Broomer's Blog

From the category archives: Outlook

Outlook

Outlook March 2019

The recovery in markets has been remarkable. Having had its worst December since the Great Depression, the US market had its best January since 1987. The volt face by the US Federal Reserve has lifted the spectre of a continued programme of interest rate increases and the chatter on the Street is that even QT may be curtailed towards the end of the year. Despite the size of Trump's stimulative package, the economy appears to have been acutely sensitive to tightening financial conditions and the trade war is acting to complicate matters further.

The precipitous falls in economic numbers during Q4 appear to be stabilising and some of the more forward looking indicators have bounced, alleviating fears of recession. Having got perilously close, the Treasury yield curve is now some distance from inverting [although the overnight dovish Fed announcement has flattened the curve once again]. All this has allowed the VIX volatility index to return to more relaxed levels.

Continue reading »

Outlook January 2019

"Britain can be cancelled, top EU lawyer says" so read a headline on the CNN website. It certainly feels like it. A divided nation, a crippled Government and a Leader of the Opposition who transparently covets investors' hard earned savings. The nation is crying out for strong leadership but few of our current crop of politicians come close and Parliament merely mirrors the divisions across the nation. As the old joke advises, you really don't want to start from here. It is perhaps not a surprise therefore that this has been the worst year for UK financial markets since the Great Recession in 2008 and the FTSE 100 is back down to a level first seen in 1999. Thankfully, we have positioned our portfolios with limited exposure to equities, particularly in the UK and this has helped provide some insulation for our portfolios.

Perversely, the principal cause of the markets' woes was not UK related but more global in nature and, in particular, American. Stock markets began to feel the chill draft of the US 10 year Treasury bond topping 3.2% in late September, triggering the global market correction that began in October. At the time, it appeared to be a replay of February's valuation recalibration in response to a higher discount rate. However, many weeks later, nerves have yet to settle despite Treasury prices rallying; the 10 year note is now yielding below 2.9%. Unlike in February, the hitherto market leaders have been pummelled and the ecommerce giants seem have lost their air of invincibility. This is despite Q3 earnings leaping by 24% and President Trump's tax cuts accounting for only part of this bounty.

Continue reading »

Outlook Sept 2018

The FTSE All Share has drifted this year but decent money has been made from international stocks. The MSCI World has been driven higher principally by the performance of US stocks which in turn have been driven by the ecommerce stocks. The US economy is responding to Trump's spending package and earnings are benefiting. EPS growth is exceeding 20% yoy, a little less than half of which came from Trump's tax cut. Encouragingly, corporate revenues are up 9.5% over the period, well ahead of nominal growth rates. Speculative hunger appears to be significant: those who only lost half their shirts on cryptocurrencies, now have the chance to lose the rest in cannabis stocks. Piling into Facebook and Amazon is far more rational in comparison and who are we to stand in the way of such momentum. Expectations of 10% EPS growth next year sounds demanding but could be possible as a virtuous circle of confidence, spending, investment takes hold.

We were right to fear tightness in the oil market as we did at the beginning of the year. The oil industry needs continual investment to maintain supply and the freeze on development has had an inevitable consequence once the stock overhang had been dealt with. We highlighted last quarter about some of the secular changes that could worsen the inflationary outlook. Now CPIs are ticking up globally as energy prices work their way through. The effects of the trade tariffs are yet to be reflected.

Continue reading »

Outlook March 2018

A correction is normally defined as a fall of between 10% and 20%, January's downturn just qualifies with the S&P falling by 10.1%. The adage that markets head higher on the escalator and come down in the elevator could scarcely be more apt. Note that the S&P 500 is leading the global rebound from February's lows and already the tech sector is breaking new ground.

This stumble took us back only to where we were in the autumn and it has done little more than blow off the market froth that had developed over recent weeks. If global markets begin to run again (as we suspect they might) this episode will quickly be forgotten. The catalyst for the fall was the US Treasury market where yields had surged 45 bps over the first six weeks of the year. They have since stabilised. One board member of the Federal Reserve described this episode as "small potatoes". We absolutely concur and fear that it is only a taster of might be to come.

Continue reading »

Outlook December 2017

While the mood in the main developed markets does not feel heated, professional investors are becoming optimistic and momentum in markets is clearly building. The world index's 13-successive months of positive gains is unprecedented, though this may be more to do with the dollar's weakness than investor euphoria (or Donald Trump for that matter). Money is pouring into more peripheral markets, for example: $450m for a da Vinci painting of doubtful provenance, Bitcoin (enough said), and a rampant IPO market in Hong Kong. The Fed may be reversing QE but let's not overlook that the BoJ and the ECB have pumped $2tr into the system over the last 12 months. These liquidity flows are now below the peak hit last year but the dollar's weakness and easier credit conditions have helped keep the monetary conditions very loose.

Trump is clearly a man where scant attention should be paid to what he says and it is far more productive to watch what he actually does. Thankfully, there is much less of the latter than the former. His more populist policies are confined to Twitter while actual policy has been more conventionally Republican - not a great surprise given a cabinet heavy in Goldman Sachs alumni and ex-Armed Forces Generals. The tax reform bill is making its tortuous way through Congress and it would appear that both Houses have agreed to reduce corporation tax to 20%. If ratified, this is great news for stockmarkets, however, from an economic perspective the need for a fiscal boost at this juncture is at best questionable.

Continue reading »

Outlook September 2017

Volatility has collapsed over the summer months with the standard deviation of returns on the S&P 500 running at well below half the normal level. This is not to say nothing has happened. Brexit negotiations are proceeding painfully slowly. This is scarcely a surprise but political commentators and insiders are becoming disheartened by the calibre of many of those in the Cabinet. Such are the complexities of the task at hand, it would tax the very ablest. Worryingly, many of the current crop of British politicians are firmly from the second division.

Events in the Korean peninsula are serious but we should not forget that North Korea has been a nuclear nation for almost a decade. However unpleasant, the world needs to learn to live with this threat. If America had any good means to deter North Korea from pursuing its nuclear programme, it would have surely used them already. The biggest risk we face is from an overreaction, but as I wrote here, even ratcheting up the war of words is counterproductive. The DKK has an agenda and this clearly does not involve thermonuclear war. Even an impetuous set of sanctions could do far more to damage international trade than this tin pot country warrants. Let us not forget that Kim Jong Un spends less on feeding his people than Americans lavish on their pets.

Continue reading »

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.

Continue reading »

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.

Continue reading »

Outlook December 2016

In a presidential race that featured two of the most unpopular candidates in history, it was inevitable that someone appalling was going to be elected. However, Trump's victory has once again left the political pundits and financial markets astounded. Some of Trump's policies will act to stimulate the economy, others will fall flat. The trouble is that we don't have the detail and frankly even if we did, we still wouldn't be much wiser as to whether they will work. However, what we can be sure of is that Trump represents a shift in economic regime away from monetarism and towards more Reaganomic type policies. These will bring greater fiscal deficits and at a time when the Federal Reserve is already tightening monetary policy, risks inflation.

Continue reading »

Outlook Sept 2016

Investors this year should be as happy as a guest on the Jeremy Kyle Show, who has just found out that they are not the father. Unfortunately, the returns have not come about through corporate performance, rather a continued compression in yields as discounts rates fall ever lower. By some accounts, discount rates are now as low as they have been in the last 5,000 years. Since the credit crisis we have been in unchartered economic waters and we are now even moving off the known map for many financial markets. This leaves us totally reliant on valuation metrics to act as our compass and liquidity analysis as our sextant. Equity valuations can be justified only in relation to bonds, unfortunately we are struggling to see any way to defend bond valuations. The relaxed nature of the recent market run has left us uneasy and sensing that market participants are becoming complacent.

Continue reading »

Pages: Previous12NextReturn Top

Archive