CNBC TV Interview: Bonds - Expect more extreme moves

Edmund Shing, global equity portfolio manager at BCS Financial Group, says bond volatility is on the up. 

Click on link below to watch the video clip:

Bonds: Expect More Extreme Moves

VIDEO CNBC Europe Closing Bell Guest Host: Greek Stocks Crushed

VIDEO CNBC Europe Closing Bell: Greek Stocks Crushed

Greece has brought forward its presidential election by two months, causing anxiety in the investment community. Edmund Shing, global equity portfolio manager at BCS Asset Management, weighs in on the discussion.

VIDEO: Why September is a Danger Month for Equities; but better for Bonds, NatGas, Gold...

Click below for a 3-minute Video Presentation on the Seasonal Dangers for Stocks,
and Why September is Better for Bonds, Gold, Gas

Why I am not worried about US employment growth, I still like Bond-Sensitive Income Investments

1. There is still plenty of spare capacity in the US labour market, lots of people want to work full-time but are still only working part-time;
2. The Federal Reserve will raise interest rates in 2015, but only very slowly; already priced in by 2-year bonds;
3. Long-term (30-year) bond yields are still in a falling trend… So the bond market is not worried about the risk of rising inflation;

Conclusion: I still invest in Build America Bonds, Preferred Shares, REITs as they offer a high income and will benefit from falling long-term bond yields. 

Video Link to watch (4 minutes):     

BCS Global Strategy Video Presentation 8 July 2014

Video: Have Emerging Markets Hit Bottom? What to Buy?

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

Global Financial Market Trends - Animated Slideshow with Audio Commentary

For my views on key global financial trends, watch this 4-minute video clip, which goes through a short slideshow of key market charts, together with an audio commentary.

I hope you find this helpful,

Edmund

Is The "Great Rotation" Finally Appearing?

Bond prices fall (and long-term interest rates start to rise)

Now that government bonds have been falling for a number of months (with bond yields rising inversely to the falling price), as global economic growth prospects have steadily improved, and also as investors grow increasingly nervous of any change in monetary policy from the US Federal Reserve, potentially slowing the rate at which they currently buy US government bonds (under their Quantitative Easing program) from the US government. 

1. Euro, US government bonds have lost over 5% since April this year

Up to now, the Fed has successfully helped to drive long-term interest rates both in the US and indeed worldwide to new historic lows, in their attempt to support growth in the US economy. However, now all the talk in financial markets over the last couple of months has been about a shift in monetary policy towards "tapering", i.e. not buying quite as many US bonds as they have done up to now, in an effort to begin weaning the US economy off the "easy money" drugs before it becomes too much of a permanent habit. 

US investors take note, respond by pulling money out of bond funds

US retail investors have responded to this expectation of slight change in US Fed policy by selling bond funds in size. 

2. Finally, retail investors start to sell bond funds

Interestingly, the same retail investors have tended to put money into equity funds, chasing the upwards momentum in US and foreign stock markets. 

3. But they continue to put money into equity funds

As economist Ed Yardeni comments: 

"over the past 13 weeks through the week of August 28, the Investment Company Institute estimates that bond funds had net cash outflows totaling $438 billion at an annual rate. Over the same period, equity funds had net cash inflows of $92 billion at an annual rate. I wouldn’t describe that as a “Great Rotation” just yet, but it could be the start of a big swing by retail investors into equities."

Ed Yardeni - Great Rotation?

What does my Multi-Asset Trending System (MATS) have to say?

My proprietary multi-asset trending system, that chooses between equities, bonds and cash once per month in a number of different regions, is invested 60% in equities (UK small-caps, Euro low volatility, Japanese currency hedged shares) and 40% in cash. Note: 0% is invested this month in government bonds, highlighting the poor trend in bond market performance over the past few months. 

Why listen to this systematic (i.e. the asset classes are chosen using a simple mathematical model rather than by yours truly!) investment approach? Because it has gained over 15% net of trading costs in the year to date, that's why! 

The Main Risk: That there is more to come out of bonds, into equities

Judging by ETF flows over 2013 to date, the risk is that this reversal in flows in bonds funds could turn from a trickle into a flood: looking at global bond (fixed income) Exchange-Traded Fund (ETF) flows, this year to date has still been positive to the tune of nearly $19bn, on top of strong positive inflows over 2010-2012. 

Source: BlackRock4. Bond ETF flows have been strongly positive since 2010.

Conclusion: Equity Income Funds look set to attract bond refugees

We can see from the following chart that UK investors have also been putting greater amounts of cash into equity unit trusts this year, while flows into bond funds have been, in contrast, stagnant. 

5. UK retail investors putting increasing amounts into equities too...

My personal theory is that retail investors will look to replace the income generated by their bond funds with equity income funds instead; i.e. that they will buy funds focused on good dividend-paying names in the UK and Continental Europe. 

6. UK Dividend Aristocrats ETF surges upwards

One of my personal favourite ways to buy into solid dividend-paying names without taking too much risk is via the SPDR UK Dividend Aristocrats ETF (UKDV). This ETF focuses on dividend-paying companies in the UK that have managed to raise their dividend consistently each year over at least the past 10 years. As a result of this dependability, this group of dividend payers have the happy side-property of having on average lower volatility (i.e. less risky) than for the overall market. On top of that, it is also an easy way to buy into the outperformance of value strategies over the long-term.

If you want to be more sporty with your investment, then I would look at a portfolio of UK mid-cap and small-cap companies that have not only raised their dividend consistently over the past few years, but that offer a decent dividend yield (over 3%, thus much better than government bonds or cash rates) combined with strong price momentum. 

You might want to look at: Sports Direct (SPD), Tribal Group (TRB), Chesnara (CSN), Aviva (AV), James Latham (LTHM) and ICAP (IAP) as good examples of stocks that fit this description. 

Good luck with your investments,
Edmund

Post BoE/ECB Markets Landscape: Small-caps, US Dollar show relative strength, Commodities still laggards

BoE, ECB lower for longer?

Following the forward guidance given both by the new Bank of England Governor Mark Carney, and President Draghi of the European Central Bank at their respective central bank rate-setting meetings, what can we divine from the reaction of various financial markets?

First off, no bones about it - both the Bank of England and the ECB remain fully engaged in supporting the fragile economic growth rates seen in Europe (Bloomberg - ECB signals prolonged low rates). We have been recently reminded of how fragile any economic stability is across the Continent by the volatile reactions to the resignations of 2 ministers in the Portuguese government, plus the emergence of cracks in support for the incumbent Italian government. Notice how the Portuguese bond yield surged beyond 7% in short order in response to this renewed political volatility, triggering reactions across the whole of Europe. 

Portuguese 10-year bond yield spikes up to 7+%

Let's have a quick tour of the various financial markets, to see where there are enduring trends to be identified. 

FX: US Dollar rules

As far as currencies go, the strength of the US employment data on Friday with 195,000 new jobs created in the month of June, plus upwards revisions to the jobs data for both April and May (BLS - US employment situation, June 2013), supported the US dollar, with the US dollar index (DXY) responding by making a new 1-year high.

US Dollar index breaks a new 12-month high

Sterling has been a major loser in contrast, with GBP/USD dipping below $1.50 following the Bank of England statement. 

Bonds: Still making new lows

The bond markets have not managed to reverse their bearish trend, with bond indices still sliding lower following the various central bank statements and the US economic data releases on Friday. Not yet time to dip back into buying government bonds, just yet then. 

US Treasury bond ETFs hit a new 12-month low on Friday

Commodities: Industrial metals, foodstuffs still weak as well

Another area not yet ready for buying is the commodities space: despite sizeable slumps in industrial metals, precious metals, and foodstuffs over the last 12 months, there has not yet been any discernable change in underlying trend... The mining sector continues to mirror this commodities malaise, still the worst-performing sector in the European stock market in the year to date.

Sugar dives ever lower

Don't try to catch this European Mining falling knife

Stock Markets: Small-caps holding up best,
No reason to return to Emerging markets yet

Looking at the UK and US stock markets, the outperformance of small-cap stocks continues to surprise me. However, they remain of course a good play on improving economic momentum in both countries, particularly relative to other areas such as Banks (which tend to be large-caps) or even Emerging Markets. Within Asian equities, Japan clearly remains the place to be, with the Baillie Gifford Japan investment trust (BGFD) returning to within a whisker of its 2013 peak on Friday.

US S&P Smallcap 600 Index Breaks New Highs

While UK Small-caps also look ready to return to recent highs

However, within European large-caps I would be wary of the Banks sector which has broken its 200-day moving average, while Emerging Market equities remain firmly out of favour. 

No inflection point yet for Emerging Market equities

And European Banks also look vulnerable

Conclusion: Small-Cap stocks look good, but beware Banks, Commodities

Stay long UK, US small-caps, and housing-related areas including Lumber (but not US homebuilders, which have already benefited from enormous revaluation). Stay long Japanese shares too, although the Yen will likely weaken further against the US dollar.

In contrast, there is a long list of financial assets to avoid or even short outright potentially: Emerging Market equities, European banks, industrial metals like copper and the related Mining stocks, and European Oil & Gas stocks. This is not to mention most commodity foodstuffs like sugar and coffee, which continue to touch new 12-month lows. 

Good luck for Monday and hope you are profiting from the belated arrival of Summer in the UK and France,

Edmund

Could we finally see the beginning of the so-called "Great Rotation"?

Up to now, there has been little real sign of the much-vaunted Great Rotation this year, supposedly out of bonds and into stocks & shares. It simply has not happened: judging by data on fund flows in the US and UK for this year, we have seen investors putting new money into BOTH stock and bond funds over the months up to April. 

So no sign thus far of any flight from bonds and into stocks, then. However, today I stumbled across this headline in the Financial Times:

"Bond investors face worst quarter since 1994"

With government bond yields rising sharply given the fears over central bank withdrawal of monetary stimulus, it is true that bond investors have had a rough time since early April, as can be seen from the chart of the UK gilt ETF below, whose price dropped from a peak of 1212p to just 1136p now, losing investors over 6% in the process. Given that UK 10-year government bonds yield 2.4% currently, that is a lot of money to lose in less than three months...

UK Gilt ETF Drops Sharply

Source: Bigcharts.com

Interestingly, a relatively defensive sector like Healthcare is roughly flat over the same period, not only offers a 4%+ dividend yield but also offers the prospect of dividend growth to boot, something that bonds can never offer. 

Which sectors can benefit from rising bond yields?

Historically speaking, when long-term bond yields have risen faster than short-term interest rates (in technical speak, a "steepening of the yield curve") as is happening now, the sectors that have outperformed have been:

1. Media
2. Autos
2. Mining

Well, clearly Mining is not working, as it is the worst-performing sector so far this year. However, Media is outperforming nicely, led up by TV, advertising and newspaper stocks (ProSieben Sat1, ITV, Daily Mail, WPP). 

Who gets hurt by rising bond yields?

Rising bond yields could spell trouble ahead for bond-sensitive sectors such as Utilities, Infrastructure stocks and Telecoms. 

A nice mixture of dividend yield (income) and dividend growth: Dividend Aristocrats

If you are a bond investor looking to rotate out of government or corporate bonds and want some easy stock income growth funds to buy instead, I would suggest that you have a look at the following two Dividend Aristocrat ETFs from State Street, based on S&P Dow Jones Indices:

1. SPDR Euro Dividend Aristocrats (EUDV)

2. SPDR UK Dividend Aristocrats (UKDV)

Both contain an interesting blend of dividend yield plus potential dividend growth, and tend to hold a lot of low volatility stocks, so should benefit over time from the better risk-adjusted performance of low volatility stocks versus the overall stock market. 

Interestingly, both have held up very well during the recent market volatility, and look ready to move higher once again:

UK Dividend Aristocrats regaining ground

Good luck and bon weekend!

Edmund

Well what a torrid week! Has the bond market definitively cracked? What next...

25/06/2013  A Tough Week for Investors

After a torrid week for pretty much all financial assets (stocks & shares, bonds, precious metals...), we can perhaps let the dust settle to see where we really are. 

Central banks have clearly dominated the investment landscape, with mounting fears over the US Federal Reserve starting to "taper" their reinvestment of cash in US government Treasury bonds some time from September this year, and also the People's Bank of China tightening up on credit standards in order to cool the growth in credit there. 

Volatility has awakened, but not yet near 2012 highs

The volatility in equity markets has evidently spiked as a result of the drop in stock and bond prices over the week, with the 3-month implied volatility level on the US S&P 500 index back up above 20 as of yesterday. 

S&P 500 3-month implied volatility back above 20, 
but still a long way from 2012's highs

Source: St. Louis Fed

Bond markets have been hit by the central bank fallout

Bond markets have clearly suffered too, with bond yields rising (and thus bond prices falling) to their highest levels this year. This fact has prompted many calls for the end of the 30-year bond bull market, with some even declaring the arrival of "a lost decade" for bond investors, i.e. a decade where bonds will make no money at all for investors. 

Bloomberg: A lost decade for Bonds

Yes European bond yields have risen, but are still very low by historical standards

Source: iShares/Blackrock

That said, let's not lose sight of the fact that the interest rate effectively paid by large European companies to borrow money over a number of years in the bond markets remains, at an average of only 2.3% for investment-grade companies and 4.2% for high-yield rated companies, still close to record lows. Thus while I DO believe that the majority of government and corporate bonds represent fairly poor value right now, I would not think that the rise in yields that we have witnessed recently is in any way catastrophic for investors or indeed, for the wider economy. 

Some sectors look ugly...

Within the European stock market, there are a few industries/sectors that are in a clear down trend, most notably those sectors linked to commodities, like the Oil & Gas sector and Mining:

Oil & Gas (SXEP) has been trending down for the past year...

 As has the Mining sector (SXPP)

Source: bigcharts.com

But at the same time, not all is lost for the stock market investor! There aare still quite a number of industries that look promising to those looking to invest on this market correction, including various areas of technology such as Semis and Nokia:

Semiconductors are just pulling back to a clear support level...

 Nokia is slowly recovering too

Source: bigcharts.com

And don't give up on Japanese equities either just yet...

The Japanese Nikkei index is starting to recover after a sharp sell-off

Source: bigcharts.com

All in all, the so-called carry trade (explanation here: WSJ: The carry trade ripping across Wall Street) has been unwinding at a rate of knots as worried investors retreat from equity, bond and precious metal investments in the wake of Fed President Bernanke's recent pronouncements. 

However, think of this: the higher that US government bond yields go, the higher that long-term fixed mortgage rates also go, potentially stalling both the US housing market recovery and US consumer confidence, in the process hurting US economic growth at a time when it is still relatively fragile. 

So, the higher that bond yields rise off the back of the fear of the Fed withdrawing monetary stimulus support for the US economy, the more likely it becomes that the Fed has to keep all of the monetary stimulus in place to prop up faltering economic growth as US housing weakens. All in all, judging by economic indicators such as the rate of employment growth, the ISM manufacturing survey and capital spending growth, the US economy is not at all in a robust growth mode right now (see for instance, What's Capping Capital Spending?). 

Conclusion

Stock markets in Europe have pretty much now given back all of their gains for this year to date (although not so bad for mid-caps), offer good value in terms of P/Es and dividend yields, and may now be stabilising. Investors need to be selective about which sectors to put their money into from here, particularly given that May has passed and we are now in what is traditionally the poorer 6-month period (June-October) from the point of view of stock market returns. 

I would personally stick with Technology, Healthcare, Luxury Goods and Insurance, but would avoid the likes of Oil & Gas, Mining, Utilities and Food & Beverages (all of which have ugly-looking 1-year charts). 

Edmund

The Bank of England Doing a Sterling Job?

14/06/2013

The Bank of England Doing a Sterling Job?

Despite the seemingly singular focus of financial markets on the Fed and "Will They, Won't They (start withdrawing Quantitiative Easing in September)", I have been somewhat surprised by the turnaround in the Greenback over the last few weeks.

US Dollar Index - A Failed Breakout, 

Now Heading Back To 1-year Lows

Source: Bloomberg

The chart above would seem to suggest that the US has lost a lot of fans of late, backed up by the fall in US Treasury bond prices over the last month or so:

US 20+ Year Treasury Bond ETF Has Slumped

Source: Timetotrade

But before we get carried away bewailing the end of government bonds and a rising trend in bond yields, let's not forget that this is only a relatively short-term trend, and that it is not yet evident that bond yields are in a steadily rising trend (pointing to steadily falling bond prices given their inverse relationship).

UK Gilt Yields Still Very Low By Historical Standards

Source: Bloomberg

I have been pleasantly surprised by the better stream of economic newsflow coming out of the UK: unemployment continues to decline slowly but steadily, the recent monthly CIPS survey of services activity pointed to a stronger level of services activity than had been widely expected - according to Markit, the May figures highlighted a "sharper rise in activity as new business grows at fastest pace for over three years". 

UK Services Activity Growing Quickly

Source: Markit, ONS

So, What's The Trade?

I think the following is likely to be true:

1. the Fed WILL NOT start tapering or withdrawing monetary stimulus of any sort in September, or even at all over the rest of this year. The US economic data just is not strong enough to warrant it - the key ISM manufacturing survey for May points to contraction in US industrial activity (a 48.6 reading, below the 50 break-even level). 

2. The UK economy will continue to slowly improve, despite the best efforts of the UK government to torpedo economic momentum with their austerity policies. The Bank of England is key here in continuing to support the economy, the vital housing sector remains relatively buoyant - helping boost consumer confidence - and you might even start to get some results from the boost to business lending coming through sometime soon. 

3. The rising trend in trade-weighted Sterling looks likely then to continue, so long as this more positive economic trend in the Albion continues...

Trade-Weighted Sterling On The March Upwards Within Long-Term Range

Source: Bank of England

All in all, Cable (Buy Sterling, Sell US Dollar) looks good to me at this point, as it seems to have broken above the threshold of a double bottom formation on the chart below, suggesting further potential gains ahead:

GBP/USD Heading Back towards $1.60+?

Source: IG Group

Bon weekend to all, fingers crossed for a good trading week from Monday!

Edmund