November 2014 Investment Outlook Preparing for a Year-End Rally

Stock Markets Set Up For Continued Rally

The six weeks from the beginning of September through to mid-October inflicted substantial damage on all major stock markets barring China (Figure 1), with developed markets falling 5-11% and the MSCI Emerging Market index losing 11% over the period. 

1. All Stock Markets Fell from Start-Sept. Except China

Source: Bloomberg

Fears over the strength of the global economy have dominated, with sanctions impacting not only the Russian economy but also those in the Eurozone, including that of the export powerhouse that is Germany. As a result, business confidence in Europe has suffered, putting the brakes on business investment and condemning the Eurozone to a no-growth economy (Figure 2). 

2. German Business Confidence Takes a Big Hit

Source: Bloomberg

However, this quick stock market correction has not taken into account a number of more positive economic trends, including the positive impact of lower oil prices on global consumers. 

Oil Price Plunge Boosts Consumption

The Brent crude oil price has fallen $30 per barrel from mid-June peak to around $85 per barrel currently. Of course, this is bad news for oil exporting countries including OPEC members and Russia. But according to The Economist, if this oil price were maintained, then oil consumers would benefit by paying an oil bill some $1 trillion lower.

The positive effects of this are already starting to be seen through rising US consumer confidence, thanks to retail gasoline prices falling 17% since the end of June to $3.14/gallon now. This should feed through to US GDP growth, heading closer to 3% annual growth based on current encouraging trends in the ISM Manufacturing survey.  

Seasonal Effects Now Turn Positive

In addition, after a turbulent month of October, seasonal trends now turn more favourable from November until the end of April. Historically, the VIX volatility index has peaked in mid-October, and then fallen until Spring-time, a pattern that it is starting to repeat now after touching a 3-year peak of 26 this month (Figure 3).

 3. VIX Volatility Index Calming Down

Source: Bloomberg
    

Prefer Growth to Value: Technology, Healthcare

With the US Federal Reserve edging closer to the end of the current round of Quantitative Easing (QE), this is typically a time to favour Growth as an investment style over Value. 

From an economic point of view, the Technology sector is a growth sector that should benefit from two factors: 

1. The improving growth in business investment, particularly in IT hardware & software; and
2. Improving consumer confidence in the crucial Christmas buying season boosting demand for consumer electronics.

Healthcare is a second Growth sector that stands to benefit from the continued growth in healthcare demand from emerging market consumers, and also from the increasing penetration of US healthcare insurance coverage as a result of Obamacare.
     

4. Technology & Healthcare Lead

Source: Bloomberg
        

Where to Focus in November

Aside from remaining convinced that both Technology and Healthcare sectors can move higher still, I believe that global bond yields will remain low for the foreseeable future given the continued savings glut, with investors seemingly unwilling to commit to risky assets and preferring the safe havens of government bonds and even cash. 

But, given that the best predictor of future 10-year returns from government bonds is the current bond yield, the 2.3% on offer in 10-year US Treasuries and the 0.9% offered by German Bunds seems very unattractive, with low-volatility dividend growth stocks more attractive in sectors such as Insurance and even Real Estate.

Finally, the US dollar seems set to continue to strengthen against most other currencies,  given that the European Central Bank and Bank of Japan seems set to do whatever they can to weaken their currencies, while the US Fed is putting an end to QE (at least, for now).
    

5. US Dollar Can Still Recover a Long Way

Source: Bloomberg

With Foxtons in a Tailspin, Keep Your Finger Off the Housing Trigger

Here is my latest weekly article for IBT UK:

International Business Times Article link - Click Here

International Business Times Video Link

I have to admit, I did chuckle when I saw the profit warning lurking within Foxtons' recent results. I have long detested "flash" Foxtons, a London-centric estate agent chain with ultra-trendy offices and its distinctive green and yellow-liveried Minis.

It has been a big beneficiary of the recent London property price bubble. But now, it is beginning to display the hangover-like signs of "the morning after the night before", with housing transactions slowing sharply, sending Foxtons' top-line into a tailspin and its share price to 158.5p now, versus a peak of nearly 400p (Figure 1).

Figure 1: Foxtons down more than 50% from peak

According to the latest Royal Institute of Chartered Surveyors (RICS) market survey, surveyors are now expecting prices to fall in London and to decelerate elsewhere in the UK. Already, London buyer demand has fallen for the last five months in a row and new buyer enquiries have also collapsed.

So, are cracks finally appearing in the UK's housing boom? I should at this point declare a personal interest: my wife and parents have been badgering me to buy a pied-à-terre in London where I work for many months now. My protestations about how expensive and dangerous the London property market is have rung hollow as the capital's property prices have continued to climb month after month.

Earning income from buy-to-let in a zero interest rate world

With private sector rents increasing repeatedly by more than the rate of inflation, cash deposits earning virtually nothing in the bank and house prices enjoying a steady climb, the incentive to own your own home is clear. Vast swathes of people in this country swear by the mantra that house prices never go down over the long term.

So of course I see the argument for owning your own home, even if economists such as Danny Blanchflower and Andrew Oswald maintain high home ownership worsens labour mobility and thus represents a long-term drag on the economy.

It is where a buy-to-let housing investment is concerned that I have my objections. Yes, there are times when buying a flat or house to rent it out makes sense, typically when prices have fallen or have been stagnant for a number of years, throwing up value opportunities as we saw last in 2008-09 after a 20-30% drop in house prices nationwide.

Contrast that with the prevailing situation: house price inflation over the last five years has far outstripped both the general rate of inflation and also wage increases, making housing progressively less affordable to the average UK household even with two salaries. 

It is certainly difficult to call this value for money in a long-term context.

This is not to mention the myriad costs and risks a new buy-to-let investor faces, such as:

1. transaction costs, most importantly stamp duty when buying a property, 3% or more on properties worth over £250,000;
2. refurbishment costs, typically underestimated by new home buyers by £3,000 on average;
3. initial furnishing costs, if letting on a furnished basis;
4. the vacancy risk, where there is no rent coming in but costs to bear;
5. default risk, where the tenant does not pay rent owed on time but refuses to move out;
6. maintenance costs;
7. annual service charges and ground rent on leasehold flats;
8. managing agents' fees for finding tenants, higher if also managing the property;
9. income tax to pay on rents received (less allowable costs) and potentially capital gains tax too on gains when reselling the property hopefully at a higher price.

While this list is non-exhaustive, it is an important checklist for any budding buy-to-let investor to consider before bringing out the cheque book.

So when to buy? Not just yet...

A number of sources such as RICS, Hometrack and Nationwide point to slowing national price growth and outright price declines in London (Figure 2).

Figure 2: Have UK house prices peaked for now?

Add in a negative seasonal effect too - UK house prices grow much faster during spring and summer, and often fall back over winter. Given these facts, now is a good time to sit on your hands and let sellers sweat pushing up average discounts of achieved to asking prices, while spring 2015 could be a better time to find properties at more reasonable prices, especially in and around London.

Edmund

IBT Video: No Need to Panic over Tumbling Stock Markets

To watch this International Business Times video interview with the UK editor George Pitcher, please click on the web link below:

Money-times-no-need-panic-over-tumbling-stock-markets

Stock Markets May Be Tumbling But Do Not Join the Rush to Make a Hasty Exit

When you work in financial markets, as I do, it is easy to sense the pervading air of panic as stock markets tumble.

Newspapers and websites broadcast sensationalist headlines such as "Countdown to Panic Grips World Markets" and 24-hour news and business TV channels report on a minute-by-minute basis on the immediate loss of paper wealth that the world's investors are suffering – "£46bn lost on the FTSE 100 today".

Luckily, I have a little experience to fall back on, as I have worked in financial markets for the last 20 years now – and have the grey hairs to show for it. What this experience, and a cursory scan of financial market history, tells me is that we now seem to be heading into an overshoot mode.

To read the rest of this article on International Business Times,
please click on this web link:

Stock-markets-may-be-tumbling-do-not-join-rush-make-hasty-exit

Edmund

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

VIDEO: Sky Business News Appearance on Global Stock Market Slump

This evenng (Wednesday), I spoke to Ian King about the scale and reasons for the current stock market slump. I also touched on why Initial Public Offerings are being pulled, the latest withdrawn IPO issue being Aldermore (the challenger bank). 

Click on the web link below to view this short video:

Investor-on-global-market-slump

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

Today's CNBC TV Worldwide Exchange appearance: Discussing the return of volatility (VIDEO)

Good morning,

This morning I appeared on CNBC TV’s Worldwide Exchange programme, broadcast to Europe, US and Asia.

Here in this short video clip, I discuss some reasons for the return of volatility to financial markets.

CNBC TV WWE 10/10/14

Have a look!

‘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

Oil Your Portfolio with Energy Exposure

Since the beginning of September, the benchmark FTSE 100 index has dropped over 5%. A buying opportunity, you might well think to yourself. But can we do better than that, by looking at some of the sectors within the UK stock market that have suffered more over the last month?

Bringing up the rear in performance over the last month with a 19% fall is the Food Retail sector – but this is for very good reasons, with the pressure on supermarkets from the German discount chains Aldi and Lidl, resulting in worsening profit performance from Tesco, Sainsbury and Morrisons. In my judgement, while there may be a value investing opportunity in these names, timing any investment is proving tricky, to say the least. 

I would rather focus on another large sector that has been some beaten up – the Oil & Gas sector, which has dropped over 7%. This has been principally driven by the precipitous drop in crude oil prices on both sides of the Atlantic, with Brent crude oil now costing a tad under $93 per barrel, $22 lower than the lofty height of $115 per barrel touched back in late June (Chart 1).

1: The Fall in Brent Crude and the Impact on the Oil & Gas Sector

Source: Author, Bloomberg

Why Could Oil & Gas Prices Rise?

With Winter approaching and the possibility of a cold, hard winter in the United States triggering greater demand for oil products such as heating oil, not forgetting the potential of disruption in supply of oil and gas from our Russian neighbours, we could at some point see a sizable rebound in global crude oil and natural gas prices. 

After all, OPEC nations are also keen to see crude oil prices stay above $90/barrel for their own, budgetary reasons, as oil and gas represent the vast majority of their government revenues. 

I suspect, furthermore, that global markets under-estimate the strength of the growth in long-term energy demand from the mega-sized emerging economies of China and India, which between them boast a population of over 2.3 billion who are currently using a mere fraction of the oil & gas per head that we consume per year in the Western world. 

Oil & Gas Exposure via Stocks, Sector ETFs

If you like this value investing theme, how best to get exposure? You could of course simply buy a few familiar large-cap oil stocks such as Royal Dutch Shell, BP or Total. 

Or you could buy an Oil & Gas Exchange-Traded Fund (ETF), such as the db x-trackers STOXX Europe 600 Oil & Gas ETF offered by Deutsche Bank’s x-tracker ETF division (code: XSER on the London Stock Exchange).  

Two Less Obvious Oil & Gas Investment Options

But I think that there are a couple of more intriguing investment alternatives that are a little less obvious, but which offer greater long-term potential. 

Firstly, there is the Ecofin Power & Water Opportunities Fund (code: ECWO on the LSE), an investment trust listed in London which is currently trading at a substantial 23% discount to its own Net Asset Value. To put this another way, you can buy exposure to £1 of stocks for only 77p! The Fund’s largest holdings are in oil companies, notably the US shale oil play Lonestar Resources and US oil infrastructure stock Williams Companies. In addition, the Fund also pays out a generous 4% dividend yield, a stream of dividends that has remained impressively consistent since 2005 when the Fund started. Since the beginning of this year, this trust has gained 32% to around 162p now, while the UK oil & gas sector has stagnated (Chart 2).

2: The EcoFin Power & Water Opportunities Fund Has Done Well

Source: Author, Bloomberg

A second way to take an interesting exposure to the oil & gas sector is through US-listed Master Limited Partnerships (MLPs), a particular tax-advantaged structure largely for infrastructure assets such as oil and gas pipelines which obliges the MLPs to pay out 90% of their profits in dividends. This high-yielding asset class has performed extremely well, with the London-listed Source Morningstar US Energy Infrastructure MLP ETF (code: MLPP on the LSE) up 16% in sterling terms to 7200p since April of this year. This ETF also also pays out a generous 6% dividend yield, to help investor returns (Chart 3).

 

3: Master Limited Partnerships Have Performed Very Well

Source: Author, Bloomberg

These are two intriguing alternatives to the more obvious oil & gas investment options which are well worth considering, particularly if you are an income-oriented investor. 

Edmund

Bloomberg TV Interview: On The French economy, budget and their problems...

Please click on the Bloomberg video link below to watch this interview today on the subject of the French economy:

Why-should-the-French-worry?