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The UK’s FTSE-100 dropped to once again test the level of last year’s breakout to all-time high.

There was no shortage of breakouts among global equity markets in 2016. Perhaps the most monumental, however, was that of the UK’s FTSE-100. Following a 15-year triple top between 1999 and 2014, and a false breakout in 2015, the UK’s benchmark index finally managed a seemingly successful breakout to new all-time highs, as we noted in a post at the end of 2016. After about a 3.5% pop to start the year, the FTSE returned to test the level of its breakout, around 7100, near the end of January, as we indicated to investors at the time. Or, as we put it, the FTSE appeared to be giving investors another chance to “”board the FTSE bus” prior to an ultimate run higher. Indeed, the test proved successful and the FTSE subsequently took investors along for a ride, to the tune of 5% into mid-March. 

It appeared as though the bus had left the station and those investors who had failed to jump aboard at the end of January had likely missed the bus completely. However, last week, following the snap election news out of the UK, the FTSE bus once again returned to the spot of its breakout, giving investors one more chance to hop aboard. However, they needed to hop on quickly as the FTSE has already sped out of the station as if driven by one of those belligerently impatient bus drivers. Specifically, the FTSE popped higher yesterday, gaining more than 2%.

So what next? Well, if it is another successful breakout test, there should be a lot more legs to this rally, i.e., investors who failed to “board the bus” previously can still get on at the next stop without missing too much. However, it is always nice to pick one’s optimal bus stop -- you just have to be ready for the bus.

Were you ready for the FTSE bus when it stopped last week? At The Lyons Share, we’ve been highlighting this potential setup for members for the past week. Check out this Premium TLS Post at our new “all-access” site for ideas on how to take advantage of this development in UK stocks. And don’t miss the bus -- sign up for The Lyons Share!

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The UK’s FTSE-100 Index is testing the level from which it broke out to all-time highs a month ago.

Our final Chart Of The Day, and accompanying post, for 2016 focused on the UK’s main stock index, the FTSE-100. Specifically, it noted that the index was breaking out to all-time highs. More specifically, the tone of the post was the new high’s juxtaposition against the consensus calls for financial calamity in the UK following the Brexit vote. The epic pundit forecasting whiff aside, the main point for investors was quite simply the significance of the FTSE’s new high, above the peaks of April 2015 and October 2016.

Furthermore, as a reminder, the new high near the 7100 level also marked a decisive break above the peaks from 1999-2000 and 2007.

Thus, the significance of this breakout cannot be overstated. There is no guarantee that the breakout will be successful, of course. But after waiting 17 years, 2 cyclical tops and a serious intermediate-term top, the breakout of a month ago is a chart watcher’s dream. And the good news is, if you missed the breakout the first time, you’re getting another shot at it now. That’s because after about a 3.5% pop following the breakout, the FTSE-100 has now pulled back and is approaching a test of that breakout level.

Again, there is no guarantee in this business. All one can do is try to garner the best odds of success in a trade. In this case, testing 17 years of former resistance turned possible support represents about as high odds as one can hope to find. So needless to say there is compelling evidence to hop aboard the FTSE bus here.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

Pensacola, FL asks…Mitch, the bull market is in its 7th year – is the next bear around the corner? When is it coming and how can I prepare?

Thanks for the question. Know that bull markets don’t have to die of old age. Who’s to say this won’t be the longest bull market in history? It’s possible. Investors should not make defensive portfolio adjustments simply because it ‘feels like’ the bull market is ‘due.’ This is now the 2nd longest bull market in U.S. history (behind the 1987-2000 bull) and fundamentals suggest this current bull won’t end this year.

The decision to lower equity exposure should hinge more on your age, tolerance for risk, and cash flow needs versus a forecast for timing the next bear market. In other words, investors are generally best served by allocating investments in their portfolios based on factors they know— investment objectives and time horizon. Keep it simple.

The other thing we know is that, over time, stocks have trended higher than other asset classes and have delivered consistently positive returns over the long run. You can’t find any 20-year period in history where stocks delivered a negative return. Why try to get cute with the market and risk not generating that positive long-term return? Think of it this way: trying to time the market actually decreases the likelihood you will generate a long-term positive return. In my view, it’s not a risk worth taking.

Tooting our own horn here for a minute…the Zacks Investment Management approach is to build portfolios based on quantitative research and diversify and allocate investments according to one’s risk tolerance and timing for needing those investments in the future. We’re extremely proud of our performance track record, especially given our focus on managing downside risk for our clients. Pensacola, I hope you’ll take a closer look at how we go about ‘taming’ the bears and driving performance—it’s about putting the ‘math’ and subsequent insights to work every day so clients can rest easy every night.

FREE Download – Zacks Stock Market Outlook Report: August, 2016

Following the Brexit vote, seven asset managers, so far, have suspended redemptions on their UK real estate funds. Accounting for around £18 billion—more than half of the open-ended British property funds market—these funds apparently have limited cash/liquid options to meet the flood of withdrawal requests from investors.

Heightened uncertainty around U.K.’s business prospects, following the referendum, has jittery fund-holders rushing to offload exposures to U.K.’s commercial property. But, given the relatively illiquid nature of the funds’ underlying assets, such as office buildings/parks, warehouses and other commercial properties, asset managers are suspending redemptions to avoid a real estate fire sale.

Standard Life was the first to halt redemptions. Its 13% cash reserves proved insufficient to cushion the overwhelming withdrawal requests, compelling the fund to suspend trading on its £2.9 billion U.K. Real Estate fund on July 4—barely 11 days since the poll results came out. The next day, Aviva Investors froze its £1.8 billion Property Trust.

Citing mounting liquidity pressures, Henderson halted trading on its £3.9 billion U.K. Property PAIF fund along with feeder funds. Columbia Threadneedle and Canada Life temporarily suspended redemptions on £1.39 billion PAIF/feeder funds and four funds totaling £450 million respectively.

Additionally, many money managers ‘devalued’ their funds to discourage investors from selling at prices deemed too low. Aberdeen Fund Managers Ltd. slashed a property fund value by -17% and stopped redemptions. Henderson cut its fund price by -4%.

Many asset managers want to avert a 2007-like real estate bust, when funds contributed to a more than -40% decline in UK property prices from their peak. Temporarily freezing trade on real estate funds is probably viewed by their managers as the only way to stem a potential self-reinforcing cycle of redemptions and free-fall in British property prices. It doesn’t help that foreign investment in UK commercial real estate was already down -50% in the first quarter this year. Plus, demand for the nation’s residential properties plunged to a three-year low in May, mainly due to the anticipation over the forthcoming Brexit referendum at the time.  

Also, talks of possible U.K. regulatory measures, such as requiring investors to provide a notice period of at least 30 days to six months to liquidate fund positions, and/or allowing sell-offs only at ultra-low prices, are doing the rounds.

Bottom Line for Investors

The Brexit referendum has sparked a drastic change in sentiment, from the post-financial crisis period of skyrocketing London property prices. The fund redemption requests are a sign of increasing apprehensions about the U.K.’s consistency as a business center after its vote to leave the EU—meaning, British commercial properties could experience some price decline in the future, even if temporary withholding of funds’ redemptions prevents it from ballooning into a catastrophic downward spiral. Nevertheless, if prices do manage to fall enough, long-term investors could spot some bargain hunting opportunities for high-end properties in London, especially with an already cheap pound.

On the other hand, the rush to unload British real estate exposure could also shift investor capital towards real estate in the U.S. in the coming months, especially as the latter’s economy is showing signs of resilience.

FREE Download – Zacks Stock Market Outlook Report: July/August, 2016

Theresa May is a highly experienced politician who has already made history by becoming the second longest serving home secretary in the past 100 years, serving six years in one of Government’s toughest jobs. Now, May takes on the role of Prime Minister of Britain. As she takes the reigns, she brings with her a new hope of leadership at a dramatic and tumultuous time for the nation. May is a seasoned career politician and an anti-BREXIT campaigner who is admired for her liberal stances on a number of social issues and strong work ethic.

Who is Theresa May?

Born in the seaside town of Eastbourne (Sussex) on October 1st, 1956, to a vicar (Reverend Hubert Brasier) and his wife (Zaidee), May had a humble upbringing which influenced her political career and imbued her with a sense of public service. She attended a state primary (an independent convent school) and then a grammar school in the village of Wheatley, which later became the Wheatley Park Comprehensive School during her time there. She later attended Oxford University (St Hugh's College) for higher studies where she was introduced to the world of politics.

After graduating with a degree in Geography, she initially started working at the Bank of England and later rose to become head of the European Affairs Unit of the Association for Payment Clearing Services. It was during her 3rd year in college, in 1976, that she met her husband Philip, who was president of the Oxford Union, a well-known breeding ground for future political leaders.

Her Political Journey

It was during her college years that she conveyed to her close friends her ambition to pursue politics as her career. She began her political career by stuffing envelopes at her local Conservative Association before becoming a councillor in the London Borough of Merton from 1986 to 1994. Later, she moved to Westminster where she made her entry into parliament as the MP for Maidenhead in 1997, after previously failing to win seats in Durham and Barking.

After becoming MP, she was quickly appointed to William Hague’s shadow cabinet and became the first female chairman of the Conservative Party in 2002. Under Prime Minister David Cameron, she became the Home Secretary. 

Key Dates

1986-94: Councillor, London Borough of Merton

1992: Parliamentary candidate, NW Durham

1994: Parliamentary candidate in the Barking by-election

1997 to present: MP of Maidenhead

1999-01: Shadow Education Secretary

2001-03: Shadow Transport

2002-03: Conservative Party Chairman

2003-04: Shadow Transport

2004-05: Shadow Culture Media & Sport

2005-09: Shadow Leader of the House of Commons

2009-10: Shadow Work & Pensions

2010-2016: Home Secretary

2016-present: British Prime Minister

Career Highlights

1. Holding a variety of key shadow cabinet posts from 1999–2010

2. The first female chairman of the Conservatives in 2002

3. Becoming the Minister for Women & Equalities and Home Secretary in 2010

4. Blocking British computer hacker Gary McKinnon’s extradition in 2012

5. Becoming the longest-serving Home Secretary (Britain) in the last century in 2015

6. Becoming the second female Prime Minister in 2016 (following Margaret Thatcher)

Political Thinking

1. Move forward with Brexit referendum toward a ‘win-win’ for both UK and EU

2. Unite UK by values of One Nation Toryism

3. Create a strong, new, positive vision for the future of the nation, a vision of a country that works not for the privileged few, but for every individual

4. Revamp boardroom ethics with workers guaranteed representation on company boards while shareholders vote on executive pay (which will be made binding every year)

5. Promote social mobility and reform

6. Create opportunity for the more disadvantaged in society

Final Thoughts

The Brexit referendum has thrown the UK into one of its worst political crises since 1940. As a result, Theresa May and the government face a daunting task in defining the nation’s new relationship with EU members while uniting the UK as a nation. While the early years of May's time in Downing Street may be dominated by the process of divorcing the UK from the EU, her tenure will surely shape the course of British and European history for the foreseeable future.

Download – Zacks Economic Outlook: July, 2016

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The aftermath of the “Brexit” vote is sure to create plenty of winners and losers, but perhaps most-watched will be those affected in the realm of trade. At this stage, there’s no sense in speculating how the trade relationship between Britain and the EU will ultimately look— there are far too many unknowns. But, what is worth a closer look is how the Brexit vote has seemingly stirred a movement—one that is bringing into question the benefits of globalization and trade.

 Is Free Trade on the Chopping Block?

Something we learned from those leading the “Leave” campaign in Britain was how effective it was to appeal to isolationism. Boris Johnson and Nigel Farage focused their messages on how Britain could do it all on their own—no need for Brussels bureaucracy, no need for a trade deal they felt benefited the EU more than Britain, no need for labor coming from other countries.

Readers may have a strong opinion on the topic of ‘trade’ one way or the other, some even more so who have been directly affected by it with a job loss. The economic benefits of trade are very difficult to measure directly, but the costs are quite tangible (job losses, immigration) and it is easier to see trade hurting more than it helps. In this sense, the emotional argument often trumps the analytical one.

 As a career asset manager, I’m hard-wired to put my weight behind the analytical when it comes to cost/benefit analysis, and for trade I’m convinced that freer is almost always better. There is a relatively new data set available that supports this case. The Organization for Economic Development (OECD) and the World Trade Organization (WTO) have created a joint initiative to better measure how countries, in their trade relationships, benefit from and contribute to total output.

The metric is known as the Trade in Value-Added (TiVA) and, in the WTO and OECD’s words, it’s “the value added by each country in the production of goods and services that are consumed worldwide.” A look at some of the findings reveal quite a few highlights:

The United States adds more value to China’s exports than China does to ours

Foreign countries add about 15% of value to our total exports, with the rest coming from domestic production

While most people see China as “making everything,” they actually source over 30% of the value of their production from other countries

Even Mexico relies on foreign value adds more than the U.S. does

The OECD-WTO joint initiative examines 61 countries and 34 unique industrial sectors, so one could study the findings all day and night. But, the consistent discovery you’ll make is that very few mass produced goods are made in just one country—the global supply chain is vast and interconnected. To make an iPhone, about a dozen countries are involved, and if that supply chain breaks down or a link goes missing (or is legislated away via tariffs) then the cost effectiveness of the iPhone goes out the window. Just ask any Brazilian (with whom the U.S. does not have a free trade agreement) how difficult it is to acquire an Apple computer at a reasonable price. Citizens in Brazil pay at least double what we do.

Raising tariffs or nixing free trade agreements can easily result in a backlash to protectionism, which could mean the ultimate costs of goods sold rises significantly. Roughly two-thirds of GDP in this country is comprised of consumer spending, and the last thing anyone really wants is the costs of goods skyrocketing. Trade is by no means perfect all of the time, but it’s also one of those things that ‘you don’t really know how much it hurts until it’s gone.’ 

Bottom Line for Investors

Again, I’m not arguing that freer trade is a perfect economic solution and that globalization is the end-all solution for creating the most wealth possible. But, I’d argue that they help more than they hurt. The reason sentiment against trade and globalization is easy to ignite is because the effects are felt by some acutely (those who lose jobs), and that is certainly a problem governments need to work to figure out. Ultimately, the benefits of globalization and trade are distributed throughout society via the lower cost of goods—an iPhone costs $600 instead of the $1,200 it costs in Brazil. If folks were able to see a menu of goods before tariffs and after tariffs, my guess is that free trade wouldn’t get such a bad rap.

FREE Download – Zacks Economic Outlook: July/August, 2016

Theresa May Assumes Key Role as Britain PM – Theresa May became the second woman to lead Britain since Margaret Thatcher (1979-1990), and the world is watching as she assumes the extraordinarily tricky task of guiding Britain through their separation from the European Union (EU). May is a career politician and actually campaigned against the Brexit, but she appears committed to seeing it through based on the referendum result. Germany’s leader, Angela Merkel, has already stated that Britain should not expect an easy path forward in their relationship with the EU, and May finds herself in a difficult position.

June Jobs Report Surprises to the Upside – after a dismal May jobs report that arguably sent the Fed back into the bomb shelter, U.S. job growth surged in June as manufacturing employment increased. June saw nonfarm payrolls increase by +287,000 m/m, the largest gain since last October, which followed the bleak +11,000 m/m added in May. Meanwhile, the unemployment rate held at 4.9%. One would normally assume that a stronger jobs report might encourage the Fed to revisit their projected course for raising rates, but at this stage Fed forecasting feels like a feckless exercise. Even though the Fed’s dual mandate is employment and inflation, they also seem greatly influenced by global events, like the Brexit.

Maintaining Close Ties with Wall Street – Chancellor of the Exchequer, George Osborne, met with some of Wall Street's biggest investors in New York this week to try and encourage them to keep close ties with the U.K. despite the Brexit. It seems extremely unlikely that Wall Street will want to alter its relationship with London following the Brexit, as neither party has any incentive to close-off ties in any way. In fact, once the Brexit has fully taken its course, there could be even more advantageous aspects to the relationship between New York and London, since London will no longer have to abide by regulations set forth in Brussels. Osborne will also visit Singapore and China later this month for the same end.

Bank of England Holds Key Rate at 0.5% - the market has seemingly been wrong in forecasting Britain policy moves lately—first the Brexit, and then this week in setting the expectation that the Bank of England would cut the benchmark rate by 25 basis points and perhaps also boost other stimulus measures, like bond buying programs. Neither outcome happened, perhaps as the central bank elected to hold off on using its stimulus measures until it is deemed essential. With the FTSE trading higher since the Brexit vote, the read is that the markets are perfectly content with the referendum outcome—so why should the central bank act? A 25 basis point cut would be the Bank of England’s first cut in seven years, and would represent an unprecedented low in the central bank's 322-year history.

FREE Download – Zacks Economic Outlook: July, 2016

Amidst all the gloom surrounding global economic woes this year, many people overlooked some silver linings—one of them being 2015’s record high global foreign direct investment (FDI) flows.

Swelling +38%, global FDI flows (i.e., aggregate investments made by companies/entities directly into overseas businesses versus buying shares on public stock exchanges) peaked to $1.76 trillion in 2015—the highest level since the global financial crisis of 2007-08. And, a quarter of the flows went to North America, outshining the region’s 2000 FDI levels.

The region also registered the sharpest rise at +160% last year from 2014 inflows, driven mainly by more than +250% jump in FDI to the U.S.

Notwithstanding debt woes, the European Union registered a +50% surge and Switzerland received a +886% rise to $69 billion.

Reversing a nearly five-year-old trend, developed economies collectively received the greater share (55%) of global FDI flows in 2015 versus the preceding year’s 41%. The spurt of FDI into advanced economies was largely due to cross-border mergers and acquisitions, particularly in the U.S.

 Data Source: UNCTAD

On the other hand, developing economies (excluding Caribbean financial centers) experienced a +9% increase, but flows to transition economies plunged -38% from 2014 levels.

FDI flows to Developing Asia rose around +16%. On the other hand, commodities and energy price routs discouraged foreign investments in Africa (~ -7%), Latin America and the Caribbean (~ -2%).

Data Source: UNCTAD

Harbingers of Future Growth

Usually a long-term investment, FDI occurs in the following alternative ways—a foreign company acquiring shares of, and/or expanding operations of a domestic entity; the overseas company setting up its subsidiary in the target country; or, a cross-border merger. In the process, technologies and skills exchanged between the two entities can potentially lead to efficiency gains, more employment opportunities and improved profitability—benefits which may not just be restricted to the recipient firm/subsidiary alone.

FDI contributed to around 12 million U.S. jobs in 2013—consisting of 6.1 million directly employed by foreign-owned entities plus 5.9 million jobs indirectly attributable to foreign investments via by-products, like productivity gains and supply chains.

Majority-owned U.S. affiliates of foreign entities accounted for $53 billion investment in R&D in 2013, which is 16.4% of total American R&D expense by businesses that year, underscoring FDI’s importance in sustained economic growth.

Also, emerging countries are fast capturing global investors’ attention owing to their growing market and rapid urbanization. The Indian aviation sector, for example, has reaped substantial gains, with FDI leading to the launch of two airlines, Vistara and Air Asia India, and to Etihad’s purchase of a 24% stake in Jet Airways. The developments have facilitated expansion of international air traffic from the country and operations from several new cities.

Bottom Line for Investors

Even though current global weakness is predicted to slow foreign capital flows globally in 2016, last year’s record foreign investments, particularly in developed economies including the U.S., should potentially provide adequate support for companies’ long-term prospects. Furthermore, by 2018, global FDI flows are predicted to exceed $1.8 trillion on the back of an expected global economic recovery.

As for Corporate America in particular, recent regulatory challenges may have restricted certain cross-border deals this year, but prospects of real growth offered by firming domestic fundamentals and an expected rebound in corporate earnings by end of the fourth quarter augurs well for returns on existing FDIs and add to U.S. companies’ appeal to global investors looking forward.

FREE Download – Zacks Economic Outlook: July, 2016