What to expect in the investment world in 2014? (15 Dec., 2013)

What to expect in the investment world in 2014?

2014 is an important year for investing.  Why?  In a “tapering” environment, US may slow down their money printing machine.  This is like your bank cutting your credit card limit.  It may not affect your day to day living and spending.  But for sure, it is discouraging you to spend.  At the same time, your deposit in the bank account is still going to get hardly any interest.  Same case if you invest in government bonds, not paying you very much. 

Corporate bonds are a complex investment universe and looking at iShares plc Markit iBoxx GBP Corporate Bond Exchange Traded Fund (ETF), it is roughly down 1% year to date and distributed 3.74% yield or dividend to investors.  Such performance could continue in 2014 for the Corporate Bond sector.

Equity market has a fair chance to continue its overall strong performance into 1H 2014.  This is mainly due to institutional money moving from bonds to other asset classes.  UK overall stock market, if we use FTSE 100 Index as reference, has gone up 13.7% year to date as of 13 December, 2013.  This is great performance and one of the tracking ETFs on FTSE100 is iShares plc FTSE 100.  Top exposures are HSBC, Vodafone, BP, GlaxoSmithKline, Royal Dutch Shell, British American Tobacco, Diageo, AstraZeneca and Barclays.  Buying such ETF has the economics of holding a basket of the 100 stocks in the FTSE100 index.  Many of these stocks, such as HSBC and Vodafone are global stocks.  Their share prices are subject to global economy as well as UK economy.  As you can see, these global stocks cover many different industries, so the good thing is that the fund performance does not affect by a specific industry going through a down turn, say, banking industry.  The flip side is that if a specific industry like eCommerce and internet does very well, the ETF may only have some exposure in such business.

The technology sector had an amazing year in 2013 and Nasdaq Composite Index went up 34.2% year to date as of 13 December.  Facebook, Twitter and Tesla are changing the world and creating wealth for their shareholders.  There is plenty of hot money from venture capitals going into the technology sector and banking lending is not the prime source of funding.  So the technology business sector should be relatively shielded from US tapering its quantitative easing.  For those interested in investing in technology companies, “QQQ” is the stock code for the US listed PowerShares ETF on Nasdaq 100.  The technology sector is driving an industrial revolution from social network to shale gas exploration.  This could be a core part of any aggressive equity investors.

For any equity investor, perhaps US equity is a must have in their portfolio.  US S&P 500 index has gone up 27.1% in USD year to date as of 13 December.  To gain exposure on the very board equity story, S&P 500 is a good index to hold.  Investors can consider iShares plc S&P 500 ETF.  Top exposures are Apple, Exxon Mobil Corp, Google， Microsoft, General Electric, Johnson & Johnson, Clevron, Proter & Gamble, JP Morgan Chase, Wells Fargo.  It is definitely more technology weighted than FTSE100.

How about the people next door?  Eurostoxx 50 index is up 15.3% in EUR for the year as of 13 December.  While the Euro crisis seems to be less pressing from the recent economic data, the riots in Kiev shows that the Euro zone is still an action / adventure movie.  As the Eurostoxx 50 Index rally has probably reflected investors’ appetite from fear to hope, further upside could be limited in 1H 2014.

This year star market is Japan with Nikkei 225 index went up 50.5% as of 13 December.  There is determination to depreciate the currency to simulate export and inflation.  Yes, the Japanese government wants to see inflation.  Not really considerate for the retirees but the Prime Minister Shinzo Abe seems willing to do anything to get Japan out of lost decades.  For GBP based investors, making gain in JPY based equity fund with JPY depreciating against GBP does not sound like a sweet deal.  Perhaps there are better trains to catch.

Emerging Markets scared a lot of investors away in June with correction in both currencies and stock markets.  Looking at iShares plc MSCI Emerging Markets ETF, major exposures are Samsung Electronics, Taiwan Semiconductor, China Mobile, Tencent, China Construction Bank, Industrial and Commercial Bank of China, OAO Gazprom, America Movil SA, Naspers, and CNOOC.  One name that most investors may not know so well is Naspers.  It is an eCommerce and media platforms in more than 133 countries.  Naspers is listed in Johannesburg Stock Exchange and it holds 34% of Tencent.  Tencent is the online giant in China that has portal, online games and eCommerce.  Tencent’s current killer app is “WeChat” which is competing against Whatsapp and Korean LINE.  Technology, banking and energy are major sectors to drive MSCI Emerging Markets performance.

Can banks charge for deposit? Really? （26 Nov 2013)

Can banks charge for deposit?  Really?

The market has discussed the “when” and “how” the US could taper its Quantitative Easing.  The USD 85 billion a month Asset Purchase Scheme is viewed to be vital in keeping the world rotating.  Well, at least it keeps the bull running in the US and European stock markets.  The recent gesture from the US Fed and its Chairman Bernanke is interesting to put it mildly.  Ben Bernanke is paid to make sure the world does not fully understand his words.  Yet, many people have to make a living in knowing what Uncle Ben is saying and how that could affect the market.  Uncle Ben and his team, the Federal Open Market Committee, have said they would taper its bond buying probably in the “coming meetings”.  If the US Fed is slowing down the money printing machine, it wants someone else to throw money into the system.  And the lucky ones are BANKS!  One potential outcome is for the Fed to pay banks a lower interest for putting money with Fed itself.  Currently, Fed is paying 0.25% for banks to park their reserves (versus the European Central Bank paying 0.1%).  If the Fed starts to pay less, Bernanke and his colleagues are hoping banks would put their money to work and perhaps lend to some corporates.  Well, most human beings are lazy by nature and bankers are no difference.  The banks are thinking of paying their customers less for their deposit as a result of Fed paying the banks less.  Wait a minute.  Bank clients are already getting practically zero interest from their USD deposit.  Similarly in UK, Germany or other healthier EU countries, bank clients are getting donuts from their bank deposits.  So, getting even less could means clients will need to pay the banks for looking after their money.  That’s a very scary thought for retirees or companies that are cash rich.  This is the final push to the investors through the revolving door into the casino of stocks, bonds and other securities.  This could be what the Fed wants.  By cutting the rate Fed pays for bank reserves, the bank clients would put their money to corporate bonds or shares.

With determination, the US Dollar has successfully weakened against the British Pounds.  As of 26 November, it is USD 1.6153 to GBP 1 and this is pretty much as strong as the GBP has been against the USD in 2013.  The peak was 1.6381 on 2 January, 2013 and the bottom was 1.4814 on 9 July, 2013.  The Euro peaked against the US Dollar at 1.3832 on 25 Oct, 2013.  It is now back to 1.3532 level which is still a lot stronger than the year low at 1.2746 on 4 April, 2013.  While USD is weak due to Fed relax monetary policy, positive news or the expectation of positive news in US real economy is preventing the US Dollar to weaken further this year.

Another interesting currency is Gold which is like a world currency without a government monetary policy.  Gold has been drifting south since September from USD 1415 per ounce to USD 1253 as of 25 November.  The year low was USD 1180.50 on 28 June, 2013.  Gold, in some views, is a hedge against a few purposes such as inflation, US default risk, Euro zone breakdown.  Now all 3 troubles seem so far away.   It looks as though the stock market is here to stay.  Some believe gold prices have to fade.

UK stock investors are likely to have a good year in 2013 with FTSE100 Index going up 13.5% year to date as of 25 November, 2011.  Further upside this year could be a big ask with Christmas approaching as fund managers and institutional investors taking holiday.  The overall tapering gesture from US Fed could put a lid to cool off the US bull market.  China has been lagging behind the West in terms of stock market performance.  In November, China had its Third Plenary Session of the 18^th Central Committee.  It is a very long name for a very big communists gathering.  One big outcome is that the Chinese government is relaxing its one child policy.  It sounds strange to the West that the Chinese government could limit the number of children a couple could have.  Currently, only if both parents are single child, they could have the second child.  The proposed change is that if one of the parents is a single child, the couple could have the second child.  This brings some demographic dividend to China.  Overall, President Xi Jinping and his government seems to have got the steering wheel of the nation firmly and even famed investor Jim Rogers recently interviews are giving positive comments over the Chinese stock market.

Raging bull in America

Raging bull in America (23 Oct 2013)

Many stock investors have bad memory about October.  We had the Black Monday on 19 October, 1987.  This year, October is a dramatic month for US.  First, on 9 October, we had Yellen being nominated to be Fed Chief in the midst of tapering conversation.  Investors are wondering when would the Fed start to tighten up the Quantitative Easing measures.  As soon as Yellen was appointed, investors and media focus on the US federal government shutdown and the television kept showing disappointing tourists looking at closed gates of museums in Washington. The US market was holding well and was even gaining pending politicians’ decision on Debt Ceiling.  In the 11^th hour, the Senate decided to re-open government until January 2014 and lift the debt ceiling until February.  This set the US stock market on fire and Google reached USD 1,000 a share for the first time on 18 October.  Congratulations and the mighty American is USD 17 billion in debt.

There are some side effects.  The dramatic political cat fight and federal government shutdown got credit rating agencies’ attention.  Fitch Ratings has placed the US ‘AAA’ Long-term foreign and local currency Issuer Default Ratings on Rating Watch Negative.  One does not need to understand the technical jargon to figure out this is bad news.  If US government keeps lifting the Debt Ceiling like Real Madrid paying up for Gareth Bale, how on earth are they going to find enough trees to print the Dollar bills?  The USD has been falling against major currency.  Sterling is back to above 1.60 level against the Dollar.  It was at 1.617 on 18 October after spending almost 2 weeks hovering between 1.59 and 1.60. Euro was at EUR 1 for USD 1.3686 on 18 Oct which is a new high since February 2013.

While investors are switching out of USD into other currencies, a weakening USD is great for some companies who make money from all over the world.  Like all the international giants who are listed in US stock market such as Microsoft, Apple, Coca-cola, JP Morgan, McDonalds, Pifzer, etc.  In fact, that’s pretty much all the stocks in Dow Jones Industrial Index.  They are earning revenue in GBP, EUR, SGD, AUD and other currencies.  Converting these revenue to a weak USD is good cosmetic in results announcement.  Remember Japan Nikkei had an amazing run from the 4^th quarter of 2012 to the first half of this year.  During the time, JPY fell from JPY 80 to a Dollar to JPY 100 to a Dollar.  Most people would not expect US Dollar to weaken by 25% in the coming year but the Dollar could be in a weaker stance until February.  Yellen may have to hold back on tapering until February 2014, the new deadline for another round of Debt Ceiling drama.  What US needs is strong GBP growth and shutting down the government was going the opposite way.  Tapering is negative to growth.  Printing less government debt is negative for growth as the US government is living off debt.  It is hard to see Obama taking both prescriptions together.

Investors’ belief in a weakening Dollar could be adding fuel to an already very hot US stock market.  Money would go to stocks, commodities and gold in a weakening USD environment.  US Treasury at such low yield with a weak USD outlook would struggle to lure investors, hence encouraging investors to take on more risk.

On the other side of the world, China is also doing well and posted 7.8% GDP growth in the 3^rd quarter of 2013.  Some interesting local figures that are worth sharing.  Beijing residential rent has been going up in 52 consecutive months.  Apartment near the CBD area (central business district) are renting out at GBP 800 to GBP 1000 a month.  Imagine paying GBP 200-250 a week for an apartment in Canary Wharf.  In China, a senior banking job’s salary will fall into the highest tax bracket at >40%.  Professionals and top paid jobs in Beijing are probably not London scale yet but comparable to Munich.  A city with 30 million people (a lot of visitors and visiting workers) is jammed pack during peak hours.  Put on your rugby gear before getting into the underground or you can train your EQ by spending over hour in traffic.  People will be willing to pay premium to live closer to work.  The property rental price in Beijing sounds fair and is likely to have more upside.  Perhaps there is no bubble in Beijing residential property.

Rubber contracts in Xishangbanna Commodity Exchange

Rubber contracts in Xishangbanna Commodity Exchange (October 18, 2013.)

 

Xi Shang Ban Na?  It is a place in Yunnan province in China.  An Autonomous Prefecture that kind of runs its own show and sitting right next to Burma and Laos.  Driving distance to Thailand and Vietnam who are major rubber producing countries.

 

The Xishangbanna Financial Asset and Commodity Exchange is owned by Pingan, the second largest insurance company in China.  They launched a rubber contract in September.  Physical settled into “SCR WF” standard which is the same standard used in the very liquid rubber contracts listed in Shanghai Futures Exchange. 

 

Rubber maybe a lesser popular commodities for investors but it is the second most traded commodities in Shanghai Future Exchange after copper in 2012.  The volume in Shanghai is shockingly high relatively to other exchanges.  For example, on October 18, 480,000 2014 January Rubber contracts were traded which means CNY 98 billion (USD 16 billion) worth of rubber.  The most liquid rubber contract trading in TOCOM is the 2014 March contract that traded USD 57.8 million notional on Oct 18.

 

Xishangbanna Exchange could take advantage of its location being close to the producers but it is a long way to go in order to attract the speculators in Shanghai Futures Exchange.

Iron Ore futures debut in China. An alternative carry trade?

Iron Ore futures debut in Dalian Commodity Exchange (18 Oct 2013)

 

Dalian in China launched the first physical Iron Ore futures.  Making a difference to the cash settled index based contracts listed in CME, Singapore Exchange and Intercontinental Exchange.  China is the biggest user of Iron Ore and 74.6 million tons of Iron Ores were imported in September according to a Bloomberg article.

 

Market participants are observing how Dalian Commodity Exchange handles the physical settlement.  The standard is supposed to be 62% iron content but in real life, every piece of ore will have some difference in Iron content.

 

Local Iron Ore miners in China see this physical settled contract as a new way to sell their stock.  Currently, big buyers of Iron Ores like State owned Enterprises are asking for 60 – 90 days payment terms from miners.  Funding is tight in China in general as banks are not willing to lend.  Everyone remembers the liquidity squeeze in June and the coming December yearend will be very tight.  Some miners, who are keen to get liquidity, are willing to sell iron ores at a discount for cash upfront.  The discount could be as steep as 5%.  Now this is before the Dalian physical settled contract.  If the physical settlement process is smooth, there is a carry trade angle to buy physical from miners today and sell futures to hedge.  Assuming the physical goods meet the settlement standard and delivery process is tidy, there could be room for arbitrageurs.

http://www.bloomberg.com/news/2013-10-17/iron-ore-futures-debut-in-dalian-as-china-seeks-pricing-power.html

Gold goes up by 20% in 1 to 3 months?

JANET YELLEN, NOMINATION, OBAMA, BERNANKE, CHAIR, FEDERAL RESERVE, DEBT CEILING, CONGRESS, DEBT, PRESIDENT, BUDGET, ASIA: SQUAWK BOX, JAPANESE YEN / US DOLLAR FX SPOT RATE, BUSINESS NEWS
CNBC.com | Wednesday, 9 Oct 2013 | 11:06 PM ET

Amid uncertainty in the U.S. and risk aversion in global markets, gold's performance as a traditional safe-haven has proved lackluster. Yet one strategist reckons the precious metal could rally as much as 20 percent in the next one to three months.

Sean Hyman, editor of the Ultimate Wealth Report, a financial newsletter, says the reason for the bullish call is partly based on a view that under Janet Yellen the Federal Reserve is likely to maintain its hefty monetary stimulus, fueling inflation and boosting demand for gold as an inflation hedge.

U.S. President Barack Obama on Wednesday nominated Yellen, the Fed's Vice Chairman, to replace Ben Bernanke when he steps down as Fed chief in January.

"Gold is having a traditional pull-back and I think we will have another run up to the $1,500, $1,600 level in the next one or two or three months," Hyman told CNBC Asia's "Squawk Box" on Thursday.

(Read more: Obama nominates Janet Yellen to lead US Federal Reserve)

A move to $1,600 would imply a gain of almost 23 percent from current levels around $1,302 per ounce.

Gold has been stuck in a narrow range roughly between $1,280 and $1,320 since a budget impasse in Washington triggered a partial shutdown of the government on October 1. It is down about 22 percent in the year-to-date.

Safe-haven?

Uncertainty about the budget stalemate and fears about a looming deadline to raise the debt ceiling have supported gold. But the precious metal has not received the same boost as other safe-havens such as the Japanese yen, which hit a two-month peak against the dollar this week.

(Read more: As lengthy shutdown looms, why isn't gold rallying?)

"This (move in gold) is a very curious development," said Gaurav Sodhi, resources analyst at the Intelligent Investor. "If you had asked a couple of weeks ago what would happen to gold in the event of the current situation, every gold analyst would have said gold should move higher because historically that's what happens at times of economic and political uncertainty."

Simona Gambarini, associate director of research at ETF Securities, told CNBC earlier this week that the gold trade was not necessarily over and that most investors were on the sidelines waiting to see how U.S. developments pan out.

Hyman said that ultimately gold would respond to the jitters about a looming debt ceiling as well as the outlook for U.S. monetary policy.

"Yellen will have the same concepts as Bernanke. So money will continue to be printed, the economy stimulated and interest rates kept low as possible and that's going to stimulate inflation, be good for commodities and bad for the dollar," he said.

Markets, which had been braced for a scaling back of the Fed's $85 billion-a-month bond-buying program, were taken by surprise last month when the central bank opted to maintain its monetary stimulus.

(Read more: Fed battled over ending bond-buying: Minutes)

"I'm not a gold bug, I don't think every day and any day is a day to own gold, but I do feel we are now in that phase to own gold," Hyman said.

—By CNBC.Com's Dhara Ranasinghe

Angela Merkel wins again and the market smiles (24 Sep 2013)

Angela Merkel wins again and the market smiles.

Well done, Angela!  What a result to win her 3rd term as chancellor.  If she serves the whole 4 years, she will be leading Germany for 12 years since November 2005, half a year longer than Margaret Thatcher had led UK.
Merkel spent a great deal of her second term holding the Eurozone together. Germany is the biggest contributor to EUR 496 billion rescue aid.  The widely speculated “Grexit” did not happen although there was a lot of stressful debates over Merkel German austerity stand versus Draghi European Central Bank “Whatever it takes” gesture.  The European Central Bank Outright Monetary Transactions (“OMT”) is similar to US Quantitative Easing and Asset Purchase Scheme.  Through OMT, European Central Bank was buying sovereign bonds issued by Eurozone member states.  Media made jokes about OMT that it stands for “On Merkel’s Tap”.
For people who have been investing in Germany since Merkel’s leadership, there should be a lot of smiling faces.  DAX, the German stock market benchmark index, has returned 68% since Merkel became chancellor in November 2005 versus a 15% drop in Eurostoxx 50 in the same period.
As for the German citizen, German unemployment rate is 6.8% compared to 12.1% in the 17-nation euro region.  German 10-year bond yields are 1.94% while UK gilts yield 2.92%.  Bond yield is a good reference of cost of funding.  If German government can borrow cheaper than UK government, German corporates are also likely to enjoy a lower base rate reference than British corporates.
What I found most impressive is that in November 2005, EURUSD was 1.164-1.209 and GBPEUR was 1.454-1.491.  On 23 September, EURUSD is 1.352 and GBPEUR is 1.187.  EUR has appreciated against both USD and GBP in the past 8 years.  Euro crisis is painful but the Financial Crisis was also brutal to US and UK.
With Merkel in the helm for another 4 years, the 3rd Greek bailout could not be in better hands.  Yes, Merkel is tough and she will play her austerity card.  She also has been there, done it with the 1st and 2nd Greek bailout.  She knows the drill to balance saving Greece from “Grexit” and winning support from domestic voters.  Merkel retaining her office brings stability to Eurozone.
The next big question in the investment world is “Who is going to be Bernake’s successor?”.  The market expects Bernake to step down in January 2014.  The spot light is on Vice Chairman Janet Yellen.  Bernake has managed to turnaround the stock market and bond market from financial crisis.  “Too big to fail”was managed and now regulators are throwing new rules that are phone book size to prevent any too big could exist.  The FED Chairman still needs to tackle unemployment rate in US.  The solution could be shale gas, a scientific technology rather than buying more bonds.  Shale gas has massively lowered US manufacturing cost and sucking jobs back from the emerging markets like China.  It is a Mary-Go-Round.  Shale gas lowers energy cost to a level that offsets cheap labour cost in emerging markets for certain products.
The other difficult task for Bernake’s successor is that he or she cannot lower interest rate or increase Asset Purchase Scheme to simulate the economy.  Both tools have been “used up” by Bernake after pushing interest rate to practically 0% and purchasing USD 85 billion asset a month.  These are like steroid to the market and the new FED Chairman cannot add dosage. So what monetary policy can he or she use?  Forcing banks to lend to Small and Medium Enterprises?  Or learn from China to put up with massive growth in shadow banking?
Beside US economy, the FED Chairman role has big impact to the rest of the world.  India Rupee almost got knocked out in August when Bernake talked about tuning down quantitative easing.  The currency for 1.2 billion people depreciated as much as 13.8% against USD in August and recovered well in September by about 10% as the FED decided to maintain current Asset Purchase Scheme.  Sure there were a lot of hedge funds and professional traders taking a ride but the trigger is US FED.
To sum up, with Merkel’s victory, a big piece of the Eurozone puzzle is now in the right place.  Investors should expect more of the same.  The big question market is now on Bernake’s successor and what can he or she do more or less than Bernake.  This has big impact to emerging markets.

Uncle Sam is Cutting his credit card (22 Aug 2013)

Uncle Sam is cutting his credit card (22 August, 2013)

The financial market is paying attention to when and how US is going to slow down its Quantitative Easing.  It is currently buying USD 85 billion of asset in the market a month.  Such buying supports bond prices and keeps yield down.  Bernanke and his buddies in FED are planning to reduce the credit card limit from USD 85 billion a month.  The market is reacting to the expectation of tapering.

Yield on US 10 years government bond has climbed from 2.5% a month ago to 2.9% as of 22 August. Yield is the “interest” that investors get from buying the bond.  The higher the yield, the better return for investors assuming the government manages to pay.  European investors have probably heard enough about Italian government bond yields which are at 4.4% now, 6.5% in July 2012 and 7.2% in November 2011.  Falling yield means bond prices going up and rising yield means bond prices going down.  This year, bond investors are smiling with their portfolio in Portugal, Italy, and Spain and not so happy with US. Greece 10 years government bond is yielding 9.9% after printing 12.5% March and 7.9% in May.  This is a baby roller coaster versus last year range of 30.4% in March and 11.2% in December.  EU has another cheque ready for Greece.  Most of Greece’s debt is held by other members of EU and the International Monetary Fund so all parties have their interest aligned.  There will be cat fights between politicians but the debate over austerity measures and bailouts have become American Wrestling.

US and Europe stock markets are running out of steam.  US stock market made new high in the beginning of August and pulled back hard in mid August.  Dow Jones Industrial Index closed at 15,658.43 on 2 August and lost the 15,000 level on 21 August.  Eurostoxx 50 Index made a high print on 14 August to close at 2855.89, beating the high in May.  Interestingly, it was the French that led the market with CAC 40 Index outperforming German DAX Index by 2.4% in the past month.  FTSE is looking weak in August. It zigzagged around 6600 level for 2 weeks then tanked to 6390.8 as of 21 August.  While the developed markets are feeling uphill, the emerging markets are sky diving.  India SENSEX Index did a double flip and fell from 19500 level to 17900 level in August, that’s 8.2% move.  At the same time, the Indian Rupree collapsed from INR 60 to USD 1 to INR 64 to USD 1.  In May, it was INR 54 to USD 1.  iShares BRIC 50 ETF (BRIC LN) dropped from GBp 1600 in the beginning of August to GBp 1520 as of 21 August, still 6.6% higher than the GBp 1426 low in June.  If trend is your friend, global equity market is making friends with the bears.

In a money tightening environment with weak markets in BRIC, the mining sector is feeling wobbly. Looking at FTSE 100 Index members, many mining companies appear in the worst 10 performing list. Fresnillo is a gold and silver mining company in Mexico and it is down 37% this year as the worst performer in FTSE 100 index.  Chilean copper miner Antofagasta, mining giant Anglo American, Russian/Kazakhstan miner Eurasian, African miner Randgold, Rio Tinto, BHP Billiton and Glencore Xstrata are down 12-29% year to date.  That’s 8 spots out of the 10 worst performers.  To make the perfect 10, add Tullow Oil and Petrofac who did not seem to be benefited from the rising oil price this year.  Stay away from resources related stocks seems to be the wise choice so far.

There are happier stories in the tech sector.  If you like the Iron Man movies, you may want to take a look at Tesla.  Founder Elon Musk is Iron Man in real life with his success in Paypal and now Tesla Electric cars, not only made him a billionaire, but put him in the same league as Steve Jobs.  Tesla shares (TSLA US) has gone up 336.6% this year from USD 32 in January to USD 147.86 as of 21 August.  Another better known name facebook (FB US) closed at USD 38.32 as of 21 August, beating its USD 38 IPO price in May 2012.  The stock made its historical high of USD 39.32 on 5 August.  Other names on my watch list and their year to date performance are Amazon (+13.4%), Google (+22.9%), Apple (-5.6%), Microsoft (+18.4%).

With US cooling its money printing machine and the speculation on Bernanke successor, the rest of 2013 could be eventful.  Guru George Soros has occupied a front row seat with a bearish call on the US stock market.  The conservative investors may rather be an audience to preserve their cash, sitting on some European bonds believing the EU can stay together for now.

It’s a boy! Where is the bull? July 2013

It’s a boy!  Where is the bull?  2013 July 24

What a great news to Great Britain that we have a new prince.  It is always nice to have something to look forward to.  For most ordinary families, a new born baby comes with responsibilities physically, emotionally, mentally and financially.  Strong financial health definitely can make life easier, a lot easier.  With longer life expectancy and higher unemployment rate among the youth, parents need to look after themselves for 20 years after retirement. They probably need to help their children with their mortgages plus their grand children school fees.

Luckily, the stock market has been behaving for pensioners this year.  After a major scary correction in June, the FTSE100 Index dropped from 6,600 level to barely defending at 6,000 level. July was a joyful month. FTSE100 was back to 6,600 level as of 22 July.  Looking peakish?  True.  Fortunately, the companies are showing good results and the overall Price to Earning Ratio is estimated to be 12.5 times.  It means you are paying for 12.5 times last year profit to owe a piece of the business.  It may sounds expensive if you are paying for a fish & chips shop round the corner but not too bad if you are buying index stocks like HSBC (8.1% of FTSE 100 index weighting), Vodafone (5.6%), BP (5.3%), Royal Dutch Shell (5.0%), GlaxoSmithKline “GSK” (4.9%).  Should investors stay with stocks especially a board based mutual fund on UK stocks?  FTSE100 has recovered from the 2008/2009 financial crisis and went back to the same level as the 2007 peak.  To decide whether to stay with the winning horse, we need to do some analysis.

First, let’s take a look at our neighbors.  With Euro Crisis becoming a soap opera “Home and Away”, the audience is getting familiar with expected surprises and twists.  Investors only need to keep their seat belt fastened for turbulence. It seems the plane will land in one piece.  There will be disagreement between the German and the French.  Greece has a long way to go before it could stand on its own feet.  Italy, Spain and Portugal will give us fire drill.  The cash rich countries will have to put pressure on the poorer ones to please voters but no one wants to see blood.  We will have to paddle together to survive.  A year ago, I wrote about Grexit.  Now you do not really see this word being mentioned by media.

Second, we ask Captain America.  US stock market is still making history and printing new highs.  So much energy!  The manufacturing sector is experiencing a renaissance powered by plentiful of shale gas.  Bernanke may not create enough jobs to please his boss but he has certainly sent both stock market and bond market to the roof during his term.  Yes, we are close to the end of quantitative easing and money might not get any cheaper (higher interest rate).  But these are the results of US economy recovery rather than punishments for the market and hurting investors.  The wealth creation with the bond market and stock market rally has made pensioners happier.

Talking about happy investors, we have to mention the Japan market.  Abe-nomics has made more than a difference.  If you look at Nikkei 225 Index in USD, the peak in May was higher than the peak in 2007.  This is because it was JPY 120 to a USD 1 in 2007 and currently, it is JPY 100 to USD 1.  This made Nikkei 225 at 16,000 level in June 2013 higher value than the 18,000 level in 2007 in USD terms.  So the American fund managers who invest in Japan are even happier than the jolly Japanese pensioners.  If you look at Nikkei 225 performance in GBP, the Brits are laughing to the bank as it was JPY 250 to GBP 1 in 2007 and now only JPY 150 to GBP 1.  Sterling based investment in Nikkei 225 would have made 30% from the peak of 2007 to May 2013.

The world always has some unhappy faces. This time is the investors in BRIC “Brazil, Russia, India and China”.  Looking at the iShares FTSE BRIC 50 ETF listed in London Stock Exchange which closed at GBp 1582 as of 22 July, it is quite a few pennies lower than its peak of GBp 2220 on 23 May 2008.  Some analysts start to call BRIC a “Bloody Ridiculous Investment Concept”.  Well, one should not go that far.  Every dog has its days. Since the financial crisis, the developed markets have been the winning horses.  It looks like the winning horses will keep leading for the rest of this year as both US and Japan have a clear road map financially.

If US stops printing money, we all suffer. 24 June 2013

If US stops printing money, we all suffer.  24 June 2013

On 19 June, Bernanke hinted that the central bank could slow its USD 85 billion monthly asset-buying program.  Stock markets all over the world took a dive.  The US stock market benchmark S&P 500 Index dropped 5% in 4 business days breaking the 1600 level for the first time since 2 May.  FTSE 100 said goodbye to 6400 level and reached the doorsteps of 6000 level.  As of 24 June, FTSE 100 dropped 12.3% since its 6875.62 high on 22 May.  6,000 level was last seen at the beginning of 2013.  Eurostoxx 50 and German DAX took similar paths and dropped 7% and 6.5% in 4 business days after Bernanke’s comments.  Billions of pounds disappeared from the stock markets.  Gold suffered as well. It dropped below USD 1300 level.  China completely fell out of bed with a 10.2% drop from 18 June closing to 24 June closing. 

With such gesture from FED, for sure, there is no further QE (Quantitative Easing) and the current program will be in reverse gear.  It is just a matter of time.  The slowing down of bond purchases by the central bank is like your credit card limit gets cut but you are living off it.  Imagine your household in Canary Wharf costs GBP 8000 a month.  Suddenly, you are limited to GBP 6000.  It is not a simple switch from Waitrose to Tesco.  It means you cannot spend on anything other than necessity.  The market reacted violently and institutions are dumping asset.

The currency world also went yo-yo on Bernanke’s comments.  British Sterling went through a month of correction in May falling from GBP 1 to USD 1.56 level almost touching USD 1.50.  Sterling did great in the first half of June recovering all the losses in May and reached USD 1.5752.  Bernanke’s comment on 19 June triggered a sharp drop from USD 1.567 to USD 1.549 in the early morning in London.  As of 24 June, GBP 1 was at USD 1.543.  Sterling to Euro has been relatively stable since April.  Range bound between GBP 1 to EUR 1.16 and EUR 1.19.  The range has been further tightened between EUR 1.16 and EUR 1.18 in June.  The spotlight is on Japanese Yen that strengthened from JPY 100.72 to JPY 93.79 (per USD 1) range in the first half of June. After Bernanke’s comment, it eased back at USD 1 to JPY 97.6 level.

While USD has been strengthening across all major currencies after Bernanke’s comments, the US Treasuries bonds are getting sold off.  US 10 years treasuries yield has increase from 2.129% at the end of May to as high as 2.538% on 24 June.  In price term, it dropped from 96.62% to 93.15%.  Strengthening in USD and falling in bond prices could reflect overall money withdrawal from the bond market.  This is not switching from Dollar bonds to Euro bonds.  It is taking out cash straight from the financial system.  If you know your biggest customer, US FED, is going to reduce its shopping spree, you will reduce your inventory in all products.

Back to FTSE 100 blue chip stocks in the home market, EasyJet is the winner in the first half of 2013, up 58% year to date as of 24 June.  Up 46%, Persimmon, a residential property developer, is the runner up.  The second runner up is another airline, International Consolidated Airlines Group that owns British Airways and Iberia. It is up 37% year to date as of 24 June.  Who could have guessed that in a weak economy, airlines are the leaders of the pack?  Meggitt and Rolls-Royce, suppliers of parts and engines for planes, are the 4^th and 8^th best performing stock at +31% and +29% respectively.  At 6^th place is Travis Perkins, a distributor in building and construction supplies and materials, the stock is up 30% year to date.  BT, ITV and William Hill ranked 5^th, 7^th and 9^th with 30%, 29% and 29% return in 2013 so far.  Holiday, new houses, home entertainment, a few games and putting a few quid behind your team, it seems the “family” theme is winning so far.    The losers in FTSE100 are skewed towards resources stocks.  Tullow Oil, Glencore Xstrata, BHP Billiton, Petrofac, Eurasian Natural and Rio Tinto are down 20-30% year to date.  Randgold, Anglo American (a global mining company), Antofagasta (a copper mining company) are down 30-35%.  Fresnillo stood out at falling 52% year to date with a worrying drop from 2033 pence at the end of November 2012 to 887.5 pence on 24 June.  Worth mentioning Eurosian Natural was already in the losers list last year with over 50% drop.  Resources are likely to struggle in weak economy especially with China economy stalling.

Bernanke looked at the QE switch and the world shivered 24 May, 2013.

Bernanke looked at the QE switch and the world shivered 24 May, 2013.

Ben Bernanke and his FOMC members are hinting that they may slow down buying US debt.  Not turning the tap off completely but pumping less liquidity into the system.  In technical terms, this is a slowdown in quantitative easing (QE).  As the Federal Reserve (Fed) buys bonds from the market, it pays the sellers money hence pumping money to the system.  A lot of these bonds are issued by the government.  United States are practically buying back their “I Owe You” piece of paper using Greenback that they print.  The Greenback is real money that can be used to buy food and water.  If the Fed slows down their buying of debt, there is less Greenback in the system and may have a negative impact to economy.  Since the Global Financial Crisis in 2008, the US has been using QE to save the world.  The trouble banks are busy reducing their balance sheet and debt through deleveraging and sucking money out of the system.  To counter that, Bernanke has been throwing money at the market through buying bonds and debts with real money.

We saw QE3 in September 2012 that got Fed to buy USD 40 billion of bond a month and QE4 in December 2012 to increase the purchase to USD 85m a month.  These 2 QEs super charged the US stock markets to historical high.  It was mentioned in this column before that QE is like steroid.  It helps you to punch above your weight but long term usage will damage your health and its effectiveness will decrease with time.  Ben Bernanke and his team start to think now is the time to reduce dosage as US.  Dow Jones Industrial was the first to made new high in March 2013 and the boarder S&P 500 Index made new high on 28 March.  With both indices beating the 2007 peaks, it is time for Ben Bernanke to reduce dosage.

One potential outcome of slowing QE is further strengthening of US Dollar against the world currency (Euro, Sterling, Japanese Yen) and even gold.  It is a good idea to see the economy improving with less dosage of steroid.  Investors are concern that this may mean weaker earnings in companies and the next day Nikkei 225 index dropped by more than 7%.  The biggest drop since the earthquake in March 2011.  It puts a big dent to the 70% rally in a year.  Money looks for safe heaven and many people find themselves parking in USD and US Treasury. 

There is another angle to explain the strength of USD.  If you put yourself into the shoes of some big hedge fund managers, especially the global macro funds.  These are the big picture guys and they use the most liquid instruments to express their view.  In the currency world, there are a few currencies that one can move a few billions of dollars without waking up anybody.  These are USD, EUR, JPY and perhaps GBP.  To a lesser extent, gold as well.  Most funds have short EUR for years already on the back of the Euro crisis.  However, this is a very obvious trade and everyone does it.  This is what people called over crowded trade.  The Euro crisis has turned into an on-going concern.  Most hedge funds needs big and sharp move to make a killing.  Remember when Soros attached GBP in 1992.  The attack in GBP in the first quarter of this year sent GBP from USD 1.63 to USD 1.49 on the back of UK credit rating downgrade.  The big winnings come from the JPY move.  It was JPY 80 to USD 1 in November 2012 and in May 2013, JPY 103 to USD 1.  Thanks to Abenomics.  In May, gold was the victim and it dropped from USD 1474 to USD 1360.  So far, every attack is betting on USD strengthening against the other side.  It looks like the hedge fund managers have completed a round.

In the stock market, institutional money has also gone to developed markets like US, UK, Germany and Japan.  Germany, despite being in the heart of Euro zone, its stock market is also making new high.   This reflects two things.  Firstly, hot money has limited choice with bond yielding so low.  Secondly, institutional investors should be having the biggest smile since 2007 with both bond market and stock market rallying.

It does sound too good to be true.  Here comes the big question.  Is it time to take profit in the stock market?  Remember Warren Buffet once said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.  If everyone around is greedily buying stock, it’s time to get out.  Oppositely, if people are not convinced or neglecting the market, the bull train may have a few more stops to go.

To gold or not to gold 27 April, 2013.

To gold or not to gold  27 April, 2013.

“Should I buy gold?”

“Is gold going to fall below USD 1,300 per ounce?”

“When will gold price go back to USD 1,900?”

Many investors are asking these questions.  Gold price dropped by almost 10% on 15 April to USD 1,355.5.  It was a real shock to investors because gold price was at USD 1,600 level at the end of March.  What happened to all the good reasons to buy gold?  Hedging against inflation?  Euro crisis?  Korean peninsula tensions?  USD and JPY money printing machines?  So what caused the drop?  Some said Cyprus could be forced to sell gold and other cash strapped European countries might follow.  Some blamed it on China weaker economic data.  Well, we can all find reasons after the event.  Put yourself into the shoes of a fund manager.  You have been buying gold since Financial Crisis in 2008 and sitting on a reasonable profit.  Gold does not pay dividend or interest coupon and had a zigzag year in 2012.  Fortunately your stocks and bond portfolio have been performing.  With US stock market still at historical high level, US government and corporate bond prices in strength, some institutional investors are putting more money into stocks and bonds to follow the trend.  Gold price which had been falling since October 2012 from USD 1790 level, lost the heart of some institutional investors.  Considering gold price was below USD 700 for a little while in 2008 and had an amazing run to Sep 2011 to almost USD 1,900, the recent correction to USD 1,355.5 is at a halfway point of the upward slope created by the rally.  The bulls and bears battling in the midfield seem to be retail investors versus institutions.  In China and Hong Kong, there are consumers rushing to the jewelry store to buy gold bars.  On the side of the planet, the biggest gold ETF SPDR Gold Shares experienced nearly USD 13 billion of outflow this year and overall holdings in gold exchange traded products fell by 340 tons.  The selloff in gold ETF in such size reflected overall institutional investors pulling money out of gold. 

The British Pound recovered from March dip and rebounded to USD 1.545 for a pound on 26 April.  A touch above its 50 days moving average and completed a technical rebound.  Let’s consider that factors that could affect GBP/USD movement.  British economy is and will continue to be at a weaker state of health than US.  The UK financial sector is at best not getting more sick.  Euro zone is still a burden, not a gift.  There is one aspect where UK could par with US.  Both US and UK governments are likely to print more money.  Recently, we see a fair amount of media coverage on debt to GDP ratio.  In short, some very clever people said it is bad for a country to borrow too much money versus its economy and the measurement is the debt to GDP ratio.  Some leaders religiously believe this argument and stand firm about austerity measures.  There is another camp of very smart people and they said high ratio of debt versus GDP (say more than 90%) could be managed and question whether austerity is a solution to Euro crisis.  The world has gone around the sun 5 times since financial crisis and the Euro zone is held together by shoe strings.  Austerity measures are definitely not a quick fix and the patient is still dying.  People are now worried if the patients could survive long enough for austerity to work.  What is the point to take a drug that gives the patient so many side effects that would kill the patients before it could cure?  Come back to GBP USD.  The weakening of the School of Austerity means more capacity in money printing.  The US government is still printing dollars faster than it could pay debt while the two political parties bargain over details such as tax and healthcare policy.  The UK government will have a new banker Carney in town on 1 July.  Will he use an axe or scalpel to tackle recession? If he follows Abe-nomics, the pound could be happily sliding.

FTSE 100 Index which reflects the UK stock market, spent April yoyo-ing between 6200 and 6500.  Similar to US market holding on to a relative high level historically.  Going forward, FTSE 100 could be benefited from a weaker GBP and further rally in US stock market.  Most of the companies in FTSE 100 index are global companies like SABMiller, Rio Tinto, Vodafone and BP.  They will react more to global economy than to UK domestic economy.  So don’t get fooled by the depressing local news.

No Greed, Just Fear. 23 March, 2013.

No Greed, Just Fear  23 March, 2013.

Imagine you get a text from your bank, “Dear customer, in order to save the world, there will be a 10% tax on any money you withdraw from your bank account.”.  Even the Hollywood horror movie could not match Cyprus’ lawmaker script.  There is no safe place but a gold bar under your mattress.  US Dollar, Japanese Yen and British Pounds are printing money to be ahead in the currency war and keep their currency cheap.  Most of US, UK and Japan debt are in their own currency so as long as the politicians are willing to sacrifice a few trees and not to hang the parliament, these big boys will not go bankrupt.  But their currency should fall and lead to inflation.  The Euro crisis has become the tiger on the boat with Pi.  You just have to get used to it and you may even miss it if it disappears.  However, please remember the tiger could be erratic and attack your deposit.  With bank deposit rate low and inflation visibly painful, people with deposit are losing purchasing power every day.  Borrow to buy asset sounds greedy but that’s what makes sense on paper.

Many people are predicting the end of the bond rally.  Media, experts, fund managers comment the corporate bonds are yielding too low for the risk.  But the bond buyers and borrowers are happily together.  Investors are buying ketchup company bonds.  H J Heinz sold USD 3.1 billion bonds at the lowest coupon on record for junk bond.  Heinz is paying 4.25% annual coupon for 7.5 year and the company is B1 rated by Moody’s.  Perhaps the corporate bond rally will slow and some lesser credit worthy bonds may even fall in prices, but there are plenty of demand for bonds from institutional to high networth individuals.  They know their money is at risk in corporate bonds and they are going in with their eyes open.  That’s better than having your money in bank deposit and have a surprise one day.

The British Pounds have been falling like a rock since Moody’s downgraded UK and kicked it out of the AAA league last month.  GBP started the year as high as GBP1 to USD 1.6381 and printed USD 1.4832 on 12 March.  That’s a 9.5% drop.  It regained some ground and bounced back to USD 1.5230 on 22 March.  This is the lowest since June 2010 but still significantly higher than GBP 1 to USD 1.3503 on 23 Jan., 2009.  With US market looking strong and Europe looking dull, GBP could repeat its pattern in March to June 2010.  Rebound until 50 days moving average which is currently at USD 1.545 level and then dropped again to USD 1.4231 which is the low on 20 May, 2010.

EUR is at a cross road.  It started a rally from its low in July 2012 when it touched EUR 1 to USD 1.2043 and posted a beautiful rally to reach USD 1.3711 on 1 February, 2013.  Good job Draghi for this 13.9% rally against USD!  Then Berlusconi’s potential return knocked EUR down the ski slope and gave up half its gain to USD 1.299 on 22 March.  With the noise on deposit tax, it is hard to imagine any rich daddy and mommy still keep their cash in Euro zone.  Hence a good reason for money to goto bonds even the yield is getting low.

There is also money going into US stock market and Dow Jones made new historical high.  The US stock market took just 6 years to recover and excel.  And Europe got a heart attack from Cyprus.  Who is healthy and who is unfit?  The UK stock market with the help of the GBP weakening, also posted a nice rally in Q1 until the bulls got a cold from Cyprus.  FTSE 100 broke the 6,000 level in the first trading day of the year and January was a great month for stock investors with FTSE 100 rallying from 5897.81 to 6276.88, up 6.4%.  The 6,400 resistance was conquered on 5 March but lost on 21 March.  Many retail investors missed the rally and wonder if it is too late to get in now.  The general feeling is “yes” as experts are saying corporate earnings have been good but run out of upside going forward.  So the good time is over although most people did not even notice.

Missing the boat is better than getting on the wrong boat.  The gold lovers have been struggling since October 2012 when Gold was USD 1796.08 an ounce.  It went down to USD 1555.13 on 21 February, 13.4% lower.  Then zigzagged back to USD 1,600 level.  The world is looking for yield and unfortunately, Gold does not pay dividend nor coupon.

I can see why money goes to bond.  Nothing beats Heinz baked beans.

How to win the Currency War? 23 February, 2013.

How to win the Currency War?   23 February, 2013.

The music has stopped and this time, EU has stolen the chair from the UK.  The media, economists and hedge fund managers are now saying Sterling should be weaker due to a sleepy economy, broken banking system and a no way out government budget. Sterling has been falling from USD 1.6293 before Christmas to USD 1.5131 as of 22 February.  That’s a 7.1% drop which is a fair amount even compared to USD/JPY 11.9% drop in the same period.  What does this mean?

Let’s look at the weakening of Yen as an example.  The Japanese Prime Minister Shinzo’s Abenomic campaign is asking for a weaker Yen and lucky him, he got exactly what he asked for.  Abe has learnt a few tricks from Helicopter Ben in US and Draghi’s “Whatever it takes” tactics in Europe.  A weaker Yen has injected steroid to the Japanese stock market and Nekkei 225 went up from 10,000 level to 11,400 level.  Hang on, Nekkei 225 is in Japanese Yen which has weakened against USD by more than 11% and GBP by more than 4% in the same period.  So for those who invested in Japan Fund, the Japanese is laughing, the British is smiling and the American is unmoved.

In a Currency War, governments or Central Bankers try to weaken their own currency to improve their export competitiveness and “earn” foreign money.  A trick that the West has accused the Chinese for a decade to turn everything in their household “Made in China”.  Or if you look closer to home, the weaker Euro since Financial Crisis has helped German car makers to dominate the world.  (But why not the French car makers?)

A weaker currency to a country is similar to an individual worker accepting a salary cut.  It will make the individual more attractive to hire assuming he has competitive skills.  For a product or a skill that is non competitive, a discount may not be enough.  So Toyota car going on discount may make consumers choosing them over Volkswagen.  But Fujifilm offering a discount on its old stock is unlikely to convince digital camera users to buy film.

Will a weaker Sterling improve UK’s economy?

Should be good for Harrods, Selfridges and other tourists driven business, a weaker Sterling could mean more customers.  Not great for foreign workers in UK as their Sterling is now worth less at home.  ASDA will be tempted to increase wine prices as these wines are imported from Europe, US or Australia.  A side effect of a weaker Sterling is inflation.  The Government has already safe guarded property market to make it punishingly expensive for foreigners to buy luxury properties.  Unfortunately, the bread and butter for everyone is likely to get more expensive.  If a weaker Sterling does not create job, it is likely to hurt the unemployed and the retired.

For those who do not need to worry too much about the bread and butter, but have Sterling saving or asset such as property or gilts, they have to either hope their Sterling investment return can beat inflation or they could consider getting out of the Sterling.  Switching to US Equity Fund from Sterling investment is pivoting move, hoping for the US stock market to go up or at least outperforms Sterling against US Dollar.  If one’s Sterling investment is not possible to sell such as investment in SIPP or ISA, trading Foreign Exchange to long US Dollar and short Sterling to cover the notional value of the Sterling investment is an efficient hedge.  Please consult your financial advisor or bank on such Fx transaction.  If you have not traded leveraged Fx before, maybe you do not want to start.

Since the financial crisis, the American, European and Japanese central bankers are all printing money and distorted the bond and foreign exchange market.  Sending bond prices up and swinging Fx.  More importantly, the hedge funds all focus on liquid assets and government bonds and currencies perfectly fit the bill.  Hedge Funds’ herd action may have exaggerated market trend in both speed and magnitude as we have seen in the sharp fall of Yen and Sterling against US Dollar in the last 3 months.  Currency War between the big boys (US, Europe and Japan) is a round the world roller coaster ride that eventually goes back to where you start.  One cannot erase nor conquer the other.  But the ride could be years or decades as we have seen since in EUR from its date of birth to today.  For most people, it is not about making money from Fx swings but to survive them.  Business that import goods in USD, EUR and JPY, and sell in UK to earn Sterling are used to deal with the currency roller coaster.

Many people ask if they should buy Gold as its price has fallen to below USD 1,600 per oz.  My personal view is that Gold has become more of a tool for investment portfolio diversification but not a very effective hedge against inflation.  Many investors are looking for yield (coupon from bonds or dividend from stocks) and Gold does not offer that.  Another asset class that we need to get more cautious is the High Yield Bonds issued by corporates and government from Emerging Markets.  These bonds have rallied a lot in the past 2 years and got to the point that the coupons they pay may not justify the risk for the bond holders.  It is hard to be a happy investor but with bank deposit yielding nothing, investing is becoming a compulsory hobby.

Global stock markets versus Apple 26 January, 2013.

Global stock markets versus Apple  26 January, 2013.

Good news is that major stock markets are all up.  Dow Jones Industrial Index, FTSE 100, Hang Seng Index are all making 4 years high.  US Debt Ceiling looks like a moving finishing line and turning into a political drama rather than a financial matter.  Wait until the rating agency shows US a yellow card for living on debt forever.  This could cause a wobble.  UK stock market has quietly outperformed its European peers.  If you ask UK citizens outside London, they probably struggle to understand why the stock market is so strong.  FTSE100 are dominated by global companies like BHP Billiton, Royal Dutch Shell, HSBC, Vodafone, BP that make money in many countries outside UK.  FTSE100 has little to do with domestic economy.  Hong Kong stock market has been turbo charged as institutional investors and media see upside in China stock markets.  Perhaps not so much because of China GDP growth, but a rebound after over 3 years of bear market due to lower valuation and lack of confidence in corporate governance.  Remember Paulson Fund losing USD 750m from their investment in Sino-Forest.  Anyway, the pendulum has swung back and institution money is flowing into ETFs listed in Hong Kong.  If trend is your friend, US, UK and Hong Kong could give you a ride.

Abenomics could be a catalyst to a weakening Japanese Yen.  Yen depreciates from JPY 78 to USD 1 in October to now hovering around 90 Yen to a Dollar.  That’s a 15% move in a major currency.  The weakest since mid-2010.  Investors expect a weaker Yen will improve Japanese exporters’ competitiveness and Nikkei 225 rallied from 9,500 level in the beginning of December to test 11,000 level in the end of January.  Abe Shinzo was Prime Minister from September 2006 to September 2007.  Since then, 5 people took the driving seat before Abe’s return.  Jose Mourinho left Chelsea FC in September 2007 and since then, 8 managers and Mourinho has not returned yet.  Between Obama in US, Xi Jinping in China and Abe in Japan, there is a clear favorite of who is going to leave the office first.  So Abe has to race against time and think out of the box to detour Japan from its 3^rd lost decade.  A weaker yen, a 24/7 money printing machine and 2% inflation are going to be painful to Japan’s aging population but in Abe’s eyes, necessary for the future generations.  There are institutional investors eyeing Japan market.  Is this just another season with high hope but no trophy like Arsenal?  Or a real game changer likes Manchester City?

An Apple a day, my money has chipped away.  Shocking.  When Apply launched iPhone 5, its share price hit USD 705 in September 2012.  It dropped to below USD450 after it reported record quarterly net profit of USD 13.1 billion.  Apple shares look very attractive at this level but the problem is that it already looked attractive at USD 600 in November and at USD 500 in December.  So the bargain hunters or value investors are getting run over by stop loss orders.  Again, if trend is your friend, this is not the right train.

Gold is going nowhere?  It has formed a downward zigzag trend since it tested USD 1,800 level in October.  It is at USD 1,660 level as of 26 January, 2013.  Gold as an inflation hedge maybe true but a rising stock markets have lured investor interest away from gold.  To hedge against inflation, perhaps property is a better investment.  Quite a few people have mentioned their recent investment in US single-family homes.  Buying them at distressed prices and collecting nice rental.  As yield seekers move in, prices of these single-family homes go up.  There are Real Estate Investment Trusts (“REITs”) focus on such investment.  Worth giving your financial advisor a call to find out more about REITs if you believe in mighty America recovery.

2013 and the year of Snake 4 January, 2013

2013 and the year of Snake  4 January, 2013

Congratulations to the world that the US government managed to steer the world economy away from the fiscal cliff.  How?  In short, buy a bit of time and worrying about it later.  Well, tax the rich more to show a gesture.  Just like any Hollywood action movie, the ending of a cliff hanging scene is only the beginning the next life threatening situation, the debt ceiling.  US government should not be issuing debt forever to fund their deficit.  There is a ceiling or a legal limit to US debt, some unimaginable number of USD 16 trillion.  If the ceiling is not raised around March, the mighty United States may not have enough money to pay for the bills.  The S&P 500 index put on 13.4% in 2012.  If you count the dividend, take into consideration USD has gone weaker against GBP,that is still 10.8% return in GBP terms.

The Euro zone is a parallel theme going on in 2013.  Despite all the drama, the Euro zone stayed together and the media has stopped mentioning Grexit.  Spain and Italy will still offer plenty of headlines while France is the next big worry with not so healthy balance sheet.  In 2012, Euro leaders show they really will do whatever it takes to maintain the single currency and the market is getting convinced.  Or at least it will take years rather than months to see it coming.  2012 turned out to be a great year for the European stock market with Eurostoxx 50 Index offering 16.3% total return (price performance plus dividend income) in GBP.  Who could have guessed the Eurostoxx 50 could beat US S&P in 2012.

China has its new leadership in full swing and the year of Snake is a year of settling and then progress.  Global demand is likely to be slow in 2013 and China continues to become more expensive as a manufacturing center.  However, the stock market might have priced in too much bad news and if you look at the Shanghai Exchange Composite Index, Santa loved China and the index rose from 1949.5 on 4 December, 2012 to end the year at 2269.1 points.  That’s a 16.4% rally within December and more importantly, like Chelsea winning Champions League last season, Shanghai Exchange Composite Index managed to give a +2% total return to investors in GBP terms.  So all the “China Down” and negative views were denied by the stock market performance.  Or perhaps the stock prices already priced in an even worse picture.

Apple, on the other hand, took a downhill run in Q4 2012 from USD 705.07 as of 21 September 2012 to end the year at USD 532.17.  Ops, that’s a very cold shower for iPhone 5.  Again, perhaps the expectation was too much and we did not expect Samsung Galaxy S3 and Note 2 to be so popular.  There are quite a lot of investors keen to get into Apple at USD 500 a share.  At 11 times 2013 expected earnings, that’s quite reasonable and it is the low end of estimated Price Earnings ratio that we have seen in the past 3 years.

Coming back to home, FTSE 100 had an amazing start of 2012 and closed at 6,027.37.  Nice to be above 6,000 again and that has been the top end for FTSE 100 since 2009.  It is hard to convince retail investors to buy stocks with the index at 6,000 level.  So who are the buyers in the market.  If it is not the ordinary salary people, then it could be the ordinary people in an un-ordinary seats such as fund managers, traders, Chief Investment Officers of Pension Funds.  Why do they buy at this level?  (1) it is not their money but other people’s money.  (2) they need to buy something and bonds have rallied so much that there is limited upside.  (3) sitting in cash is not really what they get paid for.  See, we have to be more understanding.  Sometimes, one has less choices than others think.