Thursday, 13 June 2013

Après le Déluge... What to do now?


Après le Déluge...

What do do now after what has been an impressive spike in volatility across financial markets over the last few weeks? 

First of all, DON'T PANIC! 
After such a good start to the year in risky assets like equities, it is hardly surprising that markets have corrected somewhat. Let us not forget one salient fact: that we are NOT in a normal market environment, with interest rates and liquidity manipulated by central banks globally in the aftermath of Financial Crisis...

So where should we be looking to invest? Certainly, no-one wants to be "catching a falling knife", i.e. investing in shares or bonds, just to see them sink even further straight away...

US S&P 500 index has not broken any support levels - still in an uptrend

If the most recent horizontal support line (on the top right of the chart above) holds for the S&P 500 index, then we will likely make further gains and potentially new year highs, not just in US equities but also in Europe. 

What I like right now

My personal strategy is to continue to buy selected stocks that are:

a. Relatively good value in fundamental terms (a good dividend yield, moderate P/E, low price/sales or low price/book) 

b. with decent profitability (e.g. judged on return on capital employed), and 

c. most importantly whose share price has recently broken to new multi-year highs, thus showing strong price momentum. 

I prefer stocks that have also recently reported strong or encouraging financial results, thus where the strong price momentum is supported by improving profit momentum.

I am looking at sectors and investment styles that continue to exhibit relative strength (i.e. that continue to outperform the benchmark indices like the FTSE 100 or Euro STOXX 50), including but not limited to stocks in the UK small-cap, European Healthcare and US Technology spaces:

  • British Polythene (BPI: UK small-cap)
  • Creston (CRE: UK small-cap)
  • Inland Homes (INL: UK small-cap)
  • Glaxo SmithKline (GSK: Healthcare)
  • Tribal Group (TRB: UK small-cap)
  • Hewlett Packard (HPQ: Technology)
  • Alcatel-Lucent (ALU: Technology)
  • Merck (MRK: Healthcare)
  • Sanofi (SAN: Healthcare)

What to buy if/when stock markets clearly rebound

I would add a number of other regions and sectors to look at once stock markets start to show clear signs of rebounding:

  • Japan (e.g. the iShares MSCI Japan yen-hedged ETF - IJPH)
  • Insurance (e.g. Munich Re, Delta Lloyd)
  • Asset managers (Aberdeen, Man Group)
  • Broker/dealers (IG Group, ICAP)

All of these regions/sectors show clear medium-term share price uptrends, but are clearly geared to the general level of risk tolerance of investors. As investors get more confident on the rebound in stock markets, these four areas should all benefit to a greater extent. 

Sectors I would avoid

There are a number of sectors which I think remain vulnerable to the threat of slowly rising bond yields, or which may well suffer worsening profit outlooks due to difficulties/disappointments in home markets or even in emerging markets:

  • Food & Beverage (Tate & Lyle, Heineken)
  • Utilities (National Grid, SSE)
  • Telecoms (Vodafone, KPN, Telefonica)
  • Mining (Anglo American, Glencore)
  • Disruptive technology shifts (ARM, Imagination Technologies)

Overall, I remain a keen trend-follower in terms of methodology, and on top of that I believe that central banks overall will be adding rather than pulling back on monetary stimulus (ECB, Bank of Japan in particular). On this basis, then, I think that stock markets have a much better chance of recovering substantially from here at least close to year highs, rather than falling much further. 

Good luck out there!


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