IBT UK: With the Stock Market, the Best Things Do Come in Small Packages

IBTimes UK Article link:
Stock-market-best-things-do-come-small-packages

IBTimes UK Video link:
Money-talks-small-caps-set-benefit-january-effect

Big is beautiful, so the mantra goes. But not so in the stock market. The very long-term view of stock market performance by size of company, comparing small-caps to large-caps, reveals small-cap companies have in general outperformed the broad market quite substantially.

If you had invested £100 in the UK stock market back at the beginning of 1975, and had diligently re-invested all dividends (ignoring all taxes), then you would have today an investment worth well over £15,000 (Figure 1). Very impressive, you might say to yourself.

Figure 1: Small-Caps Have Done Far, Far Better than Large-Caps

Source: Author, FTSE, Datastream, Hoare Govett

If, however, you had instead invested that £100 in an index of UK small-cap stocks in January 1975 on the same basis, you would now have an investment worth nearly £55,000.

In other words, over the very long-term (nearly 40 years) the small-cap segment of the market has delivered three-and-a-half times the performance of the overall stock market, which is dominated by very well-known stock market giants such as BP, Vodafone and HSBC.

Why would this be the case? The simple explanation is that smaller companies by and large tend to be younger companies with more innovative products or services and which can post faster growth rates, rather than massive companies that are well-established in mature markets with long-running products or services, and which therefore tend to grow at a more sedate pace.

The January small-cap effect

Not only have small-cap stocks done considerably better than large-caps over the long-term in the UK and US, a fact well-documented in the academic financial market literature, but these pint-sized gems have over time performed particularly well at the beginning of the year, the so-called January small-cap effect (Figure 2).

Figure 2: Spot the Small-Cap January Effect! 

Source: Author, FTSE, Datastream, Hoare Govett

While this effect was originally identified in US small-cap stocks, UK small-caps exhibit exactly the same tendency to outperform in January, historically averaging over 4% gains in January since 1975.

In fact, in the UK the first four months of the year have been the best historic period of performance, delivering an average of over 13% from January to April.

Small-caps: One of the few times it is worth using an "active" fund manager

Now in general, I tend to avoid investing using actively managed unit trusts, preferring instead low-cost "passive" index funds and exchange-traded funds for the simple reason that fund managers do not tend to justify their extra cost through better net performance over time.

However, small-cap funds are an exception to this general rule. There are a number of small-cap managers who have demonstrated index-beating performance over time, even after costs.

They manage to cherry-pick a number of high-potential stocks out of a huge universe and then benefit disproportionately from strong long-term performance in these names, while also avoiding a lot of under-performing small-cap "duds".

Figure 3. Strong Performance from Smaller Company ITs Since 2012 

Source: Association of Investment Companies

So, in this case, I would invest in a small-cap fund using one of a small number of investment trusts, which are listed closed-end funds which are run by a stock-picking fund manager.

Funds run by small-cap specialists with long experience and a solid investment process, resulting in a strong performance track record (Figure 3) include:

1. The Miton Income Fund (LSE code: DIVI), run by small-cap veteran Gervais Williams;
2. Strategic Equity Capital (LSE code: SEC), a concentrated small-cap fund run by the team at GVO Investment Management;
3. The Henderson Small-Cap Fund (LSE code: HSL), run by Neil Hermon at Henderson. This trust trades at a 13% discount to net asset value.

Each of these three fund managers have strong long-term track records of investing in UK small-cap stocks and outperforming the small-cap index over time. I particularly like the Miton Fund as it combines small-cap investing with income investing (a 3% dividend yield), aiming for an attractive combination of dividend income and growth from small-cap champions.

Perhaps small is sexy, at least around the new year.

Long-term investors: Time to Fill up the Tank with Energy Exposure

To read the article on Stockopedia, click on the link below: 

Stockopedia article link

Yes I know, the Oil & Gas sector has been a horrible place to be, really since mid-year. Trust me, my portfolios have suffered thanks to a sizable exposure to this sector.

But I believe that there are good reasons for expecting the oil price to rise, lifting the oil & gas sector with it:

1. There is an OPEC meeting on November 26, and with Saudi Arabia as the official swing producer not wanting to be the only country to cut production, is turning up the heat on other OPEC nations to participate in coordinated cuts. Bear in mind that OPEC are producing a lot more crude today than in previous months/years thanks to recovery in Iraq crude production to near to 3m barrels/day, and more recently Libya which has raised production from very little to 750,000 barrels/day over the last 2 months. But no other OPEC producers, who had increased production originally to cover the Iraq + Libya shortfalls, have cut back meaningfully - yet.
   
2. US oil refineries have been running at lower capacity rates as is normal for this time of year, of the order of 84% vs. 92% previously, as they go offline for scheduled maintenance. So as they come back online, US demand for crude should pick up again, helping to correct the unusual contango situation (where spot crude is cheaper than dated futures, whereas normally it is the other way around).
   
3. Global demand for energy will continue to grow, most notably from emerging markets as they start to catch up with Western-style energy-consuming habits, and if anything, lower crude prices will encourage greater consumption, with a lag...
   
4. There is still a risk of a cold winter hitting Northern Europe and the Northern part of the US - Siberia is seeing lots of snow, there is even snow already in Moscow! This often presages a hard winter in the North of the US, which would mean more oil and gas consumption for heating. 

Even with a small bounce today in Brent crude oil price to $86/barrel, it is still a very far cry from the $115/barrel touched back in mid-year. I would not expect necessarily to get back to these heady levels, but I would not be surprised at all the see Brent back above $90/barrel sooner rather than later. 

Wishful thinking, perhaps. But we shall see... In the meantime, I am increasing my holdings in a number of junior oil companies with exposure to US shale such as Caza Oil & Gas Inc (LON:CAZA), and also increasing my holdings in oil- and gas-focused ETFs in the US. 

Edmund

International Business Times UK VIDEO: The Halloween Effect for Stock Markets

For a 3-minute video on the positive Halloween seasonal effect on stock markets, please click on the web link below!

http://www.ibtimes.co.uk/tv/money-times-halloween-effect-should-bring-better-performance-stock-markets-12469

‘Tis The Stock Market Season to be Jolly

“Be greedy when others are fearful” 

This quote from one of the most famous investors of our age, Warren Buffett, is one to remember when confronted by a sharp sell-off of the sort that we have witnessed over the last four weeks. 

Challenging a 14-year High

In early September, the FTSE 100 index stood a fraction below the 7000 level, finally a hair’s breadth away from setting a new all-time high (the current all-time high is 6950, set back in late 2000). 

Now here we are in early October, braving the onset of Autumn and cooler temperatures, with stock markets globally also seemingly affected by a similar cooling. The FTSE 100 is now sitting around 6500, roughly 7% lower than a month ago. 

This sharp reversal, triggered by fears over weakening global growth and with the prospect of the US Federal Reserve raising interest rates on the other side of the Pond, has investors scurrying for the relative safety of bonds. According to the Investment Company Institute (www.ici.org), US retail investors have taken a net $2.6 billion out of stock funds and put over $4 billion into bond funds in the month of September. 

Don’t follow the herd and stampede out of shares

Rather than follow this herd, which has typically been late to invest in stock market uptrends and also late to exit stock markets one they have already fallen far, my contrarian instincts tells me to buy into the stock market now, on the basis that one should always be aiming to “buy low and sell high”. 

Several stock market sectors such as Oil & Gas and Food Retail have already suffered heavy falls and are now beginning to rebound. Valuation is relatively attractive too, with the FTSE 100 trading at a 12.5x P/E and paying out a dividend yield only a whisker under 4%. That’s not far off twice the paltry return that you will get for buying the UK government’s 10-year IOUs (I mean government bonds) right now! And even if the International Monetary Fund was relatively downbeat about global economic growth prospects, it was at least positive about the UK…

The Halloween Effect Could Strike (Again)

Let’s not forget about seasonal effects too. The Halloween effect, describing the traditional outperformance of stock markets globally from November through to April, is close to starting. In fact, my own research indicates that a better starting seasonal date for being invested in stocks in developed markets like the UK and US is actually mid-way through October. 

From mid-October through to the end of April, the FTSE 100 has gained an average of nearly 8% per period since 1986 (when the FTSE 100 began). This is the vast bulk of the average 9.5% yearly gain in the FTSE 100 (dividends included), and beats the average May-mid-October period performance of only 1.8% hands down (Chart 1). 

Chart 1: The Halloween Indicator Works Well in UK Stocks

Source: Author, Bloomberg

Follow the Value and Seasonal Trend in the FTSE

The current relative value (comparing the FTSE 100 dividend yield to bond yields) and the positive seasonal effect both argue that we should not overreact to the doom and gloom that surrounds investors at the moment, but rather that we should add exposure to the FTSE 100 in preparation for the strongest stock market half-year. In fact you could argue that this September sell-off could in fact be Christmas come early for the contrarian investor!

Edmund

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

Beware September; A Danger Month for Equities!

1. September Has Been The S&P’s Worst Month

2. Mid-September to Early October is Worst

3. Healthcare Does Best

4. Long Bonds Are Still A Good Place to Be

5. As Is Gold

6. Gold Stocks Get a Leveraged Boost

7. Natural Gas Tends To Be A Big Sept-Oct Winner: +22% in 2 Months on Average!

8. Total A Good Natural Gas Play

Summary

1. Equity Markets Often Suffer in September
2. Long Bonds Tend To See Lower Yields
3. Sectors: Technology is Worst-Hit, Healthcare Does Best
4. Two Commodities to Like In Sept-Oct: Gold, Natural Gas
5. Two Stocks to Like: Goldcorp, Total

Sources for charts and tables: www.equityclock.com, www.stocktradersalmanac.com

Global Strategy Weekly in Charts: Stocks to return to recent highs, then what?

Macro: Better US Outlook, But Europe Worrying

1. Markit Manufacturing PMI Points to Stronger US Recovery

2. US Initial Jobless Claims Back to Cycle Lows

3. Why the Fed Can Stay on Hold Longer: High 12.2% Under-Employment Rate

4. German 10-year Bond Yield < 1% Higlights Deflation Risk: ECB to Help?

Stock Markets: Tech, Financials Hit New High, Europe Rebounds

5. US Technology, Financials Sectors Break Out to New Highs

6. German Stocks Lagged Word By Over 8%; Now Catch-Up Time

Commodities: Has Crude Oil Found A Bottom At Last?

7. Brent Crude Oil Finally Bouncing Off $102/barrel

8. Oil Services, Exploration/Production Start To Recover

9. Nearly the Season for the Energy Sector To Perform!

Risks: Watch For Mid-Term VIX to Return to <13

10. Mid-Term VIX Volatility Index Under 13 Will Flag Renewed Risk to Stocks

11. Warning: US Retail Sentiment Back to Bullish High (Contrarian Signal)

Investment Summary

1. US Economic Recovery Seems to be Improving
2. But High Under-Employment Means the Fed Can Wait…
3. Risk-On Recovery Driving US Tech Financials To New Highs
4. European Stocks Still Primed To Recover, But Hinges on the ECB
5. Opportunity to Return to Oil Stocks As Brent Crude Bottoms
6. Watch for the Mid-Term VIX to Dip Under 13; then risk/return may change

Edmund

Bloomberg TV:Debunking "Sell in May and Go Away"

I appeared last week on Bloomberg TV in the morning, talking to host Mark Barton about why the "Sell in May and Go Away" saying is no longer strictly correct - rather, June to September is more the danger period for stocks...

CLick on the Bloomberg link below to see the Interview:

Debunking-sell-in-may-and-go-away

Stay in May and don’t fly away…

I find that I am greatly tiring of the plethora of articles which arrive around this time of year, urging investors to “sell in May and go away – come back on St Leger’s day”. Every year following May Day it is the same story but I believe the record needs to be set straight…

1. Yes, November to April is the strongest seasonal period for the FTSE 100 Index

As Figure 1 illustrates, the FTSE-100 index has typically posted its strongest seasonal performance over the six months from the beginning of November to the end of April the following year, judging from average monthly returns since 1986. December returns (including dividends) have averaged 2.6%, while April has been the second-best month at 2.1%.

1. FTSE-100 Index Has Posted Strongest Returns in December, April

Source: Author, Bloomberg

Judging from this 29-year history for the FTSE-100, May comes in as the ninth-best month for stockmarket returns, with a 0.3% – not all that impressive but nevertheless a positive average return.

2. And yes, this is true also for emerging market stocks…

Figure 2 shows the average monthly returns since 1990 for the MSCI Emerging Markets index, the main benchmark index used for investing in this geographic segment.

 

2. Emerging Market Stocks Show an Even More Pronounced Seasonal Effect

Source: Author, Bloomberg

 

In the case of emerging markets, the average return has been zero for the month of May, typically following a strong April, which has typically been the second-best month for emerging market gains.

3. The real danger period for UK stocks is between June and October

If we look at the table in Figure 3, which shows monthly returns for the thee UK FTSE stock indices by size, we can see the real danger period for stocks historically has really been June to October, with negative returns registered on average over two to three of these months.

To read the rest of this article, view the conclusions and all the charts,
please click on the link below:

Stay-in-may-and-dont-fly-away

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