US rate hike . So what?

US rate hike . So what?

Finally, since June 2006, US interest rate has gone up again. Fed Rate has gone up by 0.25% to a range of 0.25 to 0.5%. So why did US Fed increase interest rate in Decembere? There is no perfect timing and perhaps the Fed missed a better slot earlier. Like before the China A shares bubble burst in July. The tension between the European Union and Russia over Ukarine, the Syria rufugees and the unhealing Greek situation have nailed Euro to the floor. Commodities currenies such as Canadian Dollars and Australian Dollars fell as China economic slowed down. China Renmanbi also joined the dark side to depreciate its currency to ease the downward pressure in property and stock market.

Another angle is that the purpose of loosening in monetary policy and dropping interest rate to zero was to save the US finanicial industry. The AIG, Fannie Mae and Frediie Mac, Citibank and other financial institutions that were paralized from the shock of Lehman bankrupcy. Now these Financial Institutions have regained strength and the US Fed can increasae rate. Increase interest rate is like sending US economy to the gym for training. Make the economy sweats, gets fit and builds muscle and prepare for the next bubble bursting. US companies can take advantage of the US Dollar strength to do acquisition. Many foreign markets and currencies have fallen against US Dollar. It could be shopping time.

Bond market would suffer especially bonds with fixed coupon. As interest rate goes up, these bond prices tend to drop. The longer the maturity of the bonds, the more they could drop in prices. The currency market is harder to read as USD is already so strong. Long USD short EUR is an attractive carry trade. Banks charge clients to deposit EUR and pays clients interest on their USD deposit. Would EUR drops to less than a USD? Many institutions have shorted EUR agasint USD and rode the long term trend. Many hedge fund managers and currency traders who short EUR with high leverage got burnt from wrong timing as EUR could rebound fiercely. For those who are non professional but have a strong conviction in the currency market, lower or no leveage position could help you to ride the longer trend and withstand sharp market movement. Leverage or margain trading are definitley high risk investment as the investors could lose more money than they put up in the first place, leading to debt beyond affordability.

For stock investors who feel EUR will be further weakened against USD, companies that are EUR sensitive could be interesting. For example, international airlines that have most of the cost in EUR but getting revenue in USD. Similarly tourism sector, luxury goods, engineering companies and manufacturers. Eurostoxx 50 Index ETF or the German DAX Index ETF are convenient investment tools to get exposure to the Euro zone story. However, the increased compeitiveness due to a weak Euro is offset by many risk factors. The Euro zone is a live case study of a system that is facing all the uncontrollable risks at a corporate level. Currency unpeg, political risk, war, terrorist attack and social unrest are all real risks in the Euro zone. Buyers beware.

There are 2 other economies that could potentially continue their growth in a rising US interest rate environment. UK is likely to enjoy its physical separation as an island from the rest of Europe and its independency in Great British Pound. UK global software and IT sectors are competitive. Education sector is a real GDP contributor and the growing population in oversea university students drives rental market nearby and supports property prices. UK economic grwoth is expected to be around 2.9% in 2015 and it is the second fastest in the advanced world after USA. UK economy is expected to be 6.1%I larger than its peak before the financial crisis. Ireland is the only English speaking country in Europe using EUR. Its GDP rose by 7% in the first half of 2015, probably the fastest in the Euro zone after surpassing the pre-crisis high last year. Its low corporate tax rate of 12.5% attracts phamaceutical companies like Pfizer and tech companies like Apple, Google and Facebook to setup European base.

Investing for a safer world

Investing for a safer world

The attack in Paris has reminded everyone the world is under a lot of tension.  In this article, we will look at the impact to the investment world. 

There will be increasing investment in security, surveillance and defense at country level.  Most countries are going to increase resources in police and army.  This is definitely good news for stocks in related sectors.  Increase in government spending in general can create jobs and simulate economy.  Overall positive for stock market in the near term, say, 12 months.  An example of an UK listed company with exposure to the defense sector is Smiths Group plc that rallied from 925.5 GBp on 16 November to 1036 GBp on 25 November.

Social media will be monitored closely by government agents, police and army.  Can big data analysis predict or guess who, when and what?  There will be demand for faster computation power to analyze zillion of messages that appear on all social media platforms.  People want better encryption technology, smarter computer virus, and stronger anti-virus.  Positive news for hardcore tech companies as strong technology will attract investment before operating profits.  Computer Scientists will see more investment from Private Equity, Venture Capital and family offices who want to be there before Google, Facebook, Amazon and the BAT (Baidu, Alibaba and Tencent) from China.  Google is trading at its year to date highest level at around USD 750 a share.  Google beside dominating the search engine business and running YouTube, it is also one of the biggest venture capital in technology.

Central banks are likely to lean towards a more relax monetary policy to boost feel good factor and offset the fear factor.  This leads to the thought of a weaker Euro versus USD.  Good news for Europe based manufacturers like the German car manufacturers which are desperate to regain client and investor confidence after the misunderstanding in carbon emission figures.  With national security as the priority, issues that money can solve such as the Greek bailout may have become a smaller problem.  A weakening Euro has made the Greek bailout cheaper in USD terms.  Currently, EURUSD at 1.06 level is pretty much the bottom in the past 12 months.

Strong security measures will be implemented at transportation facilities.  Some may already notice the longer waiting time at airport custom.  The passengers and the tax payers will eventually bear the increased cost to manage railway stations, airports, bus terminals.  However, the number of people getting on the plane will continue to grow globally as there will be more people in developing world like China and India flying.  Global money managers will still be interested to invest in airports.  Both Heathrow and Gatwick are owned by unlisted companies.  Heathrow Airport Holdings was the old British Airport Authority (BAA Plc) which was delisted in 2006.

Tourism and airlines are immediate victims and present different opportunities.  Most global airlines are already suffering from increasing competitions especially regional budget airlines continue to grow in both geographical coverage and capacities.  This trend is likely to continue and the end of the tunnel is not yet in sight.  Hotel operators will suffer in the short term but the growth will come back.  The recent Marriott Starwood merger will create the biggest hotel operator is like a reality show of the Hotel Tycoon board game.

Retail and consumer sectors will continue to invest more to grow online.  The change of buying behavior from brick and mortar to internet continues and high street and shopping malls will continue to be dominated by global brands.  There are signs of slowing growth in the luxury consumer segment.  The Russian and Middle East petrol dollar has become history.  Chinese are still shopping but in October, the domestic growth has slowed to below 7% for the first time since 2009.  Retail and consumer may not be a segment that offers the easiest return.  Along the food chain, property investment companies especially those invest in shopping malls. British Land Company Limited has gone up from 460 GBp in 2012 to 870 GBp level in October.  It retreated to 830 GBp level in November.

Post offices and logistics companies, in general, have benefitted well from the growth in global e-commerce.  More transactions on Amazon and Taobao mean more parcels to be delivered.  Logistics companies will need to be more cautious about what they are shipping and where they are shipping to.  The impact to logistics companies is probably milder than the impact to passenger carriers. Royal Mail reached 524 GBp in May and 525 GBp in June.  At 480 GBp level currently at about 15 times profit to earnings ratio is already a rebound from 442 GBp on 2 November.  

In the financial sector, more attention to anti-money laundering policy, tighter measure in client onboarding and source of fund.  This means higher running cost and less friendly in account opening process especially for overseas individual or corporate accounts.  Global banks have just spent a fortune to adapt to the post Lehman regulation regime and now they face increasing demand in compliance.  This could be the last straw that breaks the camel bank for the banking sector.  More laid off, lower profitability and lesser return for investors.  Banking services are aligning themselves with government services rather than an exciting private sector.

When Cameron meets Xi Jingping

When Cameron meets Xi Jingping

Cameron and the Royal Family definitely treated the leader of 1.3 billion people well.  Xi Jingping, China’s President, visited UK and made friends with the Queen and princes.  It was only 1997 when China got Hong Kong back from UK and China has grown to the second largest economy in the world since.  Chinese students are flooding into UK Universities and their parents are buying UK properties without paying a visit to the local pub.  We have seen hot money from Middle East and Russia and the Chinese is the similar.  But the base number of 1.3 billion people makes everything so much larger.  UK, being the most business friendly country in Europe, is in a good place to capture the China growth story.  Europe wants to export to China and China wants to invest into Europe.  One of the big picture topics is the globalization of Renminbi, the Chinese Yuan.  London wants to continue its success as a global currency trading center and Cameron has done a good job to secure UK a front row seat in Renminbi globalization.  Mr Osborne’s northern powerhouse project is hoping China will put some money to revive the Industrial North.  Education, tourism, healthcare, design and technology, fashion are some of the sectors where UK has good chance to attract Chinese investors.

US election is getting interesting and people start to think it could be Hillary Clinton versus Donald Trump.  Donald Trump has brought his television personality to the election and his appearance is almost entertaining.  It is hard to imagine how global leaders view Mr Trump’s “Apprentice” style.  The lucky thing is that the next US President is likely to enjoy US being the super power by far in the next decade.  Europe is barely keeping Eurozone together.  Russia is cripple and depending too much on its oil export.  Japan will continue to lean towards US rather than China.  China will grow in a much lower pace in the next decade than the past decade.  The gap between US and China may actually widen due to the lead US has in science and technology.  In 10 year time, it may not be Microsoft or Google that lead the pack, but likely to still be a few US companies leading the industrial revolution.

If you talk to a teenager, there is a fair chance that he or she finds IBM a rather unknown brand.  Although IBM probably has every Fortune 500 company as clients, there is a fair chance it would be a much smaller company in 10 years than today.  For a 104 years old company that reports lower quarterly revenue for 14^th straight quarter, investors have the right to be skeptical.  IBM share price closed at USD 144.71 on 23 October, 2015.  It is at a low range if one looks at its USD 140 to 215 trading range in the past 5 years.  Dividend yield at 3.6%, 12.7 times Price to Earnings Ratio.  Microsoft on the other hand is at its highest share price since 2000 as the stock was up 10% on 23 October to close at USD 52.87.  2.72% dividend yield 35.7 times Price to Earnings Ratio.  IBM is trying hard to transform to services, platform and cloud but new leaders like Google and Amazon are also in this space.  Old guards like SAP and Oracle are defending their territory as well.  While IBM is getting out of hardware, Microsoft is moving into hardware like notebook, tablets and phones.  Windows is probably the only meaningful candidate to squeeze into the mobile operating system arena that Apple IOS and Andriod occupy.  Microsoft has subtly following Apple business model and their Surface Book and Surface Pro are competing against MacBook and iPad.  And Microsoft Xbox has all the additive gamers hooked already.  Imagine you have an Xbox in your mobile.  It will be like iTunes driving consumers to buy iPhone.

According to a research carried out by network experts Ericsson, it estimates there are 2.6 billion smartphone users in the world in 2014 and growing to 6.1 billion by 2020.  Looking at the number of people staring at their phones in the tube or even in restaurants, we know human has just mutated.  However, what more do we need from the phones which is already dominating our lives.  There are already too many apps for everything one could dream of.  The iPhone6 Plus or Samsung Note 5 is already more powerful than most PCs in the office.  The phones already justify more “face time” than your loved ones.  It is time to think how many more dollars can iPhone, Note or Galaxy can get from you.  Perhaps the next Uber can give you the next Nokia smartphone for free as long as you promise to use their services 4 times a month.  Apple share price has gone from USD 40 to USD 120 in 5 years.  It could be the next IBM in this fast changing world.

The revival of “Made in Japan” and China just party on

The revival of “Made in Japan” and China just party on

The long awaited rate hike from US Fed did not happen in September.  The Fed is worried that the fragile emerging markets especially their weak currencies may not be able to hold up.  It is great that the Fed is so considerate and they are right to be concerned.  Brazilian Real, Russian Ruble, Indian Rupee and Chinese Yuan have weakened against 52.4%, 8.74%, 4.5% and 2.9% this year as of 22 September.  The Chinese bull has lost steam and commodities prices have been falling.  Australian Dollar and Canadian Dollar have lost 13.9% and 14.2% respectively against the USD in 2015.  Market is saying the current scenario is like Asian crisis in 1998.  The developed markets did not get too hurt in 1998 and they probably could survive “Asian Crisis 2015” just like they survived “Russian Ruble Collapse 2014”.  Well, the Fed made it clear that rate hike is still on the agenda and the plan to starting increasing interest rate is delayed but not cancelled.  Asian emerging markets have an extra month to deal with an even stronger US Dollar.

The dynamics in Asia because of the currency movement have changed significantly in the past year.  Japan has been a quiet winner with a much weaker currency and it manages to be a lot more competitive in exports.  The weakening Japanese Yen has also turbo charged Japan tourism and property markets.  Bloomberg report made a forecast of 4 million Chinese tourists to visit Japan in 2015.  The Japan National Tourism Organization said 576,900 Chinese tourists visited Japan in July 2015.  Hong Kong people are investing in Tokyo property which they find more affordable than Hong Kong property.  Japan manufacturing sector enjoys both weak Japanese Yen and low oil prices.  There is a revival theme happening.  Inflation in Japan is 0.2% year on year in August and local people seems to be able to cope.  Japan economy as reflected by the GDP has contracted by 0.3% in Q2 2015 versus Q1 while Q1 was up 1.1% versus Q4 2014.

China is working hard to develop service industry and domestic economy.  It has said goodbye to the low cost labor export driven economy as many South East Asia countries are a lot more competitive in price.  The recent stock market crash and Chiense Yuan devaluation may get a lot of worrying look from the West.  But the inside story is a fair bit stronger.  Most people in the West may struggle to name a China household brand although a lot of household appliances and gadgets are made in China, including iPhones.  Maybe a few people could name Huawei and Leveno because of mobile handsets and computers.  In China, local brands are doing well in domestic market and that is a 1.3 billion people market.  Consider Alibaba's Taobao.com which is mainly targeting Chinese residence.  As a brand, Taobao is nothing like Amazon but it has 350 million users versus Amazon 244 million users.  Similarly, Facebook's Whatsapp versus Tencent's WeChat is 900 million users versus 600 million users.  Due to Chinese language and regulations, the local brands and products have obvious advantages in the domestic market.  The traditional brick and mortar business is even more localized with the exception of retails especially in fashion and luxury products.  H&M, Zara and Uniqlo have big stores in prime locations.  Hermes, Chanel, LV and many more brands are easier to find than a HSBC branch.  There are 25 Ferrari showrooms in China.  Of course, there are also 1500 Starbucks in China.  China economy is ok and still moving forward.  On the contrary, the Chinese stock market has taken a step back as government and regulators are discouraging trading.  The once most liquid stock and futures markets have gone into nuclear winter.  Stock market turnover has dropped 70% from its peak and has totally lost its popularity as the benchmark index CSI 300 is 40% off its peak in June.  The CSI300 futures used to trade over 2 million contracts a day and now at 30,000 level.  Why?  The exchange decides to charge retail investors 40% initial margin and practically limit retail investors to trade only 10 contracts a day.  This shows the government is determined to tightly manage the stock and futures markets.  If they find it hard to manage, they limit the activities to a scale that they could manually manage.

From China fear to Global Meltdown

From China fear to Global Meltdown

Chinese Yuan is falling against the US dollar.  From 11th to 24th August, Chinese Yuan depreciated from 6.20 to 6.40 to a dollar.  This is the official rate in China.  The offshore rate reached 6.51.  This is a very fast drop for a currency that is used by 1.4 billion people.  The official reason is to echo international market demand to make the Chinese Yuan currency rate more market driven and follow offshore market supply and demand.  For years, the US government has been urging the Chinese Yuan to appreciate as China exports more to US than imports from them or in technical terms, China is running a trade surplus against the United States.  On the other hand, while “Made in China” is still often found in many consumer products such as iPhone, there are more and more consumer goods such as clothing and sport shoes are now made in places like Vietnam and Indonesia.  For those who travel to Beijing and Shanghai, a business dinner may not exactly cost the same as a meal in Gordon Ramsey's restaurant but no longer at emerging market prices.  China labor cost has definitely gone up in multiples in the past 10 years.  Compared to Japanese Yen over 30% depreciation since Prime Minister Abe took office in December 2012, Chinese Yuan depreciation is not steep enough to revive its low end manufacturing.  A more significant gesture of the Chinese Yuan depreciation is that it no longer artificially tags along the US Dollar.  It is accepting market force to push it around a bit.  This could be a step towards making the Chinese Yuan an international currency.  Having seen how Russian Ruble collapsed last year, Chinese Central Bankers are very careful.  Luckily, the Chinese Yuan is not yet fully convertible so not easy for hedge funds to short. 

Why should one in Europe or US care about a few percentage drop in a restricted currency like Chinese Yuan?  Well, Chinese Yuan is pretty much the last Asian currency standing as everything from Korean won to Indonesia Rupiah have fallen 17.5% and 20.0% in the past 12 months as of 24^th August.  This may mean the US Dollar has been the winner but eventually, if all your neighbors are offering their products at 20% lower than yours, you will have to adjust as well.  If US Dollar stays where it is, it could mean US Dollar asset has to drop in prices.  This means stocks and properties.  US stock market has fallen 7.2% in a month if we use S&P500 as the benchmark.  Nasdaq Composite index also dropped 9.1% in the same period to show that even high tech stocks are not immune to asset price correction.  Apple share price dropped 14.8% in the same period on the back of concern over its sales in China would slow down.  Many US listed companies are international companies that make profit from all over the world.  If “all over the world” is struggling, many US listed companies will struggle.

Commodities such as Iron Ore, Copper and coal have been falling since 2011.  China is the biggest importers and users of many commodities.  Commodities driven economy like Australia is in winter.  Oil at USD 40 means Russian and the Middle East are pumping a lot less money from the ground.  2008 financial crisis was driven by over leveraging of bank balance sheets.  This time, we could be entering into a fundamental valuation correction and we may see deflation in developed countries and inflation in emerging markets.

Investors could take 1997 Asian crisis as a reference.  This time things should be better as Asian countries or companies learnt their lessons and did not issue USD debt up to their eyeballs.  You do not want to owe people USD when your income in local currency is depreciating fast.  The right strategy last time was to hold onto developed market currencies and perhaps pick up asset after the correction.  The difficult part is how to tell when it is “after the correction”.

Another topic.  Euro zone looks forward to the next Greek Prime Minister.  This seems to be a new series of the Greek Debt drama.  Who would be the new Prime Minister?  Would the new PM tear up the agreement made by the last PM and refuse to implement the painful austerity measures?  The nation has voted to go one way but then a change in leadership could re-open the conversation.  It is hard to see the end of the tunnel but perhaps the whole issue has become part of normal life.  Euro zone will live with the risk that one day there maybe a Grexit.  After rehearsing it a few times since 2008, Grexit may not cause a Tsunami to the world but still a tropical storm.  Euro as a currency may have reached a good level against USD or GBP.  Euro stock markets have fallen 14% in a month as of 24^th August and may need to correct more with the US market.

The world without Uber or Mercedes?

The world without Uber or Mercedes?

China stock market has gone through an earthquake in June and July.  The Shanghai Composite Index started the year of 2015 at 3237 points after going up 53% in 2014. The China bull market was in its 5^th gear in March and rally 54% in three months and reached 5166 points on 12^th June.  Now looking back, the turbo charged bull was fueled by gearing inside and outside the system.  Inside the system means margin financing provided by Securities houses at a regulated level, say, loan to market value ratio of 30-60%.  Outside the system means borrowing money through P2P platform or financing company with loan to value ratio at 75%.  When an investor only has GBP 100 to own GBP 400 worth of stocks in a market that has gone up more than double in 12 months, the “STOP” sign was written on the ground.  But just like most drunk drivers, investors believe they can all drive like Lewis Hamilton until it is too late to brake.  The Shanghai Composite Index dropped off a cliff from the peak in June to 3,687 points on 3^rd July as hundreds of thousands of investors stumbled over each other in the midst of margin call and cutting losses.  What should have been a normal correction in an overheated stock market turned into a liquidity crunch as at one point, 50% of all listed companies in China were suspended from trading.  This became a national crisis and the Chinese government stepped in to intervene.  Poured hundreds of billions of yuans to support the stock market.  The market rebounded back to 4,000 points level and closed at 4,071 points as of 24^th July.  There are some noises from the International Monetary Fund about China should respect a free market.  Well, maybe the IMF should remember the Russian economy collapsed in 2014 and Russian Ruble went down 50% in value.

Change of topic to something closer.  Everyone can sense there is a revolution happening in the transport industry.  The expansion of Uber, the launch of the beautiful Tesla electric car and the Google driverless cars are the key ingredients. Imagine most of us taking Uber driverless electric cars.  Who is going to lose out?  Mercedes, BMW, Audi, Volkswagen.  The fact that German brands dominate the passenger-vehicle industry, may have also made them the future Nokia, Ericsson and Blackberry.  Addison Lee is a car company operating in a few cities to provide an alternative service to cabs.  Uber is absorbing the taxi markets in many more cities than Addison Lee and even in remote villages where taxi does not reach.  Uber connects passengers and drivers whether the driver has a taxi driver license or not.  Uber is positioning itself as a personal logistics service at your fingertip.  Pick up flowers, laundry, parents, kids, husbands from a pub in Shoreditch.  Uber does not own any car and it is helping you not to own a car.  While Uber has not mentioned any timing about listing itself in the stock exchange, it is already valued at USD 50 billion after raising USD 1.2 billion in June.  Fidelity, Blackrock, Goldman Sachs, Qatar Investment Authority, Google, Baidu are some of the big names in Uber’s shareholder list.  Travis Kalanick founded Uber with USD 200,000 in August 2009.  

Google has been testing driverless cars in California and Texas.  They have done over 1 million miles already.  The Google designed prototype is like an old mini cooper zooming down the street.  Google is a USD 427 billion company at 28 times Price to Earnings Ratio.  It has 55% market share of search ad revenue globally.  That is estimated to be USD 44.5 billion.  Perhaps one day, one can google a restaurant, a single click will send you a driverless car organized by Uber and give you a ride to the restaurant.

Tesla is USD 34 billion market capitalization and does not make a profit yet.  Tesla’s 2010 IPO price was USD 17.  On 24^th July, Tesla closed at USD 265.41.  Tesla has done well with its sedan model launch and is going to launch a SUV model.  If the investors start to view Tesla as a car maker rather than a revolutionist, Tesla would need to sell a lot of cars and show good profit.  Volkswagen is EUR 90 billion market capitalization at 8.2 times Price to Earnings Ratio. 

What will happen to German economy if global demand on passenger vehicle growth slows down?  China is the biggest car market and it is expected passenger-vehicle sales in 2015 to reach 21.3 million vehicles, growing 8%.  With the stock market crisis in June, the future might not be as bright.  Also, competition is fierce with Japanese, Korean and local car makers all fighting for market share.  Volkswagen Group’s China sales fell nearly 17% year on year to 250,000 vehicles in June.  Germany may have managed to keep Greece within Euro zone but there is a price tag.  Its auto, engineering and manufacturing industries are facing game changing moments due to new technology.  European stock markets have had 3 good years already.  Time to keep an eye on the ground for the “STOP” sign.

Long Sterling and long Europe have been a safe journey.

Long Sterling and long Europe have been a safe journey.

With all the drama about Greece, UK election and FIFA, long GBP and long UK or Europe stock markets turned out to be a good trade in first half of 2015.

Eurostoxx 50 is up 14.3% in 2015 as of 22 June.  Performers are banks and exporters in general.  Top 10 performers are all up over 20% year to date.  Banks like ING, Intesa Sanpaolo, SocGen, Unicredit are in the top 10 while Banco Santander, number 4 from the bottom, is down three percent in price year to date.  ING is up 41% year to date as of 22 June.  Inditex (Zara fashion chain), LVMH, Daimler are also in top 10 to reflect the better business activities in the consumer and luxury segments.  Airbus tops the leader board with 46.7% return year to date as of 22 June as everyone seems to be flying more these days.  Among the top 10 losers, there are some household names like Siemens which is up 3.1% and Nokia is down 0.9% year to date.  Another interesting contrast is Deutsche Telekom up 22.0% while Deutsche Post is down 0.2% year to date as of 22 June.  More texting than writing is the norm.  Postal service needs to tie up with eCommerce giants like Amazon to be part of the supply chain.

FTSE 100 is up 4% year to date.  Property developers have done well.  Long Property Developers stay away from miners has been the winning theme.  Taylor Wimpey, Barratt Developments, Persimmon are all among top 5 performers this year.  Mondi that does paper packaging ranks second with 36% return in 2015 as of 22 June.  Schroders, a fund manager, and Hargreaves Lansdown, the Independent Financial Advisory Group also give over 22% return to their shareholders.  The resources sector is a struggle in general.  Miners like Rio Tinto, Glencore and Fresnillo are down 8%.  Anglo American is the worst performing stock in FTSE with 17% negative return and we still have 6 months to go in 2015.  In the oil and gas sector, BG Group is getting bid from Royal Dutch Shell.  BG Group is up 26.4% and Royal Dutch Shell ‘A’ is down 13%.

In US, there is no simple pattern scanning across the household names.  Netflix, the online TV/Movie content provider who also produced House of Cards, provided 98% return and top the chart in Nasdaq 100 stock index.  Electronic Arts, a game provider, Amazon and Starbucks were up 42%, 41% and 31% year to date respectively.  Walt Disney, Apple, Boeing, Goldman, Nike, JP Morgan, Pfizer are up 10-21% year to date.  Coca-cola, Johnson & Johnson, Du pont, Travelers, Exxon Mobil, Chevron, Intel, Procter & Gamble, American Express, and Wal-Mart are the bottom performers among the 30 stocks in Dow Jones and they are down 4% to 15%.  The worst performing stocks in Nasdaq 100 stock index include Whole Foods Market, Yahoo, Wynn Resorts are down 18%, 19% and 32% respectively.

Currency wise, Sterling holders have had a steady and safe ride.  GBP against EUR has gone up from 1.29 to 1.40 as of 19 June, 2015. The high print was 1.42 on 11 March.  Since March, GBP versus EUR has been range bounded between 1.34 and 1.41.  GBP against USD started the year at 1.56, weakened to 1.47 in April, rebounded to 1.59 on 19 June.  GBP against AUD started 1.91, dipped to 1.84 in January and reached to 2.04.  GBP against JPY started at 186.51 and at 175.87 in April, reached 195.26

Gold started 2015 at USD 1184 per onze, peaked on 22 Jan at USD 1302 and zigzagged to USD 1202 on 18 June.  Gold prices came off in 2012 from USD 1780 level and have been depressed since then.  2014 rebounded to test USD 1400 level.  One may expect institutional investors may switch to hold gold on the back of Euro zone crisis and the potential Grexit.  Maybe institutional investors rather hold USD, CHF and GBP then gold.  If Grexit happens, “Cash is King” could be the right strategy.

Crude Oil began the year at USD 53.27 a barrel, slid to USD 43.66 on 16 March, bounced gradually to USD 60.45 on 18 June.  Crude Oil is at USD 60 level now and it is probably equal chance to see Crude Oil price back to USD 80 before year end or test USD 40 again.  We could see both.  Last June, Crude Oil is above USD 100 a barrel.  Who could have guessed Crude Oil could slide so much.

First half of 2015 should have been a good six month for UK investors.  GBP as a currency has appreciated against EUR, USD, AUD and JPY since the end of last year.  Stock markets across the world have performed.  Gold is small up couple of percentage point year to date and oil prices have rebounded more than 10% in 6 months.   This is excellent results in the midst of potential Greece default.

Grexit and Brexit

Grexit and Brexit

Greece has to pay the International Monetary Fund (IMF) its next loan installment in June.  This is bad news for the country's coffer that is squeezing blood to pay government staff and pensions.  Greek Prime Minister Alexis Tsipras knew he had a difficult job since day one but it seems to be getting harder as time goes by.  He promised his voters a new start for Greece and reverses the austerity measures.  However, I do not know many people manage to ask their credit cards to waive the bills and Tsipras is no exception.  Tsipras certainly struggles to convince the German and the French leaders that whatever happened has happened and Greece can erase the past.  The imaginable positive results maybe the continuation of EU drip feeding minimal nutrition to avoid Grexit.  Time is against the Greek leader as its country fell back into recession.  There are more local businesses going bust than popping up.  Tourism is suffering according to the Association of Hellenic Tourism Enterprises.  Arrivals fell in top tourism destinations in April by 31 percent in Mykonos to 7 percent in Crete.  Depositors are leaving the Greek banks which discourage the banks to grant loans to individuals or small businesses.  The Greek economy is again in a downward spiral.  In April, Moody’s downgraded Greece’s government bond rating to Caa2 from Caa1 with a negative outlook.  Caa2 is many notches below Germany Aaa rating.

The voters supported the new government as they were tired of the austerity measures.  Policy changes that create pain would almost be contradictive to what Tsipras promised.  Pension reform, value added tax, staff cut in government or ideas that reduce government spending and people income are likely to cause public uproar.  Privatization of ports or other state owned business could lead to job losses and pension reform.  This is because new owners are likely to prioritize returns for shareholders over local employment and welfare.  Remember during Thatcher era, privatization of Cable & Wireless, British Aerospace, British Telecom and British Gas.  Can Tsipras’ government manage the same?  Realistically speaking, the way to recovery for Greece is painful and long but doable.  EU does not want a Grexit.  EU cannot set the case of waiving the debt as it could be a bottomless pit.

Grexit has an impact on Euro and many analysts have mentioned parity to the US Dollar.  Both in March and April, we saw EUR 1 to USD 1.05.  Just when everyone was holding their breath to watch USD 1 to EUR 1, a rebound in May clicked USD 1.115 to EUR 1.  Parity between USD and EUR is possible with the uncertainty ahead.  Even Swiss Francs had to let go of the falling Euro and the US Dollar has no affection against Euro.  There are other catalysts for Euro to go lower and let’s look at a couple.  First is Brexit and second is Chinese Yuan joining the SDR.

The Conservative Party has won the election and David Cameron is putting EU membership to a vote by 2017.  British citizens will vote for whether the Great Britain should leave the EU.  “Brexit” if EU does not give GB some flexibility in EU policies.  While Cameron has not detailed his “shopping list”, the Conservative Party’s election manifesto and Cameron’s speeches have mentioned fewer barriers to trade inside EU, having the power to block EU laws, stricter control over EU migrants.  It is hard to imagine a Brexit and UK may not be better off outside EU.  However, similar to the Scottish Independence Referendum, this gives a fair arena for voters to express their views and there are possibilities to either outcome.  If Grexit happens before this Brexit vote, the odds could tilt.  GBP has gathered strength against the USD after Cameron’s victory and rebounded back to 1.55 to 1.58 level (USD 1.58 to GBP 1) in May.  This is similar level to November and December 2014.  GBP against EUR has been zigzagging between 1.35 to 1.41 in March, April and May.  Brexit has complicated GBP EUR relationship and it could end up being a lose lose situation.

International Monetary Fund’s Special Drawing Rights (SDR) is an exclusive collection of global currencies that form a special reserve asset.  Currently, the asset consists of USD, EUR, JPY and GBP.  IMF reviews the composition of the basket every five years and China is hoping the Chinese Yuan can join the club.  If this happens, Central Bankers are likely to add CNY to their reserve which means reducing the weighting of the four currencies that are currently in the basket.  Many people said CNY should not be included as it is not an open currency that could be bought and sold freely in the market.  One could also argue that China’s huge size of economy and trading activities with the rest of the world could justify CNY to be a special breed.

When the American bull meets the Chinese dragon

When the American bull meets the Chinese dragon

The British Pound was sliding down in March against US Dollar.  After a rebound in February from USD 1.506 : GBP 1 to 1.544, Sterling against the Dollar dropped to 1.482 at the end of March.  On 10 April, a low was reached at USD 1.463 : GBP 1.  9 months ago on 10 July 2014, the GBP USD exchange rate was 1.713.  The British Pound has weakened by 14.6% against USD in 9 months.  Why?  It is easy to blame it on Greece and the money printing policy by European Central Bank.  Also need to give US a round of applause as the mighty Dollar is gaining across the board as FED tighten up their monetary policy and looking at increasing interest rate.  Will GBP keep falling against the USD?  There are some fund managers starting to take profit on the long Dollar story.  So perhaps there will be technical rebound in GBP against the Dollar.  With the UK election poll looking indecisive between the Conservative and the Labour, GBP should be choppy and could have more downside.

Chinese stock market daily turnover reached GBP 193 billion (CNY 1800 billion) on 20th April.  The Shanghai Shenzhen 300 index has gone up 120% in one year.  Yes, it is not a typo, 120%.  Over 30% gain since the beginning of this year.  Most of the stock names will sound very foreign to the western world.  Ping An Insurance, China Merchants Bank, China Vanke (property developer), Kwei Chow Moutai and Wu Liang Ye (these two are Chinese vodka makers).  Maybe easier to buy ETFs or funds that track the Chinese stock market.  Let’s learn more about the Chinese dragon.

Every netizen in China knows about BAT.  BAT stands for Baidu, Alibaba and Tencent.  Baidu is the Chinese Google.  Alibaba is the Chinese Amazon.  Tencent is Chinese Whatsapp and an online game giant.  Funny enough, BAT are not listed in China.  Baidu and Alibaba are listed in US.  Tencent is listed in Hong Kong.  Baidu is up 33% in a year but the share price actually came off from USD 250 level to USD 210 since last November. Baidu is a USD 74 billion company versus Google USD 377 billion as of 24^th April 2015.  Alibaba (stock code is BABA) was listed last year at USD 68 in September last year and reached USD 120 in November.  Similar to Baidu, BABA share price has gone south and now to USD 80 level.  BABA is a USD 203 billion company versus Amazon USD 181 billion.  Tencent share price is up 51% in 1 year and it is currently 20% higher than its November peak.  It is a USD 194 billion company versus Facebook USD 233 billion.  Looking at these numbers, the Chinese BAT can put up a good fight against the American FAG (Facebook Amazon Google).

“One Belt, One Road” means China President Xi Jinping’s plan to develop the Silk Road Economic Belt.  Building roads, railways, ports and other infrastructure projects to develop a modern version of the Silk Road.  To come up with the investment, China led the formation of Asian Infrastructure Investment Bank.  It is kind of a World Bank with an Asian spice.  The market expects a lot of money will be poured into this plan and this is one of the trigger points of the China stock market rally. 

The Chinese dragon sent a fire ball to Hong Kong after Easter and Hong Kong stock market recorded HKD 252 billion (GBP 22 billion) on 8 April breaking all turnover record in the last bull run in 2007.  The Hong Kong Exchange and Shanghai Stock Exchange launched HongKong Shanghai Connect last year which allow investors from either exchange to access the other.  Mainland China investors can buy Hong Kong shares through Shanghai Stock Exchange and the flow spiked up after Easter as hot money spilled over to Hong Kong.  Hang Seng Index is the benchmark index for the Hong Kong stock market and it is up 27% in a year, 18% year to date as of 24 April.  Considering Hong Kong went through Occupy Central last year, such performance in the stock market does not quite fit the picture of thousands of protestors camping on the main road.

15 years later, Nasdaq testing new high

15 years later, Nasdaq testing new high

 

Time is the best cure.  Some investors may remember the burst of the tech bubble in 2000.  At the time, people were talking about Microsoft, Intel, Oracle, IBM and bunch of drugs companies with a biotech kick like Amgen.  eBay, Priceline.com and Amazon.com are the few survivors while many dot com companies have been forgotten.  Nasdaq Composite Index crashed from 5,132.5 to in March 2000 to 3,042.6 in May 2000 and the Index drifted even lower to 1108.5 in October 2002.  No one had the mood to predict when the index could see 5,000 level again.  15 years passed and the US market has been going up for 6 straight years from 2009 to 2014.  Many analysts have tried to make the bear call and got run over by the bulls.  Nasdaq Composite Index has more than doubled in 5 years from 2,400 level to above 5,000 in March 2015.  While the index approached its peak, the troop is now very different.  The new kids on the block are Facebook, Tesla, Baidu and the newer and bigger Apple.  If one simply sat on their Nasdaq index fund since February 2000, they may have made 13.7% in 15 years including cash dividend which translates to 0.86% return per year.  The total return of QQQ, the most popular Nasdaq ETF listed in US is 204% since February 2005 and 156% since February 2010.  Investors could have learnt two lessons from the Nasdaq drama.  Buy and hold could mean a very long wait for very little if the entry point was badly timed.  Average buying or monthly installment could be a better strategy for long term investment.

 

Media have taken off the spotlight from Greece for a while and people have been focusing on the US Fed FOMC meeting.  The market generally expects US rate hike in June.  This is probably the milestone for the end of a 6 years rescue plan from the 2008 Global Financial Crisis.  With the USD going strong across the board and US stock market at historical high level, US have managed a perfect landing from the turbulence.

 

Many Wall Street experts are saying EUR is heading to parity with USD.  Chanel has cut prices of their handbags in markets outside Europe.  Chanel shops in Hong Kong and China were swept as price tags of the classic Chanel handbags were slashed by as much 20% in the local currency.  EUR 2000 black leather bags were sold out in a day and there were constant queuing outside the shop.  It was headline news.  Before Chanel, Patek Philippe also reduced prices in Asia by 15-20% in the local currency.  This is odd as the public was expecting a price hike from the Swiss maker due to Swiss Franc appreciation.  These are classic examples of the advantage of how exporters could be benefited from a weakening currency.  Bordeaux wine prices have been weakening in UK for couple of years already and they were probably the leading indicators of luxury market trend.  Euro zone would probably need to export their way out of this Euro crisis as domestic economy remains fragile.  Tourism will definitely help and one can notice there are more and more high-end retail shops and department stores with mandarin speaking sales staff to serve the 4 million Chinese tourists visited Europe in 2014.  This is similar to 20 years ago when shop keepers in Beijing learn English to greet the American and European tourists.  Will it take European stock markets 15 years to get back to its peak?  Eurostoxx at 3,700 and 5 years and 3 years performance are 63% and 62% respectively.  The historical high of 5,522.4 in March 2000 seems so far away.

 

China stock market was turbo charged in 2014 with a 52% rally after years of bear market.  The popular MSCI A50 index was up 1.8% and 30.7% in 5 years and 3 years in their local currency or 9.4% and 35.5% in GBP.  The Chinese government accepts a slower economic growth and target 7% GDP growth rate.  The government has changed its gesture since last year to a more accommodating monetary policy to cushion the struggling property and commodities sectors.  Please note that it is just a cushion to soften the impact to the overall economy due to the hard fall of these sectors.  Property developers, steel, iron, copper and coal business are still hanging dry and struggle to get loans from banks.  Their funding rates are generally over 10% per year while the underlying asset prices are also falling.  India stock market is a star performer among the BRIC countries and its stock market has gone up 33.4%, 35.9% and 41.8% in a 5, 3, 1 years horizon in GBP terms.  One efficient way to capture these markets is through mutual funds or ETFs.

The world is all about Greece again.

The world is all about Greece again. 

These days, there is more media coverage on Greece than the Oscar.  No one has the crystal ball and the outcome could be as surprising as Southampton’s performance in Premier League this year.  Stock market seems to be the winner so far with Eurostoxx 50 Index up 11.8%. Mainly thanks to the weak EUR.

FTSE100 is also performing and it is up 5.3% for the year as of 23 February.  Not bad in the mist of another Grexit episode.  Tesco is the best performing stock in the index.  The stock is up 27.8% so far this year.  This is a rebound story as Tesco share price was halved last year from 340p level to as low as 155.4p on 9 December 2014.  The correction in share price was mainly reflecting the expectation of poor earnings in 2015 which earnings per share is expected to be a third of 2014 according to Bloomberg data.  No one wants to invest in a future loser.  Somehow, the market believes the business is going to turn the corner in the future and Tesco share price started to rebound to 240p level.  If you look at Tesco share price past 12 months return including dividend payout, it is still down 24.8%.  It is a GBP 20 billion market capitalization company and a lot of wealth is created or destroyed as the share price goes up or down.

Mondi Plc, a packaging and paper company, also rallied 21.1% this year.  Building materials giant CRH Plc, publisher Pearson, fashionable Burberry Group are up 17.4-19.4% to occupy the top 5 spots of the ladder.  The worst performer is energy expert Centrica plc and even that is only down 10.2% year to date.  This reflects there was no big loser in the index in 2015, so far.

The currency world is probably easier to understand for a change.  The GBP has taken a leap against the EUR.  At the beginning of 2015, GBP 1 was EUR 1.27 and in February, GBP 1 can get EUR 1.36.  It was only March 2014 when a pound could only get EUR 1.19.  The Euro zone problem really has not been resolved despite the billions being printed.  The fundamental issues just got sweetened like an espresso with 2 sugars.  Could GBP EUR get back to 1.50 level as in 2006 before the global financial crisis?

EUR against the US Dollar is even more dramatic.  In May 2014, it was EUR 1 to USD 1.40 and on 23 February, it was EUR 1 to USD 1.13 which is a 19% depreciation in EUR in 10 months.  This is the steepest drop since the beginning of 2010 which was against due to Euro zone crisis.  Could EUR USD get back to 0.823 level as in October 2000? Or when will we see EUR 1 to USD 1.60 as in July 2008?  The latter seems like mission impossible at the moment but what if the weaker members have a peaceful exit and EUR becomes more like the good old Deutsch Mark?

Let’s look back at the 2000 era when Euro in coins and notes were first circulated in 2002.  At that time, there were a lot of unknown about the Euro.  If there is a Grexit, Euro zone could be back in time before Greece started using EUR.  The market would speculate who would be the next to give up using EUR.　Such uncertainty would be a big shock to the world and EUR could be first sold off due to the uncertainty.  However, EUR could rebound afterward as the stronger countries like Germany would weight more in the currency.  The swing might even reach the high and low of the past decade.  What does it mean for GBP?  GBP 1 was good for EUR 1.65 in 2001.  Back in 2001, it was GBP 1 to USD 1.40 which we actually saw again in January 2009 (GBP 1 to USD 1.35) after Lehman Brothers went under.  History could repeat although under totally different situations and circumstances.

The falling oil prices have found support around USD 50 a barrel.  In terms of magnitude of this massive drop from USD 100, this is the biggest since the USD 147 to USD 40 drop in 2008.  Oil prices were between USD 20-40 from 2000 to 2003.  Oil prices are volatile by nature and oil producing countries like Russia and Venezuela are selling oil to stay alive no matter at what price.  The fundamentals are so different now than ever with green energy development and human behavior such as the acceptance of electric cars.  If Apple really launches electric car in 2020 as rumor said, it will be a landscape change in the energy eco-system.

Gold prices have been hovering around USD 1,200 and USD 1,400 per onze in the past 12 months and to be fair, spending more time defending USD 1,200 level than challenging USD 1,400 resistance.  Gold, if you view it as an alternative currency, does not pay interest.  Swiss Franc now charges interest.  For institutional money that needs to get out of EUR and already max out on how much USD and CHF they could hold, gold was a good parking space.   JPY is not a trendy currency to own and GBP is not really as globalized as USD or EUR as a trade currency.  If US Fed increases interest rate in September 2015 or the commodities currency like Canadian Dollars and Australia Dollars reach bottom, money may leave gold again.

Swiss watches, Swiss holiday, Swiss banks

Swiss watches, Swiss holiday, Swiss banks

New Year surprise from the Swiss Central Bank caused an earthquake in the financial market.  It did the reverse of the Russian Ruble and Swiss Francs was up 20% then 40% against the Euro.  Currency brokers were right in the middle of it and some could not withstand the shock.  Alpari went under and FXCM needed a white knight.  Most banks were hurt with a scratch but the Swiss banks have a bigger problem which I will explain later.  The Swiss stock market dropped thru a crack and was down 14% at one point on 15 January.  It was not funny at all.

Most people think a currency from a developed country like Swiss Franc moved by 20% is a very very big Black Swan with tabby pattern.  It really is beyond imagination and certainly falls into the same category of rare events like England Soccer team winning World Cup.  Agree.  Looking at historical data, CHF last big move was in 2011.  It was EUR 1 to CHF 1.23 in July 2011, then CHF strengthened to EUR 1 to CHF 1.03.  Then the Swiss Central Bank declared brotherhood with the Euro and told the world they would sell CHF for EUR at 1.20.  People stopped going long CHF and short EUR.  That was a small Black Swan move.  So, looking back, we should have known it.  It is simple physics.  You can have a very strong container, like the will power of the Swiss Central Bank to be on the same boat as Euro.  But if you keep pumping gas into the container, eventually, this very strong container will explore in a very powerful way.  The weak Euro against USD had been a trend in second half of 2014 but this may not be the trigger of the event.  If I were a Swiss Central Banker, I probably could live with a weakening CHF which is just dragged down by EUR.  EUR, in any case, is still a very big currency backed by the European Union.  My biggest fear would be what if my assumptions were wrong which is not unheard for Central Bankers.  For example, the concept of EUR being the currency for European Union or the concept of European Union.  The recent political movement in Greece that revived the thought of Greece leaving EU or the EUR currency might have caused Butterfly Effect to Swiss Central Bank decision.  (Just to kill the speculation, I was not, am not and mostly likely will not be a Swiss Central Banker). 

Bang!  Everyone woke up with CHF rocketed against other currency.  Selfishly, first thing came to my mind was to change my ski trip from Davos to St Anton in Austria.  Then I thought maybe I should buy a Rolex before they increase the price in GBP due to labor cost in CHF.  Then I heard about Currency Brokers suffering from potential bad debt from client’s trading losses.  Logically, those Swiss companies who report earnings in CHF but make money in EUR or USD are in tears as their revenue is now taking a 20% discount when it converts to CHF.  Swiss banks, exporters like drug makers, engineering companies, luxury sectors are all making money offshore and reporting earnings in CHF.  Unlucky.  Swiss companies who borrow in EUR or USD are laughing.  I wish I had taken a EUR or GBP loan to buy Rolex.  As Swiss Franc deposit was not paying any interest, it is almost illogical to be investing in Swiss deposit or Swiss government bonds except for the big money manager who manages billions and need to diversify their currency exposure.  Or the hedge funds or traders who have patiently waiting for the container to explore.  A bit like Soros winning in the GBP in the 80’s.  History does repeat.

CHF will eventually clam down but there are casualties already.  Swiss Central Bank has said they would step into the currency market again if they think CHF is too strong.  Of course they would, they just did it.  But they have already set negative interest rate for CHF and perhaps they could make it even more negative.  This would be very interesting if one day Swiss Banks pay borrowers interest to borrow Swiss Francs.  One could earn credit from swiping their Swiss credit card.  Hard to imagine right?  That very big Black Swan in tabby pattern may have a friend around the corner.