Mighty Jolly Great Britain

Mighty Jolly Great Britain

UK stock market is on fire.  On 22 January, 2014, FTSE 100 Index is less than 1% away from its 6875.62 high on 22 May, 2013.  More importantly, the British Pound is at USD 1.657, a relatively high level in the past 5 years and not far from the 1.7043 high in August 2009.  Stock market is near historical high and GBP is strong, how wonderful!

Leading the race in 2014 is Next Plc which is up 18% as of 22 January.  Next has been a strong performer and a winner in the eCommerce era.  It has a good balance of revenue from both online and offline.  These days, eCommerce is really cannibalizing business from the traditional brick and mortar retail business.  HMV and Blockbuster were slaughtered as their products are 100% data.  Clothing has to be physically delivered but consumers are less concerned about fitting especially for office wear and casual wear.  If the retailer has good offline services for customers to change the products, online sale could attract offline sale.  This drives O2O (online to offline) activities which is a key to success.  At GBp 6,350 share price, Next market capitalization has reached GBP 9.8 billion which means how much it takes to buy the entire company at GBp 6,350 per share.  The share price has gone up 63% in the past 12 months.  It is trading at 18.3 times Price to Earnings Ratio.  It means if you are paying 18.3 years of earnings based on last year to own shares in the company.  To know whether that is expensive or cheap, you need to compare with other retailers.  Interestingly, good old Mark & Spencer is also up 11% already in 2014 or 35% in the past 12 months.  At GBp 493.20 share price, Markets & Spencer market capitalization is GBP 8.0 billion, 20% lower than Next.  Price to Earnings Ratio is at 16.2 times and with the expected growth in 2013/2014 earnings, Price Earnings Ratio will drop a little bit to 15.8 times.  As a business, Mark & Spencers share price is trading at a lower Price to Earnings Ratio than Next.  According to analyst estimates compiled by Bloomberg, Next’s pretax profit will overtake that of M&S next year.  This reflects why investors are willing to pay for higher Price to Earnings Ratio for Next than M&S.

While we are on the retailers, let’s take a look at the “SuperDry” brand SuperGroup.  At share price of GBp 1,556, the stock has gone up 160% in the past 12 months.  Market capitalization of GBP 1.3 billion is an infant compared to M&S GBP 8 billion and Next GBP 9.8 billion.  Small company is easier to achieve higher growth as it is harder to make an elephant dances.  SuperGroup is trading at 41.2 times Price to Earnings Ratio.  This is much higher than the 16 to 18 times for M&S and Next.  The earnings growth in 2013/2014 is expected to lower the Price to Earnings Ratio to 26.7 times.  This is still much higher ratio than Next and M&S.  Investors are showing their confidence in SuperGroup growth with their money.

Another usual FTSE100 index member on the podium is Hargreaves Lansdown, the market leading online investment platform.  While the distributor is on the podium, the fund manufacturer is on the other end of the scale.  Aberdeen Asset Management is the worst performing stock in FTSE100 with negative return of 15.7%.  There is significant outflow in Asian and emerging market funds.  GBP 4.4 billion of fund was withdrawn from Q4 2013.  Another loser is William Hill that is down 15% due to disappointing earnings.  The winners and losers even out and the overall FTSE 100 Index is up 1.14% in 2014 as of 22 January, 2014.  FTSE100 may hold on to current high level with some index members performing to make up for the lost ground from the losers.  For the investors who have been sitting on handsome return in 2012 and 2013 by simply investing into mutual funds that benchmark against FTSE100, 2014 could be similar to 2011 where the index have limited performance.  Stock picking skills would be the secret to success.

From Euro Crisis to “you, no crisis”, the European Banks are leading the Eurostoxx 50 index in 2014.  Top 10 performing stocks so far have 5 banking stocks:  Intesa Sanpaolo, Unicredit, Deutsche Bank, SocGen, BBVA put on 5 to 10% gain already.  The EUR is at USD 1.3546, a high level since 2012.  In 2009 and 2011, the EUR could reach around USD 1.5 level.  That seems so far away and EUR is unlikely to get there in 2014 with US Tapering.  The Black Swan that may send EUR back to USD 1.5 level is likely to be USD weakening due to debt ceiling concern, rather than stronger than expected economic growth in the Euro zone.

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

What to expect in the investment world in 2014?

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

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

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

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

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

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

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

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

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

Can banks charge for deposit?  Really?

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

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

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

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

Raging bull in America

Raging bull in America (23 Oct 2013)

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

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

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

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

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

Rubber contracts in Xishangbanna Commodity Exchange

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

Safe-haven?

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

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

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

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

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

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

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

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

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

—By CNBC.Com's Dhara Ranasinghe