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GodfreyO last won the day on July 22 2015

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  1. "Both from the standpoint of stocks and bonds, an investor wants to go where the growth is." Bill Gross The trouble with buying into hot investment themes is that sometimes we find out too late that the idea isn’t so hot anymore. And that seems to be playing out with one of the more fashionable concepts over the last decade or so: BRICs. Back in 2001, Goldman Sachs strategist Jim O’Neil wrote an investment piece entitled “Building Better Global Economic BRICs”, which championed the investment potential of Brazil, Russia, India and China (or “BRIC” for short). Despite the fact that the four countries from three different continents are shaped by very different political systems, growth dynamics and even national sports, they were viewed by many as one homogeneous story. In fact, O’Neill was trying to represent the broader fast-growing, heavily populated emerging markets space. It reflected what was seen as a shift in global economic power away from the established powers to a new bloc. Little did he know the true impact of his acronym. Some commentators added South Africa to the party to form “BRICS” - and you could as easily have thrown in the likes of Indonesia and Vietnam into the mix – as it was really a reflection of the outlandish growth dynamism seen within the emerging market space in the new millennium, aided later by the cheap money of quantitative easing. And the story seemed to play out. Investors jumped into BRIC funds, growth boomed and investment into these parts of the world soared. It was no coincidence that these countries were also invited to host some of the major global sporting events for the first time – the FIFA Soccer World Cup in South Africa in 2010, Brazil in 2014 and Russia in 2018; the Summer Olympics in China in 2008 and in Brazil later this year; the Winter Olympics in Russia in 2014 and China in 2022. The whole thing’s been like a coming of age movie. And as with any of these things, you get to see the growing pains in full flow. 2015 and 2016 have reminded investors that these markets still have a lot of growing up to do. Last summer China’s stock market implosion came under the spotlight. Trying to sustain 7%+ per year GDP was always going to be a tall ask, particularly when your government is looking to develop a brand new growth model based on consumer spending rather than the investment and exports one that had served you so well in the past. Unfortunately, the fallout from this has left many investors questioning whether these kinds of markets deserve their attention. And it hasn’t been a great time for these countries of late. While India has held up relatively well, the economic environment has significantly impacted many of the leading emerging markets countries. Collapsing commodity prices have had a severe impact on Russia, Brazil and South Africa. As much as these countries have grown their presences on the global stage, they still have classic emerging market sensitivities to counter – too heavy a reliance on natural resources in their cases. And when growth slows, the spotlight falls back onto how well the country is being run. In 2016 we’ve already seen calls for the impeachment of the presidents of both Brazil and South Africa, as accusations of corruption, money laundering and the misappropriation of funds hang heavy over both heads of state. Russia is once again getting used to its status as an international pariah – whether that’s over the country’s involvement in Syria and the Baltics states, or allegations of state-sponsored doping of its athletes. None of this has been good for their stock markets or provided peace of mind for investors still buying into the BRICs concept. What all of this shows is that emerging markets still have risks. Plenty of risks. But does that mean investors should run a mile and stick to developed markets? No. Just looking at Asia, some 60% of the world’s population live in the region, with China and India accounting for 37% of the world’s numbers. The fastest growing consumer markets for everything from champagne to Gucci bags can be found in emerging markets. People here are still building lifestyles. They are new consumers. They are still emerging. And while there is always the argument for investing in some of these regions through companies with heavy exposure to them, it’s never the most “honest” way to approach emerging market exposure. It always feels like you’re missing out on some of the ride, both up and down. The risks are certainly there but so are the returns over the longer term. That’s why investors get excited about these types of places in the first place. Given the global growth concerns and where we are with the commodity cycle at the moment, today may not be the best time to jump into some of these markets. But that time will come and these markets will come again.
  2. The dangers of getting sucked into the hysteria surrounding the price of oil is that we might actually start beginning to be believe some of the forecasts being bandied around. A collapse to $10 oil? A rebound to $100 oil? We know about Saudi-Iranian tensions, a global slowdown, exports coming out of the US, the rise of shale, and so on. So where’s the price going to go next? The important thing to accept is that none of us really know. There are many great minds analyzing the current situation and a large slice of them will be wrong. The others will just be lucky. Back in 1999, The Economist put together a whole issue that talked about a structural shift in the oil price and that the black stuff would indeed be stuck at $10 for generations to come. The arguments were coherent, the pictures glossy and the die was set for a new normal. That was their conclusion. That conclusion was wrong. It didn’t take much more than a decade for us to see oil at $100 and a whole new chorus of forecasters talking about a new paradigm of structurally high prices. Clearly that didn’t last. So where does that leave us? No idea. As they say, forecasts tell us nothing about the future and everything about the forecaster. There are many "known knowns" (the rise of Iranian oil, for example) but probably more "unknown unknowns" to factor in. So don’t be surprised if we see more volatility, in either direction. The important thing is to avoid being caught betting too aggressively on the wrong side of the trade.
  3. “We really can't forecast all that well, and yet we pretend that we can, but we really can't.” Alan Greenspan, former Chairman of the Federal Reserve Bank. It wasn’t meant to be like that. A new year and a fresh new start was supposed to be the narrative. The Fed starts its rate rising cycle into an unassuming, benign environment. Well, it seems stock markets around the world simply haven’t been listening. It was only months ago that we were celebrating multi-year highs across a number of global indices. Now all the talk is about guessing which stock market will next fall into bear-market territory. Whether it’s China, the UK, Japan or Australia, all regions have markets at least flirting with the 20% decline from their peaks that would define such a slump. And the negative headlines continue: “India hits a 20-month low”, “The S&P 500 declines to a 21-month low”, “Hong Kong’s Hang Seng Index falls to its lowest since 2012.” It’s been a bit of a bloodbath, laced with a margin call/liquidation feel about it. VIX, the “fear index”, has jumped over 50% this year. Throw in the hits to high yield currencies and commodities, and a lot of investors are feeling a little nervous right now. So what’s driving this? In a nutshell, wherever you live in the world and whatever your geographic market bias, it’s back to stressing how much we live in an interconnected world. One of the biggest headline grabbers of late has been the collapse in the oil price. The West Texas Intermediate (WTI) grade has fallen more than 25% so far this year and now sits below $27 a barrel for the first time since 2003. 18 months ago we had $100 oil and all was right with the world. The trouble with what's happened with oil of late is that it encapsulates a number of different concerns: economic growth, politics, geopolitics, and corporate debt. On the global economic front we’ve got China’s slower growth story continuing to unnerve investors. Whether the data coming out of the country can be trusted remains open to debate. Critics only see exaggeration. Nonetheless, the 6.9% growth figure China released for 2015 did fall short of 7% government estimates, was below the 7.3% for 2014, and marked the slowest rate in 25 years. Analysts forecast 6.5% for 2016, which wouldn’t be much of a problem if the rest of the world hadn’t become so reliant on this economy to take up the global growth slack. And a slower-growth China also means lower demand for oil. Not only is the oil space being hit by a weaker demand environment, it’s also facing a new wave of supply coming onto the market. In the US, Congress voted in December to lift a 40-year ban on crude oil exports as part of a broader spending bill that averted the possibility of a government shutdown. The legislation will finance the government through September 2016. The political compromise is proving to be unfortunate timing for the oil market. Who knows what the changing of the presidential guard in the US this year will do for future energy policy? Events in the Middle East have also added to the oversupply dynamic. Diplomatic relations have become even more strained than normal between Iran and Saudi Arabia, the world’s largest oil producer. Unfortunately, this is also playing out messily when it comes to oil. US and European Union sanctions have recently been lifted on Iran, restoring the country’s access to world markets. With the country planning to immediately ramp up oil production by 500,000 barrels per day, it aims to boost output by as much as 1 million barrels within a year. Rather than trying to support oil prices by cutting output, Saudi Arabia seems set on maintaining levels and market share to nullify the Iran threat. So for expediency’s sake, Saudi Arabia appears happy to keep oil prices low to hurt Iran. That’s how it appears anyway. And then there’s the issue of debt. In the post-financial crisis world, banks had to rebuild their loan books with safer, more reliable borrowers. It was time to step away from the consumer and target corporates. What could be safer in a low interest rate environment than energy companies looking to expand production into new growth markets with the oil price at $100? Well, it’s become a bit of a perfect storm – interest rates are rising, the strong dollar is impacting the value of overseas earnings, emerging markets aren't emerging so much and we all know what’s happening with the oil price. So this is could become an earnings concern for coming quarters – will banks struggle with escalating defaulting loans from energy companies? So investors have plenty to think about. With the beauty of hindsight a number of commentators have come out to say that the Fed shouldn’t have raised rates at all in December. The counter to that view is that markets are telling a different story to the broader economics, which really aren’t that bad. Yes, China’s expansion has slowed but that’s not new news, while the US has been showing steady if unspectacular growth. But this is very much a sentiment-driven market. And sometimes sentiment can make certain scenarios self-fulfilling. Understandably money is flocking to gold and other safe havens. There’s also plenty of cash sitting on the sidelines, waiting. Who knows whether in five years’ time we’ll even remember any of the current narratives. For now, though, it’s not a time to panic. Keep calm, carry on and make the most of the cheap flights the oil price should give us.
  4. “Cheers to a new year and another chance for us to get it right.” Oprah Winfrey It’s December already and the year seems to have gone by in a flash. It doesn’t seem that long ago that excessively bullish sentiment was front and center of our minds, even if a US recovery was still uncertain and the noises out of Europe were worrying. How quickly we move on. Investors will be catching their breath after another uncertain year and the “will they, won’t they?” Fed deliberations. In September the VIX Index partied like it was 2011 all over again, the last time the volatility measure rose above the 40 level. That time we had the European sovereign debt crisis, this time we had China. We live in an interconnected world. As 2015 comes to a close it’s time to look back on another memorable year for the markets - memorable in part because we have finally put to bed the “Great Equity Market Bull Run” that blossomed out of the ashes of 2009. Yes, the Dow Jones Industrial Average hit an 18,351 record high back in May, but the market swings experienced in the second half of the year suggest we shouldn’t expect the market to oblige with a straight line trajectory in 2016. So what have we learned? If you weren’t too familiar with the Chinese stock market before this year, you’re certainly more aware of it now. Never has a 7% annual growth rate (or there abouts) turned out so messily for a country. The global market rout seen in August tells us that. As Chinese authorities battled to prevent the boom-bust behavior spilling into the real economy, so much wealth was created and so much destroyed in so short a period of time. It’s the meeting of free market principles with a managed economy. The experiment remains a work in progress. China’s increasing presence on the world stage, though, means investors have no choice but to monitor events there. And China’s slowdown and subsequent government interventions have had huge ramifications across the board: commodity prices have collapsed, hurting resourced-biased economies from Australia to Brazil to Chile. It postponed the Fed's rate hike decision in September. It sent emerging market currencies into panic mode. It even managed to take a bite out of Apple’s revenue as smartphone shipments in this key market for the company slowed. Shipments are forecast to grow about 1% in 2015, compared with a 20% increase in 2014 and 64% in 2013, according to market research firm IDC. In case it escaped anyone’s attention, Europe remains a basket case. Even without the enormity of the migrant crisis – and 2016 doesn’t look like a year of resolution for this - we’re talking about a region with a central bank that began a $1.2 trillion quantitative easing program in March and is likely to do more. The Greek crisis is still, well, a crisis. Meanwhile, the shadow of terrorism once again loomed large though Islamic State-inspired atrocities. Add to that the unconvincing post-austerity recoveries that have fed voters frustration and lurches to the extremes of the political spectrum, and you can see why confidence is fragile. The region is set for a very different growth trajectory to that of the US and that’s playing out in interest rate expectations and euro weakness. The divergence in regional cycles isn’t great for investors. Emerging markets were supposed to make up for the global growth where developed markets, and Europe in particular, were falling short. We were supposed to be embracing CIVETS (Columbia, Indonesia, Vietnam, Egypt and South Africa) as we tired of BRICs (Brazil, Russia, India and China) and milked the EM story further. Unfortunately, we've hit a pause button here. The EM space has showed signs of rolling over at a time that the US is showing signs of recovering. And having borrowed heavily in US dollars, a rising currency that will accompany rising US interest rates will continue to provide headwinds for EM. The threat of heavy fund flow out of these markets and into a US market of rising interest rates is a risk for 2016. Let the flight to quality begin. Most of the smart money accepted the price of oil wouldn’t return any time soon to the heady days of above $100/barrel seen back in summer 2014. But while the setting for 2015 may have looked challenging with West Texas Intermediate grade oil at the $60 mark, who would have guessed we could end the year closer to the $35 level? The oil story is where the macro picture meets geopolitics, very little of which has been supportive. The gold bugs have also gone quiet, for now at least. The commodity’s early-year peak of $1300/oz now looks a world away from $1066 now. The prospects of a rising interest rate environment ensured that plenty of institutional money departed stage left in recent months, leaving plenty of retail investors newer to the game with holdings significantly under cost price and effectively waiting on the next crisis. Geopolitical tension and terrorism are now part of life. For good or for ill, the market doesn’t get so shocked by terrorist attacks any longer. The shooting down of a Russian passenger plane, the tragic November events in Paris, the San Bernardino attacks, and the Charlie Hebdo terror all shook us as individuals. But the market absorbed the events and moved on. The consensus view for 2016 is broadly cautious so read that as expectations for another bumpy ride. The Fed’s rate normalization process, China’s growth narrative and Europe’s state of disrepair provide the backdrop. Let's also not forget the small matter of a US presidential election and that can polarize and impact market sentiment. Suffice to say none of us have a crystal ball and most forecasts coming out now for 2016 will be proved wrong, at least in part. That’s not to say we shouldn’t listen to them but as investors we do very often have short memories. Before we know it we’ll be excessively bullish again. Let’s just see now how quickly we move on.
  5. What does Botox and Viagra have in common? They are about to become part of the same family. It’s always interesting to see large M&A action and what narratives we hear from the protagonists as to the reason behind the tie-up. One of the more significant recently announced mergers (read: takeovers) is taking place between Viagra’s Pfizer and Allergan, the maker of Botox. Pfizer is paying $363.63 for each Allergan share, or $160 billion for the whole company, which is a more than 30% premium to Allergan’s share price ahead of the announcement. Punchy stuff. As is standard practice it’s been sold as a merger of equals (the combined company is expected to maintain Allergan’s Irish legal domicile with its operational headquarters in New York and trade on the NYSE under the PFE ticker), but really the transaction suits a purpose. Assuming that certain Pfizer shareholders elect to receive up to $12 billion in cash instead of stock in the combined company, Pfizer expects its former stockholders will own 56% of the combined company. And the majority-shareholder is already providing plenty of talk about operation synergies ($2 billion-worth are expected over the first three years) with the deal forecast to be EPS accretive by 2018. But Allergan is technically acquiring Pfizer, given the maintenance of the Irish legal domicile, and the structuring of the deal fundamentally reflects the importance Pfizer places on a favorable tax rate that it will receive (estimated at 17-18% for the first year post-close, versus an estimated 25% for 2015). The deal may still be a pretty high risk, expensive one. Integration on this scale rarely goes smoothly, particularly when you are betting on another company's high-growth pipeline and synergies. But no doubt Pfizer has firmly worked on its sums and appreciates how over the longer term this deal can help support its share buyback programs, dividends and other asset allocation strategies. Significantly, it seems as if management is sending a strong message out to the authorities to say just how unsupportive existing US tax rules are. This deal may not be the last to play the tax card on this scale.
  6. The thing about QE is it’s a sign of weakness and not strength. And that’s still the worry in Europe. The noise and narrative out of the ECB still suggests a need for support for the system. Recent events in Paris have certainly not helped the mood and sentiment in the region, while the ongoing migrant crisis suggests the region is at a crossroads on a variety of levels. Fundamentally, the region is weak yet every time the market rallies on the idea of another stimulus injection it’s as if a bad state of affairs is being rewarded. Yes, the rallies effectively say that liquidity will continue to be pumped into the system to prevent any cataclysmic event. But that isn’t the same as being able to assume a healthy growth environment, which most investors would want as a justification for a market rally. And yet the other side of the stimulus equation also looks fascinating. Recent comments out of a number of Federal Reserve officials as good as rubber stamp a December interest rate rise, essentially saying that the US recovery is alive and well. The trouble is that consumers have got so used to an emergency-level low interest rate environment it really will be intriguing to watch how they adjust to the normalization cycle. True, interest rates are unlikely to move very far, very fast. The thing is we still do not know how sensitive to rate moves indebted consumers really are. The broad assumption is that everyone will be fine with the slow and steady approach. But to paraphrase Warren Buffett, we’ll only know when the tide goes out just how many people are swimming naked. Much of the financial risk that people have taken on in recent years has solely been down to the fact that we've had a very supportive interest rate environment. The majority of us have enjoyed this state of affairs over the many recent years. And some more than others. Unfortunately, it may only take a little rise here and a little rise there to destabilize a household economy and who knows what that will mean for the capability of the consumer to save, spend or invest. We will see what we will see.
  7. “History doesn't repeat itself, but it does rhyme.” Mark Twain It’s pretty clear that a rising interest rate cycle will kick back into gear again soon. Rates may not move that far or that fast any time soon, but directionally the only way is up. So how will it pan out for investors? It’s difficult to tell. Things really are different this time. The US economic expansion has already lasted well beyond the postwar average of just under five years. As a result, we’re in pretty unchartered territory this time around, even if the scale of the recovery has been one of the weakest in that period (annual growth has been averaging 2.2% versus the 3.6% of 1991-2001). This is also a monetary policy cycle shaped by QE, significant economic dislocation and a change in Federal Reserve leadership. That’s one reason why investors have to tread carefully. It’s really not clear as to what impact interest rate rises will have - psychologically or otherwise - on a public still unconvinced that the recession is actually over and on an economy that hasn’t managed to stoke inflation in this recovery. To get a sense of what it will mean for investors, there are a number of variables to consider. How fast will interest rates rise? Will rate rises choke economic growth? Will increases hurt credit conditions? Will they result in a divergent growth path for the US relative to other parts of the world? All these factors can have a bearing on how you put your money to work and whether risk assets are still the place to be. But on a best-guess basis, and how asset classes have performed in the past, let’s randomly consider a few areas: Gold. Stating the obvious, gold’s clearly lost its sheen. If crazy volatility in the Chinese stock market and a deadlock in Greece’s economic future weren’t enough to stop the commodity from plummeting to a 5-year low then who knows what will. Yes, it makes sense to build a position for hedging purposes at these low levels, particularly if rate rises lead to market volatility and more anemic economic growth. But don’t expect to see a bull market in the yellow metal on the scale that we experienced a few years ago. Relative to cash, gold just won’t look as appealing. Money in the bank will yield cash, gold won’t. Bank stocks. Banks like and dislike higher interest rates. They like them simply because they are able to charge more for loans, while also attracting more cash from depositors. They dislike them because higher rates tend to lead to more defaults by those that can’t afford to pay that little bit extra. Net-net, they’ll see rate increases as a positive and a recent recovery in some of those names are starting to reflect that. Obviously, it’s also about making sure you get them at the right price as well. Cyclical stocks. Historically, the likes of Consumer Discretionary and Industrial stocks have tended to do relatively well when rates have started to rise. The thinking behind this is that a rate rise is a direct reflection of a healthy economy and improving consumer confidence. The trouble this time around, of course, is that you still have a sizable slice of the population not yet convinced that the recovery is taking hold. Property. How will higher rates impact? It depends. On the one hand, rising interest rates will equate to higher borrowing costs, building costs and delinquency rates, none of which are traditionally good for the industry. But if the pace of rate rises simply reflects robustness in the economy, then real estate, both in terms of hard assets and stocks, may well still look attractive, particularly if the first rate rises remove some of the speculative froth out of the sector. Cash. We’re talking about savings and money market accounts essentially. It may not be the most exciting or sensible option over the longer term, but at the very least you will finally start to see a bit of a return on your Christmas money that has been sitting on your account doing absolutely nothing. US dollar. Maybe a lot of this story has already been factored into the greenback, given that it’s been pretty strong against most currencies of late. But traditionally rising rates support a higher US dollar, which is also bad for the commodity sectors given their negative correlation to dollar. Conversely, for those economies that have currencies pegged to the dollar but don’t share the same economic outlook, maybe there’s reason to be cautious about them. An example of that is Hong Kong. While its currency moves in line with that of the US, its economy is far more attuned to the economic picture in China. And we all know that story’s been a mess of late. Fixed income. Investors no double have already been reducing their long-term bond exposure while beefing up their positions in short- and medium-term bonds, which are less sensitive to rate increases than longer-maturity bonds that lock into rising rates for longer time periods. The lack of value in the shorter-term lower-yielding bond model is the downside to this strategy and anyone looking to keep exposure to this space should consider inflation-hedging strategies. History can be a dangerous reference point for investors, particularly if extrapolated data is misinterpreted or followed to the letter. But sometimes it's the best guidance we've got available to us. So use it wisely. Disclosure: I currently do not hold any positions in any securities mentioned. As with any investment, please do your own due diligence and only invest in any security based upon your own research and ability to withstand the risk to reward ratio. Investing in any security carries risk and market conditions can change rapidly.
  8. There’s been a lot of chatter in recent months, usually taking place after an economic release, in relation to the timing of the next US interest rate hike. Various arguments had been put forward by commentators to suggest when this might happen. We have in recent days, though, seen a firm shift in expectations of a move in the near term. Get ready. A recent Wall Street Journal survey found about 92% of economists surveyed see December as the start of the rate hiking cycle. Seven years of no movement are finally about to come to an end it seems. And to reinforce this, several comments out of Fed officials clearly indicate the interest rate move is going to be sooner rather than later. William Dudley, the president of the Federal Reserve Bank of New York and the first senior policymaker to signal in late August that the Fed wasn’t quite ready to raise rates, said on Thursday that his reasons for hesitation have receded. In fact, he suggested there was a strong ease for moving ahead with a rate hike. St. Louis Fed chief James Bullard suggested the Fed should raise rates as soon as possible. John Williams, head of the San Francisco Federal Reserve Bank, said there is a “very strong case” for a rate increase next month, assuming the economy continues to progress. Even Fed Chair Janet Yellen last week told Congress that a rate hike in December is a “live possibility.” The traditional Fed policymakers’ job of getting the market to price in any moves ahead of time is clearly at work here. At the same time, Fed officials have also indicated that rate rises would be gradual and the Fed could also utilize other tools going forward. So expect the stock market to remain reactive to economic data, particularly if the news flow rubber stamps the widely-anticipated rate shift. But more importantly be ready for change.
  9. So the Federal Reserve Bank kept its cool once again this week and left interest rates unchanged. It said the economy was expanding at a "moderate" pace. Well, Q3 GDP data that came out the following day kind of suggested that things might be a lot less rosy than that. The annualized pace of 1.5% for the quarter was down from a rate of 3.9% in Q2. Admittedly, the slowdown was partly due to companies running down stockpiles of goods in their warehouses. And consumer spending grew at 3.2% in the quarter, aided by lower energy prices, which was still a strong reading and suggests underlying strength in the economy. Nonetheless the headline figure did raise enough questions for the markets to think the new data has, if anything, slightly increased the chances that the Fed will move at its next policy meeting in December. So we’re still going to have to keep monitoring the data, interpreting the individual Fed governor comments and position ourselves for the inevitable rate rise that will come. The game of cat and mouse continues.
  10. The markets really are in a strange space at the moment. It continues to find good in the midst of very mixed news. Last night, although we saw the European Central Bank keep interest rates on hold, President Mario Draghi indicated that the bank could potentially undertake further large-scale stimulus in the near future that could include further bond purchases and a cut to the deposit rate. Markets were clearly warmed by this, sending the S&P 500 1.7% higher and causing the Dow Jones Industrial Average to post its best day since September 8. But unfortunately what the announcement really shows is that the green shoots of recovery that we’d been seeing in parts of the eurozone haven’t really bloomed and now reflect a very weak recovery in the region. The fact that all the stimulus we’ve seen to date from the ECB still hasn’t resurrected the region is a worry. And let’s be honest, all of these stimulus measures are very often a sugar fix, designed to kick start conditions but not sustainable over the long term. In the real world, we all know that too much sugar isn’t good or natural for us, and we know how important it is to wean ourselves off of any such a dependency. Unfortunately, the market has got so used to getting this support that it’s created a sense of “moral hazard” – effectively, investors trading on the view that any time there are signs of weakness, governments and central bank will simply step in and act as an underwriter for the equity markets. But imagine a scenario when the Fed, Bank of Japan, ECB and Bank of England all turn off the taps around the same time. Maybe such a move won’t happen in a coordinated manner, but a normalization of conditions has to happen. Deposit rates in the eurozone are already in negative territory so the ECB can’t keep cutting forever. In that circumstance a withdrawal process might be painful indeed. Man cannot live on sugar alone. As Warren Buffett once put it: “You only find out who is swimming naked when the tide goes out." Until then, make the most of the central banks’ support.
  11. Maybe TSMC isn’t a familiar name to many of you but news that the company cut its capital expenditure budget yesterday by 30 percent is worth a mention. Why is it relevant? Basically, it’s all about what the move represents. TSMC, more formally known as Taiwan Semiconductor Manufacturing Company, is the world’s largest pure-play semiconductor foundry in the world. In other words, they are the biggest company in the world to make “chips” on the behalf of other companies. Their customers include Qualcomm, Broadcom and Advanced Micro Devices. Because of where it fits in the technology food chain TSMC has a good view of how the world’s looking. And from where it’s sitting, it doesn’t look too rosy at the moment. The company’s capex figure had been edging down gradually from its earlier set $12 billion level. Now sitting at $8 billion, it’s clear that TSMC cutting back on investing in equipment signals they see no reason for growing capacity for a while. If the company’s assumptions are correct, it effectively suggests TSMC sees weakness in this space over the next 6-18 months. Once again emerging markets are the big culprit, with the slowdown in China being of particular concern. Equally worrying is confirmation of weaker smartphone demand. This is the category that has been driving the consumer technology story. And TSMC isn’t alone in its viewpoint. Its slashed estimates follow on from Intel trimming its capex and outlook earlier in the week. If conditions change in coming months, we may well see an about turn from these names and a scramble for expanding capacity. But for now the outlook looks challenging for major parts of the Technology sector.
  12. “China is a sleeping giant. Let her sleep, for when she wakes she will move the world.” Napoleon Bonaparte The thing is China isn't the only sleeping giant. It may be the biggest and most impressive story but there's a whole lot more. Part of the fallout of the ongoing FOMC deliberations about interest rates and recent events in China has been to bring emerging markets in general back into the spotlight. Ultimately, the whole space has a story worth hearing. In terms of where we are now, the fear is that slowing growth in developed markets and an appreciating US dollar may pull down emerging markets. Emerging markets are hoping the Fed will postpone rate hikes for as long as possible, mitigating the threat of a massive exodus. For a rate hike to have a positive impact on emerging market fund flows, the Fed would need to state clearly that it plans to proceed very slowly with raising its base rate going forward. But we can expect more volatility as a result of central bank policy actions and global growth concerns. With volatility comes a lower risk appetite and an outflow of cash from riskier assets. But while we still hang onto every word out of a Fed governor and consider every economic data release emanating from China, it’s worth getting some perspective on what all this means for emerging markets. Why are we interested in emerging markets anyway? It’s basically about future growth. Economic, population, consumer demand, manufacturing capacity, resources. You name it. These countries are there to make up for where developed markets fall short. And for all the noise of late, emerging markets certainly isn’t all just about China. In fact, the phrase “emerging markets” itself is a catchall for a number of countries with aspirations for developed status that don’t quite meet requirements on certain economic or structural metrics. They don’t have to have any cultural or geographical commonalities. Simply aspirational. They are developing countries that are neither part of the least developed countries, nor of the newly industrialized countries. As a term it’s a bit outdated and as a gauge for investment it can be misleading. For one thing, different organizations classify countries differently. Greece, for example, doesn’t yet make the emerging markets list for the IMF, but is grouped as such by MSCI and Dow Jones; Nigeria doesn’t make the grade according to some investment classifications but is viewed as an emerging market one by the IMF. Recent market volatility saw all emerging markets tarnished by the same brush, despite some economies offering domestically-focused growth dynamics so are sheltered from much of the global storm. There are others like India very much on a reform path and should be rewarded rather than punished for their efforts. Any other problems with investing in emerging markets? One of the big issues for investors in these markets is liquidity. Recent months have seen plenty of capital flee these markets and no one wants to be stuck with an investment holding they can’t sell. With risk aversion comes a flight to quality, which usually means that US equities benefit. Another problem is that it’s not always straightforward to play these markets. It’s all well and good looking at fundamentals but other issues can take precedent. For example, big political uncertainty in markets like Malaysia, Brazil and Indonesia can pose too big a risk relative to company fundamentals. Investors in these markets have also had to take the recent pain of currency adjustments, thanks in part to China’s currency devaluation. And we can’t forget what’s happened in the commodity space with the collapse of metal and oil prices. Brazil and Russia, amongst many, have been hit hard. Yes, these overly-dependent economies are trying to transition themselves to less reliance, but this just means more unknowns in the short term, even if the longer-term story is more supportive. And that’s the issue for China. Currency devaluation and lower government investment haven’t been welcomed everywhere. And the country’s deliberate actions to shift to a consumption-based model away from an investment and export one have brought market volatility. But no short-term pain, no long-term gain. So do emerging markets make sense for investors? With the right risk tolerance, asset allocation parameters and time perspective, the answer is “yes”. This is particularly relevant for those chasing alpha and outsized returns. It’s about being strategic. For most people, the right investment vehicle would be a cheap mutual fund or an ETF (such as the iShares MSCI Emerging Markets ETF). But there are always pockets of opportunities for those willing to take a punt. Certain markets, such as Sri Lanka for example, are less crowded by overseas investors. Because of this they are less researched and smart investors are better able to find value. And when foreign institutional money does get round to pouring into some of these markets, it brings with it more transparency but less of the easy money opportunities. Another long-term positive is the recently agreed Trans-Pacific Partnership (TPP), a trade agreement between several Pacific Rim countries. This offers huge opportunities for the likes of Vietnam, whose GDP is forecast to be boosted by 11% over the next decade on the back of TPP. And that’s the whole point. Think long term. Corporate balance sheets are far healthier than they were during the Asian Crisis of 1997. We’re seeing burgeoning middle classes in a number of these markets willing and very able to spend. Consultancy firm Bain, for one, predicts double-digit luxury goods sales growth over the next several years in Africa. Meanwhile, Nigerians are consuming champagne at a faster rate than the fast-growth Chinese market, according to Euromonitor. So if you are looking beyond a collective investment vehicle, look for quality local companies in the right markets with steady cash flow. This will take a bit of research. Alternatively, consider US stocks with high emerging market exposure, such as Philip Morris International (NYSE: PM), Caterpillar (NYSE: CAT) and even Apple (NYSE: AAPL). Emerging markets are not just China. Risk today can be an opportunity tomorrow, so have cash on the sideline to put to work. Disclosure: I currently do not hold any positions in any securities mentioned. As with any investment, please do your own due diligence and only invest in any security based upon your own research and ability to withstand the risk to reward ratio. Investing in any security carries risk and market conditions can change rapidly.
  13. A week on from the US jobs report and the market still hasn’t entirely settled on whether or not we’ll see a US interest rate rise. What we are seeing is a disconnect between what economists are suggesting and what the futures market is implying. According to a Bloomberg survey, 38 out of 78 economists predict the Fed will increase rates next week. Ok, at just under 50%, that’s hardly overwhelming support. In fact, on balance, the slight majority still think there will be no change. But if you compare that figure with the probability factored into federal funds futures contracts it actually looks more favorable for a rate rise. The probability of an interest rate rise according to these contracts is 28% - so not very likely by that reading. Traditionally, I’ve always put more trust in where the money is flowing rather than rely on the intellectual thinking of the great and the good. So in my eyes the economists lose out. But in absolute terms both sides suggest that a rate rise is off the table until December anyway. And given that these futures contracts have been a traditional gauge for traders, if the Fed does surprise and raise rates we can expect a corrective market response in terms. For all this speculating and conceptual thinking, I guess the only ones that really know what’s going to happen are the members of the FOMC. Let's see what the coming days will bring us.
  14. It's been a long, long time since the US non-farm payroll numbers meant something. I mean, really meant something. Yes, it's always been a relevant metric on the health of the economy. The first Friday of the month has continued to be important for those US market watchers amongst us. But its significance has been watered down in this drawn-out period of ultra-low interest rates. We've certainly come a long way from the horrible numbers and monthly losses we experienced in 2009. The record low of 819,000 jobs losses in January 2009 is a far cry from what the market expects this time around of a 213,000 jobs gain for August 2015. We’ve thankfully moved on from those dark times. But the reason why today’s non-farm payrolls numbers release is so important is because it's all about where the Federal Reserve goes from here. What will the numbers mean for the FOMC’s deliberations? In recent weeks we’ve heard a few Fed governors’ rumblings suggest a September rate rise is still possible, not shaken by the market volatility that has shaken many a retail investor. And whatever number does come out will play into one side of the argument or the other. Should interest rates rise as the economic recovery takes hold or should they wait because labor market growth is still challenging? It’s not as if we should be surprised. We all know rates will be hiked at some point. It's all about "when". At the same time, it's also worth considering that maybe it’s not just about how the domestic data looks. After all, other recent data points already point to point. For example, the anecdotal information on regional economic conditions housed in the Fed’s Beige Book release does suggest that activity is expanding. On that basis conditions may already be ripe for a rate rise. But even if they are willing to look beyond the ups and downs of stock market volatility and factor in the green shoots of recovery, the strength of the US dollar and the growth picture overseas may still speak loudly to the more dovish opinions in the committee. We all know that China is slowing, Europe is talking about more stimulus and commodity-biased economies like Brazil are in freefall. The world of late has felt like a very small place. It’s all about whether the Fed chooses to separately compartmentalize the domestic story and these overseas dynamics. As much as the market has already discounted different scenarios, don’t be surprised if we see some big stock market movements on the back of the data. It’s a pretty big deal. These are strange times. It could well signal the first rate rise in almost a decade and the slow road to normalization.
  15. Panic over. For now. The Dow Jones Industrial Index closed up a very healthy 3.95% - or 619 points - following not just two days of heavy losses prompted by the Chinese growth story, but the markets ultimately rebounding from six consecutive days of declines. That provided a nice pop for the likes of Apple (+5.74%), Google (8.00%) and Facebook (5.05%). But it was also good for some of the more pedestrian names like General Electric (3.22%), IBM (4.14%) and Procter & Gamble (3.61%). So the market had a great day - the Dow's biggest daily gain since 2011. One big factor behind the bounce were comments from the Fed's William Dudley that a September rate hike looks "less compelling". That, and the fact that the People's Bank of China pumped more money into its system. It suggests that the central banks have come to the rescue once again and will do what they can do to stabilise the market mood. How long will this mood last? That's anyone's guess. It's still all about confidence and that remains fragile. If upcoming economic data out of China reinforces the slowdown tone the world has been facing, we may face another bout of negativity. It comes back to economics once again. But we can rejoice for now. The very short-term sentiment may offer up a few trading opportunities. Don't assume, though, that everything is fixed. Disclosure: I currently do not hold any positions in any securities mentioned. As with any investment, please do your own due diligence and only invest in any security based upon your own research and ability to withstand the risk to reward ratio. Investing in any security carries risk and market conditions can change rapidly.