European shares are in great demand, with cash pouring into mutual funds and ETFs following eurozone stocks, and Wall Street hungry for more.
There’s a pretty good story to tell: a weaker currency, an activist central bank and an improving economy. Unlike in the US, where corporate profit margins have been exceptionally high and look like they might have topped out, in Europe margins are depressed — suggesting to many buyers that profits are more likely to rise than fall. Even better, high operating leverage means if they do start rising, they could rise very quickly.
The reality so far is that eurozone (operating) profits over the past 12 months, as recorded by index compiler MSCI, have just fallen below the bottom reached after Lehman’s failure brought down the global economy. Read more
The China stock bubble is getting more and more bonkers. This from Deutsche Bank:
Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!
It seems everyone in the country is racing to open a brokerage account – 1.67m new accounts in the latest week, according to the China Securities Depository and Clearing Co. That sounds a lot, although it is growth of only about 1 per cent a week in the total of new accounts: China, remember is big.
But a quick bit of Excel work shows just how silly the bubble in Chinese domestic stocks, known as A shares, has become. Read more
European stocks as measured by the Stoxx 600 index finally passed their March 2000 high this week. As measured by the FTSE Eurofirst 300 they are set to pass their 2007 closing high if they can hold on to today’s gains.
Great news for investors in Europe, right? Well, sort of.
First off, record highs for shares are only good news if you are selling: investors should care about the future, and the higher the price, the lower the future returns, so record high prices are not obviously good news for buyers.
Second, these are capital only measures, which exclude dividends and take no account of purchasing power. Third, share prices are not a great guide to economic performance for all sorts of reasons, but most obviously because multinationals garner much of their income from outside their listing location.
The Nasdaq Composite has broken the furthest above 5,000 today since the flagship technology market peaked just 2 per cent higher at 5,132 in March 2000.
At the same time the Russell 2000 is back at record highs. This is no coincidence: while the Nasdaq is regarded as the benchmark for tech, it actually trades much more like the small cap measure than anything else. Read more
The oil world’s been full of speculation about the shift of strategy last year by Saudi Arabia which saw it keep the pumps running even as the price fell, turning an initial drop into a plunge.
There may be a simpler explanation for Saudi’s willingness to see prices slide than an attack on US shale or a “political plot” against regional rival Iran, though: a change in the Saudi view on peak oil.
The Saudis have two choices with their oil: sell it now, or sell it later. Read more
The US has falling prices again, but bulls need not fear: it is “good” deflation, as it is all about falling gas (petrol) prices making consumers better off.
Still, this chart should offer pause for thought: it shows US inflation on the same basis as the eurozone, which is worrying about “bad” deflation. The eurozone doesn’t include housing costs in its basket of consumer prices, so this compares the US excluding housing costs too. It doesn’t look pretty, with more deflation on this basis in the US than Europe. Read more
Now the FTSE 100 has broken through to a new high, there are a lot of myths about what it means peddled by people who should know better – including the grand old BBC.
Myth 1: The Footsie’s been really slow to get back to its peak because British shares have done so much worse than those of other countries Read more
As Fed Chair Janet Yellen prepares to answer questions from members of the US Senate’s banking committee on Tuesday, understanding the background is vital. Here are some charts presenting alternative measures Wall Street (mostly) hasn’t been looking at.
First, if you’re worrying about the deflation in the eurozone, the US is no different. Eurozone inflation is calculated without taking account of housing costs. Put the US on the same basis by stripping out “imputed rent” (calculated by surveys, complex maths and a finger in the air) and the US has exactly the same deflation problem as Europe. Read more
The British government isn’t renowned for its wonderful financial decisions. But among the best must be the consolidations of perpetual bonds between the two world wars. (Other candidates include the purchase of the Ottoman share of the Suez Canal for £4m in 1875 and the £35,000 paid for the Elgin Marbles in 1816.)
But you’d never guess this from reading Friday’s press release from Chancellor George Osborne when he announced that one of the smaller perpetual bonds would be repaid. Here’s what Mr Osborne said: Read more
With the end of QE, just a quick chart to reiterate that central bank bond buying doesn’t work the way one might expect.
Far from reducing bond yields, when the Federal Reserve buys bonds, it tends to make yields go up. Equally, when it stops – or says it will stop, or tapers – the yield goes down. Read more
Mario Draghi has been very clear about what would push him into the full-blown QE of buying government bonds. He faces some serious opposition from German monetary conservatives even to the less whizzy QE he’s unveiled so far, though — that of buying asset-backed securities.
Full-on QE faces legal difficulties from the ban on financing eurozone governments, as well as deep-seated opposition within Germany and major issues about which government bonds it should buy, and in what proportion. (Italy has the most in issue, so buy mostly Italian debt? Or buy in proportion to shares in the ECB? Or to economic size, meaning the biggest share would be German? Or in proportion to the size of the banking system?).
So it feels like time to explore some alternatives that have been, inexplicably in our view, ignored. Read more
Looking at the sea of red in the markets over the past two days, it is easy to be disheartened. The Dow Jones Industrial Average fell 334 points and the broader S&P 500 was down 2.066 per cent, matching the fall in Germany’s Dax 30 at pixel time.
It is worth putting the fall into context, even if valuation, complacency and the scale of crowded trades all suggest good reasons for concern. Over the past 50 years, the market’s been down this far in a day 289 times, or almost six times a year. It is nasty, but on this basis it looks normal. Read more
Amid the protests in Hong Kong, a quick reminder of what a wonderful place it’s been to invest, whether in equities or housing. Strapping one’s economy to China’s growth rocket while hanging on to a US dollar-pegged currency and the rule of law was a recipe for success.
Of course, for the multitude of investors who forget to read the warnings: past performance does not necessarily predict future results. Also, fabulous gains on property are frequently the precursor to not-so-fabulous losses on property. Hong Kongers should remember this: after the October 1997 peak was followed by a crash, it took until April 2012 for home prices to rise back to where they had been, with prices halving along the way. Read more
The dot plot might include two downward pointing arrows to offset the two hawks dissenting from the Federal Reserve statement today, but there’s a growing group expecting a lot of rate hikes next year.
I’ve highlighted two clusters on the Fed’s “dots” showing where they expect rates to end next year and 2016: Read more
Those looking for excess in financial markets have lots of examples to choose from, but a recent favourite has been the Spanish bond yield: it fell below that of the US three weeks ago, and has stayed there.
QED, say the bears. Markets are massively mispriced under the spell of central banks, and Spain’s bond yield proves it.
Not so fast. True, Spain is in a dire situation, with too much debt, insanely high unemployment, deflation and an economy which became no more competitive in the past year according to the World Economic Forum, which ranks it 35th, behind Indonesia, Iceland, Malaysia and Saudi Arabia. Read more
Amid all the debate about why geopolitics isn’t hurting stock markets, a nice table from JP Morgan Asset Management:
All figures show war-zone countries as a percentage of the world, with our emphasis:
- 11.7 per cent population
- 9 per cent oil production
- 3.8 per cent foreign direct investment
- 3 per cent GDP
Japan is the home of the “widowmaker” trade: the obviously mispriced Japanese government bonds (JGBs) which keep getting more and more mispriced until all the short-sellers have gone out of business.
JGBs claimed victims in 1993, 2003 and 2013, when yields plunged in the face of all the arguments presented by the bond vigilantes worried about the slow economy and government debt at levels unheard of elsewhere in the world.
This year was meant to be different. Frantic money-printing by the Bank of Japan last year weakened the yen and so pushed up the price of imported goods, particularly energy, while signs of consumer spending allowed shops to push through price increases. Read more
We’ve been worried about the lack of liquidity in the bond market for yonks. Some at the Fed (though not Janet Yellen) share the concerns, and have been talking about whether to add exit charges to bond funds to prevent a potential run on the market.
Now the Bank of England has weighed in, warning investors that they are paying more and receiving less when it comes to liquidity, particularly in bonds.
Here’s a few choice comments from the Bank’s Financial Stability Report today: Read more
Dubai stocks went bonkers last year, along with Qatar, distorting the performance of the (anyway tiny) frontier markets index.
Locals rediscovered their lust for equities, while foreigners were excited by a potential upgrade to emerging market status and the billions of dollars of inflows from index funds that would represent. In total the index more than tripled in two years.
In the past month it’s all gone wrong, and strategist Andrew Howell at Citi has a good reason why: the performance of Dubai, represented by the MSCI UAE index, looks very much like the out-of-control price inflation represented by the Nasdaq during the dotcom bubble. Read more
Janet Yellen says share valuations remain within “historical norms”.
Two words: “irrational exuberance”. Read more
There was no bald supervillain stroking a white cat, but other than that the City of London hosted a conspiracy theorists’ perfect scenario yesterday: a meeting organised by the Rothschilds, sponsored by the Rockefellers and with managers of $30tn, or more than a tenth of all financial assets worldwide, in the room. Even the British royal family was represented, essential for any decent conspiracy, although usually Prince Philip is preferred to the Prince of Wales.
Perhaps there were shape-shifting reptilians present, as per David Icke. But if so, they were keeping their heads down: rather than discussing how to rule the world, the focus was on “inclusive capitalism”. Read more
Google has a $30bn warchest to spend on foreign acquisitions, or so it’s told regulators. If it decided to spend the cash in one go the options for what it could buy* are rather limited.
There are only seven companies outside North America (we skipped Canada, rather unfairly) valued between $29bn and $30bn:
- Philips has to be top of the list, as the only technology company on the list. Beard trimmers would be a natural fit for the Silicon Valley behemoth, but medical equipment and lightbulbs not so much.
- Nordic banks Swedbank, DNB and SEB could provide Google with a solid platform to launch its own currency.
- Investor is out of the question: a Stockholm holding company with a wide portfolio of Swedish minority stakes, it would only be useful if Google planned to go a whole lot further and buy up every Swedish blue chip (currently worth a bit less than twice Google).
- East Japan Railway is a bit low-tech for Google; the problem of self-driving trains has already been solved, after all.
- Compass Group brings the most obvious cost savings: the British catering giant already runs the canteen at the Googleplex (“I liked the sandwich so much I bought the company,” Larry Page didn’t say). Perhaps Google could apply its innovative approach to rethink lunch.
Anyone who invested during the 2000 dotcom bubble knows that the inflation of internet stocks last year was nothing like on the scale of the last mania. But just how much smaller was it?
Well, the popping so far this year suggests it was about two-fifths the size…
Following Izzy’s charts from Credit Suisse, here’s an update of my favourite measure of how Europe’s turning Japanese.
This chart shows eurozone inflation since the region’s crisis against Japanese inflation from the bursting of its bubble. The offset puts the peak of 1990 where the eurozone was in 2011, when the US near-default started a panic which threatened the survival of the euro. Read more
Morgan Stanley invented the “fragile five” last year as a way to spot the pressure points in emerging markets with US monetary policy set to tighten. This year Brazil, India, Indonesia, South Africa and Turkey have mutated into the “fabulous five”, at least according to HSBC, as their currencies shed their pariah status.
The fragile five were big and matter a lot. But for the true fragile five, look to sub-Saharan Africa, reckons Sam Vecht, a fund manager at Blackrock. Here’s his comparison of current account deficits, using IMF data from January: Read more
Forget PPP-adjusted GDP. Deutsche Bank is trying to make international currency comparisons sexy with its Cheap Date index, part of its annual look at global price trends.
How much does it cost to take your loved one out? DB’s statistics wonks probably aren’t getting any, judging by the way they construct their index, which involves a date at McDonald’s and doesn’t even include flowers:
We have defined the “cheap date” as follows: cab rides, McDonalds burgers, soft drink, two movie tickets, and a couple of beers. Please note that in our last update we had included sending a bouquet of roses in the activities for a date. This year we have removed it as it was skewing the comparison.
File that excuse away; it might be useful next Valentine’s Day.
The index shows London as the most expensive place for a cheap date. True cheapskates should take their paramour to India: Read more
The attempt by US drug company Pfizer to buy AstraZeneca, the crown jewel of Britain’s pharmaceutical industry, has prompted entirely predictable reactions.
There is outraged huffing and puffing from the left and from vested interests about the loss of the UK science base. Even the FT has joined in with the pseudo-dirigism more usual in the Guardian or Le Monde, calling for an independent assessment of takeovers which might damage UK science… Read more
Much is being made of China being about to pass the US as the world’s biggest economy — and of China’s fight to massage down the figures.
We hate to side with Chinese statisticians, but at the very least Beijing may well be right to play down the comparison in its local media.
Here are a couple of surprises which come out from using similar adjustments to the PPP calculations used to show China’s economy is bigger (using the IMF’s World Economic Outlook database)…
- In 1980, Greece and Gabon (which was in default on its debt from 1999 to 2005, but has lots of oil) were ranked above the UK for PPP-adjusted GDP per person. Before adjustment they were about a third poorer.
- East Timor, on the IMF’s 2014 estimates, is ranked as richer on PPP-adjusted GDP per capita than Poland, Estonia or Hungary – and is ranked only 1.4 per cent poorer per person than Portugal, its former colonial master. It has discovered oil, boosting GDP. But before the PPP adjustment, GDP per capita is put by the IMF this year at $4,669 vs $14,166 a head for Portugal.
Here’s a quick update on returns in April and the year so far, courtesy of Jim Reid at Deutsche Bank.
A few surprises: British stocks were the place to be in April, while Greek shares did worse than Russian shares – at least in local currency terms. (Click chart to enlarge)
As brands go, the London Interbank Offered Rate – Libor – is right up there with Enron and Lehman Brothers.
So it might come as a surprise to the poor souls forced to track the level of Libor on a daily basis that the new compilers are demanding $10 a month for what used to be free for users of terminals such as Bloomberg and Reuters to look at. Read more