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  • Winning with the Collapse in OilDecember 2014

    TAM portfolios provide protection in the oil sell-off

    “I’ve been on both sides of a lot of oil and gas price swings. Every time, the first question people always ask is who wins and who loses”. T. Boone Pickens, founder and chair of BP Capital.

    The price of oil has fallen over 40% in recent months with inevitable knock on effects to the price of shares in oil stocks. Over one month, the FTSE All Share Oil and Gas producers have fallen 15% and the Service and Equipment sector has fallen an astonishing 29%. Mining stocks have also fallen 16%. Even in a market where improbable moves have become routine, such as gold, Gilts and the Russian Rouble, this is an extraordinary fall. 

    This has rattled the confidence of stock markets, dragging down all other stocks down in an indiscriminate sell off similar to that which we saw in October.

    However, TAM equity portfolios have relatively little exposure to these sectors because client portfolios are overweight overseas shares in US, Japan and Europe where oil stocks do not feature so highly in their stock markets. Furthermore, TAM UK equity investments have been predominantly in mid-sized companies where we seek profit growth, in preference to balance sheet strength, reflecting our positive view on economic growth. Our thoughts are aligned with Bank of England Governor, Mark Carney, who fundamentally believes that this is all super stuff for consumer pockets and therefore good for the economy. 

    The counter view, evidenced by the sell-off, is that a very low oil price ultimately feeds through into lower inflation and, by extension, interest rates staying lower for longer reflecting a weak economy. We believe this is an unnecessarily bearish take on the price of a commodity that has been overly expensive for an extended period in a fragile economic recovery and which has effectively acted as a tax on the consumer. Some estimates put the net contribution to American consumers at around $800 per year. 

    Furthermore, the boost is an immediate one whereas the knock on deflationary effect will take some time to feed through to the cost of goods. So we believe that cheaper oil will give consumers more money to spend elsewhere and has the potential to boost the US economy beyond its stall speed of around 2%, which is what stock markets and central banks have been worried about for years.  

    Clients with exposure to equities in TAM portfolios will notice a dramatic pick up in relative performance in December even as stock markets fall, all of which contributes to another strong yearly performance. Furthermore, we believe that an investment opportunity may be presenting itself. UK Income funds, for example, often invest in energy stocks which tend to be solid dividend payers. We are also looking at investing in the energy sector directly. 

    And so despite this recent reversal of the Santa rally, TAM portfolios are performing very well. If we conclude that the pain is now almost fully factored into the price of energy stocks, which were already cheap, then it may well be time to invest client cash opportunistically as we said we would at the beginning of the year.

  • Has Santa tried to derail the economy?November 2014

    The state of New York is no stranger to freak weather conditions but the current winter storm hitting the eastern sea board has already seen over 10 fatalities, thousands stranded in airports covered in snow and the National Guard called out. This time around it seems more than the Fifth Avenue shoppers who are going to have to take cover. No country on earth is immune from freak weather, nor are they immune from the financial and economic impacts Mother Nature leaves in her wake.

    The US at present has a very imbalanced set of asset distributions with an attributed 40% of the nation’s wealth being owned by 1% of the population. Therefore when a population with this sort of imbalance of assets decides to remain indoors, not spending and potentially not working it could be argued that this alone is enough to see a dip in US Q4 growth forecasts.  On the other side of the coin, few politicians will be happy to justify siphoning off hundreds of millions of dollars’ worth of funding for a “potential” freak event or for long winter months that may or might not arrive. Justifying this use of reserves to congress will prove trickier than waking out onto JFK’s runway with a shovel and mittens!!

    There are at present no established economic models that accurately predict the financial impact of freak weather. The very nature of such is unpredictable, making it difficult to project a figure onto future events.   In New York’s hazard mitigation plan in 2010 over the space of 2 days the city of New York’s snow bill amounted to nearly $70 million. $30 million of this was attributed to overtime costs for emergency services, snow clearance, and fire fighters. Lost revenue on parking meters and towing fees and the $14 million spent on overtime for public transport did not match the estimated $26 million dollars from a downturn in consumer spending on the likes of Fifth Avenue. That was New York State’s TOTAL snow budget for the whole year.

    Bizarrely there is an almost direct correlation to the temperature of the frozen ground and the temperature of the surrounding economy. When 1% of a nation’s population own 40% of the wealth we could realistically start to see some macro-economic ramifications showing up in the US’s Q4 announcements depending on the longevity to freak weather.  Statistics show that nationally the average US citizen needs to work more than a month to earn what one CEO earns in an hour and arguably New York State and the surrounding States house more millionaires than anywhere else in the continental US, so with a fair portion of that national top 1% living or being connected to NYC only a small proportion of the work force need not behave like working consumers for that $70 million dollar loss to become a reality. 

    Chris Rupkey (Chief financial economist at bank of Tokyo-Mitsubishi) - “I think net-net, consumer spending on goods that people buy in shops and malls, the slowdown there is going to trump whatever extra spending consumers do to heat their homes this winter. We haven't seen it for a while, but weather can provide a pretty significant headwind for GDP growth."

    If the weather continues over December and into Q1 2015 we could well see earnings and job forecasts out of the US citing the present weather as a major factor for downward adjustments.   Initial forecasts of 2014’s total weather bill in the US are coming in at $50Bn with the loss of nearly 76,000 jobs. That figure represents nearly a 3rd of a percentage point move on the US GDP needle.  St Nicholas is on the move however. It’s QE on the high street with our jolly red friend kicking his GDP sleigh into life. We can expect this to counter some of the negative effect the weather will have on the country’s Q4 growth. Time will tell the winner. 

    In the medium term into Q1 2015 we can expect the population cranking up those thermostats to fuel an increase in energy sector performance.  The colder it is the happier the energy bandwagon will feel.   However in the longer run, hopes are high for the current drop in oil prices to continue putting around $800 per head of disposable income into the US’s consumer pockets that we can expect to see contributing over the long term. 

    To conclude; Notwithstanding these fears TAM believes the macro economic growth forecasts for the country outweigh the seasonal weather disruptions to Q4 and Q1 growth that St Nicholas brings with him. We have remained bullish on the strength of the US equity market and will continue to do so for the remainder of 2014 and into 2015.

  • Weighing it upOctober 2014

    When you are in deep conflict about something, sometimes the most trivial thing can tip the scales.

    Ethel Merman

    Stock markets appear to have regained some poise after a few frantic weeks that saw the FTSE100 fall around 10%, and 10-year Gilt yields, which move inversely to Gilt prices, fall from 2.5% to below 2% as investors were attracted by the perceived safe haven of Government bonds in response to a growth scare that could stave off interest rate hikes until after the election. The last few trading sessions have reversed around half those moves but a nervous mood has settled on global markets.

    At the peak of all the volatility, it was clear from our discussions with some of the UK’s leading fund managers that it was unclear exactly what was causing so much angst.  Disappointing US retail sales numbers appeared to be the initial trigger for a sell-off, but was an unremarkable piece of data, at a relatively unimportant time of year the real reason?  Why were falling unemployment numbers and stronger industrial production numbers ignored? 

    The media, as is their way, chose to hang the story on fears over the end of QE, a slowing global economy and Ebola. This seemed to open the flood gates to a list of negatives which overwhelmed anyone quietly pondering the economic positives that had driven stock markets to record highs. As the market spiralled lower, more negatives seem to be revisited as if they were new news, reinforcing the stock market falls further. The FTSE didn’t find a base until just north of 6,000. 

    So in the wake of the bursting of the bullish sentiment, let’s conduct a quick audit of the list of dreads that have been piling up over the last year but somehow didn’t concern stock markets until now.  In no particular order:


    Fear of rising interest rates in US and UK.

    Fear over eurozone disinflation/deflation.

    Ukraine. Sanctions between US, EU and Russia.

    Fear that falling oil price affirms global economic slowdown.


    Brazil. Or rather economic slowdown in 3 of the 4 BRICs.

    End of US Quantitative Easing.

    Strong US dollar. Bad for emerging markets.

    Middle East: Syria, Iraq, ISIS and now Turkey, or Jordan…

    ECB inaction/inability to intervene.

    Israel and Gaza.

    German Industrial production slowing.

    UK inflation weaker than expected.

    Low wage growth despite falling unemployment.

    Italian politics.

    French politics.

    Fear of Chinese property bubble.

    Expensive equity valuations.

    Expensive bond valuations.

    Depending on where you draw the line in the UK (Fracturing of right wing politics, ending of double Irish tax regime and Cameron’s dubious claim that the EU will tear up founding principals etc.) this is pretty much the list of things that the financial media thought we should be worried about.  But if you look at the events that have shaped the markets all year until now, the three stand-out culprits from this list, as far as TAM is concerned, are: 

    ECB inaction/inability to intervene.

    Fear over eurozone disinflation/deflation.

    Fear of Chinese property bubble. 

    Everything else was either a given, or a situation where the real impact on financial markets was, and remains, well understood. Before we come onto these, here are some examples of what we consider to be red herrings if one is thinking about either panic selling out of stock markets or buying Gilts: 

    Fear of rising interest rates in UK and US. This can hardly be surprising since the UK is leading the world in economic growth and will be second only to the USA in 2015 which could quite feasibly grow at between 3%, according to many economists, or even 3.5% if you believe Federal Reserve Bank President, John Williams.  A move up in Bank of England interest rates before the UK election could be justified even though wage rises are lagging growth and inflation.  Although we are in the midst of one of the greatest financial experiments history shows us the early-stage rate rises are not to be feared. 

    Myriad Pro LightUkraine/Russia/Germany and sanctions.  Sanctions are affecting Germany already. There were profit warnings from German machine tool and building machinery manufacturers weeks ago.  But the sanctions are hurting Russia too. Foreign direct investment in Russia has halved and growth is projected to fall to 0.5% (IMF) or 0.3% (World Bank). The sanctions work because they target individuals and this geopolitical chapter could have a predictable end whereby a compromise can be reached, sanctions eased, and where everyone saves face. Fears that Russia will switch off the gas to Ukraine are likely overblown. Remember that Russia is not at war with Ukraine. Direct action would only confirm that the rebels are Russian backed, which Putin denies. But Crimea has gone. The endgame may look something like Transnistria. Stalemate, with some occupation by Russian troops that trumps any talk of Ukraine joining Nato and leaves Russia with a say in Ukraine’s geopolitical destiny.  

    Fear that falling oil price affirms global economic slowdown. This is not a re-run of the fear over supply in the wake of 9/11 and the fall of oil to $11 per barrel based on a severe slowing of the US economy.  If nothing had changed in the last 13 years, it appears logical that a falling price of oil would be a predictor of a slower economy ahead.  But this time it’s about supply, and the US has become virtually energy self-sufficient thanks to gas fracking and shale gas. Energy is significantly cheaper in the USA than continental Europe (see Germany).  If you really want a cynical point of view, consider that even though the price of oil has fallen from $110 to just under $85, OPEC is not easing up on production. Not trying to put the high cost US ‘frackers’ out of business surely? Or perhaps word got around that the entire Russian budget is built on assumptions of $100 per barrel rather than $85? That’s got to hurt unless you’re the US consumer. Estimates put the immediate benefit to the US consumer at $40 billon or $80 per household per month in fuel savings. That’s a positive coming into Q4 and holiday season (Thanksgiving and Christmas in US).   Interestingly one of the best performing sectors in the US equity market has been the transport sector where lower fuel costs equal higher margins.  And this despite the Ebola threat outlined next.

    Ebola. This is a big subject covered non-stop on TV news but we hear today that suspected cases are turning out to be false alarms (Carnival cruise ship, a health worker in Ohio and Spanish nurse) and Nigeria declares itself Ebola free with no new cases since July. The virus has the power to create genuine fear for the devastating effects on its victims but we consider the crisis, as it stands and understood, to be containable with little impact on financial markets.   Many African economies will be undoubtedly affected by the recent outbreaks but many are already working on post-epidemic recovery plans and the IMF has already cut deficit rules for the hardest hit countries.

    End of US Quantitative Easing. This has to be the most predictable event of 2014.  The Federal Reserve said they would reduce the quantitative easing bond buying program by $10 billion a month until it finally ended in October 2014.  This is what has happened with the final 10-year US Treasury buy-back on 21st October as planned.  The Federal Reserve is not an institution given to U-turns, which, oddly, illustrates why markets got in a flap with the “taper tantrum” last year. Once the Fed started the taper, they were not going to stop under the new Chair, Janet Yellen (as unemployment continued to fall).  The only surprise is that the Fed are dropping hints that a fourth round of QE is being discussed already.  The bond markets are fully aware that unexpectedly bad news on the economy will be countered by continued support from the Federal Reserve.

    Things to be very concerned about. 

    ECB inaction/inability to intervene and fear over eurozone disinflation/deflation.
    Despite some significant progress among the peripheral laggards, the problems of the eurozone cannot be underestimated.  The latest chapter in the never ending eurozone saga involves stock and bond markets waiting to see how bad things will get before Germany allows the ECB to engage in US-style QE to stave off deflation and create some stimulus for the eurozone economy. On 20th  October, the ECB started a covered bond buying program announced a month earlier. The plan involves the buying of billions of Euros of covered bonds and other asset-backed securities (loans, really) onto the ECBs balance sheet over the next 2 years.  However, this ambitious plan, whilst notionally welcome, will struggle to carry out its objectives in a market with relatively low liquidity. There are simply not enough bonds for the ECB to buy.  As this knotty problem has not been explained and apparently not thought through, it does actually leave the bond markets seeing this latest development as a stepping stone to full blown QE which would allow the ECB to buy far more liquid sovereign bonds.

    Furthermore, a cynic might imagine Mario Draghi rubbing his hands with glee as German industrial production data came in far weaker than expected, thus driving down bond yields further without the need for bond buying at all whilst simultaneously weakening the German stance against QE.

    Finally, the latest market volatility has left the Euro weaker at the expense of the relative safe haven of the US dollar – a role always taken during periods of risk-off stress.  Even here there is a silver lining because a weak Euro is good for German exports and the eurozone as a whole.  The fact that German growth comes at the expense of countries like Italy is another matter to be fixed in the very long term but not something that has changed in the last month.    However, even this issue can have a silver lining as we witnessed only this weeks when stock markets posted one of the best one-day gains following rumours that ECB

    Fear of Chinese property bubble. Again, this is not new news but does hang over markets due to the size of the potential problem and the unknowable ability of the Chinese authorities to keep the financial system propped up; other than the fact that the west has repeatedly underestimated the ability of the Chinese to do so. Actually, regional Asian governments and emerging markets see China in a much more positive light than in the west.  There appears to be a greater recognition that the true winners from globalisation are the Chinese middle class and that as trade corridors continue to open up, China will be at the centre of all of them.  Today’s GDP release showed that the economy grew at 7.3% in the third quarter from a year earlier, which is the weakest since Q1 in 2009, although slightly better than economist forecasts. The drop is attributed to the property sector with both property sales and new construction on the slide.  The Government has some leeway to cut mortgage rates and lift construction controls but it remains a cause for concern.   Again, this is not new news and nothing in the last few weeks has brought a day of reckoning any closer.  TAM has not directly invested client portfolios in China and with 3 out of 4 of the BRICs emerging markets experiencing economic slowdown; we are not in any rush to do so.  


    The last few weeks have been perplexing for many investors but it must be remembered that stock market corrections of 5%-10% are not unusual in the broader scheme of things and, whilst we believe that equities are the only liquid asset class that can deliver inflation beating returns, we had retained only a mild overweight as valuations had reached new post-Lehman highs.

    The low volatility we have witnessed over the last few years is a direct result of central bank stimulus in the form of a supply of cheap money.  That is not to say that the global economy has not improved.  Far from it.  From 2000 to 2013, the world economy grew from $32 trillion to $74 trillion.  There was some inflation, to be expected during loose monetary policy, but it was mostly genuine growth.

    Today, we witness the end of the Federal Reserve’s QE3 program of bond buying stimulus.  This program has run exactly to script and the chance exists for the economy to stand on its own two feet with markets unencumbered by intervention.

    The outlook for the US and UK economies in particular look good and if stocks are to be valued on their fundamentals, rather than second guessing the manoeuvrings of central banks, then that is no bad thing.  The FTSE 100 index is not expensive relative to the rest of the world.  We retain a strong bias towards UK equities and, within that, exposure to income seeking stocks.   The overall yield on the FTSE is 5% and this gives us the confidence to seek risk in opportunities elsewhere, such as Japan and selective oversold European investments.

    We are part way into the third quarter earnings season in the USA, an important time of year to not only asses the overall health and progress of companies, but to get an insight into the fourth quarter and the financial strength of the US consumer. So far, we can see that big companies are in pretty good shape although we expect some degree of caution to be built into forecasts into 2015.

    As we write, the S&P500 Index of leading US stocks has rebounded from the low of 1,820 following the fall from 1,975.  However, Goldman Sachs has reiterated its target forecast for the S&P500 of 2,050 by year end and JP Morgan has called a market bottom on 3 out of 4 indicators.  There is some technical analysis going on here, which is unsurprising given recent volatility but their targets are also a factor of valuation and the earnings growth we are seeing coming out on a daily basis.

    To believe that equities, both in the US and UK, are realistically priced, would be to assume an overly bearish outlook not supported by the evidence nor the earnings guidance of already cautious CEOs.   Markets are extremely good at shaking out the weak bulls with short investment horizons and unrealistic expectations.  We have not designed client portfolios to trade around the narrow trading ranges of interest rate expectations and have retained some cash to make opportunistic investments where appropriate. Ultimately, we expect to be rewarded for getting the longer term call on Gilts right as well as having the conviction to stay invested in the stocks of well-run companies that continue to grow profits and dividends.




  • Bill Gross "King of bonds"October 2014

    Begin at the beginning," the King said, very gravely, "and go on till you come to the end: then stop.”
    Lewis Carroll, Alice in Wonderland

    In 1992, President Clinton’s adviser, James Carville, said that he wanted to be reincarnated as the bond market.  Using more colourful language than we can publish here, he was expressing his view that in the earliest months of his Presidency, Clinton appeared to think bond markets were more important than taxes and even the Pope.  But to many investors Bill Gross “the king of bonds” WAS the living embodiment of the bond market for four decades.

    When he set up a small bond fund, not long after co-founding PIMCO in 1971, few would've believed that he was first on the scene at the beginning of one of the most extraordinary bull markets of all time.  His firm amassed $2 trillion of global funds running one of the best performing funds in its class and was the most influential bond manager in the world.

    From its peak in 1981, the 10-year US Treasury bond yield fell steadily from over 15% to just 2.38% with the wider market giving an annualised total return of 10% over 30 years. In addition to this, his foresight in creating liquid bond funds for the retail market gave rise to a $40 trillion market we know today.

    However, since 2008, bonds have been a complicated, perplexing and fickle market. Bill Gross’s fund performance has struggled since and in the last year has languished in the bottom quartile with significant outflows.  The problem has been that he has been calling time on bond markets for some time. In 2010 he declared that the UK’s bond market was like a bed of nitroglycerin, ready to go off the moment the Bank of England was forced to raise rates.  He reiterated his bearish stance again in 2013, since which time, unfortunately, and thanks to central bank intervention in the US and UK, bonds have moved higher still.  One can imagine the difficulty of maintaining such a bearish stance as $70 billion worth of investors voted with their feet.

    Against this backdrop, his resignation from PIMCO last Friday did not come as a complete surprise to everyone as there had evidently been some acrimonious disputes behind the scenes.  This was even before his No.2, Mohamed El-Erian, abruptly quit the firm in January citing personal reasons.  Indeed, the Wall Street Journal reported that PIMCO was preparing to fire him at the weekend, but were beaten to it by his sudden resignation announced in well-prepared media statement.

    What did surprise markets was that Bill Gross is moving to another California-based competitor, Janus Capital, where he starts promptly this week to run their unconstrained bond funds.  Shares in Janus, headed by former PIMCO MD, Dick Weil, rose 40% on the news as it is expected that some of the funds will inevitably follow.

    Whilst TAM clients are not invested in PIMCOs funds, we, along with the markets and the regulators will be watching carefully to see if this might provide a liquidity event given the potential for large sales from PIMCOs $220 billion fund. We have already heard of many large fund allocators redeeming from the fund and reports suggest that $23.5 billion (over 10%) has already left the fund last month alone.

    However, the fund has in excess of 6,000 holdings and well over half is in highly liquid investments that can take billions of dollars worth of trades every day – something deliberately built into a fund of that size. It’s hard to imagine selling in this part of the portfolio moving the needle at all.  Having said that, the fund is a global one and so the liquidity issue, if there is one, is not restricted to US bonds alone. PIMCO is among the largest holders of Brazilian debt, for example, holding $14 billion of the local market.

    In the last few trading days, despite some fast money trying to get ahead of certain positions, bond markets have been relatively calm, although both bonds and equities are undoubtedly more preoccupied with the police crackdown on protesters in Hong Kong with the threat of troubles spreading to the Chinese mainland, the start of renewed military action Iraq, and the threat of Ebola. Markets are also bracing themselves ahead of some important events later this week.  In the US, the keenly awaited non-farm payrolls figure will provide insight into the health of the US economy and a pointer for future interest rates – important for bonds.  In Europe, we've just seen another set of weaker inflation figures for the eurozone, rising just 0.3% year on year in September, down from 0.4% a month earlier. We will also see what the ECB decides to do about it when they flesh out details of their asset-buying plan today as the lower than expected figure will heap addition pressure on ECB President, Mario Draghi.

    So this week could be one to watch, starting as it did with the abdication of the ‘King of the bonds’ and ending, potentially, with a little more insight into the future direction of global debt markets.



  • JAPAN - Beware of bullSeptember 2014

    TAM clients may have noticed the successful investment into Japanese equities bought earlier in the Spring. At the time, we believed that the market had fallen unjustly out of favour and trading at levels we considered cheap relative to its western peers.  With the Nikkei 225 Index up around 13% from the lows, we ask if this is still the case and what we can expect for the rest of the year and beyond.

    Leaving aside the bull case for now, let’s deal with the bad news that seems to have an unusually large following. 

    It is true that deflation, once it gets a hold of you, is hard to deal with.  After all, Japan has been throwing money at the problem for 20 years.  Japan’s “misery index” has reached its highest level since 1981 with the population having to deal with rising food prices, a recent consumption tax hike and workers experiencing falling wages; a statistic made more remarkable by the fact that the workforce, as a percentage of the total population, has fallen consistently for 25 years and where the number of young males aged 15 to 34 has fallen by 25% since 2000.  Only now are there tentative signs of businesses having to pay up for new joiners.  Furthermore, in spite of a program of quantitative easing and balance sheet expansion that dwarfed the Federal Reserve for years, well before the Lehman crisis, tax revenues only really turned the corner 4 years ago.  This has left Japan with a GDP to debt ratio at around 245% of GDP, which many consider dangerous and unprecedented.

    However, it appears to have levelled off and, in the context of a recovery from a debt crisis (in Japan’s case a property bubble) that has gone on for 25 years, one has to ask who really would sell Japan here?  Apparently, it’s not the government who, under Prime Minister Shinzo Abe are seriously considering unleashing the $1.3trillion sitting in the Government Pension Investment Fund (GPIF), the largest retirement fund in the world. This fund has historically been a huge holder of Japan’s bond issuance which still yields a mere 0.5%.   Equities now yield 2% and do look historically cheap relative to bonds, having only been cheaper on this measure immediately before the Japanese rally and during the Lehman crisis itself. 

    Enter Yasuhisa Shiozaki, who Prime Minister Abe appointed as Health Minister last week into a role that will oversee the GPIF.  Mr. Shiozaki is an outspoken reformist and determined to overhaul the GPIF retirement fund and give it the freedom to seek the higher yields, and hopefully higher capital returns, available from equities.  According to one official, this enormous fund could be looking to raise its allocation to equities from 12% to around 20%.  Interestingly, Japan Post, a similar savings institution, has been reported as looking to make a similar shift with its own not insubstantial funds totalling $850 billion. 

    It’s difficult to know when this might happen but a bout of inflation that knocks bonds off their perch would help.  Happily, Bank of Japan Governor, Kuroda, reiterated his intention to bring about such a thing at the recent Jackson Hole meeting of central bank governors.  He said he believed that the economic recovery of Japan would broaden out and that monetary policy would raise inflationary expectations.  He also commented on stagnating wage growth which he believes will take time to react to actual inflation.  Temporary workers may of course be distorting the real picture here, much as it appears to be doing in the UK.  If this is the case then one might reasonably infer that the winners may well be corporations and, therefore, shareholders as costs can be contained even in an economy enjoying a healthy revival.

    A lot has been written about Abe’s "three arrows" of fiscal stimulus, monetary easing and structural reforms.  If you’re a capable central banker, the first two are relatively easy to implement.  The third is a different kettle of fish and has been discussed for the best part of 25 years. It’s a bigger problem than just saying it really means. One has to understand that we are talking about an economy that is the third largest in the world (and was the second).

    Imagine for a moment going to Japan to visit some companies.  As you gaze out of your modest hotel room on the 35th floor, you see hundreds of tower blocks right across Tokyo. If you dropped one of ours from Docklands in there, you wouldn’t even see it, and you wonder what, or who, is filling up all this real estate when little old London seems to do a fair job as a global financial centre.  What’s filling them up is partly some of the 2,300 listed companies listed on the Tokyo Stock Exchange.  That’s a lot of reform to implement and Prime Minister Abe has a lot on his plate. 

    One interesting recent statistic showed that Japan had the lowest number of female board directors out of 20 leading nations. Norway was highest at 36% with other Nordic countries not far behind.  USA and UK have around 13-14%.  Japan has 1.1%.  Perhaps this was in the back of Abe’s mind when he appointed 5 new female cabinet ministers in the reformist reshuffle of which Mr. Shiozaki was a beneficiary.   Whatever other challenges a reformist agenda faces, this had the immediate effect of boosting Abe’s public poll rating support from 48% to 60%.  Who knows? If Mr. Shiozaki’s gets his way, the impact to Japan’s stock market could be equally beneficial. 

    Considering both long and short term factors, present valuations and the possibility of ongoing structural reform we believe we are right to be invested in Japanese equities and are adding to positions where appropriate.

    The recent weakening of the Yen against the strengthening US dollar may further stoke renewed investor interest in the major exporters that form a significant part of Japan’s industrial base.   A weak Yen can often acts as a rising tide that lifts all boats as far as Japan is concerned but we are also positioned for the reflation trade which means that we are inclined to have investments in a fund exposed to Japanese financials and real estate because this is at the heart of what a multi decade recovery is all about. 

  • Walking around the bearAugust 2014

    There’s nothing like an airport for bringing you down to earth

    . Richard Gordon

    Over the last couple of years, the list of things to worry about has grown ever longer but it’s been interesting to watch stock and bond markets ignore virtually all of them except for brief periods when it suited short term punters to cause a bit of trouble regardless of whether a new drama impacted the economy or not. This was initially true of the unfolding situation in Ukraine.  The annexation of Crimea, for example, came and went without any market reaction and the S&P500 went on to a new all-time high.  However, developments over the last few weeks appear to have woken markets up to new risks as the scale of potential economic sanctions start to bite.  Italy registered -0.2% fall in the second quarter of 2014 against an expectation that it might scrape a +0.1% gain.  Unfortunately, the negative -0.1% GDP figure for Q1 means that Italy, Europe’s third largest economy, is now back in recession and battling with an unsavoury mix of failed labour market reforms, austerity and a weakening of economic activity with Germany; itself slowing down as bordering countries struggle to grow . We will see second quarter GDP data for both France and Germany later this week and both are expected to be weak.

    But it is Germany that has raised the stakes against Russia with the prospect of sanctions moving from rhetoric to reality.  Early sanctions targeted key Russian individuals but have moved on to sector wide blocks as Angela Merkel took over the diplomatic lead from the UK and France taking perhaps a tougher stance than Vladimir Putin was banking on.  The threat of cutting off gas supplies to Germany and Eastern Europe hasn’t happened yet, but Russia has banned food imports from the EU and USA and is now mulling the closure of Russian airspace to flights between the EU and Asia.  There would be some interesting consequences, not all of them obvious. 

    Regular readers will know that we are no strangers to Japan and Asia.   Indeed, some members of the investment team remember that direct flights to Tokyo were quite an ordeal back in the 1980’s.  If you wanted to go and visit companies in Japan, you had to fly over the north pole to Anchorage, Alaska (12 hours).  This was an adventure, landing as one did on a runway with snow banked up either side as high as the aircraft itself, before disembarking to the terminal while refuelling took place for the second leg to Tokyo (7.5 hours). Unfortunately, there was absolutely nothing to do in Anchorage apart from stretch your legs in the terminal for a couple of hours.  This involved joining a cartwheel formation of passengers walking around a stuffed polar bear in a glass case. We understand that you can at least get a doughnut and coffee at Anchorage these days, but it would be an extraordinary way to conduct business between Europe and a vastly bigger pan-Asian economy bearing in mind that commercial airlines are also avoiding states south of Russia: Syria, Iraq and Ukraine. During the Cold War, there were no direct flights to anywhere in Asia.  It was necessary to refuel in the Middle East which involved flying directly across the middle of Iraq, for example.

    Of course, there was no internet back then, and therefore no video conferencing, which became standard practice for transatlantic meetings in the year or so following the 9/11 attacks.  No doubt, quite a few more meetings might happen this way instead of directly, but there would be more at stake than communications in the business world.  Globalisation has changed the pan-Asian region beyond all recognition over the last 25 years and also the relationship with the UK, notably London.

    There’s been a huge rise in the number of British and Asian families having connections between homes and universities on both sides of the world and new London properties are popular with wealthy families from Asia.  One European airline has estimated that 12 EU airlines make 900 flights over Russian airspace every week.  If the average 777 or 747 comfortably seats at least 350 people, that’s around 1,250,000 people a month flying back and forth to Asia on European airlines alone.  If flights had to avoid Russia and parts of the Middle East, the impact to the UK and Europe could easily be on a par with the disruption caused by the closure of Northern European airspace during the Icelandic volcanic eruption in April 2010.  Estimates put the net loss to UK GDP at £500 million over that 1 month period.

    Russia is only considering closure of its airspace for now, and in just the last couple of days there appear to be signs that both sides are looking for a face-saving compromise where everyone gets a bit, but not everything, that they want.  To understand what’s going on, one really has to delve well beneath the headlines and take the time to understand the complexities of what the powers are up to behind the scenes.

    In the last few weeks, we have been speaking to experienced political advisers, published political historians and even an ex-Foreign Secretary to try and see if it is possible to look through the current troubles to better times ahead.  On balance, we are encouraged by what we have learned and believe that the West has the will and determination to ensure that the arena of war and the knock on effects to commodities and economies will be contained in the months ahead.   Public opinion also demands it. Indeed, President Obama is now under pressure to act rather than maintain an isolationist stance which has been popular post-George W Bush.

    Ultimately, we expect the west to step up to find a compromise solution with Russia and to implement various measures to put a stop to the extreme violence in Iraq.  President Obama is right that there will be no quick fixes but it is clear that there is a tipping point beyond which the full force of the West’s ability to project power is deployed to preserve its own interests and that of its allies. We therefore expect that the market’s attention will once again return to looking at the economy and looking forward to third quarter corporate earnings season and forecasts into year end.  Geopolitical events may impact the economy but the economic future is still all about jobs and the consumer.

    On a day when we listen to the Bank of England factoring in adjustments to its forecasts to take account of geopolitical upheaval, it’s a reminder that it’s not an exact science; but then neither was stock analysis in Japan.  Something often pondered whilst strolling around the Alaskan polar bear.



  • MH17. Realpolitik in actionJuly 2014

    The real trouble with liars is that there is never any guarantee against their occasionally telling the truth.

    - Kingsley Amis

    The weekend’s 24-hour coverage of the downing of the Malaysian Airlines flight MH17 has revealed little about what the West intends to do about it. Whilst Putin has been placed in the dock by the media, it seems that, contrary to what David Cameron is pushing for, it’s business as usual in Moscow. This is unsurprising since Russia was already weathering the limited sanctions being imposed upon it and has seemingly escaped the EU’s notice of further punishment for annexing Crimea. That’s a done deal and a distant memory. Also, there is no change in eastern Ukraine where pro-Russian separatists hold the balance of power on the ground.


    Meanwhile, President Obama seems unable to force the EU to take a tougher stance against Russia in the form of meaningful actions of any kind. As a result, we are seeing mounting frustration in the public media, notably in the Netherlands who lost at least 192 nationals in the tragedy, asking why there is no response to such an outrage.

    As these events play out within the geopolitical scene, stock market reaction has been limited. This may well be because the prospect of substantive punishment being doled out to Russia is itself limited because the consequences for the EU economy would be dire. Proper sector wide sanctions from the EU, as opposed to those targeting individuals, could backfire quickly and tip the EU back into recession. So long as there are no new sanctions, the EU economy has a chance to get up off the floor. As this hangs in the balance, so too do European stock markets. Next to nothing came from the EU foreign ministers meeting in Brussels yesterday and FTSE has barely moved since Thursday. For the moment, it appears that markets are expecting little escalation in economic sanctions despite George Osborne calling for tougher measures and warning that the UK should be prepared to take an economic hit as a price worthpaying. Over the coming weeks, whatever the Dutch, UK, Polish and Italians say, it is Angela Merkel who will gauge the level of response because the German economy has the most to lose from cutting Russia adrift economically. For as long as Merkel tows a moderate line, it is unlikely that there will be any serious insubordination from other EU states – a new EU order demonstrated clearly over the appointment of Jean Claude Junker earlier this month.

    As of this morning, equity markets are up in Asia, Europe and the UK following a +0.57% gain for the US S&P500 and a new intraday record high of 1,986.24 driven by benign US inflation data, which takes pressure off the Federal Reserve to raise interest rates, and more positive 2nd quarter corporate earnings figures. About a third of US companies have now reported and three quarters of them have delivered results that are better than expected. Even the Russian stock market rose, breaking a 6 day losing streak. 

    The FTSE100 has, yet again, moved above 6,800 and we are still positive on the prospects equities over the next 12 months. The UK 10-year Gilt yield has fallen further to 2.56% and is mildly concerning. The low US inflation data is partly to blame but another factor may be that geopolitical worries are easing, they have not exactly taken a back seat. There is a long way to go and, of course, we must carefully watch events in Egypt, Syria, Iraq and the consequences of the coup in Thailand. All of which makes the year to date performance of equities all the more remarkable.


  • Slamming the door before the horse boltsJune 2014

    Could the Fed stop investors from exiting bond funds?

    You've got to sit up and take notice when you hear that Federal Reserve officials have been discussing measures to avert a potential run on bond funds.   Lurking beneath a few of the newspaper headlines and buried on the inside pages is one of those articles which becomes more alarming as you read on and it starts to feel like a potential time bomb. It seems that the Federal Reserve is mulling the idea of imposing exit fees on US bond funds in order to counter the threat of a run on funds in a crisis.  What crisis? Does the Federal Reserve Chairman, Janet Yellen and her merry band know something we don’t? After all, US Government Treasury bond yields have fallen 0.4% to 2.5% over the last year.  If that’s a problem, it sure doesn't feel like it.  Over the years, we've grown used to central banks reacting to situations but this looks like the Fed. is contemplating shutting the stable door before the horse bolts.

    It seems the problem, in the eyes of the Fed, is that interest rates are so low that investors have moved cash into short term Treasuries, and bond funds generally, just to get some yield, ANY yield, on their cash.  If so, bond funds have effectively become a store of cash and essentially another form of banking. The funds have become “shadow banks” according to Jeremy Stein, a Federal Reserve Governor (2012-14).  He said “So much activity in open-ended corporate bond and loan funds is a little bit bank-like”.  He added “It may be the essence of shadow banking is giving people a liquid claim on illiquid assets.”  

    Whilst it is currently perfectly easy to sell bond funds for cash, the fact that bond funds are deemed liquid is because there are relatively few people selling on any given day. But the market is nowhere near as liquid as some people think.  As we have said, even before the bond tapering started, the only important question being discussed behind the scenes at the Fed is the timing of actual interest rate hikes. What they’re worried about now is what will happen to bond fund holders when rates (inevitably?) go up.  If the “shadow bank” holders made a swift exit for the door, the bond market could be in for a full blown crisis with bid-offer prices blowing wide open and investors unable to sell for lack of buyers. There is precedence because this is what happened during the Lehman crisis. We remember a senior fund manager trying to reassure clients at that time that “It’s not that bond prices have fallen, it’s just that there is no price”.  That is a deeply unpleasant situation to be in and not something we want to hear again.

    How big is the problem and could this happen? The mutual bond market is worth over $10 trillion and data suggests US retail investors have put over $1 trillion into bonds since 2009.  That’s a lot of money to try and lock up and keep from fleeing.

    As is often the case with leaks there are no details as to how any fee would be implemented to discourage investors from selling their bond funds.  It could be by pricing, by widening spreads, or a hard exit fee – either a percentage of fixed, perhaps.  There are obvious problems with all them, we think and we don’t even know who would get to keep the proposed fee!

    Actually, this isn’t the first time the Fed. has tried it on. They sprung something similar on us in the summer of 2012 as it openly considered suspending all fund redemptions to allow for orderly liquidation of funds. That, like this would have been a quite remarkable market intervention. At TAM, we recognise this as “gating” and were unsettled by a similar situation which developed in property funds in 2007-8. 

    It may be that the Fed. is simply flying kites to see what kind of reaction it gets from the market. That’s dangerous.  It would be a hugely unpopular move for retail clients invested in bond funds should it happen. Furthermore, it would also send the message that the Fed. believes that bonds are vulnerable to a mass sell-off which could actually cause the bond market to vote with its feet – the opposite of what they want. Contagion from US bond funds to the UK would be inevitable.  

    However, we at TAM have felt a twinge of unease on the issue of bond market liquidity for some time.  We are very aware that liquidity in the bond markets is poor relative to the colossal size of some of the best known bond funds and there is an undeniable risk that a bolt for the door en masse would cause short term pricing chaos.

    This risk forms part of our thinking behind moves earlier in the year to sell some of the very largest bond funds held in TAM client portfolios (in addition to high valuations at the time) in favour of smaller more specialised fixed interest and credit funds.  But we will continue to watch this development closely and watch for signs that the stable door is about to get pre-emptively bolted shut.  Watch this space!

    One way to stop a runaway horse is to bet on him” Jeffrey Barnard.



  • Bond Yields; that sinking feelingJune 2014

    Should we be concerned that government bond yields remain near historic lows?

    In 2013 expectations that the US Federal Reserve would reduce (or ‘taper’) their quantitative easing program added to speculation that interest rate hikes would surely follow. This was an obvious catalyst for yields to rise on US government bonds.  And rise they did.  By the end of 2013 the yield on the ten-year Treasury bond had risen from a brief low of 1.7% to above 3.0%, its highest level since 2011.   But now, mid-2014, despite three initial rounds of tapering plus modest signs of economic growth and equity markets hitting all-time highs, yields have again fallen to their lowest level since October and show no sign of rising soon.   What has created this conundrum and, given frequent ‘flights to quality’ of the past should we be filled with a sense of foreboding?

    There are many factors contributing to the recent fall in yields; growing geopolitical volatility, looser monetary policy, forced bond buying and slow growth in the US economy.  In March, for example, we wrote of the ‘Bull vs the Great Bear’ as the Ukrainian unrest weighed on equity markets. The annexing of the Crimea and further saber rattling from Putin certainly unnerves investors and could justify a rush to the safety of government bonds, but with the equity market shrugging off these events opinion is obviously split.    Cynics may argue that Moscow relies on global unrest to buoy oil prices and continue filling its coffers with hard currency and that an outright war was never a realistic outcome and that geopolitical risk has being over played.   One must remember, however, that there are plenty of other sources of tension around the world; China, for example,  flexing its own muscles in Southeast Asia, picking territorial fights with Japan and Vietnam, the unraveling of Thailand and instability in Iraq.  There will always be such unrest but is it the main driver of bond prices?

    US monetary policy is another key driver, but shouldn’t the withdrawal of quantitative easing be negative for bond values?  Unlike in the past the Federal Reserve has managed our expectations well and tapering seems fairly priced into bonds.  A greater risk to bonds are inflation and importantly interest rates, which will rise from current historic lows at some point; but when?   The newly appointed Fed chairman, Yellen, quickly retracted statements that seemed to imply interest hikes were imminent and many forecasts for the first hikes have been pushed back from mid 2014 to 2015 at the earliest.   Given current low levels of inflation and the central banks clear attempt at a softly, softly approach the later estimates now seem more likely to help support bond prices near term.

    In Europe, however, the situation is markedly different with central banks now experimenting with more aggressive monetary policies in the face of ultra low and even negative inflation – they certainly want to avoid any Japanese style deflation.   With little room to cut interest rates further a number of measures have been implemented including negative ECB deposit rates.   Such action could certainly be considered supportive for U.S. debt and thus another weight on yields.  Add to this the uncertainty caused by the recent euro elections and one can clearly see why US treasures would be more attractive to euro investors than European debt.   But here again we face a conundrum; is Spain more credit worthy than the US as implied by the lower yields on Spanish debt?  I think we can agree not.   With higher rates on offer and the potential for further euro currency weakness, US debt will remain attractive for European investors.

    An often overlooked support of government debt are some of the US’s largest investors; pension funds; who can now be considered ‘forced’ purchasers of Treasuries.  Having reduced their funding deficits through a doubling of the equity market since 2009, they are now focusing on matching their future liabilities rather than growth to repair their tattered balance sheets and are thus rotating out of equities into Treasuries, particularly those at the longer end of the market.    This change of allocation policy has partly been forced upon them by a budget act of 2013 which imposes larger insurance premiums and hefty fines for underfunded plans.  It is estimated that this demand will account for more than half of the outstanding 30 year Treasuries over the next two years, at a time when net issuance is falling.

    Economic growth is modest but positive with job creation in the US is improving, new jobless claims falling, good auto sales small-business optimism continues to improve. Aside from the latest industrial-production figures, manufacturing has also been strong.   Such numbers surely signal an end of such accommodative policy and thus unsupportive of bonds?

    It is difficult to pinpoint, therefore, to pinpoint a sole reason for the recent strength in Treasuries with so many competing forces.  What may be more relevant going forward is the effect this is having on our allocation policy.

    Our house view remains relatively unchanged.  We believe there is limited room for further yield compression and the risk versus reward for holding government bonds is now firmly skewed towards risk.   Our growth, inflation and interest rate forecasts remain positive though we have reviewed our timing when these forecasts will materialise.   We remain underweight government bonds across all our portfolios, favoring corporate and higher yielding opportunities.  We are specifically focused on more dynamic managers that offer the flight of foot needed to benefit in this, and our expected, future environment.   To quote an overused phrase ‘we are still dancing but dancing near the door’.  

    The downside to having an active allocation policy and positioning our portfolios ahead of the curve in anticipation of future weakness is that we can experience temporary dislocations from our portfolio benchmarks.  We remain confident that, as on many previous occasions, we will ultimately be proved correct


  • The Scottish Referendum: What would Paul say? June 2014

    Who remembers Paul the Octopus from the 2010 World Cup in South Africa?

    He shot to fame for his uncanny ability to pick the winners of matches throughout the tournament, including the final itself between Spain and the Netherlands. Remarkably, when presented with a choice of two boxes containing identical food but with the flags of the two competing nations, he correctly “predicted” the outcome of 11 of 13 matches. With the gap between the Scottish Yes and No vote narrowing, we wonder which way Paul would have voted ahead of the referendum on 19th September?

    If we look at the results across 65 polling agencies since early 2012, the unionists have it over the nationalists but the gap varies widely. Recent polls vary from a lead of 25% with 32% voting Yes, 57% voting No (according to Ipsos MORI/STV Feb 2014). This compares to a narrow 3% lead with 39% voting Yes and 42% voting No (according to ICM/Scotsman on Sunday April 2014). Furthermore, the lead, across all polls has been falling since early 2013. How much closer could it be in 3 months time?

    Clearly, it’s close enough that some well known Scotland based institutions, such as Edinburgh-based Standard Life, have felt the need to declare that they would relocate their head office in the event of a Yes vote. Vince Cable has said that RBS would inevitably have to move its headquarters to London. This is important because Edinburgh is not just the second largest financial centre in the UK, it is the sixth largest in investment management in Europe. The Scottish fund management industry employs 4,000 staff and manages at least £520 billion accounting for about a quarter of all funds under management in the UK.

    But would Paul have made his decision on these stats alone? What other factors will influence voters? Well, if the British Government is to be believed, what’s really needed here is a web-based campaign suggesting that staying part of the Union would see Scots better off to the tune of £1,400 a year. In case people don’t really grasp how much money this is, the campaign suggested that you could;

    Whilst these ill judged suggestions may fall well short of the intellectual rigour we might have expected from our Government, it’s all good knockabout stuff and adds to a colourful debate. But there are important issues for all British citizens that resonate well beyond the financial industry.

    However, our job at TAM is to concentrate on investments. The current polling is sufficiently close that it demands our attention to decide how to position portfolios today.


    The Paul Factor

    We strongly believe the vote will be a resounding “no” and that the silent majority may significantly outweigh the vocal minority when “push comes to shove”. If we are right then that will bury the referendum debate for a generation or more and avoid a 4-yearly cycle of Yes/No or “Neverendum” as it has became known in Canada over the question of Quebec independence.

    Still, it would have been nice know what Paul thought. Would he have liked mushy peas with his fish and chips? Sadly, we’ll never know. He died in 2010…..

  • 35 percent. How low can you go?May 2014

    “The President of the Commission, Mr. Delors, said at a press conference the other day that he wanted the European Parliament to be the democratic body of the Community, he wanted the Commission to be the Executive and he wanted the Council of Ministers to be the Senate. No. No. No.”

    Margaret Thatcher, Houses of Parliament, 30th October 1990.

    Opening with a quote from Margaret Thatcher is unusual in these politically moribund times, but as the European elections approach on 22nd May, there is a sense that people across Europe are waking up to what the EU is really all about and debating whether a federal super state is really what they’ve signed up for.  In a document gravely titled the Solemn Declaration on European Union, the stated aim of the EU is “Ever closer union”.  To many, this may be taken to mean ties of an economic nature, such as free trade.  Or politically, perhaps no more than a conglomeration of individual sovereign states with some vague notion of shared values and ambitions.  But what we have looming on the horizon, and what the eurozone definitely has, is something just short of what Margaret Thatcher predicted 24 years ago.  Amid the never ending soap opera that is the EU/eurozone, the ambition of the European Commission, the executive body, is to push for even more centralised power in Brussels involving powers being surrendered by national parliaments and sovereign central banks towards the European Central Bank. 

    The most visible and tangible example of this is the Euro currency.  Some will remember its predecessor, the ECU (European Currency Unit), a soft currency of which Margaret Thatcher was deeply sceptical. Back then, there was an idea that the ECU would trade alongside the national currencies of the French Franc, German Mark and Dutch Guilder, for example, but allowing for pan-European accounting and pricing in ECUs.  The basket of sovereign currencies, which included Sterling of course, was an exchange rate mechanism where central banks would endeavour to maintain FX rates within specified bands whilst maintaining some independence. We all know how that ended. 

    Beyond that, many people across the European Union, and particularly the eurozone, are relatively unaware of how the EU and the Euro really work.  Indeed, in the wake of the first Greek debt crisis with riots breaking out and central Athens in flames, one high ranking EU official was quoted as saying that it was a good thing that Greeks were unaware that the Euro was to blame for the country’s ills.  Greeks have overwhelmingly wanted to stay in the Euro before, during and after the crisis.

    The ignorance or indifference of the voting public also blights European elections. The turnout in 2009 was down to 43% compared to 62% in the first elections in 1979. But ask how many people actually know who Herman van Rumpoy is (Nigel Farage famously didn’t) or that he is President of the European Council and represents the heads of Governments of EU member states.  What about Jose Manuel Barroso, President of the European Commission? And what is that? Some may be surprised to know that it’s the executive branch of the EU in charge of legislature and, therefore, the most powerful office in the EU.

    But if you’re voting on the 22nd May, you won’t be seeing these names or voting on these posts.  Barroso was appointed by the European Council as a result of the nomination of the most powerful party within it, the European People’s Party, or EPP. A successful vote for your local MEP only gets them membership of a 751 strong European Parliament that has no power to pass any laws unlike, say, the UK House of Commons. That’s done by the unelected executive, the European Commission. 

    The mathematics of winning the European elections hinge on how many turn out to vote and this year and it may break the record for the lowest level of interest across the EU.   Those with the strongest sentiment against the EU are more likely to vote than the silent status quo – hence the vote may be skewed towards eurosceptic parties that will subsequently fail to feature so strongly in national elections when people are more concerned with voting on the state of the economy.

    Insofar as any political body influences the economy, and therefore markets, we don’t see the Euro elections having a material impact one way or another. If we are just talking about the UK, then UKIP was always the favourite to win among EU followers assuming they could get their act together to overtake a rather benign approach to the whole thing by Labour with Conservatives trailing in with the pro-Europe Lib Dems.  If at some point in the future the UK were to get an in/out referendum that would really shake things up but nobody is thinking about that this side of a Scottish independence vote let alone the general election. 

    At the EU level, we do not think that markets are even concerned about a new left-leaning European Commission President in the guise of the widely tipped Martin Schultz given that his incumbent, Jose Manuel Barroso is a self confessed Maoist.  Mr. Schultz already chairs Euro parliament debates anyway.

    For stock and bond markets, we are more interested in the policies being pushed by the sovereign states of UK, France and Germany and the ECB’s Mario Draghi, who is more closely watched than any of the domestic politicians.   He has a problem with the legal structure of the ECB and cannot act with the independence of the US Federal Reserve when it comes to policy intervention with things like QE.  Mr. Draghi has paid the market a lot of lip service to defend the euro, and keep European Union together, with his “whatever it takes” statement (hence the strength of the Euro) but the time has come for the ECB to deliver with negative interest rates and real plans for QE, both of which Germany objects to, or markets may call his bluff.

    It has been a difficult second quarter for many investors because many expected the simple economics of supply and demand to kick in as central banks, notably the Federal Reserve, wound down their bond buying programs. One would imagine that the biggest buyer of bonds shutting down would naturally see the price of bonds fall and, therefore, yields rise.  But the opposite has happened.  In part this is down to a quite serious fall in inflation across the eurozone which would keep interest rates, and bond yields, lower for longer – even in Germany.  UK Gilts are not wholly immune to falling yields and the differential, or spread between, UK and German whilst wider than before, has acted as a pull for lower Gilt yields. 

    There is also the uncomfortable notion that central bank support for bonds acted like a free bet for investors to take on more risk.  If the Federal Reserve, say, is underwriting the stability of markets and making it clear that rates will stay low, one might feel more comfortable about buying debt in emerging economies. If that goes, it’s not hard to see why a return to safe haven assets actually pushes bonds up rather than down due to less buying by the central bank.

    Ultimately, lower interest rates are good for equities of any hue. Genuine growth stocks look even better in low interest rate environments because of the higher value of discounted future earnings.  Our conviction towards equities is as strong today as our opening 2014 Outlook report in January.  It may be a rocky summer but we believe equity returns will reward the brave.

  • The year that never was (April 2013 - March 2014)April 2014

    On the face of it, there was a lot going on during the year.  Global markets dealt with a US government shut down, Federal Reserve tapering, Chinese economic slowdown and an emerging market rout. Closer to home, we had the never ending eurozone saga to deal with and, just in case anyone was getting a little bored with it all, it’s all kicked off in Ukraine and we have the alarming prospect of a new  “war” being seriously discussed for the first time in decades.

    There are reasons to be cheerful however. Cheap money is still sloshing around the system, and looks set to increase with the Bank of Japan and European Central Bank getting busy with the monetary taps. Unemployment is falling in the US and UK and inflation appears to be rather benign everywhere. A bit too benign in the eurozone but bad news here is good news and nothing a bit of negative interest rates can’t fix if you believe ECB president, Mario Draghi. 

    And yet, if you ask yourself what markets have done in this stew of gloom and euphoria, you’ll find the answer is….absolutely nothing. The 1-year performance of the TAM balanced benchmark, made up of 50% UK equities and 50% Gilts, shows the return was a perfectly round number, yes 0%.  If it felt like a cracking good 12 months, there’s precious little evidence to support it unless you were a TAM client who, benchmarked against the same mandate, made 6.5% on average.  This performance was particularly pleasing since it was achieved with less volatility than the market itself.  But it was not fertile ground for inflation beating returns and good asset selection was key. 

    Over the year, as expected, equities were more volatile than bonds. The FTSE 100 Index hit 6,800 in May 2013 but quickly fell to nearly 6,000 in response to Fed tapering and a Chinese economic slowdown. The index reached 6,800 again in February 2014, reflecting a level of confidence which has eased somewhat in the last month.

    Gilts and bonds, on the other hand, performed very differently.  Doubt over the health of the UK economy reached its nadir in April last year, pushing the 10-year Gilt yield down to just 1.5%.  But it rose to 2.7% in the summer months as bonds fell and equities staggered back, and has been stuck there ever since.  Indeed, the narrow range in which Gilts trade, has made trying to time that market a futile exercise. A 0.1% change seems to be cause for comment these days.  So, in short, equities made a small return over 12 months which was offset by a fall in Gilts – the year that never was!

    There may be a catalyst for change as the US earnings season gets underway and our eyes fall on Alcoa, the largest aluminium producer in the world and always the first company to report.  Traditionally considered a bellwether of the US economy (think coke cans, aerospace and tin foil), it was good to see them reporting stronger than expected numbers.  But there’s a way to go yet and profits need to be seen in all areas of the economy and particularly in technology. 

    As a minimum, the equity markets need strong company earnings to deliver in 2014 to support current valuations which many believe are priced for perfection. For equities to move materially higher, and for bond yields to break from their narrow trading ranges, a strong rebound in economic data is what is really needed. Watch this space.


  • Bull vs the Great BearMarch 2014

    Is it time for the bulls to hold their nerve as the Great Bear stirs?

    It is understandable that, on the face of it, headline news of Russia invading a sovereign nation on the borders of the EU may give rise to some alarm for investors, but the media has been positively revelling in the word “Invasion!” as Russian President Putin dispatched 6,000 Russian troops to key strategic Russian assets in the Crimea.

    However, we believe that this is a limited strategic move by Russia to protect what it sees as its direct assets and that whilst we are not political analysts, we do not perceive this to pose a threat to the long term sovereignty of Ukraine and not something that demands a shift in investment strategy.  With global stock markets already sitting with their finger on the “sell” button in face of notionally high valuations and the eternal tapering issue, a sell off might have been expected.  The fact is that Ukraine’s turmoil and political and economic weakness was nailed on the moment the existing regime fell last week and that markets ignored it and went on to new highs.  Why? - Because they believed it was not a market moving event.

    The fact is that Russian politics and business are intertwined and President Putin carefully weighed up the likely western response to the military action beforehand and concluded that there’s not much to worry about from the Russian perspective.  At most, some boycott of the post-Olympic G8 was to be expected.  This will hurt Russia a bit but the rising cost of energy, and Russia’s stranglehold over it, offsets any other reaction from the west which, so far, has been all noise and rhetoric. The champagne bill for G8 in Sochi was never going to move the needle on the $45 billion cost of building the venue in the first place.

    Even President Obama seems keen to distance himself from any ugliness.  His best offering was a rather weak and ambiguous statement that “Russia will count the cost if it orders military action in Ukraine”. What does this mean?  Not much, in our view.  Maybe a few top Russian officials don’t get their visas to go to Aspen or California this year. So far, it’s been Obama’s Secretary of State, John Kerry, that’s been sent in again to do the hard talking following his tense visit to Beijing two weeks ago.  Sadly, Obama’s also off the Christmas card list in China too, after his meeting with the Dalai Lama.  Readers may remember that he was due to visit later this year after his October trip was cancelled due to the US government shutdown. 

    It never rains, it just pours, in Washington these days.

    Reaction from Europe, as it heads close to deflation, is similarly muted as Germany in particular, is badly exposed on its reliance on Russian gas supplies. Greece, who currently hold the EU Presidency (we’re not making this up), will chair an emergency meeting in Brussels.  What this is supposed to achieve, and what Putin will make of it, is anyone’s guess.  It’s an uncomfortable reality for the EU that Yanokovich, who’s ousting the EU supported was actually democratically elected, and so it’s is not difficult for President Putin to argue at home that mother Russia needs to act to stop the bad guys and, according to some reports, save Ukrainians from the threat of starvation. This is all face saving, of course, but President Putin is also under considerable pressure to act.  A show of strength is as much for his own people who may have smouldering thoughts of regime change themselves. The biggest issue is the naval base in Crimea’s Sevastopol which is the home of Russia’s Black Sea fleet and already home to between 15,000 to 25,000 Russian Navy personnel.  It is a key strategic port giving Russia its only access to the southern warm water oceans (Syria was closed due to the civil war) but the military assets, and we must assume nuclear weapons, must surely be secured now that they find themselves located in a country with a political vacuum. The fact that most of the population in the region hold Russian passports is also a factor. We do not see the Russian move as a warning shot against the expansion of NATO but more internal face saving.

    So while the politicians argue and exchange vague warnings in a political battle for Ukraine’s soul, we do not see the current situation as one that is likely to escalate to dangerous levels.  It is unthinkable that Ukrainian and Russian soldiers, literally ex-comrades in arms, would take up arms against one another and any military intervention from the west is absolutely out of the question.  Even for William Hague.

    As we write, the FTSE100 Index is off marginally but still around 6,700.  Given the recent sell off to near 6,400, and recovery to over 6,800, some easing from the highs was already underway and to be expected.  We currently see economic factors as exerting a greater influence over markets than geopolitics – however intertwined some may be.  Growth in the US and UK must come in 2014 to support current valuations and persistently low inflation in the EU and Japan is cause for concern.

    As we set out in our Outlook 2014 in January, we believe that it is really only equities and selected property that will deliver this year.  As the market grinds higher, it is almost impossible to predict what the next catalyst for profit taking will be as there are dozens of issues around the world that keep the nervous on the sidelines in cash and bonds.


    In conclusion our strategy remains the same.  We are optimistic for investment returns on equities in 2014 and will buy on any unwarranted or excessive weakness.  This will test the mettle of investors but, right now, we think it’s time for the bulls to face down this stirring of the Great Bear.


  • TAM Outlook 2014January 2014

    Equities higher, government debt uninspiring; more of the same?


    The start of the long awaited withdrawal of Fed stimulus for the bond market is upon us and will have ramifications for global markets if handled badly.  But, like an energy drink, the stimulating effects saw equity markets finish 2013 on a high from which they seem reluctant to come down.

    It was inevitable that the Federal Reserve would begin to wean markets off the unprecedented $80 billion a month bond buying program built up over the past four years.  Both the Federal Reserve and Bank of England will have to tread a fine line between withdrawing their stimulus and supporting a fragile economic recovery.  With inflation targeting abandoned in favour of targeting lower unemployment, the appointment of Janet Yellen, an academic in the field of employment, is a reassuring change that bodes well for a steady transition to a self-sustaining recovery. Against this back drop we present our outlook for 2014.

    • Equity:  OVERWEIGHT with a potential for both the macro recovery and corporate earnings improvements.
    • Fixed Income: UNDERWEIGHT sovereign debt and OVERWEIGHT corporate debt as bond yields rise on both tapering and inflation expectations.
    • Property: NEUTRAL.  Having been underweight throughout 2013 we now see potential opportunity
    • Commodity: UNDERWEIGHT. We retain our view that the equity (paper asset) to commodity (hard asset) switch has run its course over the last decade and do not see a relative opportunity in this asset class so long as China’s economy continues to slow.
    • Absolute Return: OVERWEIGHT. The better quality market neutral bond and equity funds still provide strong positive comparatives against government debt markets.

    In summary, considering all of the asset classes we are investing in for 2014, we are seeking to build on the successful approach of last year by getting the big calls right whilst achieving higher returns and lower volatility than the markets themselves.

    2014: Echoes of 2013 and 2012 – we are in a bull market!

    At a glance, global market sentiment today is eerily similar to that which prevailed a year ago as the worries of 2012 spilled over into 2013.  Despite  the FTSE 100 returning a respectable 5.8% in 2012, the market continued to dwell on  Moody’s downgrade of the UK’s debt rating from triple-A, the fact that inflation remained stubbornly high and that disappointingly weak UK GDP data threatened to tip the UK into a triple-dip recession.  Combined with a raft of global geopolitical concerns in the first quarter of 2013, one could hardly be blamed for thinking that the obvious thing to do was to hunker down in quality bonds and wait to see what happened.

    For those that sat it out, it was a worrying time as equities continued to grind higher despite the unremitting media gloom. The FTSE 100 broke through 6,800 in May – a little over where it finished the year. There was brief respite for the equity bears who were vindicated in the summer months as Federal Reserve Chairman Ben Bernanke hinted that asset purchases could be reined in or “tapered” as early as the Autumn.  This sent out some short term waves of panic as markets feared that it was too much austerity, too soon, but set in place the paradoxical situation where any bad news on the economy was actually good news for equities, as the decision to start easing the $80 billion a month stimulus was repeatedly kicked into the long grass by the Fed.  Either way, as we said it would at the beginning of 2013, it took patience and conviction to stay overweight in equities, particularly at TAM where, in addition to the overweight, we shifted our equity bias towards small and mid caps stocks and away from the relative comfort of large cap income.  We held onto our convictions and TAM clients enjoyed a thoroughly good year. 

    The FTSE 100 ended the year up at 6,749.09 with a raft of improving UK economic data giving Chancellor George Osborne plenty to be happy about following a challenging year.  Combined with truly surprising employment and payroll numbers out of the US, a palpable sense of optimism emerged in all corners of the market.  The all time high reached by the Dow equity index (breaking above 16,500) and S&P500 (touching 1850) in the US forced investors to re-evaluate upwards in hindsight their overall view of the world and 2014 arrived with a sense of optimism absent for some time. But, in all honesty, any new bulls arriving after 58 months of a bull market were late to the party.  As the markets drew to a close at year end, many other investors were nursing heavy losses in bonds, commodities and emerging markets. They had simply been wrong footed by a combination of economic growth and misreading central banks’ actions. 

    We enter 2014 with client portfolios positioned as follows:

    Equity markets: OVERWEIGHT.  While valuations have caught up with corporate earnings forecasts, we believe equities have further to run in 2014 and we expect the FTSE to decisively break up through 7,000.  As in the previous few years, optimism should be contained for there will be periodic setbacks, the catalyst for which could be any number of well flagged issues that are waiting in the wings. Money flowing between cash, bonds and equities will almost certainly outweigh arguments about valuations from time to time and whilst we will continue to make investments for the longer term, it will be necessary to keep an eye on short term technicals and act if we decide that the opportunity justifies the risk.

    We believe that the potential for both the macro recovery and corporate earnings in the USA, from which the UK markets undeniably take their lead, have been underestimated. This will ultimately support high valuations, as long as the recovery is not so strong as to materially accelerate the unwinding of loose monetary policy.  It’s understandable that pundits are questioning relatively high valuations, equity markets having just experienced a “melt up”. But it is normal for valuations to move up before an improvement in earnings and stocks.  It should be remembered that the in the context of the 6 years since the pre-crisis summer of 2007, share price/earnings ratios are at the top of a range around 10 to 15 times earnings.  But, if you’ve been around and investing since the 1980’s, as we have, the more normal range is 12 to 25 times.  

    In the UK, if company profit margins are stable and companies can cope with the impact of the inevitable need to hire and invest, the steady pick up in the economy will be good for confidence and there should be no need for interest rate hikes to be brought forward. It will be a delicate balancing act for the Bank of England as well as the Federal Reserve and investors will require patience and nerve to reap the full rewards.

    Continuing a couple of themes from 2013, we expect to stay invested within the UK with a small and mid cap bias and with a lower exposure to overseas markets than in previous years, although there have emerged some opportunities in currently unpopular areas that we are keeping a close eye on.

    Fixed Income markets: UNDERWEIGHT sovereign debt, OVERWEIGHT corporate debt.  Our call for an underweight positioning in Gilts was vindicated in 2013 as the 10-year Gilt bond yield broke free from sub 2%, a level we considered “return-free risk”, to finish the year at 3%.  Given the extraordinary levels of Gilt issuance, one could make the case for yields to be higher still in the longer term. But, as we have pointed out before, they’re not going to get there in a straight line so long as Gilts retain the perception of a safe haven whenever a renewed sense of crisis springs out of left field to spook markets.  On fundamentals, we do not expect inflation, or the lack of it, to have as big a hold over the direction of bonds in 2014,  Indeed, the Fed and Bank of England have long since stopped worrying about inflation, being much more interested in employment statistics when considering their next move for interest rates or reigning in stimulus.  We may look again at bonds in emerging markets now that the impact of rising rates among the G7 has been factored into bond prices amid the big tapering debate. Further weakness could present a tactical opportunity. The actions of the central banks in China and Europe, the ECB, and whether they follow in the footsteps of the script the Fed has written will be key not only to their own markets and currencies but to the prospect of global growth and support for equities.

    Property:  NEUTRAL. With UK commercial property on the rise and rental income rising faster than expected, we are considering re-entering this asset class in 2014.  As with bonds, the extent to which the property market is affected by the prospect of rising interest rates is clearer now than it was a year ago. The recovery in capital values is quite broad based but we believe that yields could be resilient in the face of a re-rating.

    Commodities: UNDERWEIGHT.  We reiterate that the decade long switch from paper (equity) assets to hard (commodity) assets has run its course.  There will always be short term opportunities if global, and particularly Chinese, growth picks up faster than expected.  But, failing a dramatic change in the way the Chinese central bank manages the economic slowdown, we believe that commodities will continue to be negatively impacted with inevitable knock on effects to the economies of countries like Australia and mining stocks here in the UK.

    Gold is more usually discussed in connection to the US dollar, which would probably be considered to have been stronger in 2013 if the Euro hadn’t been stronger still.  Nevertheless, gold had a bad year last year, falling 17%, following on from a choppy 2012 when the dollar bulls fought those expecting hyperinflation and the end of global money.  The US dollar appears to have turned the corner in the last quarter of 2013, however, and the risk to those holding gold would appear to be that the US economy improves faster than expected and interest rates rise earlier, boosting the dollar.  As we said in 2012, “gold is an unnecessary hedge against an unlikely threat and priced in a currency which has historically been deemed a better safe haven than the metal itself.”  

    Absolute Return: OVERWEIGHT. The low volatility of the absolute return investments delivered modest returns but comfortably beat the Gilt index which fell around 2%.  We added to this asset class in Q4 last year, investing in absolute return funds with equity based strategies which we believe will deliver return materially above Libor.

    Some thoughts on 2013 - A review of the core TAM calls 

    The man with the plan? – February 2013 

    In the wake of the UK losing its AAA status, does the Bank of England governor elect have what it takes to get the UK economy moving quickly?

    The arrival in the UK of ex-Bank of Canada Governor, Mark Carney, has stoked a flurry of excitement from economists and the media ahead of his appointment as Governor of the Bank of England this coming June.  While Sir Mervyn King keeps his seat warm until then, Mr. Carney has been doing the rounds and giving some hints as to what role he believes the Bank should be playing in the midst of a fragile economy and what policy changes he might be making as a result. His first important appointment was the most daunting; a grilling from the UK’s Treasury Select Committee – something that could have put him off UK press conferences for life.  The session did begin with some rather awkward questions about his salary from a sceptical panel of MPs with a point to make, but his deft handling of the discussion limited further "banker bashing" and his confident yet respectful performance appeared to win over MPs from the left and right; offering to adopt a more open dialogue with MPs about internal Bank of England discussions – all part of a “new look”.  Furthermore, inflation targeting will be more flexible in the future and, whilst he stopped short of making firm predictions about the UK's growth potential, it was clear that stimulating the UK economy will be higher up the agenda.  It was, in short, a polished performance in front of intense media scrutiny hanging on every word.

    Mr. Carney has already dismissed talk of a dual-mandate and growth is clearly now the name of the game in this new cooperative approach with the Government, and with their eyes on an election in 2015.  It may take the form of some GDP targeting although it’s unlikely that anyone will admit as much in the months ahead in order to downplay any sense of major upheaval.  Nevertheless, Gilts are starting to struggle in the wake of this new reality and, whilst we do not expect them to entirely lose their relative attraction as a safe haven during periods of volatility, we have no intention changing this stance as TAM portfolios enjoy a strong start to the year.

    As keen Federal Reserve watchers, we identified the change of leadership as a significant event that would boost market sentiment initially but would deliver a marked change in emphasis from the Bank of England. Some may have harboured doubts about the appointment of a man who, by luck it may be argued, presided over The Bank of Canada through the Lehman crisis and had turned down the job offered by Chancellor George Osborne on more than one occasion. But accept he did.  And with his arrival came a commitment to tell it like it is along the same lines of “forward guidance” adopted by the Federal Reserve under Ben Bernanke. Unfortunately, the differences between the Bank of England and the Fed are too different to work in practice and Mr. Mark Carney had to adapt quickly to the demands of the UK press. But what has become clear is that he has a more pragmatic approach to supporting the banking system and a less rigid way of gauging when the time is right to raise interest rates.

    Levels of unemployment continue to dog the Government and the lingering fear of interest rates having to rise is not lost on UK voters ahead of an election in 2015.  It would be extremely damaging if the Bank of England were to raise interest rates in response to a resurgent economy.  But Mark Carney’s salvation may lie in the production capacity of UK businesses.  If the productivity gap in the UK, which is notoriously difficult to measure, really does allow for both the manufacturing and service side of the economy to pick up without a massive drop in unemployment, then the need to raise rates will be avoided and will represent something of a “get out of jail free” card to a central banker trying to stimulate an economy without the hindrance of raising interest rates.

    Red herring alert – April 2013 

    As news of erroneous fish stocks entering the food chain across the US and Europe appear to have attracted little attention, so too have a few red herrings that have recently entered the headlines which have threatened to derail the rally in equities.  Last week, while the financial news stations ran 24 hour commentary and discussion about whether the Cyprus bailout could lead to a disastrous bank run across the eurozone, the S&P 500 index of leading shares hit an all time high in the USA with just one stock, Apple, holding it down…

    ….As we have stated before, we believe the time has passed to panic and seek out yield at any price.  We acknowledge there are serious geo-political threats and we maintain some balance against short term setbacks where appropriate. But technical and macroeconomic analysis are not exact sciences and very little of the bad news is new news.  It is important to remain as vigilant against red herrings as it is to be prepared for genuinely negative developments. On balance, we consider short term sell offs in equities, driven by negative sentiment, to be good entry points to add to equity exposure within portfolios. 

    Interestingly, 2013 was notable for the things that did not happen as well as those that did.  Angela Merkel’s re-election hinged on containing the eurozone crisis until the elections in September – something many thought impossible.  But through various twists and turns and a political determination within the eurozone to hold things together at any cost, bailouts for Cyprus, Portugal, Greece and Spain failed to derail the equity rally.  There was no Greek exit from the Euro and bond yields in the troubled Mediterranean states did not go through the roof.

    Nor did the euro crash amid all the rampant speculation about an imminent breakup.  In what must surely rank as the cheapest ever currency intervention, the Euro stayed propped up through a combination of factors.  Firstly, the ongoing assurance from ECB President Mario Monti that he would do “whatever it takes” to protect the Euro from breakup. In addition, unlike the Federal Reserve and the Bank of England, the ECB did not embark on outright quantitative easing to flush the system with liquidity, thus keeping the Euro relatively strong against the US dollar and Sterling. This wasn’t particularly good news for an embattled eurozone trying to export its way out of trouble. Italy did not suffer political collapse in the wake of the political demise of Silvio Berlusconi and a wave of protest votes in the election.  Neither North Korea or the island dispute between China vs Japan sparked military conflict.

    In the US, the political stand off didn’t lead to a melt down over the debt ceiling negotiations or knock 4% off US GDP, nor did the shut down of Government agencies later in the year.  Indeed, even when the US Department of Labor closed, unable to publish the closely watched non-farm payroll data in December, the market shrugged it off and rolled on to new all time highs.

    Our Red herring alert note was published in April, identifying a number of concerns that appeared to be preoccupying the headlines even as the market enjoyed a positive first quarter.  What really mattered was the economy. 

    Sell in May and go away?  Not today… - April 2013 

    The pernicious school of thought advocating selling in May and going away has, in these short sighted times, built up something of track record.  In the last four years, equity markets have been shaken out of their complacency by any number of scare stories circulating around the markets in the first few weeks of Spring.

    There are some unavoidable seasonal factors penned in the diary at this time of year and the US earnings season, which we are halfway through, can be a tricky time despite the fact that it is arguably the least important of the four.  But this year is different.   On the last day of April, the S&P500, the main US index of leading shares, reached an all-time high.  It effectively raises the stakes should any bad news break from left field during an otherwise positive earnings season sprinkled with mildly positive macroeconomic news.  On the first day of May, the London FTSE100 followed the euphoria, posting a 0.4% gain to over 6,450.  But this is not how we see the market unfolding in the months ahead. Investors are more concerned with the relative valuations between the two asset classes rather than on the absolute levels.  However unpalatable they may be, those seeking yield (pension funds for instance) are being pushed up the risk curve or, ultimately from bonds and into equities. This has the look and feel of a market feeling compelled to capitulate and buy just to keep up with benchmarks – something we do not believe in at TAM where we offer the flexibility to hold cash. Could global equities sell off by 5% or more based on any number of economic and geo-political threats around the world?  Absolutely.

    The May sell off, like the daffodils, came late in the month but did see 5% knocked off US equities and, briefly, even more off UK shares, as Federal Reserve Chairman Ben Bernanke hinted that asset purchases could be reined in or “tapered” as early as the Autumn.  It was a nervous time for many, particularly as Gilts were also falling, but we saw the sell off as an overreaction to some pretty punchy price movement technicals which rarely last long.  Ultimately, the wholesale slaughter of the bulls never happened and, save for some smaller, bouts of selling in early August and again in late September, the S&P index went on to a record high by year’s end.

    Overheated summer daze – August 2013

    “…and the stock market has its best week since July…Take that, Karl Marx”.   From the film “Uncle Buck” 1989.

    What a scorcher! And the weathers not too bad either. Murray is champion, Froome is victorious and the cricket is all sewn up. For those yet to depart on holiday, the stock markets aren't looking too shabby either. The FTSE100 Index has recovered to a respectable 6,525 and the S&P500 index is at all time record -+`high. Even the bond markets are behaving themselves, with US yields approaching 2-year highs and Gilt yields sitting in a Goldilocks range around 2.35% and new Bank of England Governor, Mark Carney, telling us what we want to hear.  What’s not to like?

    So TAM has decided to bank the profits now while the stock market charts are pushing technical highs.  This move will only bring client portfolios back into line with benchmarks.  It does not alter our thoughts on bonds or equities in the longer term but we believe this is a prudent move which may afford clients the chance to sit back and enjoy this hazy summer in a daze of relative contentment.

    From the beginning of 2013, and having taken advantage of the May sell-off, TAM equity weightings were pushing the absolute top of our risk limits. This was due in part to the performance of the market but also to the performance of the equity investments above and beyond the market itself, particularly in the UK.  This was a nice problem to have but prudence had to prevail and we took the decision to de-risk client portfolios closer to benchmarks.  By year end, this consolidation, born out of necessity, was quite clearly the right thing to do and we were very pleased to report that as 2013 came to a close, every core equity investment in client portfolios had outperformed the equity benchmark in addition to putting in an impressive gain in absolute terms. 


    More of the same in 2014 – but just a little more restrained?

    The Fed has now confirmed that they will finally taper in January under new Federal Reserve Chair, Janet Yellen.  But from where we’re sitting, this was old news as far back as November.  Tapering was coming and it didn’t really matter much if it was Christmas or a Springtime “Tapril”.  The only debate going on behind the closed doors of the Fed is the timing of real interest rate hikes if the economy continues to improve apace, as it did in the fourth quarter of 2013.

    Ben Bernanke was at pains to drive home the message that tapering does not mean monetary policy tightening. And so, whilst a rise in bond yields is most likely, the Federal Reserve is determined to convince us all that they will keep interest rates at zero for as long as it takes.  As Bernanke put it, the Fed won’t even consider using rate policy unless “all goes well”.  Futhermore, in case we’re in any doubt that the Fed is now tracking fundamentals other than inflation, he added “the Committee believes it will be necessary to keep short-term interest rates low “well past the time” when the unemployment rate falls below 6.5%. Ben Bernanke, in final press conference as chairman of The Federal Reserve:

    “If incoming information broadly supports the Committee’s expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labour market and inflation as well as its assessment of the likely efficacy and costs of such purchases”.

    So this does not mean that QE is now consigned to the dustbin of history. Janet Yellen takes over the wheel of the Federal Reserve with a reputation for a dovish approach to the management of the economy. Her appointment, not without some controversy at the time, and not Obama’s first choice, is an interesting one given her background. Where Ben Bernanke was an academic of the aftermath of the 1929 crash, Janet Yellen is a Keynesian economist whose decisions may be guided with a greater emphasis on unemployment rather than inflation. In 1995, on the Board of Governors at an FOMC meeting, she said that letting inflation rise could be a “wise and humane policy”. In the here and now, perhaps Bernanke’s last press conference gave some indication of how Yellen will carry on. Emphasising her endorsement of the tapering move, when asked why job growth had not been stronger in recent years, he said “People don’t appreciate how tight fiscal policy has been”.

    We therefore enter 2014 with a broadly positive view on equities intact, together with our now familiar negative view on sovereign debt.  Overweight positions on equities will be quite modest, for we have exposure to excellent investments that comprehensively outperformed their relevant indexes in 2013 but with lower risk.  But, as we continue to invest for the long term, we will be alert to any short term opportunities that arise if we believe that the risk/reward is fully justified.