Broomer's Blog

Outlook June 2017

Markets have made strong upwards progress so far in the year, though unlike in prior years earnings growth is coming through sufficiently strong to keep multiples stable. This is providing some comfort to us though we do wonder how long this EPS spurt can persist. Economic growth is unexciting but at least it is steady and broadly based. Recent data suggests that the US economy may be softening a tad but this is being offset by the pick up in Europe. Equity market valuations remain expensive but are unlikely to come under severe threat whilst conditions remain benign. This does not preclude the possibility of a summer correction and after the recent run, some back filling is now overdue.

We are baffled how interest rates can be maintained at negligible levels as the spare capacity created by the financial crisis appears close to spent. Experience tells us that we should be seeing wage pressure with inflation following on at its heels, though there is scant evidence of this happening. The slow down in productivity is another mystery and although arguably this predates the financial crisis, the scars created by the crisis may have deepened the trend.

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Filling the Bath in the Dark

NAIRU is one of those nasty looking acronym beloved by economists. Typically, the concept works very well in theory but has an unfortunate tendency to breakdown as soon as you apply it in the real world. It kinda makes sense that if there is a sufficiently large pool of unused labour in the economy, wage inflation will remain under wraps. Only once that spare capacity is used up do workers have the power to claim higher wages which are in turn passed on in higher prices.

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5 Key Things to Remember When Analysing a Fund

1. Commonly applied past performance screens are totally useless. Managers are rarely as bad as you think they are when they underperform, nor are they as good as you might think when things are going well.

2. You are looking for a manager who can invest money wisely, not necessarily ones that present well. Don't confuse these two skills.

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Does This Bull Market Still Have Legs?

Summer is finally upon us and while the temperatures are rising, there are few signs of any improvement in this blog's prose. However, the real question is how near are global markets to the chills of winter?

The old market adage has it that bull markets don't die of old age. While there may be elements of truth to this, elderly recoveries must be more susceptible to mortality. The current 8 year run is roughly the average length seen over the last decade and surprisingly it is only just half the length of the longest on record which occurred after WWII. For the current expansion to exceed this run, it would have to pass into 2024.

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A Wellard Brexit?

Some 9 months since the vote, we are gradually gaining a little clarity about the nature of Brexit. Despite court challenges, May's government triggered Article 50 in March and the process is formally underway. There are number of large stumbling blocks between the EU and the UK positions. As Juncker is reported as saying to Merkel over the weekend, May is 'living in a different galaxy' and that he is now "ten times more skeptical than before".

The two main contentious issues are the powers of the European Court of Justice and the free movement of labour. There may be some sort of compromise possible on the former, but the latter appears intractable. May would like free trade without uncontrolled immigration, the EU would like not. The UK as a result seems destined to leave the single market and take a clean break from Europe. In May's words, "No deal is better than a bad deal". A diamond tipped hard Brexit seems to be the likely outcome.

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May calls a snap election

After months of speculation about an early election in May, and perhaps thankfully for headline writers, May has surprised everyone by calling one in June. At first sight financial markets took fright at this news with the FTSE 100 falling by over 2%, but this was actually a reflection of the moves in the foreign currency markets where sterling shot up by 2% versus the dollar. With many of the UK’s largest listed companies deriving a large proportion of their revenues from abroad, a stronger currency has a negative effect on company profits. Political pundits and financial markets seem confident that a larger Conservative majority will result. If by some off chance Corbyn does prevail, investors should brace themselves for falls in both the stockmarket and the pound. Assuming the election goes as intended, it could ease May’s hand in her negotiations with the EU. We still don’t know if May favours a hard Brexit, which would be bad news for UK asset prices, or a soft Brexit which would b ...

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You've got to love this guy!

“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me,”   Donald Trump.

For those more interested in facts, the dollar index is up 1.3% since the election result on 9th November.

Outlook March 2017

Markets are always guided by what's in the rear view mirror, and we've certainly passed through a particularly picturesque patch. Following a period of profits recession, earnings are forecast to hit new highs led by the rebound in energy and material companies. The key global economic blocks are all chiming in unison and this has lifted global GDP expectations to near 3% for 2017. Tax cuts in the US, solid growth in Europe and a pick up business and consumer confidence are all acting to create an air of heady expectation. Strong investment returns will provide clients with warm feelings as they review their portfolios but experienced professional investors have seen this particular movie many times before. We know all too well how quickly the script can switch from 'feel good' to 'a weepy'.

The S&P 500 is on 26x historic earnings and nearing 30x on Shiller p/e. The market is bifurcated between the cheap financials and anything that provides a steady earnings stream with a sound business model, many of which are now on 30+p/es. The bulls argue that this cycle can be extended through fiscal policy. Well it might, but when government budgets are already in deficit and labour markets tight, crowding out and higher inflation seems a more likely outcome. The Snapchat IPO highlights investors' festive mood. Such a debut will encourage other companies to list and together with the upcoming Saudi Aramco listing, this will increase the supply of equity to markets.

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The Euro: How a Common Currency Threatens the Future of Europe

Followers of my blog will be aware that I am no great fan of the European experiment (or at least the way it is being sold to the European electorate). The euro was fatally flawed from birth and we should take care never to forget this. The rather ponderous title of this blog has been taken from a new book written by no less an authority than Nobel Laurent Joseph Stiglitz. The Eurozone operating with a fixed exchange rate and single interest rates causes enormous imbalances that are very difficult to correct.

Quite simply, Germany is massively outcompeting its European cousins and now thanks in part to a relatively cheap euro is amassing the largest current account surplus in the world (even ahead of China and Japan). Germany accounts for around 75% of the Eurozone current account surplus which is running at a massive 8% of GDP. Externally, this can be managed but within the single currency it is a major problem as Greece and Spain have discovered.

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Well, I Got That Wrong

For some time, we have been puzzled by the apparent complacency in the general population despite the growing gulf between the haves and have nots. Real incomes have struggled to grow through the early part of this century and have only just begun to advance from the pre-crisis peak. However, the picture for the average worker is far less rosy as the chart below details. Incredibly, median salary US male workers are now worse off than they were in the 1970s in real terms.

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