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.