Mixed Markets - The Importance of Sector Allocation

Global equity markets have been fairly mixed today as Cyprus concerns still remain, however the U.S offers yet again a brief reprise from this doom and gloom as durable goods orders beat expectations of 3.9% to rise 5.7%. Gains filtering through from home purchases and the auto industry have filtered down the economy.  This lagging indicator provides great insight into the structure of the economy and at present it seems to be doing quite well.  Let’s hope the FED does not withdraw the support of monetary stimulus before this ball is well and truly moving.

The markets opened cautiously as investors were unsure how to feel about the current issues in Cyprus, some uncertainty had been cleared up, however the bad taste left in European’s mouths may lead to a run on the banks.  As such, banks are to remain closed until Thursday and strict controls on capital withdrawals are expected to be implemented.  This comes after a bailout agreement that will take a substantial amount of all deposits over €100,000.  Now many people are questioning whether this policy may be used elsewhere as Slovenia is teetering on the brink of a bailout.  A further worry is that future elections within European countries will favour the anti-austerity party much more now as people do not wish to suffer the same treatment.

The divergence in equity markets merely highlights the important of market and sector selection.  Most notably, as mentioned above, housing and the auto industry have been benefiting of late in the U.S. whereas you would not want to be holding banking stocks in Europe.  Stock Picking is a hard thing to master, however there are a number of funds that manage to get this right.  Fundsmith’s equity fund has returned just under 24% over the past year investing in a concentrated portfolio of 20 global companies, one to consider for the long term.

Auto Sales - A Sign of Improvement

Construction and industry are what many great nations have been built on. In the midst of the industrial revolution the first automotive was created in 1806, since then they have played a fundamental role in the growth of the global economy.  Now around 62 million cars are sold around the world each year. 

During the credit crisis one of the most affected sectors hit was the automotive industry.  As many see cars as a luxury, new car purchases crashed to the floor.  A number of companies sought emergency loans, most notably GM Motors, Ford and Chrysler receiving a record bailout from the U.S and Canadian government of around $85bn. 

These big three have recovered somewhat since 2008, however global competition has been ever increasing.   Since the start of the Eurozone, Germany its primary contributor has benefited hugely and as one of the major producers of cars they have seen profits rise significantly on the back of a weaker currency. 

Asia follows suit as currency plays a key role in exports.  Japan has historically been a major producer of cars, such as Toyota and Honda.  However, these companies have been hampered over recent years by the strengthening Yen and until recently has had trouble competing with the likes of South Korea and China. Since the introduction of the new Prime Minister, Shinzo Abe, the Yen has weakened significantly by around 20% and this will inadvertently roll through to company profits. 

The gathering pace in automotive industry should start to show in company profits by April, and a number of funds are well positioned for this.  Aberdeen Japan Growth and JOHCM Japan have a heavy weighting in the automotive sector and would be my pick.

Over the past twelve months, we have seen consecutive rises in auto sales and this is a good sign the global recovery is gathering pace.  This lagging indicator has a powerful message and is one to look out for.

Consumer Confidence, a Powerful Economic Driver

Identifying key changes in economic data can provide you with great a insight into successful investment ideas.

A basic strategy which many countries have used to stimulate growth is the multiplier effect.  By increasing the money supply in an economy, it can kick start growth . For example, if a Government decided to build a motorway; the effects of this extra money supply is felt through each economic participant.  Builders, Engineer and Contractors are required for the construction and therefore receive more work.  The increased earnings are then spent on food, clothes, entertainment, etc generating profits for more businesses.  This cycle continues on, as the additional money is felt throughout the economy.

Confidence can have the same effect.  As people become more optimistic about their situation, pressures to save are reduced and spending generally increases.

One of the most effective drivers of confidence are increasing house prices.  Receiving the news property values have risen provides the feeling of increased wealth, although in many cases this is not realisable immediately.