An independent professional's take on the latest news and trends in global financial markets

Archive for the ‘Editor’ Category

New Year hopes

My suspicions back in the autumn that a market rally was on the way have, I am happy to say, been borne our by events. Not for the first time, the peak of rhetorical despair – this time about the dire outlook for the world economy should the Eurozone crisis not be resolved – has turned out to be the moment to turn bullish. The rally since the failure of the Cannes summit has been impressive.

The MSCI world index is up by more than 20 per cent since its October low and has risen for seven straight weeks in a row, something that has not happened since the spring of 2009, according to the equity strategists at Societe Generale. Equity markets have made an even stronger start in 2012, with January producing one of its best monthly returns for many years. Contrarian sentiment indicators, such as the venerable Investors Intelligence survey of investment advisors in the United States, once again proved invaluable in identifying a turning point back in the autumn.

Read the rest of this entry »

Views on Europe

Back from a two-day trip to Paris, it is no surprise to find that the markets are still obsessing about Europe. In the absence of elections political change is rarely a straightforward business, as this week’s tortuous attempts to form new governments in Italy and Greece are demonstrating. The markets remain volatile, but as yet nothing has happened to change my view that we are moving towards an endgame that will ultimately prove beneficial, howver messy it becomes in the short term.

What is noticeable is how opinion is at last slowly shifting away from arguing over how the eurozone in its present form can be saved towards the (more sensible) view that the eurozone cannot continue exactly as it is, whether or not it survives the immediate crisis.. See for example an excellent piece by Lord Owen, the former Foreign Secretary, writing in The Guardian on Monday which begins:

A eurozone may survive, but it will not be the present 17 member state eurozone. What will emerge, if it is to survive, will be smaller and more focused around German financial and monetary disciplines

Read the rest of this entry »

Written by Jonathan Davis

November 10, 2011 at 3:02 PM

Those damned voters…

Did I say there was a need to take these markets one step at a time yesterday? Make that one day at a time. The unexpected decision yesterday by the Greek Prime Minister to call for a referendum on the eurozone package clearly introduces a whole new element of uncertainty into the outlook for financial assets. It almost certainly brings forward the date when Greece defaults and leaves the euro (as eventually it must).

It has never been obvious to me that staying in the euro is the best option for the Greek people, and that may well turn out to be what they think too.  They may opt to take the Icelandic route and vote for the devil they don’t know in preference to the one they do, which has little obvious to commend it.  The decision of the Eurozone to go all out for monetary union without waiting to establish the necessary fiscal  and political regime that was needed to make it workable has always been its most serious flaw, but sadly not the only one.

A consistent failure to consult or carry public opinion has been another hallmark of the whole EU project, and one that may now prove very costly to its architects. Markets hate uncertainty, but if the prospect of a referendum in Greece now forces the Eurozone leadership to start planning properly for the consequences of at least a partial breakup of the single currency, instead of trying to do everything to avoid even thinking about such an outcome, it will be no bad thing. Look out next for the departure of Berlusconi.

Written by Jonathan Davis

November 1, 2011 at 10:31 AM

Nose out of book

After several weeks immersed in completing the book I have been writing on the investment methods of Sir John Templeton, to be pubished in the spring next year, this week sees the return of this blog to active duty. The past three months in the financial markets have been amongst the strangest and most volatile I can remember for some while - certainly since the great crisis of 2008. Two main things (the Eurozone crisis/horror movie and an apparent slowdown in the recovery of the US economy) have dominated market sentiment throughout these months, leading to a huge amount of displacement activity by anxious investors, and a good deal of hyperbole amongst the commentariat.

Suffice it to say that the news on both counts appears to have improved in the last few days. Although the Eurozone crisis is clearly still a long way from being resolved, the US data does appear to point to things picking up on the other side of the Atlantic, which should silence the most extreme prophets of doom for a while, at least.  Having broken out of their trading range, it will be surprising if equity markets do not finish the year on a relatively strong note, perhaps even crawling their way back to the level at which they started the year. The prospect of new bouts of quantitative easing by the Federal Reserve and Bank of England have dampened yields on long term Government bond, but the sovereign debt of overborrowed developed countries continues to look a/the most vulnerable asset class on any but the shortest of time horizons. Read the rest of this entry »

Written by Jonathan Davis

October 31, 2011 at 4:04 PM

Mixed messages from the markets

Two contrasting views today that neatly sum up the current rather feverish market dynamics. This link summarises Deutsche Bank’s view that the worst case outcome the Eurozone crisis could be a 35% fall in global stock markets. And here, on the other hand, is the latest weekly view from fund managers Artemis, citing six reasons to be cheerful.

Of course the whole world could still go to blazes in debt’s handcart. It might well. But on balance, we prefer to remember that the FTSE 100 is (just) above its level as 2011 began. And that’s despite, it’s worth remembering, Japan’s tsunami, war in Libya, Arabian unrest, nemesis in Greece and the end of American QE.

Corporate health. Sure, there’s more bad news to come, we reckon, for most UK retailers. But there’s still much less credit risk in most companies than there is in governments. Take a stock like Hunting (oilfield services). It has cash of £300 million, a third of its market cap. Or publisher Reed. It’s priced at 11.5x, has a 4% yield, diversified earnings and improving margins. Japan’s NTT Docomo (mobile telecoms, 3.8% yield) has more cash than it knows what to do with.

M&A. Weaker sterling makes UK assets even more attractive to foreign (war) chests. Negative real interest rates in the west. These force investors, reluctantly or otherwise, into (high yielding) equities. Pessimism. It’s pronounced. If history has any predictive power, the gloom suggests this is a ‘buying signal’. Emerging markets. China seems to be Goldilockian. The prospects are patent, and the growth is good. The best western companies will continue to make their money there, not here. QE2. Its positive effects will take time, but will benefit the US economy.

What all this confirms to me is that the market, as always, has great difficulty in finding a level when there is a wide range of potential outcomes, some of them extreme. The Eurozone crisis is a good case in point.  The way the crisis has evolved is as much an indictment of the inadequate way that Europe’s political class have responded to the new threat of sovereign debt default as it is about the underlying gravity of the potential problem.

Meanwhile, the interesting part about Mr Bernanke’s recent testimony, to my mind, is the reaffirmation that his whole approach to running the Federal Reserve is rooted in his paramount desire to avoid deflation at any cost.  if he does restart a further round of printing money (quantitative easing), it will be because the Fed sees a real risk of deflation once more.

The odds are still against a worst case outcome at this point, but there is no denying that it is a possibility, and that is what sends risk-averse investors scuttling for protection. In these circumstances remember all those stories about a big turn in sentiment towards gold and other commodities in the early part of the year? Gold’s continued ascent to new highs tells a different story.

Written by Jonathan Davis

July 15, 2011 at 2:00 PM

Anything but gilts

My latest piece in The Spectator discusses what might make a future trade of the decade to match that which was the standout (and therefore widely ignored) long term trade at the time of the Prince Charles- Princess Diana wedding in 1981. Then the trade was to buy UK Government bonds; now, I argue, it would be to buy anything but gilts, and concentrate on assets which can withstand the inevitable arrival of inflation.   Note that I am discussing here the best long term buys and sells facing investors today, not which asset class might do best in the next few months (when I fear that a new deflation scare, which would be positive for gilts, remains a distinct possibility).

Written by Jonathan Davis

May 22, 2011 at 9:07 PM

Something different, something new

Having decided against taking up a job in the City three months ago, I have been adding instead to my portfolio of outside interests with a couple of non-executive appointments, as a director of the Jupiter Primadona Growth Trust and as a member of the investment committee of D&G Asset Management, a firm which specialises in prime central London residential property. Starting today, following a brief interlude, I have also resumed a monthly column in the Financial Times, in which I comment on the Buffett/Sokol affair and Jeremy Grantham’s latest Quarterly Letter. (You can also read here an interview I did with Grantham in 2007, when he advocated extreme caution ahead of the credit crisis). More new things to follow.

Written by Jonathan Davis

May 9, 2011 at 6:50 PM

Posted in Editor, Uncategorized

Strange and wondrous times

In my latest Financial Times column, I argue that current market conditions are fascinating, but inherently unstable, because the Federal Reserve’s monetary policies have removed the traditional anchors on which investment decisions are traditionally made.  By chance I notice that Bill Mott of Psigma Investment Management, who has been managing equities even longer than I have been following the markets, has come out with a similar line of argument.

You can read all my FT columns and Spectator articles in an archive on the Independent Investor website. Here is a short extract from the latest one, which starts by recalling that even golden decades like the 1990s were punctuated by a succession of crises. I am also attaching a copy of Bill’s latest comments, which should be read in the light of the current fascinating stand-off between Ireland and the EU over how best to resolve its deepening banking problems, which I imagine will continue to weigh heavily on market performance for a while.

The striking thing about recalling these past episodes is that it is possible to make a plausible case that we could see an imitation rerun of nearly all of them in due course.  That the euro is ultimately vulnerable to fragmentation needs no elaboration, given the market’s run at Greek and now Irish debt. Some form of 1994-style rout in the bond market seems unavoidable in the next few years. The risk of a fresh market-induced disruption in emerging markets too, although it is almost certainly some way away, is also growing by the day.

The problem for investors is not that these risks are in any way concealed from view – in fact the more visible they are, the less of a concern – but that some tried and tested tools to analyse the right course through them are lacking. The consequence of the deliberate monetary stimulus now being masterminded by the Federal Reserve, and imitated in other places, is not just that it is distorting asset prices, but that it is also rendering useless the traditional anchors on which valuations and investment choices are based. Read the rest of this entry »

Written by Jonathan Davis

November 17, 2010 at 4:45 PM

May Can Be The Cruellest Month Too

MAY TURNED OUT to be one of the worst months on record for world equity markets, reports Andrew Lapthorne, the head number-cruncher and quant in Soc Gen Asset Management’s award-winning strategy team. The MSCI World Index dropped almost 10% in dollar terms, making it the worst May for this index since it began in 1970, and the worst monthly performance since February 2009, which turned out to be the final death throes of the great credit crisis bear market, the darkest hour before the dawn.

The worst country casualties, unsurprisingly, included the Eurozone countries whose debt problems have been so much in the headlines; Greece down 19%, Ireland 13% and Spain 11% in local currency terms. It turns out however that the falls in Asia were much greater: China’s Shanghai B market was down 16% and the Nikkei 225 down over 11%. The best performing markets year to date, as at the start of the month, more surprisingly, are mid and small cap stocks. Both the Russell 2000 and the FTSE 250 are still ahead year to date.

What is easily overlooked, of course, as with any short term data set, is that the recent falls in equity markets followed an exceptionally long and sustained period of market gains from February to April, with the S&P 500 rising for something like ten consecutive weeks, a most unusual trend. To use the jargon of the technical analysts, markets had become highly oversold. To that extent May’s falls were no more than a necessary and overdue correction.

However it seems clear that, just as Anthony Bolton predicted six months ago, equities are likely to be pushing against headwinds for some weeks yet. News will continue to be dominated by crises of one sort or another. The earnings upgrades that have helped to drive the markets higher are petering out. Valuations appear to have priced in a lot of future recovery already, with the MSCI World index trading on a p/e of 13 and a dividend yield of 2.7%.

Nevertheless the scale and strength economic recovery around the world continues to impress seasoned market-watchers. Few fund managers have navigated the crisis of the last three years better than Jonathan Ruffer and his team at Ruffer Investment Management. To quote a recent note of theirs: “One of the by-products of the tumultuous events and the private sector bail-outs of the last two years has been a massive transfer of risk from the private to the public sectors”.

“In part it is precisely this factor which has enabled equity markets over the past year to display a raffish insouciance in the face of so many outstanding problems and risks; with risk being largely socialized and a negligible cost of money, the measures that the corporate sector has taken in terms of inventory liquidation, labour shedding and capital spending cuts means that its present rude financial health stands in stark contrast to the groaning public sector deficits on view across the globe”.

They go on: “While we never try to time markets, it does not seem outlandish to say that the next few months will see risk assets move into the departure lounge from the ‘sweet spot’. Improving economic conditions, which we fully expect, will bring into sharper relief the need for ‘exit strategies’, with a likely reduction in liquidity available for investment in financial assets”.

“Further sovereign bond crises, accompanied by default risk, may erode the valuation basis for equities. Meanwhile, even if the UK is an acute case, inflation is regularly outpacing forecasts and will prove indeed to be part of the solution. After the relative ease of the last twelve months, protecting capital and generating real returns is about to start getting more difficult again”. We shall see.

A LOT of headlines have been generated by the European School of Management’s report into hedge funds.  The main findings are that hedge fund investors chase recent past performance and merrily buy into investment styles that have been working well recently regardless of the huge differentials in risk that different styles entail. 

The researcher, assistant professor Guillermo Baquero, concludes: “These results raise serious concerns about investors’ ability to make the right allocation choices and suggest that increasing investor protection and curbing unnecessary risks and speculative activity of hedge funds should be a priority for regulators”. 

I am not so interested in the regulatory issues. It has always been my view that hedge funds are not appropriate for retail investors, and should remain what they once were, namely largely unregulated vehicles for professionals and consenting wealthy adults. There is plenty of evidence to suggest that a small minority of hedge funds, if you are lucky enough to find the ones with real talent, are proven and consistent wealth-generators.

The majority, however, charge too much for what they in practice deliver, and their risk profile is skewed far too heavily in favour of the managers to make them prudent investments for most investors. Illiquidity too can be a problem, as became all too evident during the credit crisis. It is no real surprise that there has been a lot of pushback on the level of fees since the crisis. To blame them for causing the crisis is quite wrong however.

What these new research findings do show clearly, as many of us have long suspected, is that hedge fund investors are really no different from investors in general. They may be richer, and more sophisticated in other ways, but at heart they make just the same old mistakes – too greedy for results, too short term, too hyper-active, too blind to risk.

A SURVEY by the Association of Investment Companies names the top 20 investment trusts of the last decade, as measured (a) by their absolute returns and (b) by the consistency of their performance. Top of the list on both scores, gratifyingly, comes a trust that I own, Blackrock World Mining, which has returned an impressive 811% over the past decade and outperformed the average investment trust in eight of those ten years.

It is followed in the rankings by Fidelity European Values (once run by Anthony Bolton, but for most of the period in question by his successor Tim McCarron) and HgCapital, the private equity fund that spun out of Mercury Asset Management some years ago. (This is another fund which I happen to own, having bought some shares last year). The table of supporting data is worth looking at, although purists would argue that it suffers from taking no account of risk, gearing or volatility. A table of risk-adjusted returns would show some significant differences, as indeed would a table constructed on the same basis 12 months ago.

As a long term investor in investment trusts, the main message that I take from the survey is that identifying the big long term themes in the investment world and letting them run their course through a shrewdly managed, low cost vehicle is a much easier way to make money than furiously trying to pick winners over shorter periods of time.  Blackrock World Mining is a play on the commodity cycle. A good number of the other trusts on the list are essentially beneficiaries of emerging markets in one form or another, which has been the other big story of the past decade.  In a decade when the equity markets have produced little return overall, it is also noticeable how well some smaller company funds have continued to do.

AT A ROUND TABLE discussion I chaired for Spectator Business magazine last week, to be published shortly, a key theme on which all the participants agreed was the need for the new coalition government not to make a mess of the recovery by bungling the proposed Capital Gains Tax changes. As it happens, there is a powerful blast on the subject in this week’s Spectator from Art Laffer, inventor of the notorious Laffer curve. Economists may not be able to agree whether or not the Laffer curve is valid, but the general conclusion seems compelling to me. The way that the government crafts its CGT proposals is going to be a critical test of how far the new Government is hampered by the need to make concessions on tax to its own coalition partners.

THE THOUGHTS of Canadian investment strategist and commodity bull Don Coxe on the markets (from a recent conference call with clients): “No new bear market — we are going to have a correction here, but the global economy is still growing, but not as fast as the optimists would have hoped, and I don’t believe we can have a true bear market as long as liquidity is being supplied by the central banks at virtually zero cost. So much of that liquidity was misallocated before, but gradually as the economy grows it will be able to absorb it in actually productive activity”. I hope Don is right. Marc Faber dug out this apt quote from the US founding father Thomas Jefferson for his most recent monthly market commentary: “I predict future happiness for Americans if they can prevent the government from wasting the labours of the people under the pretext of taking care of them”.

Written by Jonathan Davis

June 7, 2010 at 8:31 AM

Colin McLean’s Latest Thoughts

The Edinburgh fund manager Colin McLean was featured in my book Money Makers and remains one of the most talented stockpickers I know. His UK Opportunities funds are high beta, and have recently therefore done very well. These are Colin’s latest views on the equity market, which has of course been remarkably strong over the last two weeks. I rmeian confident that it will end the year higher than it began, confounding those of a bearish disposition.

“Summer tends to be a quiet time for stockmarkets with low trading volumes. Many investors are on holiday and there is little real news from companies. But in some years the summer months have been far from boring. Unexpected economic news or currency trends can trigger sharp stockmarket moves. How should investors deal with this unusual period?

There are precedents that give good reason to distrust summer trading. July and August 2008 delivered a sharp rotation from resources into financials. This year’s surprise is a continuing strong recovery in commodity prices and in shares of economically sensitive businesses.

The initial catalyst for the rally was news of exceptionally strong trading in investment banks, but encouraging growth in China has also lifted oil and other commodity prices. Many oil and mining shares have still not fully retraced last year’s fall, but are moving strongly back into profit. Investors should not dismiss the more positive stockmarket mood, even though overall trading activity remains light.

Undoubtedly, the UK economic background remains weak, but the unprecedented injection of money into banks is starting to feed into mortgage lending. There is still a large gap between the level of bank deposits and loans needed, but there are other ways to correct this. An extension of existing arrangements for the Bank of England to assist banks in funding mortgages could give a further boost to the economy. And the fact that the UK is doing some things right is shown by the strong performance of the Pound this year. The UK is proving a more flexible and resilient economy than Germany – not what many economists were predicting twelve months ago.

Since May, there has been greater realism in shares, with signs that the early euphoria of March and April has given way to investor discrimination. Some defensive sectors like pharmaceuticals and tobacco are recovering from their previous underperformance, but utilities are continuing to disappoint. Deflation is proving a tough environment for water companies, and if this continues many sectors will see further dividend cuts.

This summer, the stockmarket may surprise. But investors should not just look ahead to next year’s earnings recovery, but also try to assess future dividend risks. There may be no safety in high yields. However, it is not too late to buy into shares of some major companies with sustainable growing dividends”.

Written by Jonathan Davis

August 3, 2009 at 3:58 PM