Sunday, 27 March 2016

Stories we should be thinking about

Ahead of the new working week here are a few finance and related stories to be thinking about.

Macro matters:

Not the easiest last week for the global financial markets (especially in Europe)...

(via dshort.com)

...but as I have said before the key as to whether the bull market will continue or not is sentiment.  To this end I liked this via @ukarlewitz who observed:  

'The most optimistic survey is from Investors Intelligence: the bull/bear ratio is back to where it was last November and also in May 2008 (20%). Both times, equities rolled over. But bear market rallies in 2000-02 did not end until the ratio moved higher (to 25-30%). In a bull market, the ratio is not at an extreme until it reaches 35-40%. This measure is now neutral'


That implies that the market advance over the last couple of months has some legs. To this end interesting to see the preponderance for April to outperform: 



Far more interesting I believe is the whole 'growth versus value' debate.  The latter has started to outperform after a poor last 18 months or so.  'Mix is the new mantra' is not a bad way to think. 


Of course interest rate increases in the US with their impact on the US dollar could really impact such an environment.  So this was a useful piece which noted that: 

'In other words, if you’d like to see “factor shares”—the shares of income going to capital and labor—rebalance, then you want to allow for another source of non-inflationary wage growth: redistribution from profits to wages…More to the point, it would lead the Fed to tolerate 4 percent versus 3 percent wage growth'

Such wage growth levels may be hard to achieve though if the US economy is not growing fast enough.  All of this implies to me that 'lower for longer' will still prevail in the world's largest economy.  I am sticking with my view of only one increase in US rates in 2016...and this means a lower US dollar (and hence the outperformance of the emerging markets, the euro, commodities etc.)

Of course we also have the curve ball of a US election later this year too.  As David Stockman strikingly noted: 'When the next president enters office in 2017, he will start planning his 2018 budget. In that year, Social Security will become the first trillion-dollar program, and it will be gobbling up an additional $60 billion or so every single year'.


With such a backdrop I am not sure you want to chase low quality or high yield stocks generally.  Any 'value' outperformance is going to be much more specific position selection centred.  Mix is the new mantra


Very interesting from @worldeconomics on how the Commonwealth is a bigger part of global GDP than Europe.  I still don't believe the UK will vote for a Brexit but so far I have not heard about a re-focus on the Commonwealth.


Turning to Asia I read here that: 

'To achieve its growth targets, China will have to rely on domestic demand, including investment and consumption. Thankfully, it has strong prospects in both areas'

I would agree with this.  Meanwhile here I see that there was some Chinese data out over the weekend...and it held some interest for both the bulls and the bears: 

'Chinese industrial profits snapped a seven-month losing streak in the first weeks of this year, while the data also showed companies fell deeper in debt while inventories grew. Industrial companies’ profits climbed 4.8 percent from a year earlier to 780.7 billion yuan ($120 billion) in January-February, the National Bureau of Statistics said in a statement Sunday. Oil processing, electrical machinery and food companies led gains as 28 of 41 industry groups posted profits, NBS said. Profits fell 2.3 percent in 2015'.

Nice chart on negative population demographics...


...no surprises then that Japan heads up the robotisation league table too then: 


Sector and companies: 

A good amount of return differentiation in YTD markets...


...and look at that lack of correlation between the YTD and the last 4 years performance. 

Some good medium-term orientation by BMW who have '...set an ambitious efficiency target in its automobile manufacturing plants of 30 hours production time per car. Zipse said the target is “not far off” but would not state the current production time per vehicle. For comparison, it averaged 61 hours for competitor Mercedes-Benz to make each car in 2005...The automated trolley program is part of BMW’s strategy to cut costs by several hundred million euros over the next few years. Reducing overhead is integral to freeing up funds for BMW’s development of new innovations like self-driving technology, which are investments that might take years to pay off'

I thought this was a very sensible piece about a share I also own Royal Dutch Shell: 

'Either way, whether you purchase shares of Shell at $37 or $47, you stand to collect a large chunk of cumulative income over the next 10+ years'

Lovely write-up on P&G here noting the scope for a value-enhancing breakup: 


Talking about simplification well Credit Suisse is broadly copying the moves undertaken by its sector and country peer UBS

Coca-Cola has not been the greatest investment recently (although the longer-term compounding is remarkable).  I must admit I cannot get the numbers to work on the stock. 


And a few stories from today's Sunday Times:

'Glaxo risks investor backlash with £11m golden hello for new chief' - no-one has been appointed yet

'Shell prepares North Sea sale after BG tie-up...pledged to sell up to US$30bn of assets' - sensible but will be interesting to see the trade prices. 

'Some of America's biggest buyout funds are preparing bids for Old Mutual's £4.5bn wealth management arm' - makes the Old Mutual sum-of-the-parts angles even more interesting. 

And finally...

According to a Japan Times article fruit in Japan is also showing disinflationary consumption pattern tendencies'households of at least two people buy an average of 18 kg of bananas a year, well ahead of the No. 2 fruit, mandarins, at 13 kg a year. The main reason is that bananas have developed negorokan, or “the perception of being reasonably priced”'

And as it is Easter it is good to read here that ‘a lot of previous research has shown that there are, or at least could be, immediate cognitive benefits from eating chocolate…"I think what we can say for now is that you can eat small amounts of chocolate without guilt if you don't substitute chocolate for a normal balanced healthy diet" '

Have a good week. 

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