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

Archive for the ‘Equity Markets’ Category

Mark Mobius on the Eurozone crisis

leave a comment »

How does Mark Mobius see the outlook for investors in the light of the ongoing crisis in the Eurozone? You can find out by listening in to my latest podcast interview, which can now be downloaded from the Independent Investor website (link). Dr Mobius, who next year celebrates 25 years running the Templeton emerging markets funds business, with $40 billion of assets under management, discusses the threats and opportunities which the crisis has created.  This is the first of a series of podcast interviews with leading professional investors and advisers. Other to be interviewed in the series include the global investor Jim Rogers, author and economist John Kay and Guy Monson, the Chief Investment Officer of the Swiss private bank Sarasin.

Written by Jonathan Davis

December 11, 2011 at 6:58 PM

Forecasts be damned

If someone told you that the end of the world was coming tomorrow, and the day passed without incident, would you be inclined to believe the same person the next time they came out with a piece of radical advice? I doubt it.  Yet one of the wonders of markets and economics is how quickly even sensible investors will switch their assumptions about the future without missing a beat.

The latest example of this bizarre phenomenon was evident in the Chancellor’s Autumn Statement. The independent Office for Budget Responsibility, run by Robert Chote, a formidably bright former economist colleague of mine on The Independent, has drastically reduced its forecasts of future economic growth. They are radically different from the forecasts the same body presented just a few months ago. Yet by some magical process they are already being treated as gospel truth. Read the rest of this entry »

Written by Jonathan Davis

December 3, 2011 at 11:30 AM

Good news, bad news for equities

Why have I mentioned more than once the possibility of a strong stock market rally coming soon? There are several factors at work here. The normal end of year experience of markets finishing strongly is one of them. The oversold technical position in many markets, allied to very low trading volumes, negative headlines in the media and deeply bearish sentiment, is another. More fundamental though is the possibility – which I now rate quite high – that Germany will in due course sanction some kind of ECB involvement in the Eurozone crisis that will provide a trigger for all the investors currently sitting nervously on their hands to rush back into the market. It may not yet happen – the politics of the Eurozone remain fragile and complex, and nothing is certain – but if it does the effect in the short term could be very powerful.

Read the rest of this entry »

Written by Jonathan Davis

November 24, 2011 at 3:15 PM

The Eurozone crisis: not insoluble

The Eurozone crisis is a political mess that can only be solved by a political solution, which you don’t need a degree in politics to see is not proving easy, given the variety of interested parties involved – 17 eurozone member countries, 10 other EU member states and the governments of every other major economy on the planet also feeling the need to have their say. Much to the chargrin of some Eurozone leaders, voters too have to be consulted.

Given how many warnings there have been of the risk of a depression and financial meltdown if the Eurozone is not saved, the wonder is that financial markets have not been more affected than they have been by the failure so far to arrive at an agreed solution. The equity markets in particular have been surprisingly resilient. How can that be explained?

This is how one sensible wealth management firm, Saunderson House, is addressing the issue in its client comunications. Implicit in this view is that there will be an endgame in which the Eurozone survives, at least for now, without triggering an economic crisis, which must mean Germany eventually sanctioning some action by the European Central Bank once the various peripheral countries with the worst debt problems (Greece, italy, Spain) have their new governments in place. Read the rest of this entry »

Written by Jonathan Davis

November 21, 2011 at 1:45 PM

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

Time to watch that basket closely

An interesting range of views from market-watchers in this story from the Financial Times today.  Investors are slowly waking up to the lopsided nature of the currrent global market dynamics, in which there is an apparently real risk of a severe negative market event – either in Europe or in the United States – but one which still falls short of being a likely outcome.

How to position yourself  if you rate the probability of this occurring at say 20%? Is that high enough to justify taking extreme defensive action in anticipation of just such an outcome? That will ultimately depend on your tolerance for risk. A number of well regarded fund managers whose opinions I track have taken their holdings of cash to higher than normal levels in recenet weeks, although few have taken it as far as George Soros, whose Quantum Endowment Fund,  as I noted yesterday, is reported to be 75% in cash (although this is likely to include a range of currencies, which these days are often treated as proxies for other types of investment).

Read the rest of this entry »

Written by Jonathan Davis

July 29, 2011 at 6:08 PM

Valuations have rarely been this attractive

So says Neil Woodford, award-winning manager of Invesco Perpetual’s income funds. He was talking yesterday about the sectors of the market that he favours most, which are pharmaceuticals, tobacco and telecoms, and argued that the gap between prices and fundamental value in these sectors has not been this wide, or the shares as attractive, since Old Economy stocks were so out of favour at the height of the Internet bubble.   “Many analysts recognise the undervalues in the market where we have exposure, but say that they don’t see a catalyst to change market perception. In a way, the catalyst I focus on most of all is valuation. Valuation is the only catalyst that I trust. It has a primeval influence on the market and it will assert itself over time”.  This kind of argument was widely ignored in 1998-99, but proved to be right on the money once the Internet bubble burst.

Written by Jonathan Davis

March 30, 2011 at 11:48 AM

The wonders of pet food – and other things

What is so wonderful about pet food as a business? Why is the fund management industry “broken and not fit for purpose”? Why should you only invest in businesses which operate in industries where there is at least one dominant privately owned company? Terry Smith, the outspoken City broker, has plenty to say on these and other subjects in my latest interview piece for The Spectator. You can read the longer unedited version of this article by following this link to the Independent Investor website.

Written by Jonathan Davis

March 27, 2011 at 10:31 PM

Hoping for the best in 2011

The strategy team at Societe Generale, regularly ranked the best in the City, despite their idiosyncratic ways, chose a useful title for their annual presentation last week on the outlook for markets in the year ahead.  Hoping For The Best, Preparing For The Worst neatly summarises the bipolar nature of where I think we are in the cycle – not much to play for in terms of long term returns, but nevertheless some good reasons to think that the current market recovery can continue into 2011.

Here are a couple of keynote charts from their presentation.  One shows where the US market sits on two well-known long term valuation metrics, a cyclically-adjusted p/e ratio (named after Prof Robert Shiller, the US academic who popularised the methodology) and Tobin’s q, which measures the ratio between the current value of the equity market and the replacement cost of its component companies’ assets.

Read the rest of this entry »

Written by Jonathan Davis

January 24, 2011 at 11:40 AM

Is Japan a buy? A new report says yes

My friend and collaborator Dr Sandy Nairn, the CEO of Edinburgh Partners, and former Director of Global Equity Research at the Templeton/Franklin group, argues the case for taking a long, hard look at the Japanese equity market in the latest briefing paper published by Independent Investor. You can download the full 20-page report Is Japan a Buy? for free from the Independent Investor website.  Simply follow the link on the right hand side of the home page.

The case for Japan has been made many times over the last 20 years, but the trend of the market, as we all know, has been one of prolonged decline, punctuated by periodic false dawn rallies. Dr Nairn concludes however, after looking in detail at the 40 year trends in Japanese profitability, growth, national debt and demographics that there are now compelling reasons for buying into the Japanese story. Many shares are cheap and it is a myth that all Japanese companies are condemned to earn lower profits than their counterparts in other countries.

Written by Jonathan Davis

January 10, 2011 at 11:59 AM

Thoughts on the markets

Some further comments on the outlook for markets:

In one of my first FT columns this year, I made the observation that top of my wish list for 2010 was an increase in interest rates and bond yields. Although this sounded a bit Irish to some readers, who were still obsessing about the risk of a double dip recession and sovereign default, the point was that rising interest rates would be an indication that the private sector recovery was finally beginning to get underway – good news, in other words, rather than bad news, as Martin Wolf correctly pointed out in his FT column this week.

Read the rest of this entry »

Written by Jonathan Davis

December 16, 2010 at 4:37 PM

Skewering the Fed

Is there anybody left who doesn’t appreciate how damaging the Federal Reserve’s lax monetary policies over the last 12 years have been for the long run health of the global economy and –  by extension – for the interests of committed long term investors? The collapse of the housing market in the United States and the subsequent banking crisis can both be traced directly back to the Fed’s deliberate and short-sighted willingness to open the monetary stimulus taps at the slightest sign of trouble in the economy.

Andrew Smithers, the London-based economist, has consistently deplored the corrosive effect of the so-called Greenspan/Bernanke put – the realisation that the Fed will repeatedly cut interest rates to below market levels in order to ameliorate the effects of asset price bubbles and/or crises in the financial system, without regard for the longer term social and economic consequences. This is how he sums up his concerns now, given that the Fed seems hell-bent on continuing its policy, this time with a new round of QE (quantitative easing):

1. The Federal Reserve’s excessively easy monetary policy was the cause of the 2000 equity bubble. When it broke, it took large fiscal and monetary stimuli to contain the resulting recession and these stimuli led to the next bubble, which included both houses and equities. Read the rest of this entry »

Written by Jonathan Davis

October 27, 2010 at 12:15 PM

Unusual correlations

I am grateful to Dhaval Joshi of RAB Capital for the observation that something unusual happened in the month of September – bonds, equities and gold all went up together. This is not something that is meant to happen, and rarely does. In fact, according to RAB Capital, the last time this happened was in the early 1980s.

He comments:

Such a conjunction of asset returns is a rare event in the financial markets. In the 123 calendar quarters since 1980, there have been just 4 other quarters, each in the 1980s, when all three asset classes have gone up by 4% or more. The rarity of this event is because there are virtually no economic or financial scenarios that favour equities, government bonds and gold at the same time – at least under normal circumstances.

The obvious reason for this anomalous turn of events lies in the prospect of further quantitative easing by central banks in the US and UK, allied to monetary stimulus elsewhere – which together are creating massive distortions in asset prices. These are not normal markets and as always when asset prices move in mysterious ways, plausible rationalisations are always at hand. The trick is not to be conned into believing that a distorted market can endure indefinitely.

On the previous occasions that equities, bonds and gold moved up together, at least one of the assets ultimately proved to be mispriced. At the end of 1980, bond prices declined by 20%, while gold plummeted by 40%. In 1983, bond prices fell 10%. And in the middle of 1986, bond prices again dropped by almost 10%. This time too, the assumptions underlying the simultaneous rallies may eventually turn out to be inconsistent with each other.

Note that for equities, both deflation and rising inflation are ultimately enemies. Deflation is a threat to the nominal value of profits, while rising inflation normally means a declining profit share of income. Hence, a portfolio of long dated deep out-of-the money put options on equities, bonds and gold could produce handsome returns. One, or even two, of the options could expire worthless. But for the asset that breaks down, the value of its put option could multiply several times over.

Well, the idea is smart enough. To judge the value of the put option strategy depends on how the relevant options are priced. It is simpler to take a view about which asset class is wrongly priced. Short term, both gold and equities look overbought, so corrections are likely after their strong recent momentum moves. Bonds are the obvious midterm casualty, as they were on the previous occasions.

Written by Jonathan Davis

October 13, 2010 at 1:14 AM

Future Investment Returns In Perspective

Whatever your view on the next movement in security prices, which has been the subject of recent posts, it is important not to lose sight of the bigger picture. Bill Gross,  founder and head honcho at Pimco, the world’s largest bond fund manager, sees  nothing but mediocre  investment returns in the years ahead, a state of affairs which for some time he has been characterising as  the “new normal”.

He starts his latest monthly commentary by commenting on two recent items of news from the hedge fund world: (1) the decision by Ken Griffin’s Citadel Group, one of the giants of the hedge fund business,  to consider cutting fees on its  funds and (2) the decision by the  57-year-old hedge fund manager Stan Druckenmiller to pack in his investment career and retire to the golf course after a career that included many years working for George Soros as his right hand man.

His departure and Mr. Griffin’s price cutting are more than personal anecdotes. They are reflective of a broader trend in the capital markets, one which saw the availability of cheap financing drive asset prices to unsustainable heights during the dotcom and housing bubble of the past decade, and then suffered the slings and arrows of a liquidity crisis in 2008 to date. Similarly, liquidity at a discount drove lots of other successful business models over the past 25 years: housing, commercial real estate, investment banking, goodness – dare I say, investment management – but for them, its destination is more likely to be a semi-permanent rest stop than a freeway. Read the rest of this entry »

Written by Jonathan Davis

October 4, 2010 at 4:22 PM

No Fun To Be Had From Stockpicking

There was a lot of talk earlier this year from active fund managers that the world was  returning to a  “stock pickers’ market”, one characterised by relatively high volatility in a market that was essentially going sideways within a reasonably well defined trading range.  Such conditions should be ones, in theory, in which talented stockpickers can do well.

In practice, as this nice story from the always excellent Wall Street Journal makes clear, it has not quite worked out like that so far this year. The markets have behaved just as described, but the stockpickers have not been reaping the reward. Instead the market has been driven mainly by “macro” factors in which all equities tend to go up or down, regardless of their fundamental characteristics, in response to the latest news about sovereign debt, quantitative easing and other big picture issues.

Here is a short extract (the full article may require a subscription):

Stock pickers say macro forces began moving stocks in a big way during the 2008 financial crisis,and that has continued this year following the European debt crisis. Traders also are focusing on the potential for a double-dip recession to hit corporate profits; on government deficits; and especially on what central banks will do about stimulus programs that pumped cash into the economy.

A host of other factors is contributing to the macro trend. The rise of exchange-traded funds, which typically track broad market indexes or benchmarks, has made it easier for investors to make broad bets on commodities, bonds and currencies. Such funds now account for 30% of daily stock-trading volume. Individual investors and pension funds have been pulling money out of stocks, leaving shares more vulnerable to trading by hedge funds with short time horizons. Read the rest of this entry »

Written by Jonathan Davis

October 1, 2010 at 11:55 AM

An Unequivocal Bet On The Markets

William Littlewood, the manager of Artemis Strategic Assets Fund, is the latest  fund manager to come out today and say unequivocally that they  are now betting that equities are a better place to be than bonds. This is his view  (I am an admirer and an investor in his fund):

Our net equity position increased from 77% to 80% as we increased the long position and slightly cut back the shorts. I continue to believe that equities are easily the most attractive asset class, and offer compelling value relative to government bonds.

It is noticeable that in recent months there has been increasing take-over activity, indicating that companies are finding it cheaper to acquire than to build. In the UK two mid-cap companies, SSL and Tomkins, have been taken over and on the global stage Sanofi is actively pursuing Genzyme while Billiton wants to buy Potash. These deals suggest to me that the equity market is attractively priced.

In regards to currencies, we have added to our positions in Norway and Sweden so that these two Scandinavian countries amount to 15% of the portfolio. Both these countries have current account surpluses and sound public finances. The oil-rich Norwegians have a substantial government surplus and the Swedes have one of the lowest government deficits in the mature world. Our view is that strong countries will eventually have strong currencies and so we are optimistic for both the Krona and the Krone. Read the rest of this entry »

Written by Jonathan Davis

September 29, 2010 at 10:54 AM

Unarguable Sense From Philip Gibbs

Some bullet points and a telling slide from a recent presentation by Philip Gibbs, the  fund manager and financials expert at Jupiter Asset Management. Not much need to comment, as it is hard to argue with anything in it (although the recent performance of Philip’s funds has been somewhat disappointing by his own exalted standards).

Medium term investment outlook:

  • Emerging market assets and currencies are by far favoured over the developed world.
  • On a view of a few years it seems highly probable that a crisis will ensue as a result of developed world indebtedness.  Governments may have to print so much money that they will unleash inflation.  US and Japanese government bonds will probably perform terribly.
  • Western equities relying on Western consumers will face many problems as a result of this situation.
  • The Swiss Franc and gold will probably perform exceptionally well.  The dollar and the yen and sterling and the Euro look to have a dismal outlook.

Read the rest of this entry »

Written by Jonathan Davis

September 27, 2010 at 9:27 AM

More On The Great Optimists

Having mentioned grounds for optimism in the equity market in my last post, it is striking that the markets have perked up suddenly in the last 48 hours – no more than a happy coincidence, I fear, as for now the markets remain in their trading range and are merely reacting to individual items of  economic or political news that by their nature have little in the way of reliable or enduring meaning. The tug of war between inflationists and deflationists, and between double dippers and equity bulls, goes on, and most likely will do for some time.

The FTSE All Share chart, for instance, continues to trade in a band around its 200 day moving average, which itself is struggling to find a new direction. It is difficult to read anything into this lack of direction other for the moment  than that it is still consistent with either school of thought being ultimately proved right. At some point we will witness a breakout that gives a more positive clue as to where the markets are heading.

It was interesting to see the Financial Times reproducing Bill Miller‘s positive take on large cap US stocks in the paper yesterday. These comments in fact originally date back to his quarterly market commentary written more than a month ago, something I logged at the time. Bill is one of the professional investors I was referring to in the last post, and someone whose views I have followed for a long time, but I could name several others. Having performed very badly through the credit crisis, and misread  the last bear market completely, such is the way of the markets that few probably take much notice of his comments any more – which doesn’t mean he is wrong, merely out of favour.

Read the rest of this entry »

Written by Jonathan Davis

September 2, 2010 at 2:57 PM

Managing Money Is Not So Easy Anymore

Return figures for the first half of 2010 did not make for inspiring reading.  Government bonds performed rather well and some high yield and emerging market credits much better still. The main story however was one of renewed volatility and flatlining or declines by most asset classes.  July has so far been a different story however, with several key markets and risk assets turning sharply back up.

This patchy narrative is, frankly, not much of a surprise, given the nature of the economic conditions through which we are living.  Volatile markets moving sideways amidst continuing uncertainty about economic trajectories is very much what the “new normal” is meant to be about. It has not made managing money any easier however. Of more than 2700 UK funds monitored by Trustnet, for example, the median return year to date is just 2%.

According to the latest quarterly survey by Asset Risk Consultants, the average manager of sterling or dollar based private client assets gave back all or more of the gains that were eked out in the first quarter. For many hedge funds, the year has been a virtual washout, despite the fact that on paper volatile markets are meant to be the ones in which they should be thriving. Those dumb, derided retail investors who poured their money into bond funds for the moment look smarter than the pros.

Standing back from the fray, is it possible to see what is going on? While equity markets were clearly due a pause after their powerful recovery last year, investors remain mired in the fog of a seemingly unending struggle between powerful ongoing global deflationary forces and concerted Government and central bank attempts to head off the consequences through monetary expansion and (whisper it not too loudly) competitive currency debasement.

Read the rest of this entry »

Written by Jonathan Davis

August 9, 2010 at 12:36 PM

Robin Griffiths: What’s Ahead

The technical analyst Robin Griffiths, now working for the blue chip firm of Cazenove, was in more than usually ebullient form at an Investment Research of Cambridge seminar in London last week. With the precision that never ceases to amaze me about technical analysts, he laid out the dates when he expects the next turning points in the market to occur.

Although I have never bought into the technical mumbo-jumbo that many chartists bring with them, the best of the breed, of which Robin is undoubtedly one, use their work to illuminate rather than dictate what they think. The secenario he paints on this occasion is certainly a plausible one. His starting point is the unarguable one that the big indebted countries, such as the US and UK, are on a different route map to those of the fastest growing developing economies. While the former are still toiling their way through a secular bear market, the latter are in a clear secular uptrend.

In practical terms what he thinks this means is that the US stock market will head down again from its current technical rally, with the S&P index falling from its present 1100 to around 940 by late October, which is when he reckons President Obama will introduce a new set of stimulus measures, including a second state of QE. That will give the market one more short term boost before capitulation finally sets in and the market falls back to test its March 2009 lows some time around the end of 2011, with both yields and p/es down to around seven, a typical end of bear markets level.

Read the rest of this entry »

Written by Jonathan Davis

July 25, 2010 at 5:51 PM