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‘Study the past, if you would divine the future’ - Confucius

To use a football expression it was a game of two halves for financial markets in 2016 with the key investment decision being at some point close to the Brexit referendum result to sell some bonds and buy some equities.  Of course this was against almost all prevailing investment logic that Brexit presaged an inevitable decline in the coherence of the Eurozone, a worsening of general trade relations and a recession in the UK.  Welcome to the weird and wonderful world of the financial markets!

Of course all this may ultimately pass.  But in the meantime anyone who did not learn the lesson of Brexit got hurt again later in the year when the fear of a Trump Presidency and, in the last week, a ‘no’ vote in the Italian constitutional referendum when the key to investment profits was to embrace risk and buy.  

There were two main reasons why hope got rewarded more in the second half of the year than in the first six months of 2016.  The first is that a bit of inflation is back aided by oil prices that have almost doubled from the lows of late January/early February.  Second the world started to realise that ultra-low (and sometimes negative) yielding bonds just do not offer value.  Whilst Brexit, Trump and European political shenanigans clearly can and will influence financial markets a little bit of inflation changes what you want to buy.  Bonds are in the middle now of a major shift from hero to investment perception zero whilst equities are in the middle of the opposite journey.  

And a little bit of inflation usually leads to a little more even beyond the oil price firming further as OPEC at least transitorily manage to strike a deal.  Note how President-elect Trump garnered support in his calls for infrastructure spend and more jobs or how the Bank of England had no qualms in restarting the quantitative easing/lower interest rates machine.  Inflation is edging up and that not only should make you as investors prefer equities but it should also change the equities you buy. Another key investment theme for 2016 was rotation.  The first half of the year was all about defensive, worthy, higher yielding businesses like the big consumer staple names, utilities or telecoms. And the second half of the year – as investors started to get their head around higher bond yields and rising prices - was all about having exposure to the grimy and more volatile (and previously heavily out of favour) financials, commodity stocks and industrials.  My guess this whole sector thing gets much more anarchic in 2017 as the rally in the latter groups has just gone a bit too far, too fast.  

Looking at the UK specifically the above trends have been accentuated by the fall of the Pound which has acted pretty much as the Brexit fear safety valve as we scrabble to some form of a European Union exit at some point later this decade – a debate that will boringly continue throughout 2017.  A weak euro has helped keep European exports at firm levels and ever greater stimulus policies by the European Central Bank has kept the game going for the region. Watch those French and German elections in 2017 but the fear factor is already very high.  Europe certainly has the scope to (positively) surprise in 2017 and that includes scope for a cobbled together Brexit deal that does not hurt all.

China and the US kept growing in 2016 to the great benefit of the world economy and financial markets – and both have the scope to continue doing this in 2017.  However – and this is the biggest however of 2017 in my view – things are brewing in the American-Chinese relationship across Twitter, trade, US bond purchases and currency levels.  If you want your source of global financial market volatility in 2017 this is where you should focus.  

In short, 2016 was a year for making one big decision in the middle of the year to change your portfolio exposures and stylistic biases.  In 2017 it is going to be a bit more mixed up.  That does not mean there will not be opportunities but the number of investment decisions to be made will be higher.  And – in good advice too ahead of the potentially sedentary Christmas period replete with overeating – therefore the key for ticking the box in your investment portfolios in 2017 is getting active.

Season’s Greetings and good luck in 2017.

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

‘I eat carefully because people don't want to see a large person judging cakes. They'll think to themselves, “That's what happens when you eat cake” ’ - Mary Berry

So I read that the terms "Brexit" and "Donald Trump" were among the most common search terms on Yahoo in 2016.  Who would have thought this a year ago?  Now we are probably not surprised and I predict little will be different in 2017.

Other changes are apparent too.  I am still getting over the report earlier in the week that Italian panettones were proving more popular than traditional UK Christmas puddings in terms of sales at one exclusive UK retailer.  Well I am glad that one Italian export is doing well because given the high likelihood of a ‘no’ vote in this weekend’s constitutional referendum the country is going to need all the help it can get.  

Let’s not get too pessimistic though: the European Union is not on the cusp of some new panic. I spent some time in Milan a month or so ago and everyone I spoke to was convinced even back then that a ‘no’ vote would prevail.  When something is generally anticipated then its impact tends not to be large.  And let us not also forget that after 63 governments in 70 years Italy’s problems are not going to be solved by embracing less Europe – it should be embracing more.

Who remember ‘Grexit’ or the general expectation that Greece would leave the European Union once the populist Syriza party with their anti-euro/anti-austerity ticket were elected?  The trouble is when a country and its banking system has too much debt and is overly strained – as is the case in both Greece and Italy – you cannot make a decision to cut and run.  If an individual burdened with a high credit card and mortgage bill tried to walk away the banking system would view them as toxic for years and years to come.  It is the same with a country.

So if Italy and Greece are staying surely the UK is still leaving the European Union? I would agree with this but note that in most circumstances you 'cannot have your cake and eat it'.  Of course politicians like to break the rules…and so earlier this week we have seen copious analysis of the scribbled comments from a ministerial aide direct from a high-level meeting 'accidently' caught on camera by a group of political photographers. Mistake or a subtle leak to see what the impact was?

What is less indisputable is that a 'hard Brexit' - like the worst-case scenario from the Prisoner's dilemma classic game theory insight - is a 'lose-lose' (as are most major trade disputes). Using the last set of full data available, 51.4% of British goods exports go to the European Union, whilst 6.8% of overall European Union goods exports go to the UK.

Despite a full range of politiking from both sides cooler, saner heads should prevail given the extent of the trade linkages at a time of pretty shabby economic growth rates compared with historical trends - a point reiterated in last week's Autumn Statement.  And what do I read sprayed across the front page of one of the more established UK broadsheets?

‘Britain is leaning towards a softer Brexit after ministers admitted that they were considering plans to allow low-skilled migration and could pay to access the single market after leaving the European Union. The government does not want to end up with damaging labour shortages’

I should coco. In addition, you can see the impact as shown in terms of more popular opinion.  A series of recent polls under the title of 'What do voters want from Brexit?' highlighted that even a majority of 'Leave' voters agreed with assertions such as: 'EU citizens already living in Britain should remain there'; and 'Allow EU boats to fish in British waters and vice versa'.  It makes you wonder what all the wailing and gnashing of teeth in late June and late July after the referendum result was all about.

If you put it all together global investors currently worry too much about Europe and Brexit and probably too little about Donald Trump given the US markets continue to trade at/around all-time highs.  Still now we are in December the lure of Santa Claus will influence markets more than any of these issues despite the Federal Reserve in the United States being likely to raise interest rates in mid-December.  

Next year however will be more of a challenge.  Lots more on that in a week’s time.  First though I have to see if I can put my hands on a reasonable quality panettone – I’ve stashed in a cupboard a couple of traditional British Christmas puddings already.  

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

‘Ideas are like pizza dough, made to be tossed around’ - Anna Quindlen

What did you make of the Autumn Statement last Wednesday?  Certainly it is an unusual world when the government of the day is accused of underestimating future growth potential.  That however is the whole Brexit debate for you – there are still a million and one scenarios out there and to try and conclude anything definitive is not easy. Lower growth and a greater financial burden feels like a sensible view.

So picking apart the Autumn Statement is not really worth the effort.  Far better to look for some insights from individual companies and two in particular caught my eye over the last week.  The first is Thomas Cook (TCG) where after a barren five years as the company recovered from a near corporate death experience caused by building up too much debt, long suffering investors finally have a reward with a small dividend reward – and a sharp rise in the shares over the last week.

Now this was not because Thomas Cook’s results were rampant, in fact profits versus the equivalent period last year were slightly down.  However the numbers were better than hoped as the company managed the expensive transition from geopolitical and terrorism issues in locations like Egypt and Turkey in favour of old school areas such as Spain.  That’s the benefit of over 175 years of leisure and travel experience – they have seen it all before.  

There was another aspect which interested me and that was the clear assertion that the propensity of UK citizens to go on holiday is relatively undimmed – and Thomas Cook’s early data on Winter 2016-17 and Summer 2017 trading is perfectly solid.  So much for the grinding negative and uncertainty of Brexit and a lower Pound.  

And then there is fast food. Recovering from the Autumn Statement data deluge I listened to an investor day presentation from Domino’s Pizza (DOM) on Thursday.  Perhaps wired on fast food they were certainly excited about prospects anticipating continued growth scope, market share gains, ever more online/mobile ordering and heightened pizza takeaway location density. And that was just the UK: vignettes like the almost immediate profitability of the company’s fledgling Swedish pizza takeaway business (fact of the day: apparently Sweden has no national pizza brand) were pretty striking.  

Takeaway pizza certainly is convenient…but convenience comes at a price compared to the much cheaper pizza that can be bought at the local supermarket for example.  This hardly sounds like an austerity backdrop does it? Or maybe people wanted to stuff their face with Italy’s finest export to forget all the gloomy economic prognostications out there.

Consumers matter in a developed market economy typically accounting for between 60 and 70% of overall gross domestic product (GDP).  So those essentially gloomy Autumn Statement economic growth forecasts are basically saying the consumer is going to be more than a bit coy going forward.  Judging by the comments from Thomas Cook and Domino’s Pizza – two companies in the direct firing line – domestic UK economic life is not as bad as some worry about.  

Yes, wage growth is likely to be patchy, the housing market – especially in London – looks stretched and a Hard Brexit reality has the scope to hurt, however the UK is not down and out. The Pound is cheap, domestic politics is more benign than many would have thought and the consumer is still buying holidays and takeaway pizza.  In a word a backdrop that feels ‘workable’ – as evidenced by today’s UK GDP update which confirmed 0.5% third quarter growth – with private consumption growing faster than this.

In short, don’t be scared of investing in more domestic UK economy centred investments for 2017.  

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

‘I believe in the Golden Rule - The Man with the Gold... Rules’ - Mr. T

Gold divides opinions. Some build their portfolios around it whilst others see it as a ‘barbarous relic’.  One aspect is true today however: gold has dropped to its lowest level since May and is down a cool 7% plus since confirmation of Donald Trump’s Presidency.  So why is this scary for anyone interested in the financial markets?

Most professional investors will concur that gold is a defensive investment.  Its role as a medium of exchange over time, difficulty in being destroyed and limited new supply each year via the mining industry has made it a popular asset for individuals to central banks over the last one thousand years plus.  When gold in the vaults backed cash in circulation in an economy the ability of bankers or politicians to meddle disastrously was much reduced. Inevitably this has led consistently since Roman times to periodic de-basing of gold backed currency regimes with the ripping up of the Gold Standard in the early 1970s being the latest occurrence.

So why worry if a defensive investment is out of favour?  The fall in the gold price is just another way of saying that the good times are back with Donald Trump pro-growth and pro-hope.  Just look at the rise in bond yields and all three of the major US indices pushing near highs…

Those who have seen a few business cycles will probably be smiling now.  The great hope of a new political regime was very apparent eight years ago with the ascension of Barrack Obama and multiple other politicians over the years.  Now let’s not get too nihilist about it.  Some politicians do make a positive impact and Donald Trump and the other members of the ruling political class of 2017 and the next few years could be that grouping but what is truly amazing to me is how quickly the financial markets have gone from this being a potential opportunity to this being a near-certainty.

A week ago I asked whether Donald Trump was an investors’ best friend or not (link) concluding that for active UK investors who ‘use volatility as an opportunity to buy and euphoria as one to take profits’ it could well be.  However I said that an important transmission mechanism for all this was a lower US dollar which I perceive as critical for the successful imposition of Trump’s policies.

And yet was has happened? Via enthusiasm for Trump’s to date Presidential stance (versus low expectations) and Federal Reserve head Janet Yellen hinting again that US interest rates will be tweaked higher in December the US dollar has romped with the trade weighted index at its highest level since March 2003 and, as I write, is eyeing a tenth straight day of gains, which would be the longest winning streak since 2012.

You can see the impacts of this everywhere.  Japan and Europe like the sound of their currencies being weaker as they boost the capability to export…but all this does is accentuate trade tensions and reduce any incentives to reform their domestic/regional economies.  For emerging markets it puts pressure on dollar denominated debts and exchange rate pegs like the one China has.  And it also tends to push down the price of dollar denominated commodities which includes gold.  

In short the optimism which has pushed markets up and gold down is resting on the uncertain foundation of dollar strength.  And every time you unpick that optimism a little and markets gets a little more varied then expect the greenback to fade and gold to go up.  

For investors it seems clear to me.  My primary investment allocation remains that active selection of global equities.  My second investment is certainly not poor value bonds nor ultra-low yielding cash but out-of-favour gold.  Again, sell euphoria and buy fear.

Don’t forget to include considering something shiny in your investment portfolio allocations.

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

(originally published here). 

‘Somebody made the statement that Donald Trump has built or owns the greatest collection of golf courses, ever, in the history of golf. And I believe that is 100 percent true’ – Donald Trump

Someone once said that stock markets make you humble.  I would agree with this.  Events of the last few days have reiterated this stance and showed up many experts who predicted doom and gloom for the world’s financial markets if he won the Presidential election.

And for a few hours early on Wednesday morning London time they were correct but then – like a late Bonfire Night firework – the touchpaper was lit and whoosh risky assets like financial and mining shares start to act as if it is party time.

And of course maybe it is.  Like him or loathe him the President-elect talked a good story in his acceptance speech early on Wednesday morning.  Distilling his message he wants higher US growth and plans to achieve this via corporate tax cuts, massive deregulation and an infrastructure spend programme all of which sounds great…and hence the party time mood of various parts of the global stock markets.

Now he may well pull this off.  However unlike those halcyon days twenty or thirty years ago when economic growth rates here in the UK or in the US regularly began with a ‘3’ today’s world is different.  No doubt a return to such days has been part of the appeal of Donald Trump’s campaign with his promises of ‘making America great again’ but the rise of China and the other emerging markets has changed the game.

You cannot enjoy the benefits of globalisation like cheap consumer goods and effortless travel without the flipside of a greater sharing of the economic wealth pie.  Now you can think about building a wall, heighten tariff barriers and exhort your citizens to buy domestic but the genie is out of the bottle in my view.

If ‘The Donald’ thinks along those lines then he will quickly run into problems.  However he remembers what really made the 1980s and 1990s appear great to many people…and that was tax cuts, liberalisation and (most importantly) hope.

Bottle these three elements and mix with an infrastructure plan and anything could be possible.  The trouble is the operating room for manoeuvre is much tighter than before because of the rise in power, scope and competitiveness of the emerging markets.

This tension is not easy to solve politically or economically.  It means bouts of volatility in financial markets get more regular and probably sharper and it undoubtedly means inflation will be a little higher as a bit more spending and the search for higher growth tends to lead to this.

The easy conclusion is that an investor – or their adviser – is going to have to start switching around investment strategies more regularly as equities get hurt by volatility and cash/bonds by inflation.

However UK investors have a special advantage.  If I distill all the above into a single investable prediction it is that the US dollar will go down over the Trump Presidency term.

A falling exchange rate changes all the prices in an economy and will help provide the cover for the President-elect to boost jobs and growth without ripping up too many trade deals which will open up hopes for a second term.  It also means the much maligned Pound goes up, the emerging markets continue to progress and commodity prices remain firmer rather than weaker – all trends which impact rather positively the biases and exposures in UK listed shares.

In short, I don’t see the Trump Presidency as being economically revolutionary for the United States but via a lower US dollar it entrenches my view that an active selection of UK equities is the great core investment allocation for anyone’s portfolio.  I would keep shy of bonds, have a little bit of cash for ‘dry powder’ and still retain some gold as a mixer asset just in case protectionism angst does ratchet up.

So to answer my original question, Donald Trump was perceived earlier this week as a saviour by sufficient numbers of the US electorate.  Active UK investors should be happy too: in a mixed up world there are some good London-listed companies to buy.  Just don’t sink your money into a cheap FTSE-100 tracker.  The key is very much to be specific and flexible, use volatility as an opportunity to buy and euphoria as one to take profits.

Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

'Halloween is an opportunity to be really creative' - Judy Gold

If you have been watching the FTSE-100 index of leading UK shares over the past few weeks you would have seen it flicking above and below the 7,000 index point level.  Professional investors often describe such moves as indicating a stock market that is 'unwilling to push through resistance levels'.  In short, prepare for something bad. 

With Halloween almost upon us it is the right time to review the potential for any upcoming stock market horrors.  If we look at the evidence this week then uncertainty continues.  UK economic growth was a little better than expected during the third quarter of 2016...but a closer inspection of the numbers showed that it was the service sector making all the running as the industrial/construction sectors contracted.  Meanwhile there was good news for Sunderland as Nissan committed themselves to new investment and car production...but questions about what precisely the UK government offered as a commitment remain at the time of writing unclear.  Finally the Governor of the Bank of England - Mark Carney - confirmed that he would be taking into account the fall of the Pound in his views on whether to cut interest rates or not in the future.  Given the Pound's plunge over recent months is quietly stoking inflation the chances of a further rate cut are receding by the day.  

Put it all together and it is a clearly mixed backdrop.  

Within the global markets the announcement of the mega US$100bn plus attempted purchase by American telecoms behemoth of the media content business Time Warner was met with a degree of scepticism by a number of observers including both US Presidential candidates who questioned the rationale for the deal.  Certainly efficiency gains equivalent to just around 1% of the total price paid highlights that this deal is not the easiest to financially understand.  And it does tend to be the top of the stock market cycle when such deals are struck as observers back in 2000 and 2007 will remember.  Meanwhile in the UK market the mooted listing of software company Misys was abandoned as potential investors baulked at the valuation the business was being offered at.  Of course this follows other recent listing issues including the sharp cut in the price by waste company Biffa earlier in the month to get its stock market debut secured.  Unfortunately the shares have fallen even further in their first couple of weeks of stock market life. 

So Halloween horror then in terms of the market outlook?  

Hang on a second.  I have talked about in previous columns the caution - and high cash balances - of professional investors and why that is potentially good news as the pressure for them to invest money before the end of the year is increasing.  I have also noted the downturn in the performance of bonds around the world and this continues apace assisted by a rise off the bottom of inflationary forces.  The attraction of higher yielding equities remains clear for those requiring income.  And putting all this together note how the three UK banks that have reported this week - Lloyds, Barclays and Royal Bank of Scotland - actually were generally making fairly positive comments and especially in the case of the latter two exhibited a clear upward move in their share prices as the results were digested.  Within even fluctuating stock market indices there are always individual shares doing well...and that's why I cannot be too pessimistic for active investors today. 

The reality is that to be pessimistic - or the more muted uncertain - is easy today.  However as the world's most successful investors of recent decades Warren Buffett has continually urged as all: 'be greedy when others are fearful'.  There are opportunities inside equity markets and usually these opportunities count double when pessimism is high. Given that there is good and bad economic and political news in the big world out there, inevitably there will be good and bad in the global stock markets too.  But with - on average - higher yields on offer and bonds and cash offering precious little at the moment my faith is still in stock markets making you a bit of money by Christmas a period seasonally they historically have performed very well in. 

In short: the Halloween mask may be appropriate for the next few days but the warm embrace of Santa Claus awaits you over the next couple of months.  

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

‘Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning’ - Albert Einstein

You should always be focused on inflation as an investor…and this counts for double today.  You probably saw earlier this week that the UK’s headline rate of inflation rose to its highest level since late 2014 in September. Admittedly the consumer price index hit just a 1% level but the uplift trend is clear.  Factor in the impact of the weak Pound and the falling out of the early 2016 ultra-low oil prices over the next few months from the year-on-year numbers and we will see a 3%+ inflation print in the UK before the end of 2017.

Whilst this is small beer for those schooled in the volatility of the 1970s and 1980s it reflects a sharp break with the prevailing low/no inflation theme that has helped drive bond yields to ever more negligible levels in the last few years. And as yields go down bond prices go up generating huge gains for bond investors since the time of the Global Financial Crisis just under a decade ago.  

Rising inflation however significantly reduces the attractions of bond investment today.  That just over 1% yield that you get today for your 10 year UK gilt (government bond) will get nowhere near to covering inflation over the next year and quite conceivably the next few years.  If you want to reduce the purchasing power of your investments fast then government bonds are a good place to start…and most corporate bonds will struggle to help you out too.

So what should you do? Well the professionals – institutional fund managers – have made their call: they prefer cash.  The biggest regular survey of fund managers observed earlier in the week that bond allocations relative to cash allocations is now at its lowest level since July 2006, meaning that professional investors are showing a clear preference for cash over those unattractive bond assets.

Unbelievable!  At least bonds are giving some yield and I am not apocalyptic enough in my views to countenance any large developed countries – or even FTSE-100 companies – would default on their bonds in the next decade or so.  Cash is giving you even less yield and I am afraid this is unlikely to change much for the foreseeable future in the UK or in the broader European area. Nevertheless these large global investors when surveyed have cash levels close to a 15 year high.

I would not copy what the professionals are on average doing.  The only real way to protect yourself is a mix of equity and real assets. The former is of course the classic asset class to switch to when you sell bonds or want to move out of cash. However this generally happens when the world economy is moving out of recession and into a period of clearly stronger growth and that is not the case today.  

This is why you have to dust down those stock selection skills and not buy cheap index funds. The key differentiator for an equity to outperform is going to be pricing power, in short an ability for a company to raise its prices at least in line with any underlying inflation rate. From this capability earnings and cash flow – which are the real determinants of share prices – will occur.

So equities can work…and so can real assets like gold or classic cars or watches or art.  My rule of thumb is that your investment portfolio – which does not include the house you live in – should have about 10% in real assets.  Gold should be your default position given its historic longevity and relative ease of access but if you have a real knowledge base in one of the other areas then my suggestion is to go for it…otherwise you may find via your pension fund manager that you are holding a whole load of cash.

So welcome back to a bit of inflation…and a reiteration that protecting yourself from a rising price level is the critical first aim of your investment policy.  

Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

‘Progress comes to those who train and train; reliance on secret techniques will get you nowhere’ - Morihei Ueshiba

It really is ALL about Europe if you care about global equity markets. I guess you are imagining that this is going to be yet another article about a ‘hard’ or ‘soft’ Brexit and related.  Of course this issue – especially if you are sitting in the UK – is far from irrelevant but actually Europe is important for other reasons.  

I wrote last week about the Pound and why investors should not panic because (1) the currency weakness is not all bad news and more importantly; (2) Sterling will recover a bit over the next year.  However in the shorter-term the Pound being weak has helped inflame the US dollar.

Now what is wrong with a bit of US dollar strength I hear you ask? After all the Federal Reserve keep on flirting with an interest rate rise and from a political risk perspective the more predictable Hillary Clinton has stretched out a poll lead.  It seems quite reasonable that the Greenback should be stretching its legs.

Of course you would be correct with such analysis but the Pound dumping, the realisation by the Japanese authorities that maybe a strong yen is not the way to go to boost the moribund local economy and the upfront commentary by the Swiss central bank earlier this week calling for a lower franc has meant that the US dollar has got a bit fruity.  

Now this causes problems for two important constituent groups. The first are the emerging markets. Many have considerable US dollar denominated debts and if the US currency goes up then these start to impose a bit more pain.  The second reason is that many commodities are quoted in US dollars and when that currency goes up so does their prices.  Higher commodity prices crimp economic activity.  Put the two impacts together and it is not good news typically for the world economy or equity markets. Just look at how the Chinese currency – which nominally tracks the US dollar – is at a six year low against the US currency as they feel the competitive pressure of trying to maintain the linkage.  A big, formal Chinese devaluation would certainly negatively capture the attention of the world’s investors.    

The last time we had a bout of US dollar strength was in the first couple of months of this year.  You may remember that instead of the “FTSE 7000” levels of the last couple of weeks, the FTSE-100 index was kicking around below 5600 index points.  Almost all other global markets were similarly poor. A fall back to such levels would certainly hurt the value of your pension fund or ISA holdings.  

Step forward then our battered and under pressure hero who is the only one who can save the day (excepting a miraculous uplift in the polls by Mr Trump): the much maligned euro.  If you take a look at global currency markets then the only two Premier League currencies are the US dollar and the euro.  As exchange rates are always a two-way street we basically need the dollar to go down and the euro up.

And this is why you should pray for Europe.  Clearly matters are somewhat troubled currently with Brexit, political angst, Italian constitutional vote concerns, the migrant crisis, low economic growth…and much more.  It is easy to be pessimistic and the world’s investors are: big outflows from Europe (including the UK) equity markets over recent months and a general lack of faith in the euro which sits at barely 1.10 against the US currency when the OECD tells us that fair value is in the 1.30s.

What I am trying to say is that there are big issues but also a big discount against a reasonable value level for the euro.  All it is going to take to approach the equity market friendly world of a rising euro and a falling US dollar is some bit of extra faith that Europe is edging towards a better and more sustainable economic and political backdrop.  

Some will believe that the structure is intrinsically flawed and the Brexit vote was the beginning of the end for the European Union and the ideals of deep European integration.  If this is so then get your tin hats on because global equity markets are going to be volatile.  However if you believe that it is only when their backs are to the wall that the European leaders actually start to consider sensible and pragmatic moves then there is some hope.  Mix this in with the benefits of all that late-to-the-party stimulus that the European Central Bank has employed in the last year or two and just maybe you could have a better 2017 story around Europe than you think even if Brexit per se remains mired in uncertainty.

And if this is the broad scenario, the euro will catch a bit more attention and go up…and so will equity markets generally in 2017.  

In conclusion: keep watching the euro as the wealth of your portfolio is highly likely to be influenced by its movements!

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

‘A pound of pluck is worth a ton of luck’ - James A. Garfield

Wise advice above but a British Pound’s worth of pluck is not worth what it used to be in euro or dollar terms.  When your home currency is battling with the much maligned Argentine peso to be only the second-worst major global currency performer during 2016 then you know it is out-of-favour.  To put some numbers on this you have to go right the way back to 1985 to find a lower Pound-US dollar exchange rate than today’s meanwhile against the euro the Pound is down to levels last seen in 2011.  I hope you do not need to buy some foreign currency for a getaway break anytime soon.

Consensus is that it is going to get worse.  There are various theories why the Pound has fallen so sharply in recent days but fears of the impact of a ‘hard Brexit’, concerns of tensions between the UK government and the Bank of England plus a growing realisation that 2017 will economically be an uncertain year for the UK economy have all be cited.  I see thoughtless computer trading has also been thrown into the mix.  Meanwhile investment banks are starting to compete with each other to have the lowest target for the Pound.  

Back in 1985 this manifested itself in investment calls anticipating parity between the US dollar and the Pound…in reality however the next stop for the Pound was two US dollars and not one.  As always pessimism peaks just before the turning point.

And this will happen again. All of the above economic and financial market criteria overhanging the Pound are legitimate and real – but also widely known.  There is certainty in the uncertainty!  An exchange rate relates not to just one currency but two and the corollary to today’s weak Pound is a stronger euro and a stronger US dollar.  For these two currencies – and others around the world – to be persistently stronger against the Pound their local economies are going to have to do better…persistently.  You see longer-term currencies follow big economic trend criteria like growth, productivity and competitiveness all nicely captured in a metric called Purchasing Power Parity (PPP).  When you look at the PPP numbers generated by the big supranational institutions like the OECD and the IMF they suggest that fair value for the Pound is around 1.45-1.50 against the US dollar and about 1.12 against the euro.  

Despite the fog around the upcoming US Presidential election maybe the relative strength over recent years of the American economy does justify a stronger dollar but – at current exchange rates – a 15% stronger US currency is hard to justify.  Even at current exchange rates you will soon hear US exporters squealing in pain.

Against the euro the Pound has fallen to around fair value.  You will all have your own views on the relative direction of the Eurozone and UK economies but in my view both are clouded by uncertainty – and the UK has a much better economic track record over recent years.  Certainly no reason for the Pound to slide further against the euro.  You could say the same for Sterling against the Japanese yen or Chinese yuan.  

What I am trying to say here is that the panic in the Pound is overdone.  You cannot ignore the political uncertainty around Brexit and related but financial markets have the trait of selling first and asking questions later. If you dig behind the excitable headlines your Pound will be firmer against pretty much any currency you might like to mention this time next year.

Good news for any summer 2017 foreign holiday currency requirements you may have!

 Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

If you were back at school and told by your teacher that last year you were ranked tenth best in the class whilst this year you were up to seventh best you would justifiably feel pleased with yourself.  Earlier in the week the UK economy received its ranking report from the World Economic Forum (WEF) and over the last year it has risen to being the seventh most competitive economy around the globe.

Well that’s good news for jobs and your wealth – especially as the three countries the UK overtook during the last year were the dynamic Hong Kong, the robot futuristic Japan and the regularly lauded Finnish economy.  So why has the UK risen up these competitiveness rankings?  What can we learn from the six countries even higher up the rankings? And is it all going to go wrong with Brexit?

First the good news. The ranking has gone up because of even more ‘efficient goods and labour markets’, ‘sophisticated business processes’, a ‘high level of digital readiness’ and apparently a ‘partial recovery in the macroeconomic environment’.  I am not sure if that wholly reminds me of the UK economy I know and see…but I guess the WEF are the experts.  

Before we rest on our laurels though two caveats.  First and maybe inevitably – given the time it takes to put together this complex global surveys - almost all of the analysis was undertaken before the Brexit vote. Second...it is really confusing when you look at the countries ranked above the UK.

The three most competitive countries in the world as per this week’s WEF data are Switzerland, Singapore and the United States much to the glee I am sure of the average Brexiteer as you would struggle to name three more dynamic, flexible and global advanced economy countries in the world.  The route is clear: rip up regulation, liberate business and don’t be afraid to be inherently global.  

And yet…sitting just behind these three countries are Germany, the Netherlands and Sweden, three inherently capitalist with a social edge countries where redistribution is important, taxes can be high and the untethered market is discouraged.  You can imagine disappointed Remain voters from late June pointing to these countries and bemoaning the future direction of the UK economy.  

If I have learnt anything about economics over the last twenty years it is that you will get a range of different opinions from a range of different economists…and one set of economic criteria or policies generally do not work everywhere – and often the political and social shifting sands change views and opinions over time.  

What matters more than anything is ‘buy in’.  The day American citizens do not believe they cannot become rich or become President will be the day the amazing economic performance of the United States comes to an end.  Similarly the vision the average Swiss, Singaporean, Swedish or Dutch citizen has about their country’s general direction and values – which all subtly differ from one another.  After such a split Brexit vote, this ‘vision thing’ is the key for UK policy makers – and the key is that it has little to do with being in the European Union or not.

The UK is a very international economy and if you invest in the UK markets you are getting inherently global exposures with well over two-thirds of FTSE-100 earnings from outside of this country.  That’s why we have those ‘sophisticated business processes’ and flexible and efficient goods and labour markets.  UK corporates have no choice but to be competitive with all types of economies around the world – either compete or commercially die.  

So no ‘little Englander’, tariff barriers or even defensive postures.  If you want to be competitive and rank well in WEF surveys then you have to embrace the world.  The UK’s got some natural advantages here but it is not God-given.  

In short if you want to stay wealthy then embrace the world – as an individual, investor, employee or entrepreneur.  And if we all do this then the UK’s competitiveness ranking will take care of itself irrespective of the increasingly tedious post Brexit vote debate.

The headlines looked good for Carnival today:

Carnival (NYSE:CCL): Q3 EPS of $1.92 beats by $0.03. Revenue of $5.1B (+4.5% Y/Y) beats by $60M.

And it is never a disaster when there is chat around the ‘strongest quarterly earnings in our company’s history’:

“We delivered the strongest quarterly earnings in our company’s history affirming our ongoing efforts to expand consumer demand in excess of measured capacity increases and leverage our industry leading scale. Revenues during the peak summer season were bolstered by strong performances from both our North American and European brands and across all major deployments including the Caribbean, Alaska and Europe”

Fundamentally I also liked net revenue yields on a constant currency basis increased 2.7 percent for 3Q 2016, ‘toward the top end of the June guidance range of up 2 to 3 percent’ and good cost control trends:

‘Gross cruise costs including fuel per ALBD decreased 0.2 percent. Net cruise costs excluding fuel per ALBD on a constant currency basis increased 5.5 percent, better than June guidance of up 6 to 7 percent, due to the timing of certain expenses’.

So put it all together and was I that surprised that the company raised guidance slightly (as per below)?  Not really…

Professional fund managers have it made, yes?  They get access to interpretations of the latest economic data straight into their inbox within minutes of the information coming out.  Company management teams visit them and answer their questions. And it is typically not a poorly paying job.  

Despite all these positives professional fund managers are not in a happy spot.  The first reason is that – seemingly inexorably – index-tracking passive investment is still on the rise.  This cheaper form of investment puts the asset bases – and potential jobs – of more classic stock picking fund managers under threat.  

The second reason is that professional fund managers are currently in pessimistic mode.  Despite cash paying next-to-nothing in interest, as per the leading monthly survey of professional fund managers, average cash balances are at the highest level since 2001 when the world was a very different place.

Here’s the problem. Professional fund managers have built up such cash balances over the last months by selling equities. Apparently in thirty two of the last thirty eight weeks money has flown out of the equity markets…and embarrassingly such outflows have been especially fervent in the period post the Brexit referendum vote.

Now this IS embarrassing because you probably have noticed that after a few volatile days after the 23 June vote the world’s stock markets have performed well and hence those that have built up some cash have underperformed – a trend which has further accentuated the attractions of those pesky index-tracking funds.  

If you are a professional fund manager there is one date every year you either love or hate.  On the first business day of every new year the number crunchers start getting to work to definitely answer the question ‘how did the fund manager do last year?’ One year is just one year but it matters at many levels from new money raising capability to professional pride and in extremis for the maintenance of your job. This is why as the Autumnal colours bloom fund managers and fund management groups all ask the same question: ‘how am I going to improve my performance over the balance of the year?’

The average professional fund manager has underperformed their relevant index-tracking benchmark during 2016 so far.  The only reasonable conclusion all investment committees struggling with this reality can come to is to put some money back into shares as holding cash has not worked.

Of course this means eating some humble pie but such a strategy can be wrapped around a few developing economic and market stories.  Expectations for 2016 UK economic growth for example has been edged up by a number of august forecasting bodies over recent weeks and of course the Bank of England both cut interest rates and undertook further monetary stimulus back in August.  Additionally the lack of movement by the US Federal Reserve on interest rates this week has had a buoyant impact on markets.  And the yields on the typical larger cap equity remain well above their peers in the bond market.  Expect to see professional fund managers accentuating these positives over the more recently quoted EU disintegration, US Presidential uncertainty and Chinese economic slowdown angst.  It is not that the glass is currently spilling over with opportunity and good cheer, it is just the rationale building to cover the embarrassment aspect of having to switch money from cash to shares at much higher prices than a few months ago.

So why should you be excited by this scope for a panicky switch back into equity markets by professional fund managers?  Warren Buffett – inspired by his mentor Benjamin Graham – often talks about the ‘voting machine’ and ‘weighing machine’ investors.  The latter group carefully weigh up all prevailing matters in the stock market and look for those longer-term insights and sources of value. Most professional fund managers would like to be in this group judged over multiple years and maybe a business cycle or two.  However because of the rise in index funds and the poor performance of most professional fund managers in 2016 shorter-term pressures are apparent.  ‘Voting machine’ investors push share prices around via that most fundamental of notions: supply and demand.  In short underperforming professional fund managers are going to be buying shares over the next few weeks.  Despite the significant run in many global stock markets, including the UK’s indices, during the third quarter, there is more to come before the end of the year.  

At least for the rest of this year being too cautious is not going to be in the best interests of building investment wealth.  

One of the more surprising reports I read today was that Europe is in an economic sweet spot.  Judging by today’s manufacturing PMI updates not only are output trends decidedly mixed (note the balance below between ‘highs’ and ‘lows’)...

Source: Markit

...but that the notes attached by the survey provider to the report highlight the reality of the underlying situation: life remains tough and more quantitative easing by the European Central Bank (ECB) is a reality:

For too long Europe has relied on one support or another.  Over much of the last few years it has been a weak euro...

...but as the Chief Economist of the (ECB) observed in a presentation earlier today despite the plunge in the local currency Euro area growth has simply been dire versus the US.  

Look carefully at the chart above on the right.  The lack of domestic demand has been the real source of disappointment in Europe...and that’s what has got to change.  Good timing then then for the Volkswagen crisis to hit...

So why am I telling you all this?  As analysts, fund managers and financial market watchers rev up for the third quarter earnings season still expect a big lag in the reported earnings of international earners. Just look at that contrast below between S&P 500 companies with more than 50% of sales in the US (the blue bar) to those with less than 50% (green bar).  Thanks Europe (and China amongst others). 

So Europe is dire and is going to have to unleash more support mechanisms.  Just maybe China has the same combination of attributes.  In the meantime the consensus expectation is for lousy ‘international’ versus ‘domestic’ stocks.  

Well that sounds a potentially interesting combination.  Nike did not do too badly last week selling to the wider world and selling branded footwear and related will not be the only brand to prosper relative to suppressed hopes.  

In short, Europe has problems but at least its policy-makers are better at acknowledging it now - and the solution is way beyond just a lower euro.  The same applies in China.  Mix some extra stimulus efforts with a lowered earnings hurdle and the chances of some interesting stocks popping out during the upcoming earnings season is high.  And that means some unheralded and currently unanticipated stock picking return potential. 

Well that - at least - is what I am hoping to write about in the next few weeks. 

Chris Bailey is the Founder of Financial Orbit.  More of his thoughts can be found at www.financialorbit.com and on Twitter @financial_orbit 

Shall we get the inevitable Buffett quote out of the way early?  Well yes it is correct to be ‘greedy when others are fearful’.  Easy to say, difficult to do with all the psychological pressures from the wall of market commentary out there.  

Thinking about this I drew some inspiration from my very first Yahoo Finance Contributors posted way back in...late-ish October last year.  Remember that time?  Back then the most troubled part of the world was Europe and even the mighty (relatively speaking) German DAX index was on its knees and kicking around below the 8,800 level when I wrote:

‘The new 52 week low is another signal for change.  It feels and looks so bad that it is going to be not just ok but good. An updated chart in a year’s time is going to look a lot better’

I barely had to wait six months for the payback with the DAX rallying 35%+ from this point by April.  By June I was lampooning the amazing statistic that 100% of European strategists were bullish.  Never ever back a 100% poll: it is bound to be false.  

So here we are now once again at a time of market fear and strife with the German DAX index below the psychologically important 10,000 index point level and my thoughts turn once again to my first Yahoo Finance Contributors posting as European (and many other global indices) remain on track for their worst month since 2008 and the time of the Global Financial Crisis.  

Mix in the continued application of quantitative easing by the European Central Bank with some better-than-average individual companies who actually are global leaders and depressed sentiment and to conclude once again for both Europe and more general global equity markets that... 

An updated chart in a year’s time is going to look a lot better’

...feels reasonable to me.  After all even a rollercoaster ends up where it starts...

(h/t @IvanTheK)

Chris Bailey is the Founder of Financial Orbit Limited.  More of his global macroeconomic and related thoughts can be found on www.financialorbit.com and @financial_orbit 

So John Deere cut guidance: cue the wailing and gnashing of teeth about US farmer incomes as crop prices slide.  Yes it is true that farmer incomes are not what they were a few years ago but they are not getting worse very quickly as shown below.  

No, whilst the company’s US business is not exactly rampant with sales down 25% year-on-year the negative revisions have come from other parts of the world, especially South America.  Chalk up another one for the Brazilian slowdown.  

Work all of this through and the company nibbled down it overall guidance for full year 2015 at both the sales and net income levels.  

So time to panic?  By definition Deere is a longer-term focused business  more interested in servicing the necessarily lumpy equipment needs of an essential business sector.  Their focus has to be on brand, fiscal longevity, reputation and service.  As noted above they are still taking positive pricing and the statistics below suggest net net they are taking a little bit of market share. Second inventories compared to better conditions a year ago are not blowing out. That reflects good underlying business management.  

And they are still pushing up the dividend too.  The company is not a huge yielder at a c. 2.5% yield but at least its distributions have been progressive reflecting a 25-35% payout of mid-cycle earnings.   

With the shares set to open back in the $86s this morning any year-to-date gains will be largely wiped out...

...so time to worry or time to embrace an opportunity?

Agriculture remains a positive market theme structurally and tactically. Structurally the need for crop productivity initiatives globally remains clear as Monsanto noted a couple of months ago...

...meanwhile tactically chat around a ‘Bruce Lee’ El Nino effect still could be influential especially as a crop prices - as with most commodities - remain washed out.  

Put all of this together and the malaise in John Deere shares today is more of an opportunity than a threat.  

Chris Bailey is the Founder of Financial Orbit Limited.  More of his thoughts can be found at www.financialorbit.com and on Twitter @financial_orbit

Top image sourced from here.  

Even with the help of a full quarter of quantitative easing, today’s eurozone second quarter economic growth estimates are downright dull and France - typically regarded as the eurozone’s second most important economy - did not even grow at all. Meanwhile only Greece and Spain grew by more than 0.5% quarter-on-quarter and the whole region grew by an underwhelming 0.3%.  

Yes you did read that correctly: Greece and Spain led the growth charts. When the Greek economy - which suffered economically cataclysmic banking sector shutdowns and capital controls from the start of the third quarter onwards - is the only geography to beat growth hopes you know things are bad. Let’s face it Greek growth numbers - flattered during the second quarter by a panicky push to buy something rather than leave too many spare cash balances in the bank - are going to fall off a cliff in the next disclosure.  

As for Spain, the IMF in a report issued earlier today whilst observing some general progress noted that

‘...deep structural problems limit Spain’s growth potential going forward and vulnerabilities remain. The high structural unemployment and pervasive labor market duality, and the lack of economies of scale of Spain’s many small firms hold back medium-term growth’.

Ahhhh.  Structural reform. Still the bugbear of the eurozone (EA) economies as nicely shown below for the critical enforcing of contracts: 

And how this has helped impacted economic growth rates way beyond just the second quarter 2015 numbers: 

Source: IMF

Revitalization strategies are never easy to implement especially when a good chunk of Europe has a lot of debt...

...and there is still huge debate about whether to write it down or not.  The Greek Parliament today may have agreed to necessary changes to receive bailout monies today but as to whether the required help to reduce the overriding debt burden will be agreed given ‘Berlin isolated’ as noted in this front page headline from today’s Financial Times is another issue...

Source: Financial Times

Europe - on hopes of the impact of the imposition of QE, a weak euro and growth bounceback potential - has attracted material fund inflows over the last year.  

The challenge going forward is that such optimism needs something to underpin it.  Today’s poor growth numbers and still ongoing debate about how to solve structural and debt issues is not a great backdrop.  In short best to stick with individual global competitive European listed stocks and not buy European indices.  

Chris Bailey is the Founder and Chief Investment Officer of Financial Orbit Limited.  More of his research work can be found at www.financialorbit.com and on Twitter @financial_orbit