Saturday, 8 February 2014

The Idle Investor Weekly Newsletter: 8 February 2014

Market Outlook: Are We Already Back to the Races?

As per the usual script, this recent stock market correction was unexpected and sudden on the downside, illustrating once again that while stock markets may go up steadily, they tend to drop out of bed quickly and without much warning, catching the majority of investors by surprise.

And just as everyone starts to panic and sell any exposure they have to Emerging Markets (which have suffered mutual fund huge outflows in the US over the month of January), stock markets in the US and Europe have started to recover, and volatility has started to go back down. The US VIX volatility index (commonly known as the “Fear index”) has already eased back to just over 15, after rising from 12 to a peak of over 21 (Figure 1).

1. The US VIX Volatility Index Is Receding Quickly

Even some of the worst-affected emerging markets such as Russia have even some measure of stability return to their currencies, after suffering a sharp bout of depreciation against the US dollar. 

Is this a buying opportunity, or is it too early?

This is a fair question. I would suggest that the issues that triggered the turmoil in emerging markets are far from being solved.

However the structural issues facing countries such as Turkey and Brazil are far from being as serious as those faced by Asian economies or Russia back in the crises of 1997 and 1998. 

Personally, I would not be buying into emerging markets just yet despite the compelling value they seem to offer, as they can always get cheaper still in the short-term, as has been pointed out by Templeton’s famed emerging markets guru Mark Mobius. On the other hand, developed stock markets such as the UK and Continental Europe do look attractive to me post their recent declines, as do certain US stock market sectors such as Oil Services. 

If you are determined to buy some cheap emerging market exposure as a committed long-term investor, then can I recommend you look at relatively well-developed Asian economies such as South Korea and Taiwan. Both of these countries are home to a number of world-leading industrial and technology companies, including Samsung, LG and Hyundai, to mention but a few. They also do not have economies that are vulnerable to pressures on external debt funding. You can see from the chart below that the South Korean KOSPI index has started to bounce after a slump from the start of December (Figure 2). 

2. The South Korean KOSPI Index Stars to Rebound

So where are the best opportunities right now? I thought I would form my own model portfolio of exchange-traded funds (ETFs) and investment trusts, that I feel are best-placed to gain ground over the next few months. 

NEW! The Idle Investor’s Model ETF & IT Portfolio

The table below details the 6 UK-listed ETFs and investment trusts (3 of each) that I favour at the moment. There are a number of other ETFs and closed-end funds that I am keen on in the US, but have not included here for reasons of simplicity.

Company                           Code Price (Fri)

iShares MSCI UK Small-Cap ETF    CUKS.L    15,027p
Source GLG/Man Europe Plus ETF   MPFE.L      10,999p
iShares Japan GBP-Hedged ETF     IJPH.L        4151p
Invesco Perp. Enhanced Income IT IPE.L          73p
Fidelity Asian Values IT          FAS.L         198p
Herald IT                         HRI.L         715p

A few notes on each fund:

CUKS.L (UK Small-Cap Stocks) – I am very enthusiastic about UK mid- and small-cap exposure, which held up much better than the FTSE 100 in the recent correction, and which should benefit more than their larger compatriots from the strength in the UK economy (as the largest companies tend to be more global in focus). This iShares MSCI UK Small-Cap ETF is a good way to buy exposure to this UK investment style relatively cheaply, without going to all the effort of buying a basket of individual small-cap stocks.

MPFE.L (European Stocks) – This Source ETF is an interesting twist on a European stock fund, as it combines the best stock picks from investment banks in a single fund. Historically, this ETF has outperformed the broad European stock market by around 2% per year, so the model clearly seems to work in adding performance.

IJPH.L (Japanese stock market, hedged) – This iShares Japan ETF is a way to invest in Japan without taking Japanese yen currency risk. After all, one of the reasons that Japanese companies like Toyota are growing their profits is the competitive advantage conferred on these exporters by a weaker currency. However, that is not such good news for an investor based in a currency other than the yen, as then their yen-based assets tend to depreciate. This fund neatly sidesteps the problem by hedging the yen each month back into sterling. 

IPE.L (European Corporate Bonds) – the Invesco Perpetual Enhanced Income Trust is an investment trust that invests in UK & European corporate bonds, and through application of 25% gearing, offers a dividend yield not far off 7% at present. Rare to see such a high yield these days…

FAS.L (Asian Stocks) – The Fidelity Asian Values Trust is an Asia-focused investment trust that is heavily weighted towards South Korea, Hong Kong and China, and which trades at a 12% discount to net asset value following the recent emerging markets rout.

HRI.L (UK Small-Cap Technology & Media) – The Herald Investment Trust is a specialist investor in UK small-cap technology, media and telecoms stocks. Historic performance has been strong, it is invested in both sectors and the size style (smaller companies) that I prefer, and also trades at a 12% discount to net asset value. 

So there you have it, 6 of my current UK-listed fund favourites, all in one portfolio. These can be used by an idle investor to invest in a relatively well-diversified set of assets, without the need to delve into choosing individual stocks, and all achieved at low management charges. 

I will track the performance of this portfolio over the weeks that follow, so we shall see if it is an inspired set of choices or not!

This Week’s Articles, In Case You Missed Them…

I wrote an article on the UK Construction sector in my MindfulMoney Expert Opinion column this week:

1. UK Building Is All Systems Go! If ever anyone needed confirmation that the UK building industry is enjoying the best of times, you only need cast your eyes over the recent UK Construction Confidence survey from the firm Markit, that was released this morning, which hit a new high at nearly 65. Which stocks should benefit from this strength in building? Click on the article to find out…

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

2. CNBC TV Guest Host: Why I still prefer Insurance to Banks.... I was asked what I thought about European Banks in the wake of the announcement of Credit Suisse's results - I maintained that I still prefer Insurance companies to Banks. To find out why, please click on the CNBC TV web link below to watch the video…

3. Bloomberg TV Interview: On Emerging Markets, the allure of Technology The topics of this 5-minute interview were the value that can be found today in Emerging markets and European stock markets, following the current correction, and my continuing fondness for the Technology sector.

And if you would like to see and listen to my slideshow presentation with audio commentary on why further monetary stimulus efforts from the European Central Bank are key to the investment case for the European stock markets, click on the video link below:

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

The best of luck for the week ahead,

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