Captain America 27 August, 2012.

Captain America  27 August, 2012.

after a fantastic olympic, the summer is coming to the end with the US market roaring to recent high.  The Dow Jones Industrial Index closed at  xx on xx August versus its 2012 high of xxxx.  It historical high was xx in  xx 2007.  The strong performance of the US stock market is reflecting US blue chip companies are generally in the fast lane while the European blue chip companies are stuck in traffic.  aren't we supposed to be in a very difficult market where banks are not willing to lend to business? how do the American companies do so well?  first of all, these are global companies like Microsoft, Coca-Cola, Exxon Mobil, Pfizer who has income from many countries in all continents.  They have competitive products and services that are necessities to the society in today’s world.  Their home market, US has friendly labor law when compared against Euro zone.  Their corporate setup has flexibility to redeploy resources and manpower in both bull and bear periods of a cycle.  Many of these companies are cash generating with healthy balance sheet.  They can raise capital from stock market, bond market and banks.  The recent IPO of Facebook is a prime example of how company can raise money from stock market instead of borrowing money from banks to chase dreams.  For those who believe the US equity market still has further upside, there are a lot of US equity fund and ETFs available.

US blue-chip companies have their winning products, access to capital.  Their CEOs need to ensure revenue is growing and always hungry for more clients.  So they are keen to expand into new market or acquire client base.  One way is to buy business.  For example, oil companies are bidding for oil fields, drinks companies are expanding into energy drinks or fruit juices plus getting into new market like India and China.  These corporate expansion plans drive commercial activities globally and often lead to acquisition.  As they pay up to acquire companies, the target company’ share price rallies.  Again, using Facebook as an example, their USD 1 billion acquisition on Instagram is probably the ultimate dream of start up.  Facebook offers USD 300 million cash and 23 million shares to buy Instagram, a mobile application for users to polish and share their photos with their friends.  The 23 million shares used to worth USD700 million upon Facebook IPO.  Unfortunately, Facebook shares 40% price slide since IPO means the Instagram owners is getting almost USD 300 million less for the deal.  I hope they still see their glasses half full.  For high networth investors who do not have the time to invent the next killer App but want to participate in this social network fever, there are opportunities to buy shares of some of these companies before their IPO.  For example, Twitter could be the next big thing.  Some shares are traded privately in clips of million dollars.  Some niche brokers or private banks could get access.  Beside the technology sector, I would also pay attention to the pharmaceutical and resources sectors which are active in merge and acquisition.

The health care reform in US, could be read as a cushion to health care companies income as a wider population will enjoy health care services beyond their affordability.  There are sector funds on health care and pharmaceutical companies. 

Fund that invest in companies that belong to the same sector, such as pharmaceutical and health care.  Investing in sector fund means you are hoping for the whole sector to perform.  Those who have invested into the banking sector would have learnt a painful lesson from 2007 to now.  Investors please beware the difference between what the society needs, what is a good business and what fund managers are willing to invest in.  The society needs banks and there will still be banks on the planet in next centuries.  However, as we have seen in the past 5 years, banking is a tough business to be in and banks are struggling to deliver healthy financial reports and balance sheets.  Hence, fund managers are not buying bank stocks and their share prices are lagging behind other business sectors in the past 5 years.

With the Euro crisis in full swing, the competition from European based companies has faded in general.  The European companies’ war chest is depleting with deteriorating home market revenue.  In most of the arenas, the American companies are in the driving seat.

If the big picture is more colourful in US, should investors pay attention to European companies?  Yes, to win the league, winning the home games are important.  There are some exceptional success such as the fashion brand Zara that belongs to Inditex group (Industria de Diseno Textile) listed in Spain.  Stock picking is difficult as what you see from day to day life and media coverage, what it says in financial reports and how share price behaves may not make sense.  Super Group that owns the fashion brand Super Dry has dropped x% this year, and it still makes really cool clothes and opening big stores.  Investors should consider talking to their stock brokers, advisors before making investment decisions.  There are a lot of stock analysis websites but without some good understanding of financial reports, some of the analysis could seem foreign to the readers.

We have talked about US stock market and some potential advantages of these companies.  We touched on the concept of merge and acquisition opportunities and trends with a US focus approach.  We mentioned the idea of investing into a sector, companies that are in the same field providing the overall backdrop of the industry is bright especially if there is government policy backing the industry.  While we think the grass is greener in US, there are some European champions that we could vote with our money.  While most investors could probably make up their mind on investing in US as a whole, picking particular sector and stocks require a lot of considerations.  You may already have regular conversations with your financial advisors.  Something is going to change on 31 December, 2012.  There is going to be a new regulation in UK called the Retail distribution review (“RDR”). It is changing the financial advisory and wealth management business model.  There are some good reading materials about this in the FSA website (www.fsa.gov.uk).  In short, your advisors need to be paid by you and cannot include their commission or fees in the products you buy.  It is like going to your doctor and you pay a consultation fee and get your prescription from the pharmacy. The doctor does not get any fees or commission from the prescription and only earn the consultation fee.  After 31 December, 2012, your financial advisor will charge you advisory fee and you will pay for the products such as mutual funds, structured products, saving plan from the product manufacturer without the advisor getting a fees or commission.  Again, like most of the new regulations that came out post Global Financial Crisis, they all have good intention but the execution will lead to some practical teething problems.

I would suggest all readers contact your advisors to get some advices or ideas now before 31 December 2012.  It is like asking the taxi drivers for some recommendations of where to party before the meter starts ticking.  There is no harm to zoom into a few areas for 2013 investment with some free recommendations.  Then execute the investment plan after 31 December to enjoy RDR’s good intention.  Of course one should ask the advisors about the future advisory fee schedule.