Three stocks to profit from a value rotation

Momentum takes a beating, Value remains near highs

So it is true: what goes up quickly, can also come down quickly! The month of March has seen US momentum stocks fall sharply, while in contrast value stocks have held up very well. 

Figure 1 shows that momentum stocks (the line in black) have hardly outperformed value stocks (the line in yellow) over the last half-year, after a torrid month of March.

1. MOMENTUM STOCKS TAKE A HIT, VALUE HOLDS UP WELL

Source: Bloomberg

Three sub-sectors in particular have been hard-hit (Figure 2):

1. Biotech has lost 13% from its high at in February (line in yellow);
2. Social media stocks such as Facebook and Twitter have lost 14% in aggregate from their peak (line in green);
3. Recent IPOs retreat 6% from the peak, judging by the First Trust US IPO ETF (FPX; line in black).

2. BIOTECH, SOCIAL MEDIA AND IPOS CAUGHT IN THE MOMENTUM RETREAT

Source: Bloomberg

Yield back in vogue

Long-term government bonds have performed well of late. Both European and US long-term government bond funds have gained significant ground over the year-to-date. This, in spite of the poor yields being offered by both (2.1% for a UK Gilt ETF; 3.1% for a US 20+ year Treasury bond ETF).

We can see that yield is becoming very popular once again as an investing strategy; this is evident from the recent performance of both US high yield corporate bonds (in black) and also US real estate trusts (REITs; in orange)...

 

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

Three-stocks-to-profit-from-a-value-rotation

Happy value hunting!

Edmund

On CNBC Europe this morning - my preferred sectors...

I went on CNBC Europe's WorldWide Exchange programme this mornign to talk about company results and my favourite sectors. What are they? Well:

1. UK housebuilders - like Inland Homes (INL), Barratt Developments (BDEV) and Telford Homes (TEF). Note the strong results this morning from builders' merchants Travis Perkins (TPK), helped by the strong UK housing market, together with the Government's aid from the Help 2 Buy programmes.
   
2. Technology stocks, in particular semiconductors - Infineon (IFX in Germany) and Sandisk (SNDK in the US) would be two good plays here; cash-rich and benefiting from the "Internet of Things" theme.
   
3. Mining stocks, which are cheap and recently posted good Q4 results: in the short run, they will be driven by sentiment over Chinese growth, but I still like Rio Tinto (RIO) and Anglo American (AAL) in the medium-term. 

While stock markets had a very strong 2013 and have bounced back to new highs this year, I see further positive momentum ahead as economic momentum picks up in the Eurozone, and recovers from a short-term dip in the US and China. 

Explore oil services for attractive value and momentum

Oil services coming back into vogue

As a contrarian value investor by nature, I like to look at sectors that have under-performed and which look to offer long-term value. If we look at the performance of the various S&P 500 sectors since the beginning of this year, the Oil & Gas sector stands out as one of the worst performers, with the iShares US Energy ETF falling from $50.50 at end-December 2013 to $46.40 by the beginning of February.

Since then, however, the Oil & Gas sector has staged somewhat of a recovery – still, over the last three months, the iShares Oil Equipment & Services ETF has lagged the S&P 500 by 4% (Figure 1).

However, in the long-term, I still see the Oil Equipment & Services sub sector remains an excellent way to take a “picks and shovels” approach to investing in the US shale oil & gas theme. The crude oil price has, if anything, moved higher over this period, judging by the Brent Crude Oil ETF (BNO; Figure 2).

To read the rest of this article and see my 3 favoured European stock picks to ride this Oil Services recovery, please click on the Mindful Money article link below:

Explore Oil Services for Attractive Value and Momentum

All the best for the week ahead,
Edmund

Weekly Newsletter: February 17, 2014 - Focus on SmallCaps

Weekly Spotlight on: Small-Cap Stocks

While global stock markets have continued their steady recovery following January’s emerging market-led swoon, a difference in performance is emerging between small-cap stocks Stateside and those both located in the UK and also in Europe. 

Now normally, you could expect the performance of small-cap stocks in general to be driven broadly by two factors: 

 Firstly, the direction of the broader stock market, as small-cap stocks tend to have a beta higher than 1 as a group; that is to say, when the benchmark stock market indices are moving higher, small-caps tend to move higher even faster. Conversely, when stock markets are correcting, small-caps tend to suffer more as small-cap liquidity can dry up, causing wider swings in stock prices on lower volumes.

 Secondly, small-caps tend to be driven more by the momentum in the domestic economy than large-caps given their greater domestic exposure. So when the domestic economy is improving rapidly, as it is currently in the UK, you would expect small-caps to be more responsive to this trend and outperform their large-cap compatriots.

Now small-caps are indeed outperforming the large-cap stock indices in the UK and Continental Europe as you would expect given rising stock markets and positive signs from the UK and Eurozone economies. 

UK SmallCap ETF BEats the Footsie Hands Down

Source: Yahoo Finance

However, this is no longer the case in the US, after an impressive 2013 when US stocks did well (the S&P 500 benchmark index gained over 30%) and small-cap stocks did best of all (+37% over calendar 2013!). 

Why might this be? Well, there are some signs that the US domestic economy is not perhaps growing as robustly as was previously thought. Employment growth (as measured by the non-farm payrolls data) has been much weaker over the past two months. 

Now while some of this weakness may be attributable to the extremely cold weather hitting much of the US over this period, there are also lingering suspicions that better US economic growth is not translating into better job growth, suggesting that the peak in domestic US growth may already be behind us. Hence the relative weakness in US small-caps, reflecting these economic doubts. 

A second factor to bear in mind is valuation: US small-caps now sit on average at a hefty valuation premium to large-caps, when traditionally small-caps have traded more often at a discount to the largest US companies. This suggests that for US small-caps to grow into their higher valuations, they are going to have to convince investors by posting superior earnings growth from here on out. 

In the meantime, I think I shall be calling time on my US small-caps ETF strategy, and instead looking at different investment styles for my ETF exposure to American companies. As the eagle-eyed may have spotted in lat week’s weekly newsletter, my favourite ETF/investment trust portfolio includes a Nasdaq 100 ETF (EQQQ.L), rather than any US small-cap ETF, as I am still very partial to US technology exposure. 

But what about UK, Euro Small-Caps?

In contrast, I am still keen on exposure to UK and Euro small-cap ETFs and investment trusts, as the situation here is somewhat different. 

Euro SmallCap ETF Heading Back To Highs

Source: Yahoo Finance

Firstly, the valuation differential between small-cap and large-cap indices is not at all extreme on this side of the Atlantic; if anything, small-caps still trade at a modest valuation discount to large-caps.

Secondly, the economic evidence is different in that the UK and Eurozone are still seeing improving domestic trends. The UK case is relatively clear-cut, with employment growth still accelerating rather than slowing down (albeit disproportionately driven by the “London effect”). 

In the Eurozone, economic growth rates are still modest but are improving, with Friday’s Q4 2013 GDP growth data beating analysts’ expectations. The employment data in the Eurozone is very variable, but we can start to discern slow improvements even in peripheral countries such as Spain and Ireland. 

So for these two reasons, I shall be maintaining my UK and Euro small-cap fund selections in the Model ETF/IT portfolio.

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	Share Price Feb. 7, 2014	Share Price Feb. 14, 2014
iShares MSCI UK Small-Cap ETF	CUKS.L	15,027p	15,276p
Source GLG/Man Europe Plus ETF	MPFE.L	10,999p	11,126p
iShares Japan GBP-Hedged ETF	IJPH.L	4151p	4136p
Inveco Perpetual Enhanced Income IT	IPE.L	73.0p	72.0p
Fidelity Asian Values IT	FAS.L	198p	202.5p
Herald IT	HRI.L	715p	726.5p

Well four out of the six funds saw gains over the week, with the UK Small Caps leading the way in the form of the Small Cap ETF and also the Herald investment trust. 

In contrast, the Japan ETF struggled this week as the Japanese yen strengthened, with continued doubts over the success of Prime Minister Abe’s “Abenomics” economic revival plan. I remain convinced that China should see better days ahead, and that this should have positive knock-on effects for the Japanese economy and stock market, which on certain profit-based valuation measures looks cheaper than it has for many, many years. 

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

I wrote a couple of articles on Gold and on Europe in my Mindful Money Expert Opinion column this week:

1. Focus on Gold Miners as gold glitters once again: Gold bugs have had a good start to 2o14, unlike those invested in stock markets. While the FTSE 100 index has lost 1% over the year to date, in contrast gold futures have gained over 7% in US dollar terms. Billionaire hedge fund manager John Paulson’s Gold Fund gained some 18% over the month of January, according to Institutional Investor Alpha. What are the best ways to play the gold rally? Click on the article to find out…

2. Buy Europe! The ECB will have to give the Euro economy a boost: Yes, I know that you may be hesitant to buy Continental European stock market exposure, given the travails of the Euro zone since 2008. And you would be right to object that the Euro zone sovereign crisis has by no means been definitively solved, with debt loads of countries such as Portugal, Spain and Italy still pretty enormous.

I am a firm believer that the European Central Bank (the ECB for short) will need to stimulate the Euro zone further in the months ahead, which should be unabashed good news for the European stock market.

There is also a video interview you can watch:

3. Bloomberg TV interview: Focusing on Euro corporate results. 

I invite you to cast your eyes over my Bloomberg TV appearance early (too early, at 6:10am!) this morning, commenting on corporate results from: Rio Tinto, BNP-Paribas, Commerzbank and Nestlé.

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 

    idleinvestor@idleinvestor.com

The best of luck for the week ahead,

Edmund

Following up on 3 Mindful Money Articles On: AstraZeneca, Marwyn Value and Rio Tinto

Since late December last year, I have been writing a series of articles for the finance and investing website www.mindfulmoney.co.uk. Three of these articles were focused on single UK stocks: 

1. AstraZeneca AstraZeneca: Why it should defy the bears and perform;

2. Marwyn Value Investors: Marwyn Value Investors: Unlocking hidden value; and 

3. Rio Tinto Rio Tinto: Mining for value

Since writing these articles, what has happened to their share prices? Well I am pleased, and somewhat relieved, to report that each of these companies has enjoyed a rising share price in the period between article publication and close of play on Friday February 14. 

Performance of Astra, Marwyn, Rio Since Article Release

Rio Tinto (RIO.L) has recently reported an encouraging set of results, focusing on improvement in earnings via cost-cutting, notably a reduction in long-term capital expenditure plans on new mine construction. After all, there is already sufficient mining production capacity for industrial metals like copper and iron ore, and also for fossil fuels like coal, to which Rio is heavily exposed. 

This is a pattern that has been also repeated by Rio’s global mining competitors such as Anglo American and BHP-Billiton. Moving forwards, this positive share price momentum will hopefully benefit from tightly controlled supply of these industrial commodities, and an improvement in commodity prices and demand improves principally on continued growth in China and India. 

Rio Tinto continues to offer attractive valuations on profit-based valuations measures like P/E and EV/EBITDA, and also offers a combination of healthy dividend yield (around 3.5%) plus the prospect of steady dividend growth to come. 

Rio Tinto Breaks Out of its Trading Range

Source: Yahoo Finance

AstraZeneca (AZN.L) continues to wrongfoot its many professional sceptics, with encouraging results in early and mid-stage drug development, giving some hope that the company will be able to manage the oncoming patent expiry “cliff” of major blockbuster drugs like Crestor better than had been previously expected. 

AstraZeneca Breaks the £40 Barrier

Source: Yahoo Finance

Valuations continue to trade at a significant discount to its global pharmaceutical competitors in Europe and the US, and shareholders also pick up a near-5% dividend yield to boot. 

And finally to Marwyn Value Investors (MVI.L). This small-cap closed-end investment fund has been boosted in particular by very good fundamental and share price momentum in its dominant investment holding, Entertainment One (ETO.L). 

ETO reported results this week that were significantly ahead of analysts’ expectations, with a 75% jump in net earnings and encouraging prospects for its pipeline of future TV and film releases. ETO’s shares have gained some 29% since the publication of my article on MVI. So it is hardly surprising that MVI has also seen a 15% price gain in response, in line with the improvement in the fund’s underlying net asset value. 

Would I continue to hold these three shares? While I feel obliged to add the rider that you should do your own research (as always), I think there is further upside potential in all three… 

Personal Disclaimer: I own Marwyn Value Investor shares in my SIPP

Focus on gold miners as gold glitters once again

Gold bugs have had a good start to 2014, unlike those invested in stock markets. While the FTSE 100 index has lost 1% over the year to date, in contrast gold futures have gained over 7% in US dollar terms. Billionaire hedge fund manager John Paulson’s Gold Fund gained some 18% over the month of January, according to Institutional Investor Alpha.

This rally should of course be put in the context of the substantial slide that the gold price has suffered since October 2012, when it sat close to $1800/ounce. Today, even after rising since December of last year, the gold price is still only $1292/oz (Figure 1). Were the gold price to continue to rise back to its October 2012 level, there could still be another 38% to gain!

1. THE GOLD PRICE BREAKS OUT OF ITS 2013 DOWNTREND

Source: Bloomberg

Now that is easy to say; but what could the drivers be for a continued gold rally? And is there a better way to play this trend than simply through the yellow metal itself?

Uncertainty and Strong Chindian Demand Are Key Drivers

There are two key drivers that can be easily identified for gold; one is uncertainty in financial markets, and the second is the growth in demand for physical gold from Chinese and Indian consumers.

Focus on gold miners as gold glitters once again

A final thought:Bear in mind that, since 1900, the gold price (London fixing) has actually beaten the US Dow Jones Industrial Average stock market index! 

Edmund

On Bloomberg TV this am (Video), commenting on Euro corporate results

I invite you to cast your eyes over my Bloomberg TV appearance early (too early, at 6:10am!) this morning, commenting on corporate results from:

Rio Tinto, BNP-Paribas, Commerzbank and Nestlé.

            Bloomberg TV Video: Feb 13, 2014 - Company Results

UK Building is All Systems Go! Stocks to play the theme

Highest UK Construction Confidence in 10 years

If ever anyone needed confirmation that the UK building industry is enjoying the best of times, you only need to look at the record level of UK construction confidence registered this morning in the Markit UK Construction PMI survey - a reading of over 65, confounding analysts' expectations for a fall in confidence. 

Unsurprisingly, residential construction is leading the way, given the buoyant state of house prices nationwide, but most of all in London. You only have to look around London to see the amount of regeneration that is going on, even after the 2012 Olympic Games, for instance in the North and the East End of London.

To see charts and UK stock suggestions to play this strong construction momentum, please click on the Mindful Money website link below:

UK-building-is-all-systems-go

This is one of my personal favourite investment themes of the moment in the UK, as I feel there is quite a bit further to run in the UK's economic renaissance, with the property market crying out for new builds to alleviate the current shortage of housing supply in London and the South East. 

Edmund  

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

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:

Clean-energy-has-the-solar-wind-in-its-sails

Take advantage of this following wind for your investments!

Edmund

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

AstraZeneca: Per Ardua ad Astra?

Hello there,

Today's idea is a single stock idea in the Healthcare space, the UK-based pharmaceutical giant AstraZeneca. 

Recent years have seen Astra experience more than its fair share of problems (loss of patents for key drugs, difficulty in developing new drugs), but now there are several signs that finally matters may be improving for the company.,

Please click on the web link below to read the full story...

Astrazeneca-why-it-should-defy-the-bears-and-perform-in-the-long-term/

As always, I am interested in any comments you may have, so please don't hesitate!

Happy reading and bon weekend,

Edmund

Investing for the Santa Claus Rally

In the article below, I considers ways to benefit from the festive statistical effect known as the Santa Claus rally. 

Some of you may well have already heard of seasonal effects in the stock markets such as the Halloween effect – that the strongest performance of stocks tends to occur between the beginning of November and the end of April each year. This also gives rise to the well-worn stock market adage: “Sell in May and go away.”

Well, we can be even more specific than that! The best stock market performance of the year, as judged by discrete four-week periods, tends to occur statistically over the last two weeks of December and the first two weeks of the New Year – the so-called “Santa Claus rally”.

Please click on the link below to see the full article with charts on the Mindful Money website:

Investing for the Santa Claus rally

Best wishes for the festive season,

Edmund

Buying into the UK's Industrial Renaissance

New "Expert View" Column on Mindfulmoney.co.uk

I wanted to introduce my new column on the finance website mindfulmoney.co.uk, with whom I have started to work.

Buying into the UK's Industrial Renaissance

My first article on the site focuses on why you should look at investing in stocks that are exposed to the UK's industrial renaissance, part of the UK's surprisingly strong economic growth pattern (beating all other major European countries in the process). 


I would ask you to support me in my humble endeavours by clicking on the link below in order to read the article:

Buying into the UK's Industrial Renaissance

Many thanks for your support, all (constructive) comments welcome as always, happy reading!

Edmund

Weekly Global Strategy Screencast: Playing "The Internet of Everything" investment theme

Screencast: Playing "The Internet of Everything" investment theme

In this week's animated presentation with audio commentary, I take a look at how to play the "Internet of Everything" investment theme, without falling into the trap of paying very high valuation multiples for social media and e-commerce stocks, i.e. the likes of Facebook, Amazon.com and Linkedin.com. 

Screencast presentation (Youtube): Investing in "The Internet of Everything"

Or simply click to watch the video (small window size) below:

For an introduction to the Internet of Everything, watch the Youtube videos below:

Introduction to the Internet of Things

What is The Internet of Things?

Dr. John Barrett: The Internet of Things (speech)

Happy investing!

Edmund

Dividend funds: caveat emptor!

Market Indicators Remain Positive

With the US S&P 500 stock index hitting new highs, we might ask ourselves if shares are finally starting to become expensive, and vulnerable to a near-term correction. Checking a number of my favourite market indicators, conditions look to remain favourable for stocks and shares. 

1. US advance-decline indicator hits new highs

The cumulative advance-decline indicator, that measures how many stocks have gone up versus those that have gone down each day and adds the up-down balance up over time, continues to make new highs. This points to good market breadth, i.e. that the market is being driven by a large number of stocks rising. If this were not to reflect a similar pattern to that for the benchmark stock indices, then I would be concerned. But no worries here...

US Advance-Decline Index Remains very Bullish

 2. US Value Line Geometric Index Also Very Strong

A second measure of market breadth is the Value Line index, which looks at the performance of the average stock in the US. Again, if this were not to be making new highs at the same time as the benchmark stock indices, I would be concerned. But once again, things look good...

US Value Line Index Also In A Bull Trend

3. European Industrial, Bank Stocks Still Performing Well

In an economic recovery scenario, both industrial and financial stocks should perform well, reflecting the benefit of a stronger underlying economy for profits in both these cyclical sectors. Looking below, we can see that European Industrial (SXNP) and Bank (SX7P) sectors are still in strong uptrends, and close to new highs. 

European Industrials, Banks Close to New Highs

But High Quality Dividend Stocks Now Expensive In the US

Interestingly, stable dividend stocks have in particular started to become expensive as investors have looked for yields outside of the traditional bonds and cash sources, given the very low rates of interest currently on offer from both asset classes. 

US Dividend Aristocrat Dividend Yield at record low

The chart above represents the US dividend aristocrat ETF, which only holds US large-cap companies that have raised their annual dividend consistently each year over the last 25+ years. Members include healthcare companies like Johnson & Johnson, and consumer staple companies like Coca-Cola.  All very high quality companies, but now increasingly expensive, only offering a 1.8% dividend yield now as opposed to nearly 2.5% at mid-year. Clearly investors are looking for a better yield than they can get on bonds or cash, but without taking big risks and thus preferring to invest in companies that offer relative stability. 

Focus more on Small-Cap stocks

October has been a pretty good month for Small-Cap stocks, with both UK and US small-cap indices continuing to outperform the large-cap benchmarks and rising in a strong, steady pattern. Both small-cap indices have gained nearly 5% over the last month, continuing to forge new all-time highs. 

UK, US Small-Cap Indices In Steady Uptrend

Favour Industrials, Small-caps; Beware Overvalued Dividends

I remain a big fan of ETFs exposed to small-cap stocks such as the iShares MSCI UK Small-Cap ETF (CUKS) and the iShares S&P Small-Cap 600 ETF (ISP6). You could get exposure to Small-Cap stocks in Europe overall via the db x-trackers MSCI Europe Small-Cap ETF (XXSC). With capital expenditure trends improving, European Industrials also remain a good area for investment at this moment: db x-trackers STOXX 600 Industrial Goods ETF (XSNR). 

But I would be wary of continuing to chase large-cap dividend stocks and indices higher at this point, as many of these stable growth stocks are now sitting at relatively expensive valuations, particularly in the US.  

If you want to buy exposure to European dividends, it would perhaps be better to look at a high-yielding sector ETF that is performing well, such as the STOXX Europe Telecoms ETF (offered by db x-trackers, Lyxor amongst others) rather than chasing what seems to me to be expensive dividend growth, at this point.  

Banks Breaking Higher In Spite of US Political Roadblocks

Given the drag to US economic activity from the ongoing US government shutdown, and the looming need to raise the US debt ceiling (before the US government runs out of money!), I am surprised to see that US investment banks and broker-dealers continue to do very well, with hardly a pullback in sight. 

US Broker-Dealers Bounce off 3m Moving Average

Boosted by Retail Investors Buying Stock Funds

This particular index comprises investment banks such as Goldman Sachs and Morgan Stanley, stock and commodity exchanges such as the CME, ICE and NYSE Euronext, and electronic trading platforms with as TD Ameritrade and E*Trade. They are all clearly benefiting from the current bull market in stocks, and the swtch by retail investors away from bond funds back towards equity funds, e.g. in the form of buying equity ETFs. 

Money Still Flowing Into Equity ETFs

European Financials Lead the Stock Market

In Europe, the same trends can be seen, with both the European Banks and Insurance sectors at or breaking new highs:

European Banks break a new year high

European Insurers also hitting a new high

You might argue that financial markets are perhaps being a little too sanguine over the risk of a US government debt default; the accepted consensus seems to be that a US default would wreak complete havoc on the US and global economies (not to mention global financial markets), and thus will be avoided by a combination of the US Treasury and Federal Reserve at all costs. 

Nevertheless, the fact remains that volatility remains historically low in spite of the political deadlock, and investors are still stuck looking for somewhere to invest their savings where they can garner a half-decent return, which is still leading them back to stocks and shares. 

Implied Volatility Still Close to Multi-Year Lows

Personal caution

I personally would rather be a seller into this rally than a buyer, as I believe that any eventual debt ceiling deal in the US could result in the stock market cooling off, as it is often better to "buy on the rumour, but sell on the news". 

That said, the US and European Banks and Insurance sectors still contain many companies that look attractively valued when looking at P/E, dividend yield or price/book valuation metrics, at a time when the US stock market overall could be argued to be already fully valued (as was argued recently by the famed investor Julian Robertson in a recent CNBC TV interview: Julian Robertson interview).

So what to do? I am still heavily invested in the UK, European, US and Japanese stock markets for now, but I must admit, I am looking to sell down positions sooner rather than later. After all, we are still not even halfway through the month of October, which has proven a pretty volatile month for stock markets in the past (see previous post for details)...

So invest in banks and insurers if you are confident of a successful resolution to the US debt ceiling issue, and if you believe that upcoming quarterly earnings releases from giant US banks such as JP Morgan and Wells Fargo will not disappoint expectations. 

Good luck,

Edmund