas of financial services and following the 21 December 2012, we will see how this will be embedded into our existing legal framework and processes.

How does this impact DGT valuations?

When calculating the open market value of an income stream to arrive at a discount, HMRC guidance provides the use of certain gender specific mortality tables. HMRC have indicated they will review their guidance to take account of the judgement. However, it is likely that any change would not happen until late 2012. For DGTs declared before any change to the HMRC guidance on valuations, this judgement should have no impact, as the basis of the discount calculated will be relevant as at the date the trust is declared not the date of death of the settlor(s).
It should be remembered that the discount is just one factor in deciding whether a DGT is a suitable arrangement as part of your Inheritance Tax planning strategy.

The Rationale for the Judgement

Directive 2004/113/EC prohibits all discrimination based on gender in the access to and supply of goods and services. 

This means that from 21 December 2007 the Directive prohibited the use of gender in the calculation of insurance premiums and benefits. However, the Directive allowed exemptions to Member States regarding the use of gender specific premiums and benefits so long as the Member State ensured that the underlying actuarial and statistical data of which the calculations are based are reliable, regularly updated and available to the public.

The judgement considered if the intention of this exemption was to allow gender specific premiums and benefits to continue indefinitely. The Court concluded this was not the case and that gender specific premiums and benefits works against the achievement of the objective of equal treatment between men and women and therefore it was appropriate to bring this practice to an end.

Concluding that gender specific premiums and benefits would be regarded as invalid with effect from 21 December 2012.


Passive vs Active Fund Management Argument Rages On

15 Nov

It has been the argument for many years – Does active fund management generate better investment returns? The general accepted conclusion has been yes but only for the best managers whereas the rest under-perform. So the question as an investor is it worth the additional cost?

Personally, I agree with the above points and  believe a combination of strategies is best – the point is, if active fund management generate above sector average returns on a consistent basis then by selecting, monitoring and reviewing we will achieve the best risk adjusted returns. The question is which sectors to combine and this is where my expertise adds value and my expectation of betters risk-adjusted returns.

Premier Fund Management has challenged the  opinion that average fund managers always tend to under-perform the associated indices.

Conventional measures of the “average” fund manager’s performance – the use of fund sector averages based on the mean performance of all funds in the sector – have long appeared to support this view. Many experts have tended to attribute the under-performance to the effects of active fund management fees on the funds’ performance.

However, research by Premier Asset Management based on ‘weighted averages’, which give bigger funds a greater influence on sector average calculations to reflect the true average return in the sector, shows that in most cases this is not the case.

In the IMA Asia Pacific excluding Japan sector the conventional sector average return of funds in the past five years was 27% – far lower than the FTSE World Asia ex-Japan index gain of 34.8%. However, when the amount of assets in each fund is taken into account, the actual weighted average performance experienced by investors was 37.4% – better than the index, the research shows.

In the IMA Global Emerging Markets sector the conventional average performance was a 23.9% gain, compared with an MSCI Emerging Markets gain of 27.4 per cent. However, the weighted sector average gain from funds was actually 32.2%, the research shows.

It also shows that, while the weighted average fund performance was not necessarily better than stockmarket indices in all sectors, it was better than the conventional sector average in seven out of the eight sectors that were examined. This suggests that the existing reported sector averages published to investors understate the returns enjoyed by most clients of actively managed funds.

The one sector where the conventional sector average was higher than the weighted average was IMA North America – suggesting that the biggest funds in that sector actually under-perform the smaller funds on average.

Simon Evan-Cook, investment manager on Premier’s multi-asset team and author of the research, said the weighted average calculations were a better method of judging funds because more investors were affected by the performance of larger funds. “As a whole, the industry is understating the performance and value of active management,” he said.

Ed Moisson, head of UK research at Lipper, said Premier’s method was “logical” and demonstrated the strength of larger funds’ track records, but added it did not tell the whole story.

The US Election Is Over, Now What Happens?

12 Nov

After months of waiting, investors now have one less uncertainty to deal with. The election is over, and voters decided to give President Obama another four years to lead the country.

In addition to winning, the Democratic Party retained a majority in the Senate, picking up 2 seats. However, the Republican Party also maintained its majority in the House of Representatives. This means that the political leadership will not change significantly. That doesn’t mean everything will stay the same. Voters decided to retain many of the same leaders, but recent polls suggest many people want to see different legislative results.

Looking ahead, the new Congress and President Obama must now find a way to boost economic growth and create jobs. Along the way they need to avoid the fiscal cliff, foster trade with other countries and maintain the security of the United States in an increasingly threatening world. Unfortunately, avoiding the fiscal cliff and promoting economic growth are immediate problems. If Congress fails to take action, the Bush-era tax cuts and the Obama payroll tax cuts will expire at the end of this year. At the same time, mandatory federal spending cuts are scheduled to begin (as lawmakers could not agree on a compromise to reduce the deficit during last-years’ debt-ceiling negotiations). The Congressional Budget Office estimates that the economy could go into recession and contract 0.5% next year if all the tax hikes and spending cuts take place as scheduled.

We believe there are several scenarios that could unfold around the fiscal cliff. The most likely outcome would be that lawmakers would find acceptable middle ground including some tax increases and spending cuts but not the full measure scheduled to occur at the end of the year. Modest tax hikes and federal spending cuts would not severely hurt the economy but would be a drag on economic activity next year.

Recent economic news shows that the U.S. economy is slowly recovering from the 2008-2009 recession. Fortunately, the housing market has finally turned up after six years of subtracting from economic growth. The country will face some fiscal drag if Congress allows some tax increases and spending cuts to reduce the deficit next year. This fiscal drag will most likely be offset by the recovery in housing and continued increases in consumer and business spending. As a result, we believe that the economy is likely to grow in 2013.

Many investors may be concerned that the election outcome will lead to continued political gridlock that has existed during the past two years. However, both parties recognize the risk to the economy if lawmakers do not address the fiscal cliff. Therefore, during the next few weeks we are likely to see both parties talk about a willingness to work together, but start the process by stating the pre-conditions for cooperation. We believe this would just be the first step toward addressing policy differences. Obviously, the process will not be quick and easy.

Some strategists are suggesting that Congressional Leaders could allow the country to go over the fiscal cliff as a way to force a compromise. If this happened we would expect any compromise after the first of the year would be retroactive to the start of the year and the economic impact would not necessarily be that severe. The outcome would be volatile financial markets.

So what do the elections mean for investors? We believe that the underlying U.S. economic fundamentals remain favorable. The economy is growing, and the uncertainty of the election is behind us. If Congress and the President can find some middle ground and compromise over tax hikes and spending cuts, the outlook for the economy would be better than the worst-case scenario of allowing all the tax hikes and spending cuts to be implemented as scheduled.

The economy is expected to start the year on a weak note until the fiscal cliff issue is addressed, but we expect economic momentum to build as the year progresses. In this environment, the stock market would be volatile during the next few months. The positive seasonality during November and December could support stocks if investors see Congressional Leaders trying to work together. Longer-term, we look for the stock market to have modest gains next year.

Fortunately, the Federal Reserve’s easy money policies will partially offset the fiscal drag of reducing the deficit. The government may borrow and spend a little less next year if a compromise is reached but net lending in other sectors of the economy has increased, and this increase in credit in the private sector is likely to support economic growth. In addition, the credit markets are likely to benefit if the Fed continues to provide liquidity to the economy by buying bonds until the unemployment rate declines.

My clients have been positioned with asset preservation and potential of positive returns in mind during the past year. This was in order to deal with the uncertainty of the global environment, the Eurozone debt Crisis, slowdown in China’s GDP, the US election outcome and the pending fiscal cliff (to name just a few). Finally, businesses appear to have delayed capital spending and hiring until the direction of governments policies becomes clearer. After waiting much of this year, next year could potentially be a year of action and less worsening situations (possibly even improving situations). Investors may take a less defensive position, assuming investor sentiment improves (on a relative basis, this is anticipated) and this could lead to stocks outperforming bonds in 2013. If this scenario ends out being true then cyclical sectors of the stock market are likely to perform better than defensive sectors. Although this is only an “if”.