Archive | Investment Markets RSS feed for this section

Launch of Waverley Court Consulting Ltd – Website www.waverleycc.co.uk

18 Dec

I am pleased to announce the launch of my website – http://www.waverleycc.co.uk

After much work, reviews, re-writing and editing my website is now live. Let me know your thoughts on the content, design and presentation. Personally, I am most pleased with the Testimonials sections – every one who kindly provided their comments presented their views of our relationship.

The Current Market is a Stockpicker’s Paradise

17 Dec
The best time to be able to add value to portfolio performance is during times of troubled markets. Now the markets are clearly troubled, or in crisis, or in panic, or in confusion…
A stock-picking approach is vital during these times and a strong stockpicking discipline is possibly the best way for investors to ensure their money survives the current recessionary environment.
Many industry commentators have suggested that a combination of low-interest rates and low growth is a nightmare for managers who take a bottom-up approach. Maybe more so than ever, investors need to become students of the political scene as much as the macro-economic environment. You, as investors, more than ever need to focus on a company’s fundamentals. We are clearly in unprecedented times, The Bank of England interest rate has been at 0.5% for over two years (the lowest ever in history). This is not the time to be aggressively taking on risk, I believe we have to stay defensive, and the way we do that is by being very selective about which holdings, sectors and niche markets we pick. Although, we also need to remember when to break this rule as there are opportunities – suitable asset combining is essential to manage the potential for success with a capital preservation overtone.

Stockpicking has been a style that can prosper even in the most difficult markets. 

Global Review On 30 November 2012

3 Dec

So where do we start, there is always a “silver-lining” – not all the data was bad. There again even though the concerns over the Eurozone are real and serious, growth figures from many developing economies are declining, and many other problems. These are all known and expected, what more they are less worse than earlier in 2012. 

What does this mean in English? The likelihood of a doomsday scenario is less likely. There is more support for the argument, “we are struggling our way through”. 

What this means to me, the markets will remain volatile and economies will drop in and out of subdued technical recessions – this is an opportunity for the professional investor.

Moody’s cuts AAA rating of ESM Rescue Fund

Moody’s has cut the AAA rating of the European Stability Mechanism (ESM) euro rescue fund by one notch to Aa1 and given it a negative outlook. This follows a downgrade earlier this month of key ESM-backer France.

Moody’s also cut rating of the mechanism’s predecessor, the European Financial Stability Facility (EFSF)

Managing director of the ESM and EFSF chief executive, Klaus Regling, described the ratings agency’s decision “difficult to comprehend”. In a statement, Mr Regling was critical of Moody’s approach, which “does not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure.”

The largest backer of the two schemes, Germany, remains at the top-level of Aaa.

The European Stability Mechanism (ESM) was launched in October as a permanent agency, based in Luxembourg. From 2014 it will have up to 500 Billion Euros to help countries in difficulty.

The rescue fund is available to the 17 Eurozone countries, but loans will only be granted under strict conditions, demanding that countries in trouble undertake budget reforms.

Economic growth slows in India, Brazil and Canada

Canada’s slowdown was in part due to weakening activity in its oil and gas sector. A string of major economies have reported disappointing data. Economic growth slowed in India in the third quarter, while in Canada and Brazil it dropped surprisingly sharply.

Meanwhile in the Eurozone, unemployment hit a new high of 11.7% in October, as German retail sales fell unexpectedly and French consumer spending dropped.

In the US, citizens saw their incomes stagnate in October, while spending fell slightly (in part due to disruption from Storm Sandy).

The department’s Bureau for Economic Analysis, which compiled the report, said that much of the underlying data was not yet available, and the drop in spending largely reflected its own estimates of the likely loss of business due to Storm Sandy.

Other recent data from the US has pointed to a strong rebound in the world’s biggest economy, including a surprise upward revision of the country’s third quarter annualised growth rate from 2% to 2.7%.

In contrast, Canada’s economy fared far worse over the summer with  a sudden drop in the country’s exports and weakening activity in its oil and gas sector pulled its’ annualised growth rate in the Third Quarter to 0.6% (many economists had previously announced expectations around 0.9%).

Similarly, Brazil’s growth rate for the Third Quarter was 0.6% (In 2010, growth was 7.5%); and previously, the market estimates were nearer 1.2%.

India’s growth rate was 5.3% for the third quarter and was as expected. They have clearly hit a soft patch in the last 18 months.

 

The Eurozone

The picture remains bleak. European Central Bank president Mario Draghi said on Friday that the region would not exit its crisis until the latter half of next year, although he conceded that the ECB’s recent monetary interventions had helped put an end to the months of financial market stress experienced up until the summer.

We seem to be in a two-speed Europe. The southern European economies of Italy and Spain have been in recession all year, thanks to government spending cuts, troubled banks that have been cutting back their lending, and in Spain’s case a steadily deflating property bubble. It seems unemployment has continued to rise in both countries, while in Germany the jobless rate held steady close to a record low.

UK banks may need more capital, Bank of England says

Major UK banks may need to raise more capital as protection against possible future losses, as reported by the Bank of England’s Financial Policy Committee.

Bank governor Sir Mervyn King said there were “good reasons” to think current capital ratios did not give an accurate picture of financial health.

The report suggested that the ‘Big Four’ UK banks need £5bn-£35bn of new capital.

The main UK banks include HSBC, Barclays, Royal Bank of Scotland and Lloyds.

Mervyn King said there were three reasons why the Bank of England thought that the banks were not strong enough :-

  • Future credit losses may be understated.
  • Costs arising from past failures of conduct may not be fully recognised.
  • Risk weights used by banks in calculating their capital ratios may be too optimistic.

Sir Mervyn added: “The problem is manageable, and is already understood at least in part by markets. But it does warrant immediate attention…..Mis-selling costs, inadequately capitalised banks hold back economic recovery and undermine investor confidence”.

The Bank is being granted greater regulatory oversight over banks from next year when it takes over the Financial Services Authority. One of its primary roles will be to make sure UK banks have sufficient capital to support the economy.

US economic growth rate revised up to 2.7%

The US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested.

The figure is significantly higher than the 2% initial estimate that the Commerce Department released just before the presidential election. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained.

Developments in the US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery. A rebound in the housing market could help to sustain the US economic recovery

Normally, periods of recovery in the US economy are led by residential construction, as building firms quickly get back to work on a backlog of projects as soon as the recession is over.

But this time round, the recession was in large part caused by the bursting of a housing market bubble, that left behind a glut of unsold homes, bankrupted many homebuilding firms, and saw the sharpest and most sustained collapse in homebuilding activity in recorded US history.

Who can drive the Global Recovery?

In the aftermath of the global financial crisis, countries like Germany, China and Brazil were the engines that kept the global economy expanding, but recent evidence suggests that they are losing steam.

The World Bank expects a soft recovery, with global growth of 2.5%. But within that there appears to be a clear divide between developing economies, which are forecast to grow by 5.3%, and advanced economies by just 1.4%.

Is China’s economy heading for a crash?

Of the major developing economies, only China appears to have recovered from a worrying slowdown before the summer, with a string of positive economic data announced just ahead of the country’s decennial leadership transition earlier this month.

China’s economic growth has slowed for six quarters and the period of rapid economic growth may be over. China’s export model may no longer be working as well. The Chinese government and many economists are now expecting growth to slip below 8% this year, with some even predicting doomsday scenarios of a crash.

So what are the prospects for China’s economy?

China is not only the world’s second-largest economy and leading exporter, it is also the world’s largest construction site. Construction has come to dominate China’s economy, accounting for roughly 25% of all activity and about 15% of all jobs.

Most analysts take comfort from the fact that there are no sub-prime mortgages or complex financial derivatives in China.

Japan

Japan is still recovering from last year’s devastating tsunami and nuclear crisis.

Recent data have shown that Japan, one of the world’s top exporters, was not exporting as much as it used to. In fact it has been massively importing – including energy, which has pushed the country’s energy bills sky-high after Tokyo stopped nuclear reactors.

The strong yen has also hurt exporters, making their products more expensive to foreign buyers.

The Bank of Japan forecast the economy would grow 2.2% in the current fiscal year and 1.7% the following year. The rosy growth projections were enough for the central bank to hold off on further easing to boost the economy.

“Japan’s economic activity has started picking up moderately as domestic demand remains firm mainly supported by reconstruction-related demand” following last year’s natural disasters, the Bank of Japan has said.

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.

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”.

Protect Your Portfolio From Inflation

29 Oct

Why invest? Market volatility means there is an inherent risk that capital value may drop and the returns achieved may not match our expectations. The answer is INFLATION. How else can we inflation proof the value of our money?

I have no other answer to this life-long question – so the question becomes, how do we protect against dire volatility while maintaining the true value of money?

Many great statistical minds have tried and all have failed to effectively predict volatility and inflation with any consistency. I believe that it is easier and more appropriate to weatherproof a portfolio against the potential situations.

The case for high inflation goes something along these lines: paper money, not backed by any physical store of value, effectively only derives its worth from the goods and services you are able to exchange it for. By printing lots of it, as we have (such as, through quantitative easing [QE]), without a corresponding increase in the number of things you are able to spend it on – its value decreases.

So, if twice as much money can only be used to buy the same amount of stuff, then it must be worth half as much. It is debatable how much money has to be printed before there is any noticeable drop in value; especially since the extra currency gets recycled many times through the banking system, where its impact could be multiplied massively. The worst-case scenario is that there has already been too much extra cash printed and the effects are slowly gathering momentum.

Additionally, there is the fear that by becoming the lender of last resort to governments, notably in the US and UK and more recently the ECB, central banks will be unable to take corrective action without effectively bankrupting their home nations.

High inflation erodes the real value of your portfolio, and this needs to be protected against. One obvious starting point is inflation-linked bonds. The income on these bonds is indexed to the rate of inflation. While this will prevent a fall in the real value of income received, it could still leave you exposed to falling real capital values. A fairly consistent defence against moderately high inflation has been equities. It makes sense to match up markets to currencies; if you are concerned about UK inflation then UK equities are a good choice. They protect both income levels and capital value. Shareholders will always demand a real return, forcing businesses to pay out higher dividend rates to attract investors. At the same time, the higher rates will attract investors seeking income protection who would otherwise be in low -yielding assets such as cash.

If you are a bit more extreme in outlook, with a sizeable number of people predicting the end of the fiat money system altogether, then it is best to hold physical assets. Gold is the favourite of inflation conspiracy theorists and its record price shows the extent of the fear of high inflation. As a homogenous, globally traded commodity, its value tends to increase any time the threat of inflation rises anywhere in the world. The difficulty with investing in gold is that unless you physically have it in your hand, you are just as exposed to the system of interconnected promissory notes as you are with equities or any other paper asset.

Raw materials such as oil, food and other industrial metals and minerals are likewise relatively good bets in a high-inflation environment. These physical assets can not be debased by simply conjuring more up and as they will always be in demand, their value is reasonably assured. Again, it is quite hard to stockpile barrels of crude oil or frozen orange juice concentrate, but if you are looking for security you want as little separation from the physical items as possible. A focused fund can also be a useful addition to a portfolio. It is important to remember that inflation is a risk that is actively managed by most fund managers as part of their standard investment process.

A well-diversified portfolio, not just across asset classes but taking in a good spread of strategies and outlooks will likely cover you from the most likely inflation scenarios.

Good financial health – The WelshMoneyWiz

Assessing The S&P 500 Performance – The Highs & The Lows

12 Oct

What a Difference Five Years Makes – 10 Years Makes – 15 Years Makes

With this week marking the five-year anniversary of the stock market’s record high, much of the attention will and has been devoted to the market’s steep drop and sharp rebound. The chart below shows, the S&P 500 has been swinging in a wide range for the last 15 years. The pattern has been quite extreme – doubling and then falling by half over and over again.

Five years ago, the S&P 500 closed at a peak of 1,565.15.  Since then the index has seen a huge decline followed by a huge rally.  After all those swings, the S&P 500 has declined 7.9% over the last five years (annualized the decline works out to a loss of 1.63% per year). If we extend the period to the last 10 years, the S & P 500 has increased by 85.6% (6.38% per year).

SPX 5 & 10 Year Return Table

Some people may not remember, is that five years prior to the S&P 500’s all-time high made on October 9th, 2007,  the index bottomed out from the 2000-2002 bear market at a level of 776.76.  Following the post-Internet bubble low on 10/9/02, the index rallied more than a 100% before dropping more than 50% from 2007 to 2009.  After bottoming out in March 2009, the index has since rallied more than 100% once again. 

S&P 500 15 Year Performance Chart

With the S&P 500 about 7% away from its all-time high of 1565.15, I am skeptical the market is poised for another multi-year decline. The stronger earnings, higher dividends, reasonable valuations and an improving US economy are four main catalysts why I currently doubt the rally won’t fall off the edge of a cliff.

Conversely, I  don’t expect double-digit returns in the coming years.

I believe that stocks may produce below historic average returns in the years ahead and in the near-term the market and associated economies face daunting challenges in the coming months. This includes – a sluggish global economy, European financial stress, U.S. budget battles and the looming fiscal cliff. However, with better fundamental drivers of value than at similar points in the past 15 years, stocks are likely to weather most potential outcomes better than they have in the past, making a return trip to the lows of the 15-year range unlikely, at least for now. Plus, if history is to repeat itself we are three years into the five-year cycle – but that is a very big “if”.