A Triumphant 2016 and a better 2017

A Triumphant 2016 and a better 2017

2016 turned out to be a good vintage for the stock market.  US, UK, Germany and Japan stock markets all had a good run in the second half of the year (as of 22 December anyway).  Who could have guessed that?  Brexit turned out to be a great opportunity to buy stocks in developed markets and Donald Trump winning the US President Race was a turbo charge to the stock markets.  Italy referendum ended up being a celebration party and stocks rallied harder.  The currency market was skewed.  The mighty US Dollar gained so much against the Euro, the British Sterling, the Japanese Yen and the Chinese Yuan since the Trump victory.  Currency brokers had a great November and December.  The world is suddenly so beautiful and rosy if stock chart is the only reference.

2017 is definitely going to be a busy year for UK government with Brexit issues filling up their email inbox.  Uncertainties are going to be the core components in any business.  Lucky for some, the weak Sterling is a life saver.  Companies with cost base in Sterling and income in USD or oversea clients are feeling the joy.  Technology, pharmaceutical, oil, global banking and finance, tourism, education, security sectors are some obvious ones.  These companies contributed to the rally that took FTSE 100 to above 7,000.  FTSE100 had a range of 5500 to 7100 level in 2016.  Pretty much any entry point to the market during the year is a good entry point.  2016 is a good vintage indeed.  Will this trend follow in 2017?  We need to consider the currency.  Where is the Sterling heading against the US Dollar and the Euro?  There are people betting on Sterling, Euro and the USD all becoming 1 to 1.  Yes, GBP 1 = EUR 1 = USD 1.  This means GBP drops another 19% against USD.  It sounds unreal and it would be a black swan.  But an 18% drop already happened in 2016.  On the other side, can anyone see GBP getting back to 1.49 against the USD in 2017?  This would be an even bigger black swan.  Especially if one takes into the account of what the Euro zone is facing in 2017.

2017 is a year of election for the Euro zone.  The Netherlands’s General Election is on 15 March.  France’s Presidential Election has its first round on 23 April and second round on 7 May.  Germany’s Federal Election on 22 October.  Italy may also have a Prime Minister election in 2017.  Each of these could bring a new leader with a political agenda on leaving the EU.  In most EU member countries, there is a political party with leaving the Eurozone as its political statement.  It is expectable.  There are hardcore Manchester United fans and there are hardcore Man City fans.  But there is only one champion each year.  Fortunately, the Premier League champion does not get to decide on leaving the EU.  Otherwise we could be in and out of Brexit every year.  Maybe the Dutch, French and German elections would turn out to be a nonevent like Italy referendum.  I doubt it.  So there should be a few opportunities to enter the stock market in 2017.  Currency wise, Euro is within walking distance to parity level with USD, 1.047 as of 22 December.  All Euro needs to do is to swing like a pendulum and we are likely to witness EUR 1 = USD 1 in 2017.  So please do not be surprised.  A weak Euro is helping export economy in the Eurozone like Germany.  Italy and Spain will benefit as well but they really need to issue more debt to keep the country going.  Austerity stops working when your income is dropping faster than you can cut cost.  Italy has 63 different administrations and such historical setting means any austerity measure is likely to be diluted or even resisted.  Italian banks are too big to fail as that will hurt the depositors and could cause social unrest.  There is a good reason why some people think Italy needs to leave the euro and goes back to lira.  To buy time, the European Central Bank continues to print Euro, pump money to the countries that need help and allow Euro to weaken further.  Hopefully, someone will have a cure in the future.

If USD strength continues in 2017, Europe and UK stock markets have the wind behind them.  UK has already set its sail on the Brexit route.  Euro zone is likely to hold itself together in 2017 while the money printing machine probably needs to work overtime.  Assume both Euro and Sterling weakens hand in hand against the USD, 2017 could be a good vintage in volatile weather conditions.

Donald Trump and Beppe Grillo

Donald Trump and Beppe Grillo

Donald Trump is the next US President.  The world was stunned.  Republican has also won majority seats in Congress, beating the Democrats in both the Senate and the House.  On 8 November, the actual day of election, Asia markets panic and came off on the back of Trump leading the race.  Europe opened low.  Surprisingly, US market opened strong and seemed to be celebrating Trump victory.  The S&P 500 index rallied 3.4% from 2131.52 to 2204.72 from 7th November to 23^rd November. Trump made comments about removing Obamacare and Dodd Frank.  Healthcare stocks and banking stocks put on a massive rally.  Pfizer and Merck were up 3.4% and 2.6% from 7^th to 24^th November.  JP Morgan share price went from USD 69.88 to USD 78.86, up 12.9%, in the same period.   Citibank, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch all went up 13.8%, 17.0%, 20.7% and 20.9% respectively in the same period.  

The market took Trump America first gesture very seriously and the USD strengthened against all major currencies.  USD JPY moved 8% from 104.2 to 112.6 between 8 November and 24 November.  The Chinese Yuan weakened from 2.3%, the EUR and GBP also lost 5% and 0.4% against USD.  Gold also dropped to USD 1180 level as investors expect US Fed to increase interest rate in December.  A strong currency with an expectation of a rate hike attracts a lot of money. The USD strength may be fiercer than anyone could expect.  But there were signs.  Bank of Japan has been waiting for this opportunity to welcome a strong USD.  Remembered when Bank of Japan announced QQE in October, the market did not react much.  The market knew Bank of Japan is running out of tricks to depreciate JPY as the market was willing to bet that Bank of Japan cannot push JPY weaker.  However, Bank of Japan can wait for a stronger USD and the US President Election was the catalyst.  As JPY weakened, the Japan stock market has been strong.  Nikkei 225 has rallied from 7% from 8^th November to 25^th November.  On the other hand, Eurostoxx 50 rallied 1% from 7^th November to 24^th November.  FTSE100 went up 0.3% in the same period.  Banking stocks in Europe also enjoyed a nice rally.  HSBC went up from GBp 59.15 to GBp 61.45 from 7^th to 24^th November.  Lloyds, Barclays, Duetsche Bank, Credit Suisse and BNP were up 6.4%, 16.3%,  11.0%, 11.3% and 5.3% respectively in the same period.

December could be a difficult month for Europe with the Italy referendum taking place on 4 December.  Could this be the 3^rdpolitical surprise this year after Brexit and Donald Trump?  Mr Matteo Renzi, Italy Prime Minister and leader of the centre-left Democratic Party, is putting up a referendum to reduce power from Italy’s 20 regional governments and the Senate.  It is a threatening tactics and Mr Renzi is saying to voters either to give him more power or he will step down.  A bit aggressive from an Italian in some eyes.  The flip side of passing this referendum is that if the Prime Minister is a disaster, the Senate can do very little and Italy will be stuck with the wrong leader for 5 years.  If the referendum dose not get pass, Mr Renzi is likely to step down.  Then Mr Beppe Grillo, a former comedian and leader of the Five Star Movement, may get a shot at the top job.  The former stand-up comedian is outspoken and he wants to abandon the euro.  Five Star Movement is an anti-establishment party and they want to leave the Eurozone.  Italeave may become a real word rather than a joke on Twitter.  If the outcome is yes, Mr enzi gets the power he wants.  All future Italy Prime Minister would also benefit from it and enjoy a 5 years guarantee mandate.  Such power could be mis-used and may not be good for the country in a long run.  Especially if the next Prime Minister is Mr Grillo, Italeave may happen.  If the outcome is no, Mr Renzi steps down and Mr Grillo may also be the next Prime Minister.  Mr Grillo may call a referendum on abandoning the euro.  At least, there will be balance from the Senate and the Chamber of Deputies and Mr Grillo may not get what he wants.  Either way, Italy is clearly at a point of unstable equilibrium and more conflicts within the country is expected.  Yes may mean short term positive for the Euro and no could trigger panic selling.

Full blown constitutional crisis may hit GBP

When was the last time the English, the Scots, the Welsh and the Irish (Northern) agree on the same thing?  Teresa May has quite a big task to make sure the four legs of the table are standing before Britain bargains the Brexit terms with the Eurozone.  Scotland’s first minister, Nicola Sturgeon, is making Brexit more interesting by mentioning the possibility of the second vote for Scotland Independency on the table.  One tangible impact is the weakness of the British Pound, it touched 1.106 against the EUR on 14 October.  On 14June, it was EUR 1.258 for GBP 1. Against the US Dollar, GBP hit 1.218 on 17 October.  On 17 June, it was USD 1.430 for GBP 1.  Great for tourism, education and perhaps investment.  FTSE 100 has been strong since the buggy jump from Brexit.  FTSE100 was as low as 5982.2 on 27 June and it is at 7020.47 as of 21 October.  FTSE100 was also above 7000 level in April 2015 and at that time, GBP was around 1.36-1.4 to EUR.  Let’s look at a scenario.  If GBP and EUR becomes parity, so GBP weakens another 10% against the Euro and GBP 1 is EUR 1.  Never say never.  Analysts at HSBC and UBS are making such forecast.  UK has been running deficit in both fiscal and current account balances since the financial crisis in 2008.  It is like the country is swiping credit cards and spending more than it makes for 7 years.  You can afford that if you happen to have the money printing machine as well.  One of the potential outcomes is that people stop believing in the money coming out from the printing machine, the British Pounds.  Companies and countries that sell goods and services to the UK may prefer to have the sale in EUR or USD prices.  Even if they receive GBP from UK clients, they would convert GBP to EUR or USD.  This makes the GBP goes lower against the EUR or USD.  The Bank of England might need to increase interest rate to encourage people to hold on the GBP in their bank account.  This sounds extreme but it is textbook logic.  If Britain becomes 4 individual nations all want their own deal with Euro zone, which could trigger the market to panic.  The Eurozone definitely does not like Brexit but they do not want to see a broken Britain neither.  The headline news of “GBP 18 billion divorce bill for Brexit” scared many British tax payers and probably gave Nicola Sturgeon a stronger voice when he meets Teresa May.  Meanwhile, foreigners are enjoying the cheap Sterling and shopping luxury items in London.  For investors with GBP income, the key words for investment are diversification and protection.

While the GBP move could trigger market panic, another black swan is swimming away.  Hillary is increasing her lead against Donald Trump in the US presidential race.  On the surface, Donald Trump would be less predictable than Hillary in terms of impact to the global political scene and economy.  Hillary has been a full time politician for decades.  Back in 1977, President Jimmy Carter appointed Hillary to the board of directors of the Legal Services Corporation and she was the first woman to be chairman of the board of directors of the Legal Services Corporation in 1978. President Obama appointed her as Secretary of State in 2008.  In short, she has been in the circle for 40 years and politicians are familiar with her style and approach.  She is also very aware of the dos and don’ts in the White House.  Well, she may not be a technical person when it comes to emails.  Hillary winning the race against Donald could be a voter choice for stability.  It makes the market easier to read.  It also means the FED in US could continue its path to increase interest rate without listening to Donald.  Investors are already getting used no Quantitative Easing in US and preparing for rate hike in US.  A higher US interest rate could contribute to a stronger USD against GBP.  This is another straw on the camel back for GBP.

So far, the weakness in GBP is one reason of FTSE100 rally.  Glancing over some UK stocks, one may have a rosy picture over the UK economy.  Tesco closed 214.85 GBp on 19 October, a new high in 2016.  London Stock Exchange printed a 2016 high at 2922 GBp on 4 October.  BHP Billion had a peak at 1267 GBp on 10 October.  Of course, there are lesser performers to balance things out.  The banking sector is definitely not winning from Brexit.  Take Barclays as an example, it closed 183.2 GBp on 21 October, a fair amount below 214 GBp level at the beginning of 2016 but already a lot better than the 127.2 GBp low on 27 June.

Donald could give us the next buying opportunity

Donald could give us the next buying opportunity

It was a busy week on 19th to 23rd September with both US and Japan central bankers expressing their latest monetary policy.  US Central Bank did not increase interest rate in September FOMC meeting and the market now expects a December rate hike.  Japanese Central Bank made it clear about its determination to maintain zero interest rate policy.  It sent Nikkei 225 from 16,492 on 20th September to 16,809 on 21st September, 1.9% higher, and Japanese Yen actually strengthened from 101.85 to 100.39.  Financial Institutes are getting used to negative interest rate in Euro, so zero interest rate is not that scary.  Global stock markets have put on a great run since Brexit and further upside from here could trigger profit taking.  Many speculators are probably looking for opportunities to offload and the market friendly outcome from Japan and US central bankers meetings helped.   European stock markets had a good run from no monetary tightening and FTSE 100 and Eurostoxx 50 were up 3.0% and 3.3% from close on 16th September to 23rd September.  US market was actually lagging with 1.1% movement in S&P and 1.2% in Nasdaq in the same period.

HSBC has put on a good run since Brexit and its share price went up from GBp454.45 (23rd June) to 574.48 (23rd September), up 26%.  HSBC shares buyback, downsizing and de-globalization helped.  In the same period, Barclays, Lloyds, RBS, Deutsche Bank, Santander share prices moved -7.8%, -21.2%, -27.1%, -28.0% and -4.8% respectively.  Comparing these European giants to their US competitors, Goldman Sachs, JP Morgan, Citibank and Wells Fargo share price movement were 8.6%, 5.8%, 6.4% and -3.8%.  Banking stocks in general are not expensive in terms of valuation but the future is still dark.  The regulatory risk and cost could be brutal.

Apple share price had some luck with better than expected iPhone 7 launch and Samsung's nightmare with the Note 7 battery.  Samsung Note 7 disaster could mean a shift from high end Android users to Apple.  As a tech stock, Apple is trading at relatively reasonable valuation.  Apple Pay could actually be a wild card and it has launched in China already.  User comments have been positive.  Apple share price was USD 112.71 as of 23rd September, beating April high at USD 112.1, still far away from USD 133 2015 high print.

Twitter announced it has put itself up for sale on 23rd September and its share price rallied 21.4%.  Smart move.  Better to let go while there are takers than hanging on like Yahoo.  The social media space is hot but the investment in technology and competition for talents are stressful battles.  Competing against facebook and Google social media portfolio is more than a tall order.  Twitter itself is probably at a cross road, to acquire or to be acquired.   Already, market mentioned Salesforce.com, Verizon, Microsoft and Google have shown interest to buy Twitter.  Verizon just bought Yahoo.   Google could turbo charge Twitter with its Chrome, Gmail, Google map, YouTube, Google Play, Google search and Android all with over 1 billion users.

With rate hike concern out of the way until December, the spotlight moves to Donald Trump versus Hillary Clinton.  It looks like it is going to be a real tight race between them.  Maybe as tight as George W Bush and Al Gore.  If Donald Trump leads the poll, the market may panic and post a significant correction.   This could be a good chance to buy.  Looking at the market since the Global Financial Crisis in 2008, buy on big dip has been a good trade.  The US and European stock markets are at high level as global companies are still growing.  The tech stocks like Amazon and ARM, the retailers like Zara and H&M, the pharmaceutical companies have made up ground for the financial and resources sectors.  The central bankers are printing money to make up for the deleveraging in the financial sector.  Someone must be benefited from the low interest rates.  Picking the right sector, right stock and right timing need a lot of luck.  Index Funds especially Exchange Traded Funds on FTSE100, Eurostoxx 50, S&P 500, Nasdaq are convenient instruments to capture market movement.  Another asset that everyone is familiar with is property.  Property prices in London, Paris, Zurich, New York, San Francisco,  Hong Kong and Shanghai have certainly reflected that there is plenty of money chasing hard asset.  The Central Bankers have been using money supply as a universal solution to deflation and recession.  Negative to zero interest rate, quantitative easing, drop money from helicopter, all with the purpose to get money moving.  Whether the next US president is Donald or Hillary, the tricks are the same.  Obama launched Obama care, Donald may favor the construction sector as he builds a wall between US and Mexico.  Hillary may benefit the IT and security sector as she needs a more powerful email system with better encryption.  The reality is that US is run by a complex system consists of different political parties, the parliament, the government, layers and layers of organization and bureaucracy.  If Donald wins, US politics will surely become more entertaining and lead to more coverage in social media.  The world will goes on and the money printing machines are likely to continue.

Let’s celebrate

Let’s celebrate

Great Britain team brought home 67 medals from Rio Olympics beating the record of 65 medals from London Olympics in 2012.  This put team GB second in the Rio medal table after USA and above China.  This is an amazing achievement considering Great Britain population of 65 million versus China 1.3 billion and the effort that the Chinese put into Olympics.  Another amusing result is women’s volleyball.  The Chinese ladies won 5 out of 8 games and got gold medals.  The Serbia team won 6 out of 8 games and got silver.  The US team won 7 out of 8 games and got bronze.  It is about which battle to win not how many battles you win.

Similarly in investment, it is more important to be right on one big win than on many small bets.  Brexit could be the best entry point to the stock market this year.  Now, the stock market in US and Europe are looking toppish.  UK political scenery is clear and Brexit work has started.  Market refocuses on EU monetary policy which means expecting the Central Bank to continue pumping money to the system.  Bank deposit and high grade bonds are giving investors zero to negative return.  Sitting on cash is not a sustainable option for money managers.  Investing in stocks is the lesser of two evils and this could be a driver for potential further upside in the stock market.  Another piece of good news to the stock market is the Brent crude oil price is getting back to USD 50 a barrel.  This gives oil producing countries like Russia and Saudi Arabia some breathing space on their budget and shines some light to the oil and gas companies.  Money managers who switch out of bond investment into equity could be buying index funds and probably index ETFs (Exchange Listed Funds) with good daily trading volume.  There are ETFs on Eurostoxx 50, German DAX, French CAC, FTSE 100, US S&P500, Nasdaq, Japan N225 and China A50 with great trading volume and low management fee.  The good daily trading volume is important for money managers so they could get in and out of the ETFs easily.  If they feel like getting out of the ETFs and get back to the bonds, it is just a matter of pressing a few keys.

London Underground going for 24 hours service is an interesting topic and it comes with 24 hours restaurants, bars, gyms, etc.  The economy taking a vampire shift could indeed boost jobs, cut pollutions because of less driving and lift London property prices in general.  It also helps London securing its position as the currency trading place in European time zone.  Currency trading is round the clock and highly electronic.  So London traders sitting in their office can indeed trade in US and Asia timezone with clients all over the world.  Same applies to Spread Betting and CFD (Contract for Difference) business that offers margin trading on stocks, currency, precious metals (eg Gold) and commodities (oil, copper, etc).  The next question is where to find the labor force to man the sleepy hours.  Everyone knows the answer is the hard working talents from the EU community.  This is going to make Boris’ job interesting.

Donald Trump has similar hair to Boris and his falling popularity surprisingly has nothing to do with his hair style.  The audience seems to getting bored of Donald’s “you are fired” Apprentice infotainment marketing approach.  Even within the Republicans are feeling divided.  On the other hand, Hilary Clinton has got a lot more united support from Democrats as a whole, at least from the surface.  Hilary is gaining while Donald is losing steam as we could see from the poll.  Hilary is too experience to make silly mistake to let Donald come back with a knocked out punch.  Obama started his Presidency with the Global Financial Crisis and his two terms turned out to be a great bull run in stock market.  Too early to say if the bull run in US stock market could continue if Hilary moves into the White House (as President this time).  However, Donald will certainly give the world a lot of surprises and more volatility to the stock market.  Maybe Donald is good news for the construction and building materials companies because of the great wall along the border to Mexico.  One common theme between the 2 candidates is that National Security budget is likely to increase and security and surveillance related companies should deserve investors’ attention.

A messy world with plenty of opportunities.

A messy world with plenty of opportunities.

Watching the news, it is hard to be optimistic.  Brexit has happened before Grexit.  Donald Trump could become the next US President.  Racial tension in US.  Terrorist attack in Nice and shooting in Munich.  It has been a month since the Brexit referendum and many people feel the world is in a bit of a mess.  Many sad stories and many uncertainties.  The British Sterling jumped off the cliff after Brexit vote and against the EUR, it was at 1.3055 before, went to as low as 1.1646 on 7 July and rebounded to 1.1937 as of 22 July.  That was a near 3-year low against Euro.  Against the US Dollar, the British Pound went below 1.30 to a 31-year low.  There was a big side show going on in GBP versus JPY.  It was at 154.77 before referendum and the Pound weakened to JPY 130.18 on 8 July, rebounded to 139.02 as of 22 July.  In short, the entire Britain has become 10% cheaper in the eyes of American, European and Japanese. 

Since Brexit, we have Japanese Softbank buying UK chip-designer ARM, US AMC Entertainment buying London-based Odeon & UCI Cinemas Group, China’s Fosun International buying English football club Wolverhampton Wanderers.  The Softbank ARM deal is a GBP 24.3 billion takeover and it will be Europe’s biggest-ever technology deal if it goes through.  ARM is the largest London-listed tech company by market capitalization and the Cambridge-based group is a market leader in chip design for mobile devices.  Investors get nervous whenever “biggest-ever” deal goes through.  It could mark the burst of a bubble.  Remember the dotcom bubble and the telecom merger and acquisition saga around Orange, Mannesmann and Vodafone back in 2000.  In June, Microsoft announced to acquire LinkedIn for USD 26.2 billion.  Also in June, China’s Tencent and its partners announced paying USD 8.6 billion for the majority stake of Finnish game maker Supercell.  The sellers are Japan’s SoftBank and Supercell current and former employees.  The deal values the “Clash of Clans” developer at USD 10.2 billion, nearly double from a year ago.  According to thinkgaming.com, Clash of Clans daily revenue is estimated to be USD 453,000 and 24,600 daily installations.  It ranked 5^th on top grossing games and 48^th on top free games as of 24^th July.

Maybe not many people are familiar with smartphone games “Clash of Clans”, but many grew up with Nintendo Gameboy and Pokemon Pikachu.  Pokemon was first released in 1996.  In July 2016, Pikachu entered the smart phone games arena with a global block buster Pokemon Go.  Pokemon Go was released in Australia, North America, Europe and Japan.  It beat Candy Crush Saga record in US to become one of the most used smart device apps.  As of 22 July, Pokemon Go was downloaded by more than 40 million people worldwide.  The game makes use of location, camera and augmented reality technology.  It combines real world with the virtual world so one could take their children to Hyde Park to catch virtual pocket monster and battle with other players in Trafalgar Square.   On 19^th July, Nintendo share price in Japan was at one stage doubled since the launch of Pokemon Go and it has come off 10% from its JPY 32,700 5 years high to closed at JPY 28,220 as of 22 July.  Its market capitalization is JPY 4 trillion or GBP 28.8 billion, a bit higher than ARM.

The bargain hunting was across the board.  The European stock market has also digested the Brexit news pretty well.  Eurostoxx 50 Index dropped from 3037.67 as of 23 June (Thursday) to a bottom of 2,697.44 as of 27 June (Monday) and recovered to 2972.23 as of 22 July.  The FTSE 100 index was 6,338.1 on 23 June, dived to 5,982.2 on 27 June and now higher than pre-Brexit level at 6,730.48.  Of course, if we take 10% off due to GBP weakening, it is weaker than pre-Brexit.  UK banking stocks have not recovered.  Taking the same 3 dates as above, RBS pls was 250.50 GBp, 174.30 GBp and 188.92 GBp.  Lloyds was 72.15 GBp, 51.15 GBp and 54.49 GBp.  Barclays was 186.95GBp, 127.20 GBp and 151.80GBp.  Aberdeen Asset Management share price matched the performance of FTSE 100.  It was 312.70 GBp on 23 June, 245.80 GBp on 27 June and 316.00 as of 22 July.  Hargreaves Lansdown was 1389.00 GBp, 1056.00 GBp and 1271.74 GBp.  One could see the more UK centric the business, the more hammered are the share prices.  Too early to say the worst is over but for sure, the smart money is in full action already.

Virtual Reality takes over real life

Virtual Reality takes over real life

Remember the movie Matrix in 1999. Keanu Reeve was wiring himself to a pod that sends his mind to another virtual world. Knowledge and martial art could be downloaded to his brain and he saved the world in a Hollywood way. This is now happening to our current generation. The new generation of games will make gamers put on a pair of goggles for hours. You will see your children screaming and jumping around the house wearing these goggles and you have no clue what they have been eating. The tiny screen could give the gamers the experience of sky diving or wrestling with a zombie in their own living room. This actually sounds worse than everyone looking at their mobile phones at the dining table on Christmas. Virtual Reality (“VR”) could make the people in your house further away from the real world. There is a more real version of VR. Augmented Reality in simple terms is to project a virtual world in a real world. So through the screen, one will see Spiderman hanging on his ceiling and Captain America sitting at his desk. There are some day to day commercial use in AR. For example, one goes into a Porsche showroom and if you have the right App, you could point your phone at the latest white 911 and change the color to red and change the exhaust pipe, leather color inside, etc. Or you can point your phone at your living room, drag and drop different Ikea furnitures to get a feel of what the living room would look like with a new sofa and dining table.

The giant multi-national companies of course want to make a living with this new technology. Sony Playstation and Microsoft Xbox obviously would take this chance to secure their fans base with launching new VR games. It would be amazing to play Winning Eleven and tackle Messe in virtual reality. Samsung has launched a pair of goggles for you to attach your latest Samsung handset to experience VR anytime anywhere. HTC launched an almost NASA laboratory like gadget called Vive that minimizes the lag between your hand turning and the display on the goggles. Apparently, it should make the users less dizzy. Facebook bought Oculus Rift for USD 2 billion in 2014 and the headset was launched at EUR 700 a piece in March 2016. Oculus already can take you to experience Games of Thornes with virtually real sword and sheild. The combination of Facebook and virtual reality could be explosive. Friends will have virtual gathering or could attend a distant birthday party without the travelling.

Big money is being poured into VR. According to a report from Digi Capital, in 2015, USD 700 million was invested into Virtual Reality and Augmented Reality. In 2016, USD 800 million investment went into Magic Leap, the hottest startup in the VR world and it is based in Florida. Apparently, it will really turn you into an Iron Man, maybe not the flying part but the bit when you could throw a globe in the middle of your study room and it expands to the galaxy. If Magic Leap could turn an apartment in Eelphant and Castle to a townhouse in Chelsea, the USD 800 million is very well spent. AR and VR revenue is forecast to hit USD 120 billion annually globally by 2020.

VR uses a lot of computation power. This makes the future of cloud computing even brighter. Amazon and Google have mentioned their VR initiative here or there. But these two giants do not need to necessarily compete with their own gadgets. Google has launched a smartphone or two but it is happy to see Apply, Samsung and Huawei fighting for market shares as long as there more and more smartphones sold on the planet. More smartphones mean more searches and more revenue for Google who still dominate the search engine world. Amazon similar enjoys more online shoppers who use smartphones to shop while they are waiting for their transport.

Brexit and Donald Trump

Brexit and Donald Trump

Just a month before the EU referendum, Chancellor George Osborne commented Brexit would lead to a “Do-it-yourself recession.  Remain campaigners “Stronger In” argument is focus on economy.  Vote Leave is zooming into the immigration issues.  According to polls conducted by ICM, ComRes and Ipsos MORI, the top issues in people’s mind are immigration and economy.  So the Remain camp and Vote Leave camp have to leverage on these big hitter issues.  The Remain camp got the US President Obama to comment “Brexit would put UK at the back of the queue for trade talks”.  It is a fear factor play and it probably works on some of the middle class voters.  The fear of some global firms moving their Europe headquarters away from Britain (to Dublin perhaps).  Some business owners also do not like the uncertainty in tariffs and the trouble of getting visas for overseas EU workers.  Looking at hotels and restaurants in London, one could sense the importance of EU workers.  The Vote Leave camp focuses on immigration issues and getting the management control back from the EU to the UK government.  United States, China, Japan or Australia is not part of the EUs and they are not exactly missing out.  UK is physically close to EU but that still does not mean UK has to be part of it. The　　fact that no one can imagine UK to give up the Sterling and adopt Euro means it is acceptable to keep a distance.  Vote Leave does not mean UK does not trade or work with EU.  It just means putting a bit more distance in between.  DIY Recession may be worrying but staying in EU does not mean UK never gets into a recession.  Japan has been in recession for years and recession seems no more annoying than the bad weather in winter.  There are economic fixes for economic problems.  The unknown is true and is part of the future.  Would Brexit be a transition similar to Sir Ferguson passing Manchester United to David Moyes?  Or more like a Leicester City 5,000 to 1 Premier League journey?  It is up to the people.

Looking at the GBP EUR exchange rate, there seems to be no panic yet.  The Sterling is at EUR 1.2961 to GBP 1 as of 23 May, 2016, stronger than this year low in April at 1.236.  FTSE 100 is also doing ok at 6146 level as of 22 May, 2016, much higher than the 5537 low in February.  Perhaps the market is pricing in Remain camp to win as of now.

While the Remain camp has Obama, Donald Trump said a Brexit would make sense for Britons especially in the light of the craziness of the migration chaos.  Trump’s election journey has been as unbelievable as Leicester City’s road to champion.  His strongest card is immigration and his comments on building a great wall and a deportation force were jaw dropping.  Trump has now only got Hilary Clinton between him and the White House.  He is probably better at hosting reality TV than Hilary but Hilary has certainly spent more time as a politician than Trump.  This is Harry Potter against Lord Voldemort in terms of experience.  The world is changing and voters are different.  It is more important to understand what voters want than what you have on the shelf. 

Amazon is conquering the retail market globally through understanding its customers better than most of his competitors.  Its share price is at USD 702.8 as of 22 May, 2016.  5 years ago, it was below USD 200.  Amazon market capitalization is USD 331.6 billion (GBP 229 billion) versus Wal-Mart at USD 219.3 billion (GBP 151 billion).  Tesco market capitalization is GBP 13.3 billion.  Amazon is branching out to all lines of business from its e-Commerce nucleus.  Good at dealing with big data gives them a world leading position in cloud computing.  Knowing the customer tastes allow them to venture into private-label goods in food and household products, offering videos and other digital entertainment, clothing will come.  Shipping to so many customers globally means building up their own delivery services and logistics operation.  As the buy orders keep coming into Amazon.com, it looks like the buy orders for its shares also continue.  If EU can run like Amazon, voters would probably have an easier decision on to stay or to go.

Made in China “Mermaid” beat Kung Fu Panda 3

Made in China “Mermaid” beat Kung Fu Panda 3

China movie industry is catching up with Hollywood and Bollywood.  Good old love story between a Mermaid and a billionaire in today’s China.  Mix together a message of environmental protection, Jim Carrey style acting and Mr Bean sense of humor  The results were USD 552.5 million box office pretty much all in Chinese speaking markets.  The Mermaid, directed and produced by Stephen Chow who was born in 1962, same year as Jim Carrey.  Stephen Chow also directed and produced Kung Fu Hustle (2004) and Shaolin Soccer (2001).  It was released during Chinese New Year in 2016.  Its box office beat Kung Fu Panda 3 and the Revenant.  This column is not about movie but the success of “The Mermaid” reflects the strength of China domestic economy and its transformation to a service industry driven economy.  China cannot compete against the Frontier Markets such as Vietnam on cheap labor.  Just like Great Britain had to evolve from heavy industries such as coal mining and steel plants.  So when the media says China economy is slowing down.  It is a very general statement.  The labor and resources intensive, environmentally damaging industries like the coal mine owners in Guangxi are suffering.  The Alibaba headquarter in Hangzhou are full of young IT talents chasing their dreams.  China 6.7% GDP growth in Q1 2016 is the results of a cliff hanging resources sector and rocket growth in services sector such as e-commerce, entertainment and tourism.  China stock market has lagged behind Russia and Brazil this year.  There is still time to get on the train.  China A shares indices such as CSI300 includes 300 listed companies and is a good representation of the overall China A shares stock market.  Hang Seng China Enterprises Index “HSCEI” represents 40 large Chinese companies listed in Hong Kong Exchange is also a good representation and Hong Kong is a more accessible market.

The “B” and the “R” in BRIC have been on fire in a good way, stock market and currency wise.  Brazil Ibovespa index year to date return is +23.72% as of 21 April, 2016 and Brazilian Real strengthened against USD by 10.89%.  Russian MICEX +10.71% and Russian Ruble strengthened against USD by 8.8% this year.  Well, the numbers look good and showed nice recovery after last year correction.  The Brazil story is very different to Russia.  Investors are putting money on a potential change of leadership in Brazil but change does not necessarily equals to economic growth.  Typically, the country that host Olympics empties their war chest to put on the games.  There is some ground to consider buy on dream and sell on fact in the Brazil investment story.

Russia economy has been bleeding mainly due to oil price collapse and it was looking very concerning in 2015 as the Russian government tried to defend the Rubles.  In the end, Russian government accepted the currency market was like an ocean and no one could fight against the force of natural.  Beside a falling Rubles and stock market, the government had to deal with the conversations with US and Euro over Ukraine and sending troops to Syria.  Against expectations, some Russian companies survived the storm and emerged stronger.  Typically, these are export driven business with cost in Rubles and revenue in USD or Euro.  For example, steelmaker like Severstal saw its profit margins rising to record level in six years.  Its share price rallied from RUB 600 level at the end of last year to RUB 800 in April.  Even the Russian banks are enjoying the sunshine.  Sberbank has gone up more than 20% since its dip in January.

The “I” and “C” in BRIC are behind.  India Nifty index cover 50 blue chips and its year to date return is down 0.43% and Indian Rupree has depreciated against USD by 0.36%.  India attracted USD 63 billion worth of Foreign Direct Investment (“FDI”) projects in 2015, overtaking China.  This is the first time India top the FDI chart.  So the money has gone in through direct investment although not through buying listed company shares.  China CSI300 index that covers 300 stocks listed in Shanghai and Shenzhen stock exchanges is down 15.29% year to date and Chinese Yuan has strengthened against USD by 0.18%.  This makes China the worst performing market among the BRIC year to date.

Also want to say “Happy Birthday” to the Queen and perhaps next year Donald Trump would represent US to congratulate her.  Will Britain still be part of EU next year?

Lend me 100 and I pay you back 99.6.

Lend me 100 and I pay you back 99.6. 

The Japanese Central Bank started it and the European Central Bank took it to a different level.  Japan’s government has been paid USD 464 million to borrow money since yields turned negative in October 2014.  The European Central Bank (“ECB”) went full throttle with negative interest rates and lowered its overnight deposit from -0.3% to -0.4%.  It is like taxing people with money in bank account.  Mario Draghi, European Central Bank President said it out loud that interest rates would stay very low for at least another year.  Mario is doing everything it could to stop Euro zone economy goes into deflation.  ECB extended its monthly asset purchase to EUR 80 billion a month and will add investment grade euro-denominated bonds issued by non-bank corporations.  This means ECB is practically lending money to non-bank corporations directly.  German mortgage bank Berlin Hyp AG made history by selling a EUR 500m 3-year bond at a yield of -0.162% last week.  There is now over EUR 6 trillion of debt in the world that yields negative which is 29% of the Bloomberg Global Developed Sovereign Bond Index.  Central Banks in Switzerland, Sweden, Japan, Denmark and ECB are all in the Negative Interest Rate Policy (“NIRP”) Club.  What this could mean is that US interest rate and UK interest rate could eventually get to negative as well.  Normal citizens are getting used to getting close to zero for their deposit in GBP.  In the corporate world, its means blue chips companies would enjoy cheap borrowing and they are encouraged to leverage and expand through acquisition.

Marriott and China’s Anbang Insurance Group have made Starwood Hotels and Resorts Worldwide Inc shareholders very happy.  Marriott is keen to acquire Starwood that owns the Sheraton and Westin hotel brands to create the world’s largest hotel chain in the world.  Marriott offered USD 12.2 billion or USD 72.08 per share in November last year.  Anbang put USD 13.16 billion cash on the table in March (equivalent to USD 78 per share).  Marriot increased its offer to USD 13.6 billion with a stock and cash offer on 21 March, 2016.  Anbang may not get the hotels but they have surely flexed their muscle.  Last October, Anbang bought Waldorf Astoria New York for USD 1.95 billion, the largest-ever US real estate purchase by a Chinese buyer.  Anbang is Beijing based, started in 2004, and has 30,000 staff and more than EUR 100 billion in assets.  Anbang has less than 5% market share in the domestic insurance market in China.

Cheap borrowing could also lead a company to the cliff.  Valeant Pharmaceuticals was once a real gem in the fund managers’ eyes.  Valeant made use of cheap funding available.  Buy up companies and increase the price of drugs.  Their big wins included eye-care company Bausch & Lomb and gastrointestinal medicines maker Salix Pharmaceuticals.  Valeant also tried to buy Botox maker Allergan but that did not go through.  Buy low sell high, rule number 1 in trading.  Unfortunately, politics are not exactly science and politicians questioned Valeant aggressiveness in raising two heart drugs prices.  The stock dropped 88% in the last 6 months as of 21 March, 2016.  The company is trying to pivot its strategy through getting a new CEO.  Billionaire investor Bill Ackman’s Pershing Square Capital Management lost USD 764 million in its investment in Valeant.  The board of Valeant invited Mr Ackman to join the board, a very expensive board seat.

The new mega trend is cheapest funding ever is available to corporates.  The old trick is to leverage and buy low sell high.  Borrowing rate at zero means infinite rate of return in theory.  If one company pays nothing to borrow money (or even gets paid to borrow money), any profit this company could make from the loan means huge return.  Too good to be true?  It happened before and probably still happens in some countries where if you know the right person in the government, you get cheap land, cheap construction loan and guarantee buyers and tenants.  Government toll road projects and green energy projects are classic example.  The negative interest rate could make this business model even more lucrative.  This is exactly the purpose of ECB to encourage corporations to invest and grow.  ECB and central banks in the NIRP Club believe this can fight against deflation and increase GDP.  Before that happens, investors should expect to see more mergers and acquisitions in the stock market and stock prices could reach higher level.  There will be winners becoming losers like Valeant.  Very few people have betted on Leicester City winning the league at the beginning of the season.  Quite a few would guess Arsenal getting into top 4.  Some investors would find the Starwood and Valeant.  Some may prefer to take FTSE or DAX index funds to catch the general trend.

Brexit. This suspense is terrible.

Brexit.  This suspense is terrible.

This suspense is terrible.  I hope it will last until 23rd June.  UK referendum to exit Euro zone is a big deal.  Yes to stay and accept the immigrant issues, get one off refund from Eurozone bailout, enhance London financial center status and other terms.  No means exit Euro zone and many things could change from import export tax to individual working visa.  The GBP dropped 2% on 22nd February on the back of London Mayor Boris Johnson joined Brexit campaign.  This shows the financial market may not welcome the possible exit which is generally viewed as bad for business.

One of the smartest UK decisions in history is to retain British Sterling and did not use Euro.  UK could maintain its own independent monetary policy such as interest rate, issuance of debts and budget.  Imagine if UK has to follow Euro zone to adopt negative interest rate.  Look at the headache Switzerland had in trying to defend EUR CHF.  Something is not working in this relationship and both UK and Euro zone have put in effort to mend it.  Prime Minister David Cameron has put in great effort to negotiate the terms for this referendum but the terms seem to be just pain killers. It may ease the pain but does not change the relationship.  If UK citizens vote yes to stay, the big picture remains unchanged.  If UK citizens vote no, UK can decide its immigration policy on Euro zone citizens.

Immigration policy is probably as important as monetary policy.  It has a very long term and deep impact to the culture.  While the facebook, the Instagram and YouTube have flattened the world as every global citizen is exposed to similar information, actual people movement can have big impact to employment, demography, religious, talent structure of a society.  The hedge fund managers and traders may sell off GBP as an immediate reaction to the uncertainty of Brexit.  But these movements in financial market are short term.  Voters need to consider the impact to the future generations.

Global stock market continues to be volatile and fragile.  Some oil exporting countries are liquidating asset to make up of the shortfall in cashflow due to low oil price.  Mutual funds and hedged funds are probably still getting redemption from oil related high networth individuals and family offices.  As stock prices drop, there are margin calls on clients who are leveraged and these margin calls lead to more liquidation.  The low interest rate in USD, EUR and JPY encouraged investors to leverage in the past years.  So the market is deleveraging portfolio that took years to build.  The selling is so fierce that it distorts market valuation to 2008 level.  If this is 2008 and history repeats, then it is a year to bargain hunt.  Some investors may consider buying index funds.  However, the banking sectors, the oil and gas companies, commodities sector and properties in some markets deserve further consideration.  European banks are once again under the spot light and there have been a lot of news about Deutsche Bank.  Deutsche Bank is trading at EUR 14.92 as of 24 February, 2016.  It has fallen 33.3% since 31st Dec 2014.  Credit Suisse, BNP, HSBC, Barclays have all fallen 39%, 21%, 23% and 26% in their share price since 31st December, 2015 respectively.  No bargain hunting here.

BP and Royal Dutch Shell have gone down 3% and up 4.6% in share price since end of last year.  In the same period, oil price is down 14%.  BHP Billiton, Rio Tinto and ArcelorMittal share prices are 10%, 8% and 19% down year to date respectively.  Many of these companies have debt to be re-financed and even if some of them managed to find lenders, the cost of fund is likely to increase.  There is an over capacity issues in the resources sector and consolidation will happen.  It is probably too early to bargain hunt but there should soon be some emerging opportunities in oil and gas stocks.  They just got hammered too badly.

Property prices in Asian cities like Hong Kong and Singapore are softening.  This is because of the government policies in Hong Kong and Singapore have been armed to deflate the property bubble.  On the other hand, residential property prices in China tier one cities like Beijing, Shanghai, Shenzhen are rising 30% to 60% in the past 12 months according to local property agents.  Some high end luxury properties in these Chinese cities are selling at over GBP 1,000 per square foot.  Chinese government has narrowed the gate for money outflow and the local stock market has been more than disappointing.  This combination drives excess liquidity to tier one cities property.  London properties will probably continue to attract Asian buyers.

Global stock markets to start 2016 with a nose dive

Global stock markets to start 2016 with a nose dive

FTSE 100 index ended 2015 at 6,242.32 and took a nose dive to 5,673.58 closing level on 20^th January. That was a 9.1% drop in less than a month. As of 25^th January, FTSE 100 recovered a little bit from the low and closed at 5,877. In the same period from 31^st December, 2015 to 25^th January, 2016, Eurostoxx 50 Index dropped 8.1%, Dow Jones dropped 8.8%, Nasdaq Composite dropped 8.7%, Japan Nikkei 225 dropped 10.1%, China Shanghai Composite dropped 17.0%. This is a truly global sell off and there is no escape. Institutional selling has to be part of it. What happened? Did Santa send the wrong presents to the fund managers? One explanation is the butterfly effect of falling oil prices is hurting oil rich countries war chest. Hence these countries are selling their mutual funds and overseas investment to make ends meet. Saudi Arabia has been withdrawing billions from markets and it is considering to list Aramco, its state-owned oil giant.

Oil price is at 13-year lows and went below USD 30 a barrel. US, Russia and Saudi Arabia are neck to neck as the 3 biggest oil producers in the world, each at above 10 million barrels per day. For countries like Russia, Saudi Arabia, Nigeria, Venezuela who are living off petro dollar, a lower oil price could also force them to sell more to maintain cash flow. The 13-member oil cartel OPEC led by Saudi Arabia abandoned its policy of restraining production to control oil prices in 2014 and some of these countries are pumping faster than ever to pay for their bills. Iran, with the world's forth largest oil reserve base, is ready to pump up its oil production as sanctions against it are lifted. Such increasing supply put oil price and producers' financial health in a downward spiral.

Let's also point fingers to US uplifted its 40-year ban on oil exports. US oil producers can export crude oil after a surprise change in policy that was strongly opposed by President Obama and fellow Democrats. In December 2015, politicians in US Congress made a compromise. Democrats agreed to lift the 40-year ban on US crude oil exports. Republicans agreed to extend tax subsidies for wind and solar by 5 years. The 30 percent tax credit for solar was going to expire in 2016 and the tax credit for wind expired in 2014. The effects of these policy changes are estimated to be USD 25 billion or the wind and solar energy sectors. Most US oil producers need oil price at USD 40-50 per barrel to have a profitable business. So with oil struggling at USD 30 a barrel, most US oil producers are not going to produce much and definitely not to export any oil overseas. However, this means oil price could be capped at USD 50 or so because US production can significantly increase supply when pricing is right.

As of 25^th January, GBP lost 3.3% against USD since end of 2015 and it is at a 7-year low. Basically, GBP is catching up with other currencies and giving in to the strong USD. As all major currencies are weakening against the USD to increase export competitiveness and release downward pressure on asset prices, the GBP eventually followed. The strong USD finally transferred to a US stock market correction which sent a quiver to stock markets all over the world.

China's energy demand is growing at the slowest pace since late 1990s and growth in energy-intensive sectors such as steel, iron and cement collapsed. It has waved goodbye to double digit economic growth and trying to keep up 6% GDP growth a year. The Chinese Yuan got its place in the Special Drawing Rights basket, a reserve currency basket decided by the International Monetary Fund last year and they must be exhausted. The Yuan has fallen 1.3% year to date against USD, 4.1% since end of October 2015, 6% since 10 August 2015. The Yuan depreciated 2.9% in a single day on 11 August 2015. A weakening economy, a falling stock market and a falling currency in China reminds people of what happened to Russia. The BRIC countries have all lost their steam and the world economy is like a plane with an American captain with all engines stalled but 1 and running on reserve fuel. Perhaps the world economy is not crashing like in 2008 but certainly January was a hard landing. Just hope that it was a landing and not just going through turbulence.

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.