Broomer's Blog

From the category archives: Markets

Markets

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.

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The more I scream, the faster they go

Investment is a difficult discipline but there lies some very simple tenets at its heart. One of these is that the more you pay for an investment, the lower the return. As we approach the final stages of this long bull market, profits are approaching a cyclical peak and investors are paying a hefty multiple for these earnings.

It is common in late stages of bull runs for 'market darlings' to emerge. These stocks seemingly are impervious to rain or shine and behave magically as both performance drivers and havens for investors during market corrections. That is, until one day, they don't, often sounding the death knell for the bull market.

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The Beauty Parade

Keynes famously used an allegory of a beauty contest to describe how markets behave in the short term. He posed the question of how you should go about betting on the outcome of a beauty contest. To be successful, you should not bet on who you think is the most beautiful contestant but those who you think the judges will consider to be the most beautiful. His point is subtle but distinct.

James Montier at GMO recently highlighted some apparent inconsistencies in the results of the Merrill Lynch Fund Manager Survey. He points out that a significant majority of fund managers now believe the US market to be overvalued,

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This Time It’s Different

It is often said that the most dangerous words in investment are that 'this time it's different'. The phrase resonates through stockmarket history as experts pontificated that old rules of valuation no longer apply and the current crisis/situation bears little similarity with what occurred in the past. The words were widely echoed during the 1990s tech boom, as they were during the depths of the bear market of 2008. Since the days when it was first formally identified by Graham & Dodd, the value philosophy has proved its worth and presented investors with one of the few reliable ways to earn super normal returns, since valuation levels typically revert to the mean. Indeed such is our respect for its power, it plays a principal role in Square Mile's tactical asset allocation process.

Reasoning that things are different this time is typically an expensive mistake. So, I almost fell off my chair the other day when I read that no less an authority than Jeremy Grantham was postulating that valuations may be reaching a new, higher plateau and that "it can be very dangerous indeed to assume that things are never different".

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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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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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The Best Stockmarket Chart, Ever

Charles Minard’s 1869 graphic detailing Napoleon’s disastrous invasion of Russia in 1812 has been described as one of the “best statistical drawings ever created” - Charles Minard's Graphic 

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NASA Data shows Global Temperature Spike in February 2016

I am not entirely convinced by all the arguments made by environmentalists, though it is hard to deny that the weather does appear to be getting warmer.

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Knowing What to Wear

The content of Mark Zuckerberg’s wardrobe made headlines earlier this year http://bit.ly/1Rzr2Zb and while I think it falling well short of psychopathic tendencies, I confess that I do find it, well, a bit weird. However, just as it is easy to dress in the morning with little choice, sometimes, severely restricting your investment universe can make life much simpler without making much impact on the return potential.

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