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Mark Mobius on the Eurozone crisis

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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

Notes and Quotes

Here are some comments that have caught my eye in the last few days (a regular feature on this blog).

From Don Coxe, long time Canadian market strategist and commodity fund manager, in his always excellent Basic Points monthly strategy report, noting IBM’s recent offering of a three-year bond yielding (remarkably) less than 1%:

When a $1.5 billion offering of a single “A” three-year corporate bond with a 1% coupon is over-subscribed and routinely trades above-par in the after market, any talk of near-term inflation must be coming from the under-informed or the perilously paranoid.

Read the rest of this entry »

Written by Jonathan Davis

September 18, 2010 at 12:09 PM

A Powerful Argument For Global Equity Income

I have felt for some time that one of the biggest current risks for investors is that they become so bemused by the gloomy news coming out of the United States that they will miss the strength of the potential recovery in US equities this year. There are several reasons why the two trends – gloomy economic news, positive corporate prospects – are even more than usually out of synch with each other. I am grateful to Guy Monson, the CIO of Sarasin, for providing more powerful evidence of this important divergence, which has big implications for investors.

The most important reason for the divergence is that even though both the consumer and the public sector remains mired in debt, the US corporate sector has come out of the credit crisis and recession in extraordinarily good shape. In fact, as Guy points out, well established companies, especially those with a global market presence, have rarely faced better conditions – minimal domestic inflation, a super-competitive dollar, strong balance sheets and falling unit labour costs.

In fact, while it is true that the banking system remains extraordinarily fragile, and domestic demand is constrained by high unemployment and personal debt issues, for those companies looking beyond domestic boundaries the world has never looked better.  The critical point is that while there is no doubt that economic leadership is shifting from the West to the emerging markets, led by China, this trend provides an exceptional business opportunity for competitive exporters with strong brands, global distribution and access to the fastest growing markets.

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This happy state of affairs is already reflected in two highly visible trends – the rebound in corporate profits in the US, which is as sharp as the decline that preceded it and the recovery in the US trade balance, which has already been halved from its peak and is likely to continue that way, absent a further sudden shift in the value of the dollar. Meanwhile, measured against bonds (admittedly a narrow valuation measure), equities still look more favourably valued than at any time since the 1970s, despite the rebound we have seen from the lows in March 2009, according to Ned Davis Research.

For investors one of the most important implications is that the case for thinking we could be facing a rerun of the Nifty Fifty years of the 1960s, when large global companies led the global markets higher, looks well founded. Just as importantly, these conditions greatly increase the attractions of global equity income as a home for investable cash – whether you choose to access that emerging trend through a fund or directly through investments in individual corporate equities.

For UK investors in particular, this looks a much more attractive option than conventional UK Equity Income funds, which increasingly reflect the lopsided and highly concentrated nature of the UK stock market, with its dominance by just a few companies in 2-3 highly exposed sectors, principally energy and drugs companies.  Just five stocks now account for more than 40% of the total dividend payments of the FTSE All-Share index. The two largest oil majors, BP and Shell, account for 25% just on their own.

UK equity income funds are where the money is tending to flow as investor confidence slowly returns. Guy’s argument is while equity income in general is a sound place to be looking, the lopsided profile of the UK market is exposing investors in those funds to a degree of concentration risk with which, did they but understand it, they might well entitled to feel uncomfortable. According to Sarasin’s analysis, Glaxo and Vodafone between them make up more than 10% of the value of eight of the most popular UK equity income funds. All but one of them have more than 30% of their portfolios in just eight of the largest UK stocks.

As a firm that specialises in global thematic investing, it is no surprise to learn that Sarasin is currently pushing its global international equity income funds as an alternative. One needs to lay off for a degree of talking their own book. However self-interest does not mean that they cannot be right and the evidence in any event speaks for itself. (By way of disclosure I am sufficiently persuaded of the merits of the argument for switching to global equity income that I own units in one of Sarasin’s international income funds and have looked at those of other providers as well).

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The key points to take away are not open to challenge. The UK stock market has always been more concentrated than most other leading markets, because of its dependence on banks, oil companies and pharmaceuticals. In the US the 10 largest companies account for less than half the proportion of the market that they do in the UK. The universe of potential dividend-paying stocks outside the UK is therefore both more diversified and less vulnerable to dividend cuts than its UK equivalent.

More importantly, whether or not you like the idea of the Nifty Fifty (the craze for which, it is worth pointing out, eventually ended in tears in the 1970s),  there remain good reasons for thinking that large companies with strong fundamentals and global reach are liable to perform well in the shifting global environment we now face. They certainly look a better bet in relative terms than anything you can find in the bond market, in which for all their diversification value, it is surely only a matter of time before the secular bull market of the last 25 years finally runs its course.

Written by Jonathan Davis

February 24, 2010 at 7:19 PM

The Argument For Long Bonds

One phrase of Professor Paul Samuleson’s that has stuck in my mind for 20 years was his exhortation that investors should always “work the other side of the street”, the idea being that you are more likely to find value in testing non-consensual views as in accepting conventional thinking at its face value. Given that the remarkable feature of financial markets at present is how quickly consensus thinking seems to switch from one extreme view to another, the mental gymnastics required to do as he suggests have become increasingly demanding.

But the need for such challenge remains, with the inflation-deflation debate the most important current issue. In little more than a year, market prices suggest that we have moved from fear of inflation to fear of savage deflation – and now back again. True, it is not easy to gauge where consensus thinking genuinely now lies on this subject, as short covering by frustrated bears surely accounts for a good deal of the force behind the equity market’s recent strength.

My impression is that the majority of market participants remain unconvinced by the argument that inflation is once again the main enemy. There is no denying however that sentiment to that effect is gaining momentum. Most of the professional investors whose judgement I rate highly are now acting in the belief that the inflation, not deflation, camp is the right place to belong. The belief that deflation has been licked is one of the factors that has been driving equity markets higher.

In such circumstances, the need to stand back and look at the other side of the argument is greater than ever. The bond market is one obvious place to look. Peter Geikie Cobb, who co-manages Thames River Capital’s Global Bond fund (up a handsome 36% last year), gave me a powerful corrective opinion last week. His view is that there is simply no convincing evidence that inflation is rearing its head, or will do so any time soon. So firm is this conviction that his fund’s largest position by far is now in the longest duration UK gilt you can find, namely the 4.25% 2055 issue, currently yielding 4.5%. He and Paul Thursby, his co-manager, have never, it seems, owned such a long duration government bond portfolio as they do today.

The argument for such an apparently high risk stance, in essence, is that even if renewed inflation is eventually on its way, to bet on such an outcome today is distinctly premature. The only way that the US and UK economies can redeem their spiralling debt burden in the short term is through a rapid increase in the savings rate. That is already happening, but many investors may be underestimating how far and fast that process needs to unfold. Past experience suggests it will be dramatic.

In Thames River Capital’s view, with prices still falling, it is likely to be several years before we see reported inflation rising above 0%, which is why they see real yields of 4% or more at the long end of the curve as attractive. While it is evident that quantitative easing will hold down shorter dated yields in the government bond market, there is no doubt that the prices of longer dated issues do look, in general, more appealing. Although TIPs appear better value, real yields on index-linked gilts are too low to generate much current interest.

Given the unprecedented reflationary efforts now under way, some will argue that the 20-year bull market in government bonds must already be approaching its end. The charts still tell a somewhat different story. Measured against their 20-year history, yields for 10-year benchmark gilts, at 3.5%, are still firmly in the middle of the down-trending channel they have followed over the whole of those two decades. If the tipping point is coming, in other words, it has certainly not yet arrived, let alone confirmed.

So while government bonds as a class seem distinctly unattractive to those of us who expect higher inflation, the more you look at it, the case for the long bond play, whether you regard it as a hedge or as a trade, looks not unreasonable. To put it another way, even if you are concerned about inflation, it may be the least worst option available in Government bonds.

Notable too is another of the Thames River Capital team’s current convictions, which is that sterling’s renewed has further to run. Their argument is that the eurozone has still to take the punishment that sterling has had over the past few months and that the pound could well go to $1.65/$1.70 to the dollar and 1.25/$1.30 to the euro before its current bout of strength is done. Even if sterling loses its AAA status, as is certainly possible, most other currencies will be suffering just as much, if not more.

Written by Jonathan Davis

June 1, 2009 at 9:27 AM

No Going Back – Guy Monson

The stock market rally since its lows in early March (up 37% as of May 20th) has now exceeded any previous recorded bear market rally in history, says Guy Monson, Chief Investment Officer of Sarasin Investment Partners. The previous best bear market rally was 35% in 1937, according to Ned Davis Research historical data. The implication therefore is that what we are seeing is the real thing, not a false dawn.

Although we are seeing the first genuinely global recession, the current recovery in forward looking financial markets is very much running true to past form. Extreme spikes in volatility, like the one recorded in December 2008, have always marked the low points in asset classes in the past. The same goes for rock bottom consumer confidence. The liquidity injection overseen by Mr Bernanke is unprecedented and must lead to asset price inflation.

The biggest concern from here will be the living with the consequences of the unprecedented expansion of the State as Government step into the breach to offset the effect of the surging savings rate in the US and the UK. Sarasin separately are launching fully hedged versions of their global equity funds so as to allow sterling investors to take advantage of the typical pattern of pound currency shocks – namely, sharp falls in response to external events (eg 1992 andthe ERM), followed by a gradual recovery over the subsequent 2-3 years. The pound has fallen well to the south of its long run trading range, as well as below purchasing power parity, and therefore can be expected to continue appreciating, notwithstanding the risk of the UK losing its AAA credit rating as a result of its ballooning public debt and massive fiscal deficit.

Sarasin are also marketing a global equity income fund to reflect the fact that, following the disappearance of most financial sector dividends, the UK market’s dividend yield has becoming dangerously concentrated on just a handful of stocks (nearly 40% of the market’s dividend flow stems from just six stocks, BP and Shell, Vodafone, HSBC, Glaxo and AstraZeneca). The much bigger global equity market universe meanwhile has never had so many high yielding stocks to choose from. Sarasin’s fund has a current yield of more than 5.5%.

Written by Jonathan Davis

May 21, 2009 at 10:36 PM