Friday 31 January 2014

The Idle Investor Weekly Newsletter: 31 Jan 2014

Market Outlook:
Just When You Thought All Was Plain Sailing…

After what has turned out to be a rather decent 2013 for those who dared to invest in the stock market, the last couple of weeks in January have stood in stark contrast, a bit of a horror show that has seen the FTSE-100 index (UKX) drop over 300 points. 


But let’s not panic just yet. Yes, a number of emerging markets such as Turkey and Russia have revealed their structural flaws, but at the same time, economic growth is picking up both in the US and in Europe. So the news is certainly not all bad!
For small-cap investors, the picture actually looks rather more cheery. Despite a similar pullback since the middle of this month, the uptrend in the FTSE Small-Cap index (SMX) remains very much intact, with a large number of small-cap stocks that I watch closely breaking out to new price highs.


Remember: normally momentum is persistent. Another way to say this is that in stock markets, what goes up often just continues to go up, particularly after making new highs! So, for those who are interested, here is a non-exhaustive list of those small-caps on my personal radar screen that have broken out to new recent share price highs:


As always, before investing in any of these stocks, please remember that there is no substitute for doing your own research!

Put the correction in context!

Just remember that 2013 was a monster year for stock markets, particularly for the US, and that nothing can go up forever, at least not without taking a breather every now and then. To put things in context, this current correction is nothing like as bad as what we saw in the middle of last year, and yet stocks went on to regain all their losses and a lot more by the end of the year.

And remember, there are not many attractive places left to put your long-term savings. Cash deposits yield even less than ever before, you will be lucky to get a 2%+ rate on deposit accounts these days (I find the Nationwide Building Society one of the best in this respect, once you have exhausted the very limited Regular Saver accounts at the likes of Lloyds, HSBC and First Direct which offer 5% or 6% interest rates on limited amounts). 

Bond yields have come down again, so lending your money to the UK government is not very attractive – you get 1.6% BEFORE tax if you buy a 5-year gilt. You may prefer a bricks-and-mortar investment, with house prices on the rise and even getting quite overheated in London (I should know, I am looking myself!). Unfortunately, thanks to the government’s Help to Buy schemes, London property is literally flying off estate agents’ shelves – I contacted three estate agents in the middle of the week with a view to viewing 8 properties that were for sale, only to be informed that each one had already been sold or gone under offer. House prices are rising much faster than rents, with the result that effective rental yields for buy-to-let investments are falling fast, making them less attractive. 

At the end of the day, I think it is too early to throw in the towel on stocks and shares. In Europe, they continue to provide good value and in general a decent yield, ahead of what one can get from government bonds or cash deposits. This is perhaps less true in the United States, but even there there are still pockets of value, for instance in the large-cap technology stocks like Microsoft and Cisco. 

This Weeks’ Articles, In Case You Missed Them…

I wrote a couple of articles in my MindfulMoney Expert Opinion column this week:

1. RBS reminds me why I prefer Insurers to Banks: the awful results from RBS this week, with massive provisions yet again for a number of mis-selling scandals, highlight why I remain cautious on the Banks sector, and instead prefer to invest in Insurers, particularly in the closed life fund subsector, with names such as Chesnara, Resolution and Phoenix Group on my watch list. 

2. Are Global Markets At a Turning Point? As I have explained above in the Market Outlook, I think it is too early to say that the bull market in stocks is over, and in this article I have included a number of charts to support my optimistic viewpoint.

There have also been a couple of videos you can watch:

3. Investment Ideas for 2014 Which does what it says on the tin…

4. What Does the Recent Market Volatility Mean? This is a slide show with audio commentary, leading you though the key charts and conclusions to draw following this recent emerging markets-led sell-off.

Have a great week ahead, and please don’t hesitate to recommend this newsletter to anyone who you know may be interested: to subscribe, please just email me at edmundshing1@gmail.com

Signing off for now,
Edmund


Thursday 30 January 2014

Video: What Does the Recent Market Volatility Mean?

Does the recent bout of financial market volatility mean that the bull market in stocks is over? Find out with this video!



Happy viewing, 
Edmund

Twitter:                      @TheIdleInvestor


Global Markets: Are we at a Turning Point?

What to think about the Recent Bout of Emerging Markets-Led Volatility

Wow! This has certainly been an exciting few days for global financial markets, led by sharp weakness in various Emerging Markets (stocks, bonds, currencies). Figure 1 below highlights how the Russian Ruble and Turkish Lira currencies have both suffered extensive weakness against the US dollar over the last month or so, this weakness accelerating over the last few days.


1. Russian Ruble, Turkish Lira Weaken sharply vs. US Dollar

UK-based investors in Emerging Market stocks have been hit over January by the double whammy of falling stock prices and weakening currencies, as foreign investors flee Emerging Markets exposure for "safer" developed markets. As examples, the Templeton Emerging Markets (TEM) and JPMorgan Russian (JRS) investment trusts have suffered drops in excess of 10% since the beginning of November 2013 (Figure 2):

2. Emerging Markets Investment Trusts Take a Battering


EM Tough Also as Export Markets

Now, Emerging Markets have not only been tough for foreign investors, but also in business terms for a number of UK-listed companies too: today, the drinks giant Diageo (DGE) announced results, and included the comment that a number of emerging markets had been difficult for them (including Nigeria and Eastern Europe), particularly in their beer division. Rather predictably, their share price has taken a tumble today, down around 5% on this disappointment (Figure 3). 

3. Diageo Also Catches an Emerging Markets Cold

So, should we as investors call time on the bull market in stocks that has been such an enjoyable rise up since November 2012? Or are we at risk of "throwing the baby out with the bathwater", overreacting to a number of problems in Emerging Markets that will not necessarily spell the end of the bull run in Developed Market stocks? 

Putting This in a Longer-Term Context

Let's take a deep breath in, and consider where we find ourselves today in this bull market trend. 

Exhibit A: The Value Line Arithmetic index (VALUA). This index represents the stock price evolution of the average US stock, without reference to size of company. So in this index, a mega-cap like ExxonMobil has exactly the same weight as a US small-cap with a market cap a fraction of Exxon's. And what do we conclude from Figure 4? That the bull market for the average US stock is still intact, in spite of the recent mini-pullback on the back of further Federal Reserve tapering of bond purchases (from $85bn monthly to $75bn monthly in December, and now from $75bn to $65bn monthly). 

4. No Breakdown in the Average US Stock's Bull Run

Exhibit B: The FTSE UK SmallCap index (ex investment trusts: SMXX).UK smallcap stocks  continue to outstrip their mega-cap UK brethren by some margin, and also maintain the bullish uptrend that has been in place since late 2012 (Figure 5): 

5. UK SmallCaps Still Close to Multi-year Highs

Exhibit C: The US VIX Volatility index (VIX). The so-called "Fear Index" has spiked higher in recent days as a result of this emerging markets turmoil, but has still not reached the peaks touched in 2013, never mind the scale of the volatility spikes in 2012 or 2011 during the Eurozone peripheral countries crisis (Figure 6).  

6. The VIX Volatility Index Is NOT at Worrying Levels, At Least Not Yet...

Even excluding the 2008 global financial crisis, the VIX index has averaged a reading of over 19 between 2000 and today. So the current reading of 17.4, while elevated with regards to the mid-January level of 12.5, is still well below the long-term (ex-crisis) average for this stock market volatility measure.  
  
I could go on citing other indicators that do not exhibit any real signs that the uptrend in risk assets is over yet, but I think you all now get the general picture. So far, the clouds on the financial markets horizon do not look pregnant with heavy rain, but rather our investment enthusiasm is being dampened by what seems more like a light drizzle. 

How Will We Know If Matters Turn More Serious? 

Of course, the situation can always change for the worse, and we should always remain alert to such a possibility. I would never deny that there are a number of structural concerns that affect various large emerging economies such as Brazil, Russia and Turkey. However one interesting snapshot that we should watch for clues as to whether this current market pull-back develops into something potentially more concerning is the relative performance of various European stock sectors. 

Normally, during a stock market correction phase, as the market falls so-called "defensive" sectors (with more predictable and less economically-sensitive sales and profits) should outperform more cyclical sectors (with less predictable and more economically-sensitive business models). 

However, thus far this generic financial markets script is not being followed! Figure 7 illustrates that the three worst performers of the 19 industry groups in the STOXX Europe index are all defensive (Personal Goods, Retail and Food & Beverage), the complete reverse of what one should normally expect... And the industry leaders over this 3-month period have actually been cyclical sectors like Travel & Leisure (e.g. airlines), Autos and Construction. 

7. "Defensive" Sectors Have Generally Fared Worst As Emerging Markets Dropped

Perhaps we should not be so surprised at this contrary industry result, given that economic data point to the European economy picking up rather nicely right now, led by none other than good old GB and Northern Ireland!

So what am I looking at right now? 

Without going over the top, I am cautiously adding to my positions in SmallCap stocks where the price trends remain stubbornly positive in the face of a weakening FTSE-100. SmallCaps on my personal radar screen that are breaking new highs include:

Alumasc (ALU), Centaur Media (CAU), Charles Taylor (CTR), Headlam (HEAD), Hogg Robionson (HRG), Quindell Portfolio (QPP), Safestore (SAFE), St. Ives (SIV) and Xchanging (XCH). 

I leave you to do your own research on these smallcap names to decide if they are worthy of your particular investment attention too!

Signing off for now, 

Edmund

Twitter: @TheIdleInvestor

Tuesday 28 January 2014

On Sky News' Jeff Randall programme (27/01/2014), re RBS loss

RBS's trading statement last night (27 Jan 2014) was a real shocker, confirming yet again that European banks (like US banks) are not yet out of the post-crisis maelstrom that has repeatedly engulfed them. For my part, I appeared on the Jeff Randall show on Sky News to discuss this unexpected additional collection of revelations, which will drive RBS to a massive loss for 2013 overall. 

A Banking Tale of Woe

Let's have a quick recap of all the various scandals that banks have been involved in of late:

1.  PPI insurance mis-selling;
2.  Credit card theft insurance mis-selling;
3.  Mis-selling of interest rate hedging products;
4.  Mortgage-Backed Securities misrepresentation (adequate disclosure not given);
5.  LIBOR interest rate fixing;
6.  Foreign Exchange rate fixing;
7.  Inability to apply current Money Laundering regulations in Mexico;

Actually, I have probably forgotten one or two more, as there have been so many... I haven't even included the latest statement from the German banking regulator BAFIN, who believe that investment banks have also been involved in rigging precious metals prices...

FULL DISCLOSURE at this point: I have in the past worked for Barclays Capital, one of the banks involved in these various issues. 

This gives local and EU-wide banking regulators yet another stick to beat the banks with, similar to JPMorgan's experience Stateside. 


Stick with UK Insurers

Given the choice, I would stick with my preference for Insurance stocks over Bank stocks any day, particularly in the UK. Banks still have to fully comply with Basel III capital requirements, not to mention increasingly tough regulatory scrutiny from local banking regulators. 
UK Insurers Beat Banks Hands Down!
My favourite UK insurers include the closed fund life assurance companies Phoenix (PHNX), Resolution (RSL) and Chesnara (CSN), all of which remain cheap on price/book and price/embedded value ratios, and all of which offer bumper dividend yields of 5.5% to 8%.

Friday 24 January 2014

The case for the US technology hardware sector

Tech has only marched halfway up

While technology stocks have enjoyed a strong rally since the stock market nadir at end-2008, it is perhaps surprising to note that they have only recovered 50% of the ground lost during the 2000-2003 tech bust.


But over the last decade or so, there have been many changes in tech-land. Many mobile phone makers such as Nokia, Motorola, SonyEricsson and Blackberry have come and largely gone, to be replaced by Apple, Samsung, LG and a whole raft of Chinese Android smartphone producers. We have seen the advent of the tablet and even the “phablet” (a crossover between a smartphone and a small tablet), and of course we have witnessed the phenomenal rise of social media, with Facebook, Twitter, and Linkedin leading the vanguard. I want to focus in this article on the technology hardware sector, makers of physical technology objects rather than providers of services or software.

Improving Capital Spending Trends Are a Help

The technology sector is particularly geared to macro investment trends, as companies tend to favour technology-related investments in good economic times as they tend to bear quick-to-emerge and sizeable fruit in the form of productivity, boosting profitability. Guess what? US durable goods orders have recovered steadily over last year, pointing to improving corporate investment trends that should benefit tech stocks.

To read the rest of this article, please click on the MindfulMoney link below:


Bon weekend,
Edmund

Thursday 23 January 2014

Video: Why I like the (US) Technology Hardware space

Good day to all,

I wanted to draw your attention today to a video I recorded with the financial news and analysis website Mindful Money, focusing on why I like the Technology Hardware space (particularly in the US) right now.

Please click on the link below to go to the Mindful Money home page, and then click on the video on the right-hand side of the page to play it (7 minutes long):


I hope you find it interesting!

All the best,

Edmund

Monday 20 January 2014

Rio Tinto: Mining for value

Over at least the past decade, UK-listed mining stocks such as Rio Tinto (RIO) have been tightly correlated with two key financial asset classes:

Industrial commodities (industrial metals such as copper, nickel and aluminium and coal for making steel) and Emerging markets such as the Brazilian, Russian, Indian and Chinese (BRIC) stock markets, as well as the Australian stock market (which is itself heavily-weighted towards mining stocks).

The reason for this is clear: the main sources of growth in demand both for these industrial metals and for coal have been China and India, as they have expanded their heavy manufacturing bases to become the world’s centres for all types of manufactured goods, from white goods to toys.

Nothing new or particularly interesting to note so far. Recall that the worst-performing major regional stock markets over 2013 were indeed Emerging Markets; and that one of the worst-performing industrial sectors in the UK stock market last year was the Mining sector, both driven by concerns over slowing growth in the major BRIC economies.

But Rio Tinto is Now Diverging from Emerging Markets

However, now for a more interesting and perhaps less obvious fact: Since the middle of last year, the major UK-listed diversified mining company Rio Tinto has managed to de-correlate from the poor trend in emerging market stocks.

To read the rest of this article and see the associated graphs, please click on the link below to my "Expert Opinion" page on the MindfulMoney website:


Happy digging, 
Edmund

Tuesday 14 January 2014

Early Morning Interview on Bloomberg TV - discussing US Media, technology stocks

Hi there,

You may be interested to hear what I had to say on Bloomberg TV early this morning (Tue Jan 14, 2014) on the subject of US Media and Technology stocks, in focus on the back of the unsolicited takeover offer for US cable operator Time Warner Cable from rival Charter, for $61bn in cash and shares.

I remain bullish on both these sectors for 2014, both in the US and in Europe...


Edmund

Friday 10 January 2014

Clean energy has the solar wind in its sails

In hunting around for investment themes for 2014, you could do worse than look to what has already performed well through 2013. Remember, momentum tends to be persistent in financial markets, i.e. unlike the effect of gravity in the physical world, in stock markets what goes up tends to keep on going up.

One of the hottest investment themes of 2013 was Clean (or Renewable) Energy. In the US, the Guggenheim Solar ETF (code TAN) gained 125% over calendar year 2013, while the First Trust Global Wind ETF rose 64%. Could this stellar performance possibly be repeated this year?

 2014 Trend number 2: Clean Energy Gathers Ever More Momentum

The first question that needs to be answered is of course: what is driving these solar and wind energy stocks up? The simple answer is a combination of two factors:

Please click on the Mindful Money web link below to read the rest of the article, including potential ways to invest in this theme:


Take advantage of this following wind for your investments!
Edmund

Thursday 9 January 2014

CNBC Europe Squawkbox appearance: Why I like European stocks

On CNBC Europe's Squawkbox programme this morning (where I was acting as Guest Host), we discussed a number of topics including UK retailers (after the relatively poor results from Tesco, Marks & Spencer and Wm. Morrison).

We also discussed the relative merits of European stocks, given the ongoing support that the European Central Bank is giving to the Euro-zone economy (ECB meeting and press conference taking place today). 

I am a big fan of European stock markets for 2014 after pretty good performance last year: here is a 2-minute video snippet where I discuss why!


Here's looking to happy investing in 2014,
Edmund

Monday 6 January 2014

2014: Walking the Yield Tightrope

A Happy New Year to you!

Looking in the rear-view mirror, 2013 was perhaps surprisingly a very good year for investors willing to take on financial risk in the face of an uncertain macroeconomic climate. Despite the complete lack of growth in the Euro area, question marks over the sustainability of growth in previously fast-growing emerging economic powerhouses such as China and India, and the twin headwinds of a government shutdown and higher taxes Stateside, developed stock markets delivered frankly impressive returns as did a number of other asset classes such as high-yield corporate bonds and residential property.

But as we set foot on the investment path anew in 2014, in what direction should we be heading? Will 2013’s financial market trends be repeated this year, or should we be changing course?

2014 Trend number 1: Still Hunting for Yield

Please click on the web link below to my Mindful Money mini-site to continue reading this article...

2014: Walking the Yield Tightrope

Best wishes for 2014! 

Edmund