Height of summer
The investment team at Majedie comment on the state of the markets after a turbulent few months.
So much for a summer lull. Against a backdrop of geopolitical unrest, raging debate on the leanings of the US Federal Reserve and the Scottish referendum, the FTSE 100* crunched its way to a 14-year high. The days when investors could ‘sell in May and go away’ have long gone amidst a modern market that sways to the veiled messages of central bank statements and remains obsessed by any incremental changes of economic data.
As we pass the sixth anniversary of the collapse of Lehman Brothers, financial markets have an eerie feel to them. Central banks, having successfully staved off economic ruin in debt-laden developed markets, have since unashamedly distorted asset values, forcing investors into more exotic higher-yielding assets.
While the euphoria often associated with market tops is noticeably absent, there are pockets of exuberance. Our time is spent understanding the moves of central bankers and interpreting the implications for the portfolios – all in the context of bottom-up valuations and the expectations attached to each stock.
While the wider market remains focused on the moves of the Federal Reserve, which appears to be preparing the ground for higher rates, it is important to recognise how the policies of the Bank of England, the European Central Bank (ECB) and the Bank of Japan all weave themselves together, and then to try to understand what their collective impact will be on financial markets.
So far this year, the withdrawal of US stimulus has been offset somewhat by the Bank of Japan, whose printing presses remain at full stretch. At the beginning of September ECB president Mario Draghi announced that it would buy securitised loans and covered bonds from the region’s banks to help kick-start lending. These initiatives are detailed and complex, but we believe that the measures will provide a significant tailwind to depressed European business sentiment, with a subsequent follow through to earnings. Notwithstanding the heavy trading exposure of London-listed companies to Europe, we still see good opportunities in the UK.
Despite the ongoing conflict in Iraq and the uneasy ceasefire in Ukraine, the oil market remains well supplied and the price of Brent crude has slumped below $100. This is partly supply-led, with the shale revolution and a glut in the Atlantic Basin; but it is due to the demand side where China-led weakness has exacerbated the issue. China is running short of options; and while the recent weak inflation data has raised hopes for further stimulus, even China’s leaders now recognise this would be a poor solution. The economy needs to rebalance. Sentiment towards emerging markets has improved slightly over recent months but the weakness in iron ore, steel futures and Tokyo-traded steel suggest to us an economy that is on a path towards more muted economic growth.
The slide in the oil price is, however, an effective tax cut for the developed market consumer. With expectations that prices will remain subdued, we have reduced exposure to integrated oils, at the same time increasing exposure to companies that will benefit; specifically consumer and economically sensitive stocks. One such company is Carnival, the world’s largest cruise ship operator. Operating in a market that is effectively a duopoly, the business benefits on two fronts: cheaper fuel and a consumer with a bit more disposable income. The shares have the added attraction of a cheap valuation, after a difficult few years of operational mishaps.
*Source: FTSE International Limited (“FTSE”) © FTSE . “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.