Bad News Fails to Spook Investors

Equity markets edged higher today continuing a three day rally following on from a turbulent week.  There has been a substantial change in market behaviour since the start of 2013 as fear and volatility are becoming much more digestable. 

Equities have been the asset class of choice this year, as investors sought to take advantage of improving economic conditions mainly from the US.  After reaching record highs and rising almost 10% in the first three months, many investors have become cautious as this rise in equties has occurred very quickly given the level of corporate earnings and economic outlook.

We can expect equity markets to calm down somewhat as Q1 results begin to flow through, however what gives me cause for concern is the way news, especially bad news has been interpretted by markets. This year has already thrown a few curve balls at us.  Starting with Italy, their elections ended undecided leaving questions being asked about whether a governement can be formed to continue along the path agreed with the ECB and maintain their involvement with the Eurozone.  Whilst volatility spiked during this period, markets were remarkably unaffected.  There was an initial sell off on the Tuesday the results were annouced, however by the end of the week markets had closed higher.  Secondly, more Eurozone worries flowed through, this time from Cyprus as peripheral countries and their people were reminded how vulnerable they were as bank depositers faced haircuts.  This spooked the market again, having a slightly more significant effect than Italy, however yet again, over the following weeks, markets rallied back being pushed along by optimistic data out of the US.

More recent news surrounding North Korea, has been fairly localised.  South Korea has seen its markets and currency fall as a result, however global markets have been fairly reserved.

So why is bad news being taken so lightly?  This could be down to a number of reasons however it is evident that the psycological impact of bad news has been numbed over the past 5 years.  Since the credit crisis in 2008, we have seen consistent flow of bad news from Europe, then the Arab Spring, China's possible hard landing, US fiscal issues, the list goes on.  Investors have become used to this  and as a result markets can recover fairly quickly from the intial shock.  If the issues with Cyprus occured back in 2011, markets would have almost certainly reacted extremely to this. 

Another possible cause for markets to be bought back so quickly is the rotation into equity markets.  Many investors would have had a large exposure to fixed interest over the past 3 years, and now as bond yields reach record lows, there has been a rotation into equity markets (Great Rotation and the Hunt for Yield). This has certainly occured with the large amount of money sitting on the sidelines in cash.  As a result many investors see market pull backs as an opportunity to increase thier positions.  There is still a significant amount of money still on the fence, and this could continue to act as a support to markets throughout 2013.

A word of caution, when investors become complacent bad things tend to happen, so be wary of asset bubbles. 

In the meantime enjoy the ride, and if you are one of those investors still on the side line, climb aboard there is still plenty of opportunities out there.

Equity Markets Fall...

Global equity markets tumbled on Friday amidst a raft of bad news and political uncertainty.

Volatility in markets, until this week had been fairly benign, even through the Cyprus crisis. However, this week has seen a spike in volatility and led to big losses globally. So what has caused this steep fall?

Well there has been a run of poor data out of the U.S. this week. Manufacturing growth and jobless claims all disappointed and these are both significant indicators and naturally caused a pull back in equities.

Commodities have been hammered this week largely on the back of news of large inventories. This indicates to markets that there isn't the global demand to purchase these raw materials thus highlighting growth is not at expected levels, again causing markets to fall.

Then behind this disappointing back drop North Korea tensions have continued to boil and the market has also re-trained its eye on Europe following the Cyprus crisis... all in all a lot of bad news for markets to receive over a week or so!

The question is what now? Well safe haven assets, such as Treasuries and Gilts have had a good week, as there has been a flight to safety. I've been caught out a little by this given the historical high price (and therefore low yield) of these assets, however it still seems they are attractive to investors at certain stress times in markets. Gold, it seems has not behaved as one would expect and has fallen as low as $1,550oz this week. This has occured even when equities have fallen off and geo-political tensions have risen - there could be a fundamental shift in gold currently, definitely something to keep an eye on (Gold).

So many equity investors will have experienced losses this week - but all in all equities have still performed strongly this year. The question is what will happen next week, will it be a case of a rise in equities as investors pile in at a cheaper entry price, or will investors continue to be spooked, sell equities to lock in profits and prices fall further? In these volatile times it's often hard to call....

Japanese Equities - time to get on board?

One of the top performing equity markets this year has been Japan, since Shinzoe Abe returned to being the Prime Minster last November his determination to get the economy back on track has spurred investment back into Japanese equities.  The Yen has devalued to levels not seen since 2009 and as such this heavily exporting nation is beginning to show signs of improvement.

To further strengthen Abe's campaign the new governor of the Bank of Japan, Haruhiko Kuroda shares his doveish (favouring low interest rates) views and he has spoken out about the state of the economy.  With debt to GDP at 230%, the highest of any developed nation there is a significant amount that needs to be done to get the economy back on track.  Monetary easing of around £72bn earlier this year saw the first steps in the right direction, markets now expect utter commitment from the current administration as previous false dawns have occurred.  This first round of QE will be one of many steps that need to be taken in order to successfully navigate out of years of depression and meet the 2% inflation target set.  Any diversion from this plan will see investors running to hills yet again and markets will almost certainly crash to the floor.  

Mid Week Market Update

We're half way through the week and global equity markets have been broadly flat over this period. 

There was initial optimism following the announcement a bailout agreement had been reached. However, as markets digested the exact agreements of the terms this optimism faded and markets dipped lower as a result. The problems with Cyprus have not simply been resolved with this bailout and it is clear there could be years of pain ahead for the small Euro nation. Consumers may have experienced a hit to their savings and will now be faced with increased taxes and austerity, which will not be supportive of consumer spending. We may also see unemployment increase as businesses could face liquidity issues due to the closure of Popular bank and the banking sector shrinks.

So onto the good news! Well, not for the first time U.S. data surprised on the upside with Tuesday's Durable Goods Orders data increasing to 5.7% (consensus was 3.9%). This helped raise the S&P 500 to near all time highs, although it did fall slightly from this peak. 

Wednesday so far has disappointed in the UK, with the FTSE 100 initially rising but gains have since disappeared. UK GDP data for Q4 showed it had increased by 0.2% year on year, which was slightly below market expectations and may have caused the market to reevaluate their views on the UK recovery. 

French GDP data for Q4 showed the country had contracted by 0.3% year on year, a worrying trend for the Eurozone's 2nd largest economy. 

Our regular feature The Week Ahead should hopefully provide a 'heads-up' of some of the global data being released that week. 

The importance of income

For many investors assets that produce a natural income are often highly desirable. Typically people automatically gravitate towards bonds and property for this income, however given the potential headwinds facing these asset classes equity income may become more desirable.

Since the credit crunch UK Equity Income funds have been very popular. I think this is for two main reasons. Firstly in a low growth environment income becomes a bigger part of total return and helps underpin portfolio growth and does help offset any erosion in capital. The second reason is down to the nature of business that pays dividends. These businesses are usually seen as 'defensives' with stable and predictable cash flows, allowing them to return cash to investors on a regular basis. Since the credit crunch many investors have favoured these more defensive businesses that are more resilient during economic downturns. 

There are many funds available to investors wishing to have exposure to UK Equity Income stocks. Probably the most famous is Neil Woodford's Invesco Perpetual Income and High Income funds. These funds hold stocks like AstraZeneca (c.6% yield), British American Tobacco (c. 4% yield) and Rolls Royce (c. 3.5% yield). I would argue however that this fund is now too large and that some of the smaller, more nimble funds are likely to perform better and also contain less stock specific risk. Neil Woodford has large allocations to a handful of companies which could add a layer of risk. Unicorn UK Income has been the stand out performer over recent years, and other funds such as Royal London UK Equity Income also have excellent track records. 

So when looking for income from investments, equities should be considered. Many businesses are available on attractive yields, and often grow these dividends as well as having the potential for capital growth, something bonds don't offer. Many corporates are also flush with cash on their balance sheets so we may see special dividends, with even more cash returned to investors!

Technology - Onwards and Upwards!

As I look around I am surrounded by technology, from mobile phones to laptops to a washing machine.  All of which have been developed over a relatively short space of time, and it is now hard imagine a life without it all.

Today the technology industry brings in around $500bn worth of revenue each year and this still expanding!  As we become more dependent on advancements in technology it offers a great investment prospect going forward.

Most investors would remember the Tech boom in the mid to late 90s, this is when everything really started kicking off and a mass investment into advancing tech products was made.  Since then we have seen companies such as Google and Apple rise to become some of the biggest companies in the world.   

Unfortunately technology doesn't stand still, as Apple has seen recently, with a gap until their next product, many investors have become wary of future revenue generation and subsequently the share price has fallen.  The likes of Samsung have taken this challenge in their stride.  With a number of avenues, their new Galaxy S4 phone has been released only 6 months since their last.

Probably the most famous company now is Apple, and it is worth mentioning.  As one of the largest companies in the world, their revenue growth has been second to none.  With as much cash as Poland it is hard to see this company disappearing any time soon.  With many doubting their future product line, it is only a matter of time before they produce another.  With huge resources at their disposal, it is definitely one to hold onto for the long term.

Technology is as we all know very changeable, and when investing in such companies it is important to have a diverse number from this sector.  Encompassing some of the core companies mentioned already I would recommend investing in AXA Framlington Global Tech, which has been an excellent performer over the long term, or alternatively Cavendish Technology. 

For years to come this sector will be hugely profitable and would be a good addition to any portfolio.  

Asset Managers - a leveraged way to play a rising market

Over the past 12 months the number of available asset classes which have produced competent returns has been diminishing and as a result many have moved into equities.  This increased flow of money into equities has proved great news for asset managers as they make up significant proportion of equity investments.

The asset managers came under pressure after the credit crisis as many ran to cash to protect themselves from heavy losses. Unsurprisingly share prices collapsed along with the market. Since then assets have been slowly building back up gathering pace over the past year. A number of companies have reported increased profits as a result.

Increasing demand for equity funds has rolled through from institutional, retail investors and Wealth Managers.   As the asset managers have experienced gains at the end of the line, further towards the front, Wealth Managers have experienced a similar trend.  Since the introduction of the Retail Distribution Review (RDR) at the start of 2013 this separated the good from the bad and a number of wealth managers have taken this in their stride increasing assets under management.

Namely Brooks MacDonald, announcing an increase of 44% in discretionary assets over the year and raising their dividend is a prime example. Also St James’ Place and Hargreaves Lansdown have also benefited all be it from slightly different avenues.

With banks still having a number of structural issues, many investors are wary of jumping back in. These other alternatives to the financial sector have great growth potential, especially as these mid cap stocks have room to grow and increase their dividends going forward.

This rotation into equities may have only just begun which is great news for both asset and wealth managers a like.  Without going out and buying a number of these stocks directly, I would suggest purchasing Guinness' Global Money Manager Fund that invests solely in asset managers and has performed very well over the past year, returning 34%!

Mergers and Acquisitions – A Pathway to Growth

Since the credit crisis M&A activity has been fairly low as companies aimed to strengthen their balance sheets and reduce debt levels.  Over the past five years, this global restructuring has meant these companies are in some respects the strongest they have ever been.

The start of this year has seen a rapid increase in M&A activity as companies utilize high levels of cash to expand.  Such companies as Dell and private equity firm Silver Lake Partners agreeing a leveraged buyout to take the company private.  Virgin Media, also agreed a takeover by Liberty Global for $23.3bn, and Warren Buffet’s Berkshire Capital acquired Heinz for $23bn to take it private.  

Larger companies have historically had no problem in achieving good year on year growth, however markets have now changed and in many countries growth is anaemic.  The changing demographics weigh on government spending and will inadvertently reduce expansion and demand for many businesses for years to come.  A possible area for companies to expand are to takeover business which are in the growth phase, allowing larger companies to capitalise on growth elsewhere without having to expand existing operations.  

So why now, what has caused this activity to pick so much since last year? Markets have calmed significantly and volatility has been gradually decreasing.  There is a slight correlation between M&A and volatility and this is inherent in the great start we have had this year.

There are a number of factors which are helping company mergers and acquisitions.  Interest rates are at historic lows, and yields on even the highest yielding debt are the lowest it has ever been.  For M&A particularly this is a good thing, companies can borrow large sums of money for a leveraged buy out. 

As the larger companies try not to stagnate, we may see a lot of their small competitors prime for the taking and a number of funds could benefit from this.  Mainly funds in the mid cap space will be best placed to see takeover bids as they have a more consistent growth rate.  Funds such as Schroder U.S Mid Cap and Royal London UK Equity Income could do well from this over the next few years.

Food for Thought!

I'm sure you will have noticed food prices increasing significantly over recent years. Food inflation, particularly in emerging market countries where food is a huge component of spending, can become a real problem. Recently it's been caused by extreme weather conditions leading to poor harvests; with supply falling and demand growing (think population growth), underlying soft commodities have risen. Climate change seems to becoming increasingly apparent in the world and so shocks to harvests of various soft commodities are likely to continue to materialise.

Although higher prices can hurt our wallets, there are ways as investors we can benefit from this. There are many ETFs that invest in the underlying soft commodities and should rise as soft commodity prices rises. There are also agricultural equities/funds that investors can buy. Higher soft commodity prices incentivise farmers to maximise their production in order to maximise profits. This leads to increased spend on high quality machinery, fertilisers and seeds and so companies involved in these should hopefully see increased revenues/profits. Even supermarkets can benefit as they have the ability to pass on cost increases to consumers and maintain/grow margins.

Even without climate change there are trends occurring which should support the 'agricultural' sector. Land is a finite source, and population continue to grow, so it will be necessary to increase yields in order to feed demand. This will mean investment in farm related equipment increases. Shifting dietary habits, particularly as the east adopts a more protein based diet also creates opportunities.

Baring, First State and Eclectica all offer 'agriculture' funds to which try to exploit some of the themes mentioned above.

Contrarian Investing - Buying on the Dips

One of the hardest things to try and achieve in investing is market timing; I know it is something I have never managed to perfect, and many other more talented investors have also admitted defeat! 

However, what I do find interesting is how people approach investing. If a stock falls 10% then there is an argument that that stock is less risky than one that has risen 10% as the likelihood is the bad news has already been priced in to some degree and you are investing at a lower base.  However, time and time again people buy in on the "way up" and sell on the "way down".

I thought this article would be poignant today given Standard Chartered's announcements of a 10th consecutive year of income and profit growth as well as an increase in full year dividend of 10.5%. Over the summer Standard Chartered were hit by the Iran money laundering scandal which saw around 19% shed from their share price in 24 hours. Many investors I am sure panicked fearing almighty fines on the bank and sold their positions. If as an investor however, you had bought into the stock immediately following this scandal you would be sitting on a profit of around 46% (not factoring in any dividends!). Standard Chartered were fined around $700m for the scandal, but that has failed to dent profits significantly and the Emerging Market focused bank continues to perform strongly. 

Source: Google Finance

Of course there are examples where a stock has fallen sharply on the back of bad news and continued to fall, so investors need to keep an eye out for this. I think the key is to ask yourself, what has caused the stock to fall, what is the consensus view and have the fundamentals changed. If you believe the market has overpriced the bad news, and that in fact the company can recover then it could be a good buying opportunity. 

For investors who don't have the time or expertise for such type of investing there are contrarian funds available. Probably the most famous is M&G Recovery which has a brilliant track record, and a particular favourite of mine is Investec UK Special Situations.

Contrarian investing often means going against consensus and is a bold move, but if it is good enough for Warren Buffett then it is good enough for me!

Japan and Abenomics

Since the introduction of the new Prime Minister Shinzo Abe, the Japanese equity markets have reacted strongly to his dovish views and determination to move the economy out of over a decade of inflation.

Since commencing ¥13.7tn of Quantitative Easing (QE), the Yen has depreciated significantly falling approximately 14% against the USD.  Japan is a large exporter and this currency depreciation has increased confidence that profits from companies such as Toyota and Sony will react strongly. 

Although initial actions have been positive, a lot must be done to solve the countries underlying debt problems and ageing population dependencies.  With Debt to GDP of over 220% (compared to Greece at 170%), aggressive monetary policy is needed to kick start the economy.   

Have Gold Equities lost their shine?

Historically gold equities have exhibited strong positive correlation with the gold price. However over the past few years a disconnect has become apparent, with many gold equities falling off a cliff.

Now to try and understand whether this gap will converge or continue to diverge we need to try and work out what has driven the gold price and what has issues have faced the gold miners.


Physical gold has always been seen as a safe haven asset and investors have moved to it in times of economic and political uncertainty. As a 'real' asset it is also seen as a store of value and an inflation hedge. Since the credit crunch we have witnessed extreme economic and political pressures and uncertainty, coupled with tremendous quantitative easing; almost the 'perfect storm' for gold, and as such the price rose dramatically from 2009-2011. 

The Great Rotation and the Hunt for Yield

This is something you may have been hearing more and more, as concerns with the historically low bond yields spread.

Over the past few years especially you would have been well placed to hold bonds, Gilts especially would have returned you a healthy 25% since 2010.  Since the credit crisis in 2008, bonds have been steadily rising as investors sought safe haven returns.  The significant up lift in prices be it Government Bonds, High Yield or Investment Grade debt has caused the income you receive drop drastically.  On a 10 year Gilt today, you would only receive an annual income of 1.89%!

The hunt for yield is on, with cash producing next to nothing and bonds going that way, where can you turn for income?

Two major yielding asset classes remaining are property and equities.  The lower risk alternative, property has been having a varied time depending on your geographical location.