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Investment Notes 2015

  • Dawn of the FedDecember 2015

    “When you come to a fork in the road, take it” Yogi Berra – Player / Manager, New York Yankees 

    So the big day has arrived (again) and we will later find out whether the US Federal Reserve is finally going to bite the bullet and raise interest rates. The bond market is priced for a 79% probability that they will raise interest rates by 0.25%, bringing it up to 0.5%. One gets the distinct feeling that, a bit like Santa, if Janet Yellen doesn’t deliver for Christmas, there are going to be an awful lot of unhappy children.

    But let’s pretend for a moment that we already knew that the Fed was definitely 100% certain to raise.  What would you, could you, practically do? Well, if you had a ton of money on deposit earning nought or a line of free credit, low dealing fees and the right set up, you might start by making the assumption that, in theory, higher rates means falling share prices, a stronger dollar and higher yields (meaning falling bond prices). You would need a lot of money, of course, because the opportunity already having been mostly priced in means there’s little to go for in percentage terms. But you might at least reassure yourself that mathematics was on your side.  So far, so good. 

    Unfortunately, markets are not always so compliant and logical.  Firstly, there is the Chair of the Federal Reserve Janet Yellen who, amongst other things, wants us to breathe a collective sigh of relief and go and buy shares. As the most important and influential person in global markets, her wishes cannot be easily dismissed. Indeed, despite a flip-flopping side show last year resulting in the taper tantrum in bond markets, she has cut a pretty steady figure and has successfully conveyed the message that yes, she is a dove, but a cautious one and will only raise rates when everything is right with the economy.  In her own words, the US economy has “recovered substantially”, wages are up, unemployment down and the threat from the Chinese economic slowdown appears to have subsided.  So long as you turn a blind eye to stubbornly low inflation, everything looks wonderful, we can raise rates, nothing to see here, please move along.

    This is the positive spin on a rate hike and we can expect some earnest and reassuring comments to allay any fears that the outcome could be any different. Unfortunately, there is a lot of fear out there.

    We get the impression that there’s not been a whole lot of fundamental investment going on in the last few weeks.  Market volumes have been low creating fertile ground for volatility to pick up as short term trading in markets reacts to every twist and turn in news flow. Evidently, everyone is just waiting on the Fed.

    Monday was a classic example. The fall in crude oil on the back of a forecast of a continued supply glut implies less inflation in the months ahead. As this compounds the mystery of the missing 2% inflation target, it raised the unwelcome increased possibility that the Fed could back out of a hike later today.  There was a very volatile and confusing opening to Monday’s Dow as a result. But, as night follows day, markets bounced back strongly yesterday. In trying to make sense of it all, it’s improbable that the market fundamentally shifted its view 48 hours ahead of the Fed decision. Put bluntly, if everything had suddenly changed overnight and the markets had decided that the US economy really cannot handle a quarter point hike, then we are all in much more trouble than we think. More likely, in our view, is that the market is simply trading on technicals and low volume.

    Nevertheless, we know that a fear has given rise to fund managers taking measures against a material loss in the wake of a rate hike because of this. Perhaps this is understandable because we sailed off the charts into unknown territory some time ago. But in balance with the positive spin on the economy which should see markets rise on the back of some kind of relief, there are a layers of stop losses and bets using derivatives, such as put options, which could potentially act as an effective “short” on stock markets.  We are awake to the possibility that an indiscriminate sell off could trigger stop losses like a string of fire crackers until the market effectively runs out of marginal net sellers – possibly pushing down the major stock markets 10% or so.  Unpleasant though this (we hasten to add unlikely) outcome may be, we would expect the well-diversified portfolios to outperform well and it would set up a quite remarkable buying opportunity, in our view. As we have said all year, we will act quickly if the opportunity outweighs the risk, a strategy that has delivered good performance across all mandates in 2015.

    Even if we could be 100% certain that the Federal Reserve will raise later today, our answer to the question about what to do in the immediate aftermath is not immediately obvious because the mathematical, logical and technical assumptions could be entirely swept away by the positive interpretation of what a hike really means.

    We are, and should be, much more interested in 2016 and 2017 when the argument will be all about the pace and frequency of further rises and, as always, company earnings growth and the economy generally.  A straw poll around the investment team reveals a range of probabilities the Fed will raise and the average is significantly higher than 79%.  But, however close we edge to 100% probability, we all agree that the various TAM portfolios are optimally set up exactly as we would like them to be on the day of a critical decision from the US central bank.

     


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  • Best Private Wealth Management Company - TAM InternationalDecember 2015

    TAM Asset Management International win Best Private Wealth Management Company 

    In November, we were delighted to tell you that TAM Asset Management were named winners of the 2015 Wealth and Finance International 'Award for Innovation in Portfolio Management - UK'. Today, we are thrilled and humbled to inform you that TAM Asset Management International, has been named 'Best Private Wealth Management Company' at the 2015 International Finance Magazine Awards. 

    The International Finance Magazine (IFM) Awards celebrates excellence in its purest form. An event that recognizes and honours individuals and organisations in the international finance industry that make a significant difference and add value, the Award is one that will herald the highest standards of innovation and performance. The Award shines a spotlight on those who make a contribution to raising the bar in the financial industry through activities of note. These include path-breaking initiatives in corporate social responsibility or charitable activities, better corporate governance and other achievements that impact the global finance community.

    Apart from recognizing the key performers in the industry, the IFM Award makes a concerted effort to shine the spotlight on organisations in niche segments and those that exhibit brilliance in the unsung corners of the finance industry.

    It goes without saying that we were extremely proud of the recognition of our efforts to provide clients with an innovative investment solution, but we feel incredibly privileged that we have been named the winner of such a sought after award and endeavour to seek new and exciting ways to innovate our portfolios year after year.

    To learn more about our award winning portfolios, please visit our website, or to speak to a member of the team please call (+230) 454 6400 or email info@tamint.com.

     

     


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  • UK - Getting SeriousNovember 2015

    From a fund management perspective there wasn't a whole lot to get excited about in Chancellor George Osborne’s Autumn Statement although an increase in the economic growth forecast, from 2.3% to 2.4% was welcome. UK Government bond yields rose on the news marginally reinforcing as it does the case for higher interest rates in the future. Sterling strengthened as a result, making its biggest one-day gain this month. However, as markets have already got their heads around the idea that interest rates can actually go up, one gets the feeling that good news on the economy is now genuinely good news rather than spooking markets who think rates need to stay at virtually zero to support valuations.

    As we have said before, this narrative was bound to come. If rising interest rates are absolutely nailed on, and in the USA it appears nothing other than a December hike will do, then it would be nice to have a rise accompanied by the justification that all is fine and dandy with the economy. After all, if either the USA or UK cannot handle a 0.25% rise in base rates, then things really are much more serious than everyone thinks.

    The headlines will highlight an apparent U-turn on the changes to tax credits for low-paid workers but this wasn’t surprising since Osbourne’s proposals were defeated in the House of Lords last month, much to the Conservatives government’s annoyance.

    Other spending changes were well flagged such as an increase on spending for pensions, transport and housing. The reversal on proposed cuts to policing was evidently welcomed by all concerned at a time of heightened concerns over national security. The rise in the state pension of a few pounds to £119.30 was also no surprise.

    As far as the stock market was concerned, the big story was a clampdown on buy-to-let transaction which will now have a 3% surcharge levied on each stamp duty band. Shares in real estate companies exposed to letting fell on the news. The house building sector was a mixed bag as prices rose on the promise of a large housebuilding programme but came off on the news of higher stamp duty which may dissuade investment in buy-to-let. It’s not clear yet what the ramification of this change will really mean. We remember Chancellor Gordon Brown’s year 2000 budget where stamp duty was hiked in an attempt to cool a booming housing market. Unfortunately, it had the opposite effect as house prices rose 1-2% overnight as sellers sought to pass on higher stamp duty to the next buyer. Could it be that landlords will simply pass on higher stamp duty to higher rents, thus exacerbating the problem of expensive rents, particularly in London and the South East?

    For TAM client portfolios, the rise in Gilt yields is fairly modest when taken against the fall they have seen in the last 2 weeks and which many client portfolios have profited from. Nevertheless, we remain underweight government bonds ahead of a probable rise in base rates, firstly in the USA and quite possibly followed soon after by the Bank of England.

    In contrast, we are still positive on equities because we believe that the economic news is generally supportive of growth and that the UK is robust enough to weather a hike in both the US and UK which, frankly, has been talked to death all year and will probably come as some kind of relief. We expect a fair dose of rhetoric to accompany this new environment broadly hailing a stronger economy as being supportive of valuations and the sunlit uplands that await us all in 2016 and beyond. Who knows? It’s worth a try even in a highly cynical market.


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  • TAM Performance Update - Moving on up!November 2015

    “An ounce of performance is worth pounds of promises” - Mae West 

    Ask most clients what they think of the show so far and they’ll probably guess, what with all the volatility they keep reading about, that they’ve probably lost money this year.  Perhaps this is understandable sentiment, but is it true? 

    For sure, one does get the sense that markets, like the weather, took a turn for the worse after a relatively benign summer when everything seemed fine.  After all, Mario Draghi was getting amongst it with his eurozone QE, the Japanese stock market was defying gravity and the UK markets rejoiced at the Conservative election victory. Then it all seemed to go off script and markets got the sulks over Greece bail outs, Chinese devaluation and any number of geopolitical issues.  We also had the interminable wait to find out what the Federal Reserve was going to do about interest rates which, as it turned out, was nothing at all.

    Looking at market performance, in 2015 so far, point to point, a key equity indicators have barely moved with the FTSE100 and S&P500 now down 2% and up 2% respectively from the start of the year. However, as any nervous investor will tell you, this doesn’t tell the whole story because the FTSE100 has been 11% higher (April) or 8% lower (August) than it is today and the Gilt yield has been as high as 2.18% and as low as 1.33%.  Put like this, yes, it’s been a bit volatile but, depending on how you measure it, 2015 isn’t really a vintage year for greed and fear compared to 2012, 2011 and the daddy of them all, 2008, the height of the financial crisis.

    But it did have its moments and the mood was surprisingly negative at times, particularly in the last few months.  Beyond the Federal Reserve, none of the side issues should’ve had the power to create as much negativity as they did.  It was sometimes as though markets were trying to convince themselves, in the middle of the sell offs, that this was it, the big one. A hideous day of reckoning to atone for the mistakes of the financial crisis of 2008.  Then, when it didn’t happen, markets breathed a collective sigh of relief, labelled it as merely a “correction” and moved on.  Nothing to see here…

    Furthermore, these performance figures have been achieved by taking a lower level of risk than that of the benchmark. Our statistics show that most of the performance has come from picking the right investments rather than the right areas of the market.  But as we have written before, we have deliberately targeted stock picking funds because, in this market, where the effects of QE are either wearing off or being wound down, picking the best investments in bad areas can often be a better and more rewarding strategy.

    Of course, there is a list of things to worry about as long as your arm, as there has been all year.  But as we approach year end, TAM clients have very little exposure to some of the areas that are generally the most worrying. It’s true that the UK, US and European markets have recovered from the recent falls and there appears to be renewed optimism in stock markets despite every indication that the Federal Reserve do mean business in December. But TAM client portfolios have very little in emerging markets, China or commodities which face major challenges in a rising interest rate and stronger US dollar environment.

    If, as now seems likely, we are all just as data dependent as the Federal Reserve appears to be, then we will continue to maintain a mild overweight in quality equity investments and refrain from investing in the most speculative areas of the market until we believe that the risks are more than offset by the opportunities on offer.

    In the meantime, TAM portfolios of all risk types have momentum going into year end and we have every reason to believe that we can expect moving on up going into 2016.

     

     






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  • Wait for it...September 2015

    "I've got a message for your friend Jim Cramer. The Fed cannot permanently raise stock prices. The idea that the Fed is going one way or the other, and this is what's driving the stock market, is not true. He's one of the great people at looking at businesses, how good is this business, what's the profitability of the business, what's this thing worth? And to have him cheerleading for lower rates 24-hours a day is, I think, unsavory."

    James Bullard, St. Louis Federal Reserve President, in reference to CNBC stock market pundit Jim Cramer. 1st September 2015

    So, another Federal Reserve meeting and another passed opportunity to raise interest rates. The fighting talk (above) from James Bullard quite possibly illustrates the frustration held by those behind the closed doors of the Federal Reserve that they are not going to get pushed around by stock and bond market participants struggling with volatile price movements – something, incidentally, which the Federal Reserve is supposed to have a hand in stabilising. 

    Still, whether or not one connects the dots up sufficiently to blame the Chinese stock market correction as something ultimately made in the USA, the timing of the turmoil in emerging markets seems to have suited the Federal Reserve’s deeper seated desire to do nothing at all.  Federal Reserve Chair, Janet Yellen, cited “international affairs” as being part of the reason for hesitation – for which we suppose we must take to mean China.  Dennis Lockhart, Atlanta Fed Head, said it was prudent to stay on hold while global market turbulence was so high. This is an interesting development because it indicates that the Federal Reserve perceives a greater risk of deflationary contagion from China than the market, and indeed we at TAM, appear to think.

    Then we had the conflicting message from Fed member, John Williams, who tried to convince us that the decision not to raise rates was a “close call” and largely a domestic issue and that rates could be going up in October instead. We think this comment is largely to do with inflation which has been absent, mostly due to falling commodity prices, notably oil.

    Ultimately, we believe that the Federal Reserve could and should’ve raised rates much earlier in the year when the economic data, particularly employment, was pointing in pretty much the same direction it is now.  In hindsight, it would’ve given the Federal Reserve room to cut now if they genuinely believed that it was appropriate and we wouldn’t have had to endure months of speculation of “will they, won’t they”.

    As it stands, it appears that there is a determination within the Fed to raise interest rates this year which means the next decision date is either October 28th or December 16th.  We are not entirely sure what, if anything, is going to fundamentally change within such a short space of time but it’s likely, in terms of market sentiment, that we are in for more of the same speculation as we have had in the last couple of months with everyone waiting on the side lines for any hint of what happens next.

    This may feel slightly frustrating but our main objective here is to invest in the longer term and, for a number of reasons, whether a hike is now or December is largely irrelevant.  Of far greater importance is whether the economic data is supportive for a return to more normalised interest rates – the new normal being around 2%, or whether the US consumer appears suddenly weaker in Q4 which would make more likely that the Fed adopt a “one and done” approach whereby they hike once and then go back to being “data dependent” as they say they have been doing.

    This is a slightly unsettling notion when you think about it because it then seems that the all-knowing Federal Reserve is reliant on the same data as the mere mortals in the market.  Something that one might think would be fertile ground for short termism and more volatility as stock and bond markets react to every twitch and turn in economic data in the lead up to Christmas where the health of the US consumer – who appears more inclined to save than spend right now – will form the basis of all investment decisions.

    Barring some unforeseen escalation in the fortunes of emerging markets and China in particular, we are more inclined to see the next decision being based more upon the health of the US economy which, broadly is in reasonably good shape, in our opinion. If the US economy absolutely can’t weather a 0.25% hike in interest rates, then things are far worse than anyone imagines.

    At TAM, whilst not shifting our fundamental view to the short term, we have used the recent sell off to selectively buy equities and only where we believe that the opportunities outweigh the risks, of which there are a few of varying magnitude or irrelevance, as we see it, and we continue to monitor the portfolios and markets carefully at this time of heightened volatility.


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  • Amidst the turmoil TAM looks for investment opportunityAugust 2015

    Financial markets often decouple from the underlying economic fundamentals that drive them. We believe we are in the midst of one such period. Whilst it can be a worrying time living through such a period it can ultimately be a very rewarding one for patient investors. Experience shows us time and time again that market fundamentals eventually reassert themselves and normality returns. In the case of the stock markets around the world we expect stabalisation and a full recovery. The timing of this recovery is never certain but as investors we need to be ready to benefit from this opportunity and seek to enter the market at significantly lower levels.

    Why did sentiment sour?

    As always there is never one reason. Investors have been concerned by the unfolding tragedy in Greece and the impact of higher interest rates on the global economy for some time. However it was the fear that China, the world’s second largest economy and one which contributes 15% to global GDP, was slowing down faster than many suspected, that ignited the latest shift in sentiment. I use the word ‘suspected’ because it is very hard to extract useful information from the ‘official’ data released by the very secretive nation; indeed it as generally accepted that this data is manipulated to show a far rosier position than is actually the case. Analysts therefore look at other metrics to form a picture. The recent collapse in commodity prices, the aggressive cutting of interest rates and the devaluation of the currency can all be considered signs of a slowing economy, although many would attribute these to far different reasons such as oversupply in the commodity markets and Chinese ambition for the Yuan to become a free-floating reserve currency. Whatever the final analysis this uncertainty rattled investors both in China, where selling wiped nearly 50% off the country’s main stock market, and as contagion swept the globe, near 10% to 15% off the stock markets of developed nations. Interesting, despite these massive falls, the value of the Chinese market is barely unchanged over the past twelve months demonstrating the scale of the ‘bubble’ that had developed there and further indication of the decoupling from reality.

     

    Are global economic fundamentals still intact?

    Whilst sentiment drives short term market direction it is fundamentals that drive long term performance, and these, we suggest, have not changed. In the US, the economic barometer of the world, for example, employment is improving, corporate earnings are increasing, growth is positive and inflation remains contained despite the ultra-low interest rate environment. Indeed the Federal Reserve who have the greatest insight into the well-being of the economy, feel compelled to prepare markets for the prospect of imminent interest rate hikes after weaning them off quantitative easing (QE) over the past year. Many fear this eventuality, but we would argue that it should be welcomed as it not only confirms that economic growth is positive and sustainable but puts us on the long road to normalization of interest rates. And let us not forget that higher interest rates should equate to higher expected returns for investors.

     

    The rout in commodity markets can also be very positive for economic growth. It has been calculated for example that the fall in oil prices puts over $100 back into the pocket of the average American consumer; a pseudo tax cut if you wish. Given retail spending drives two thirds of the economy this is no bad thing.

    As we wrote earlier in the week we do not believe that this the beginning of a ‘bear’ market as many headlines would suggest, but rather a cathartic correction which is removing some of the froth in equity market valuations within a long term bull market for risk assets. 

    How are we positioning ourselves during the current volatility?

    We have not had to make many alterations to the asset allocation within our portfolios. We have minimal exposure to China, emerging markets or the commodity sector for example. Given these sectors have taken the brunt of the recent market falls this offers us some comfort moving forward. Our preferred investment focus has been on the more developed global markets such as the US, UK, Europe and Japan. Even within those markets we have focused on funds that avoid exposures to energy and commodity markets. Of course these markets have been dragged down by the falls elsewhere across the globe but we continue to believe that they will be the main drivers of investment return over the coming years.

     

    As always, we remain very diversified within our investment portfolios with exposure to global equity markets, fixed income markets, property and absolute return investments. Importantly we maintain a cash balance to both protect portfolios and offer us the opportunity to add to positions when we see such opportunity. Overall our equity exposure is fairly neutral with no large directional bias. This positioning has ensured that any portfolio losses over the past week have been far lower than the declines experienced by equity markets. 

    Where will the opportunity be going forward?

    We are patient and long term investors. However periods such as these can offer excellent opportunities to both enter a market and increase existing exposure to conviction positions at attractive levels. We will be looking to add to our existing positions and even rotate some of our broader exposure into the areas which we believe offer the greatest upside. At the time of writing, in the midst of the market turmoil, it is difficult to pinpoint exactly when we will invest in specific opportunities however we are already researching many potential positions and crunching the numbers to ensure we maintain within our mandated risk profile.

    One thing is certain that being a spectator and sitting on the sidelines will not generate the rewards this market shakeout has potentially offered us.


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  • Do not feed the 'bears'!August 2015

    Markets appear to some to have hit a brick wall with the devaluation of the Chinese currency and collapse of its over inflated stock market just the latest reason touted by market 'bears' to stay cautious.  Add to this the ongoing Greek tragedy, and warnings from central bankers, such Mr. Carney,  for asset managers to “check” they are prepared for market falls if interest rates go up, ensures that worries abound.  Indeed, developed markets of the world had been trading close to 5-month lows even before the events of the past days.   Is the bull market, that began some six years ago in 2009, over? Or is there more to go for?  Lester Petch the CEO of TAM Asset Management in the UK has penned his own thoughts below.

    Having seen the roller coaster movements of bull and bear markets since 1979 and lived through the crashes of 1987, 2001-2003 and 2007-2009 and multiple 10% plus corrections, I hope that allows me to comment on the status of present markets and proffer the view as to whether this is the end of the road for this bull market? Or is the bull just tired and letting off steam? 

    Developed equity markets have doubled from the lows of March 2009 – when nobody wanted to know! I recall our “Green shoots of recovery” note of April 2009 was met with some open disbelief and incredulity. I read daily now of the consideration of over valuation of developed equity markets, the disasters that are set to befall the bond markets, deflation, rising interest rates  (somewhat of a contradiction to deflation?), the technical chartists view of impending doom and other technical “words of woe”.  It’s a worrying time with Yellen in the US about to raise interest rates... maybe, with a Greek exit from the Euro... maybe, with an asset bubble in China and deflation... almost definitely. There is much to worry us, as indeed there has been since 2008!

    As a portfolio manager for some 35 years I want to hear this worry expounded and higher levels of woe, woe thrice woe rhetoric – it’s comforting to me. My personal experience is that Bull markets don’t tend to run their course until nearly all persons are the wrong side of a trade and markets are robustly extended and in bubble territory. When of course very few will see it coming and nearly everyone will be optimistic. Consensus bullishness is the primer for a bear market turnaround – we don’t have that and therefore the old adage that “Bull markets climb walls of worry” continues to stand firm. 

    Let’s consider the very big picture:

    a)  The raising of interest rates - Historically this is done at times of improving economies as a “coolant”. In the present scenario it is being painted as a return to normality, as opposed to the super low interest rate environment in which we have found ourselves for a number of years. Markets historically tend to get jittery around the time of a rate rise but longer term they are much more sanguine about the first one or two rounds of increase. Personally, I see no difference this time around. This is a positive, not a negative for the markets. To me, the potential raising of interest rates is a signal of a return to normality and stability in the growth of an economy. Let rates rise!

    b)  US earnings and corporate activity - We continue to see somewhat steady earnings growth and good employment numbers backed by subdued inflation in the US. As always, there are quarterly fluctuations that attract negative attention but we have a relatively modest ongoing growth in corporate earnings, close to full employment and indeed solid US GDP numbers. Steady as she goes if you are not watching every little snippet and nuance. The big top down view is not a negative. Why is the US important? Because regrettably still the US is the core component of the engine for global growth. I have to also say, we in the UK find the decoupling from US market returns almost impossible. You will not find (for any length of time) the UK markets going in the opposite direction to Wall Street. If Wall Street goes up, London will go up if you take any reasonable timescale. Like sheep, we follow. A solid US market is good for global equity market returns and the returns for clients.

    c)  Bond market collapse - A fairly emotive view on what is likely to be a solid bond market correction. Why wouldn’t there be? The fixed interest and bond market returns of the last 3-5 years have been mind boggling and might one say... now mired in bubble territory? The economies of the western world are almost back on track, I say almost as Europe is not quite there yet and fearful of the Greek issues unfolding negatively. Asset prices are rising (but not minerals) and inflation is low but picking up. It’s time for the retrenchment in bond prices we have discussed in investment notes of the past 2 years and that process is well underway. TAM are heavily underweight both government and corporate debt at this point in the cycle and will stay so in the short to medium term.  

    d)  Cash is King? “Having available liquidity gives you options” is probably a better phraseology. But what do you do with cash? Nothing is one answer, leave it in the bank and await better times (not a Greek one). Buy bonds/fixed interest debt... I don’t think so. Buy assets property, gold, a new car, etc. If that is the case, you add to the consumer bulldozer that is sweeping the globe at present pushing GDP merrily along.

    e)  Property as an asset class - As we are all aware, residential property in city centres  has been a super strong performer but commercial property (rentals derived from out of town shopping and commercial acreage) is economy driven and is only now significantly adding value – there is more to go in this area. However, one must remain vigilant to a turnaround as those that remember the 2007 closure of property funds will attest to how quickly they can bite back. For now - a solid investment return asset class.

    f)  Weak commodity pricing - Bad for producers and their stock prices but good for the economy as we buy oil products and other related items cheaper, which frees the $ or the £ in your pocket to pay down debt or fuel (no pun intended) further consumption.

    g)  Equities – overvalued? In my opinion, equities are not in historically cheap territory but will become potentially significantly overvalued. Pension and long term funds will continue to bleed cash into equities given the prospects for other asset classes. The 'cash is King' argument can soon burn a hole in your pocket if equity markets rise! Earnings at this point in the cycle, whilst not exciting, indicate low, steady and ongoing nominal growth. If you don’t buy equities – what asset are you buying?

    h)  M&A activity is in full flow - Why? Companies now have cash and see the amalgamation of competitors as an attractive growth strategy - confidence in their business and confidence in the growth potential of the acquisition company. You don’t buy your competition to strategically fit your business in down turns.

    i)  Company buy backs - These are on the up, as using cash to buy one’s own shares look the best deal to much company management - more belief in the position of corporate health and the availability of cash.

    j)  The bull market run - From 2009 has been characterised by multiple “pressure relieving” sell-offs of 5-10%. To draw a simple analogy, a pressure cooker needs to periodically let off steam or it will explode! Strong uninterrupted runs in equities lead to strong downside events. This bull market, and particularly the last 2 to 3 years, have not seen astonishing returns and always punctuated by pressure relieving sell-offs.

    In conclusion, it is my belief that we have further and possibly even much further to go, based on what I see as many of my own historic references to other bull markets in which I have been involved.  Despite the heavy falls over the past days core markets are still just 10% to 15% from all-time highs. It was always going to take a monster effort for markets to breach these highs  and “backing and filling” is the order of the day. I believe that by end of the third quarter 2015 that this will have come to an end and markets will once seek higher levels. I stand by my conviction that at this time and until the fundamentals change (which of course they can), we will see new highs in 2016 and a continuance of the bull market into 2017.

    This is not the view of TAM, but the personal view of the CEO of TAM Asset Management in the UK – Lester Petch


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  • Chinese devaluation - why now?August 2015

    Last Tuesday, The People’s Bank of China (PBoC) shook global markets from their relative slumber with a sudden and unexpected devaluation of the Chinese Yuan.  The move initially knocked the currency 2% weaker against the US dollar and there were further falls next day as the market got in on the act helping to drive the exchange rate down to a 4-year low. After a few days of confusion, the currency settled around RMB 6.40 against the dollar thanks to intervention by the PBoC who initially appeared surprised by the market’s negative reaction.

    However, in the absence of any clear communication, the knee-jerk reaction was understandable because if the devaluation was going to be first of a determined effort to force the currency lower still, then it would have had serious consequences globally. But why is China doing this now? In our view, the move primarily reflects an ambition to achieve reserve currency status for the Yuan and we would view that as a positive development.

    Inclusion in the International Monetary Fund (IMF) basket alongside the US dollar, Yen, Euro and Sterling would be a major development and an internationalisation of a currency considered to be an emerging market.  In trading volumes, the Yuan has overtaken the Australian and Canadian dollars in terms of trade payments and looks set to overtake the Japanese Yen, which is already in the basket. The IMF will be making their decision, as they do every 5 years, later in December and, the way things stand, the decision to admit the Yuan is hanging in the balance. On the one hand, Christine Lagarde, head of the IMF, is down on record saying that inclusion is more a question of “when, not if”.  On the other hand, the IMF have just announced that a delay in the review of Yuan inclusion, and this may have been what forced the PBoC to act.

    One possible obstacle to inclusion at the top table could still be that the currency is not free floating.  Up until 2005, the currency was pegged to the US dollar but, since then, the exchange rate has been controlled under a managed float – but it is not what the IMF consider fully convertible.

    However, the Chinese State Council has committed to widening the bands within which the Yuan trades and re-fixing, as they did last week, may be an expression of the will to allowing the exchange rate to be more market driven as it would be consistent with an economy that is slowing and where exports are falling but where, on a real effective exchange rate basis, the Yuan had strengthened 3% this year – dragged up by the stronger US dollar. The IMF might be inclined to view this favourably and that may help if they are also considering bending the rules to allow Yuan inclusion, subject to a majority vote.

    In that context, whilst it is true that a 3% move in a few days is the biggest since the mid-1990’s, the Chinese authorities are keen to convince us that this is only a one-off adjustment to put right short term imbalances.  We should also remember that the Yuan is about 14% stronger against the US dollar than it was last summer because it is this unwelcome strength that has made Chinese exports less competitive.

    Of course, weakening the Yuan significantly from here would be helpful if all the Chinese authorities were worried about was exports.  But it wouldn’t be the panacea for getting the whole economy growing again.  Furthermore, a currency war consisting of competitive devaluations around the Asia Pacific region would be bad for everyone and may not achieve much as a result.  This would be quite an uncomfortable development because it would ultimately export deflation to the USA through cheaper goods, which would imply lower interest rates (the 2-year US Treasury yield fell from 0.69% to 0.65% on the news) and, therefore, a weaker US dollar (the global US dollar index fell 1% from recent highs).

    Finally, if we are right in believing that China’s main objective is to get the Yuan IMF accredited as a reserve currency, material depreciation would not be helpful to the cause.

    In conclusion, we do not believe that the Chinese authorities have suddenly decided to tackle falling exports by pursuing a significant weakening their own currency.  The move, we believe, is part of a much wider trend of financial deregulation and reflects an ambition for IMF inclusion is the basket of reserve currencies.  TAM client portfolios have only limited exposure to China although given the influence that it has both on the region and developed markets, we continue to watch events closely, but there is little here to change our overall view on any of the asset classes that we are currently invest in.

     


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  • Japan – It has to be different this timeAugust 2015

    An unprecedented policy initiative demands a new investment approach.

    We have written up the bull case for Japan repeatedly in recent years and been invested in Japanese equities for most of that time.  Part of the investment rationale was down to the ambitious reform efforts of the Abe administration and partly our belief that the quantitative easing being undertaken was a true commitment to reflate the economy.  In this, we were correct and our investment benefitted from the sectors that typically do well in that scenario such as banks, real estate and other financials.

    We also did so correctly expecting a relatively stable Yen, for whilst Japanese QE was underway, similar QE was going on in US, UK and Europe to partially offset any consequent Yen weakening and, of course, the Yen was proving to be a safe haven currency in nervous global stock markets prone to quick profit taking. Of course, Japanese QE is nothing new; the Bank of Japan practically invented it in 2001 and have been engaged with it ever since, except for an all to brief period of relative bliss before the global financial crisis hit in 2008.

    But today, the scale of Japan’s latest QE is truly extraordinary, a multiple of that undertaken by the USA, and we think that the game has changed – for the better. Some elements of this new effort to kick start the economy look similar but are of a completely different order to that which we’ve seen before. 

    The reason for this, we believe, is that after all previous attempts to turn things around, the reality is that Japan has been mired in a battle against deflation for two decades and, whilst total bankruptcy has been avoided, the same problems remain economically, demographically and structurally.  We think that this time really is different because, frankly, the authorities (including large corporates) realise that it has to be. We believe that the triumvirate of Government, Bank of Japan and large corporates are now engaged in a joint effort to save Japan from the serious consequences of a third decade of failure.

    Firstly, as we have said before, just because Prime Minister Abe has committed to reform as part of his “three arrows” approach, does not mean that he is able to implement the third in the same way as the relatively easy first two arrows of monetary and fiscal easing/reform.

    The reason for this is that the economic base of Japan is vast and fragmented. Its main stock market index, Topix (rather than Nikkei 225), comprises 1,700 companies and mostly industrials.  The ups and downs of these companies are a world away from the mega cap household names like Toyota, Canon and Hitachi, for example, who historically exported their products overseas and, broadly, benefited from a weaker Yen.  But what we have today is a list of around 100 global multinational “winners”, with operations around the world, able to dictate prices to their domestic suppliers, and whose contribution to corporate tax revenues has risen to 75% from less than 50% over the last decade. 

    Secondly, Japan has two clear cut objectives upon which it must now deliver; paying down the national debt (235% of GDP) and cutting the budget deficit.  Question is, who can pick up the tab? Unfortunately, with the domestic economy pretty much on its back, the tax take from personal income is stagnant; virtually unchanged in nominal terms since 1987. Raising VAT looks out of the question too and it’s pretty much as high as it’s been since the 1970’s and we know that previous attempts to raise it made no difference because A) It’s not big enough to move the needle on tax take and B) the economy switched off like a light. And so we think that, in short, the only realistic source of taxation must come from the earnings of the biggest and most successful companies in Japan.

    Naturally, it’s not as simple as raising corporate taxes to punitive levels – this is a free market and fully fledged democracy we’re talking about here, and smash and grab raids on profits are bad for everyone, especially investors. The solution has to be more sublime and this is where a weaker Yen could work wonders for the big multinationals.

    If this new phase of adjustment manifests itself as a period of Yen weakness, which is clearly the objective, it should result in a huge boost to multinational profitability which in turn should, as part of the plan, feed through into wage growth and higher prices paid to domestic suppliers.  If this sounds like an unlikely level of cooperation between corporate, government and central bank, we would add that we would never expect anything like this to happen outside of Japan. 

    In conclusion, we believe we are entering an unprecedented period of engineered growth and inflation for Japan, underpinned by a collective need to break the 20 year malaise and rebalance the economy.

    Furthermore, we see this as an opportunity that goes beyond participating in a reflationary trade as we have done, successfully, until now.  In order to optimise the potential returns, we think the best way to exploit the opportunity is to stay invested in Japanese equities but with a strategy that is very selective in the sectors which it invests.  In addition, and most importantly, we will want the investment to be hedged from Yen back into Dollars and Sterling in order to offset Yen weakness which, we believe, will weaken further than many expect.



     


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  • Review of the Second Quarter 2015July 2015

    The second quarter of the year was a stark contrast to the first, with both global economic and geo-political events souring investor sentiments, leading to some increased volatility and overall decline in financial markets. Positively, despite these sharp falls recorded in many markets, our portfolios performed well, mitigating losses and out-performing their respective risk benchmarks. Over the first half of the year the portfolios have all recorded solid absolute and strong relative gains.

    The second quarter started on a positive note…

    The second quarter can be viewed as one of two halves, albeit unequal ones. The first half of April and May saw a continuation of the positivity that drove equity markets to record and near-record highs. Indeed both the US and UK stock markets hit multi-year highs with the S&P 500 reaching 2,130 and the FTSE 100 index 7,100. Such was the positivity that even bad news was seen as good! The unexpectedly weak first quarter GDP numbers on both sides of the Atlantic were also greeted with acceptance. The thinking behind this positivity is that if growth is not too strong, interest rates will remain lower for longer. Indeed, given the central bank inaction and indications that the first interest rate hikes will not be until the fourth quarter of the year at the earliest, this seemed to be accurate.

    The Greek saga rumbled along but was mostly ignored by markets who focused on valuations, a decisive UK election result, the benefits of cheap oil (although even oil regained some poise and moved back to US$65 a barrel), and the strength of the US dollar (hitting five year highs against Sterling for example). 

    Then we moved into June.

    …But ended in a Greek tragedy 

    In June we were hit with the double barrels of the real possibility of a Greek default and exit from the Eurozone, coupled with sharp falls in the Chinese stock market, this had many commentators predicting the bursting of the speculative bubble that had driven the Hang Seng to lofty heights. The negative sentiment weighed heavily on financial markets, with equity markets selling off relatively aggressively. Major falls were seen in Europe where the fear over contagion and the renewed pressure that the euro trading block would come under (whether the Greece crisis was adverted or not) had a real impact, with the EuroStoxx 50 index falling over 8%. The UK was not immune, falling 6.6% from its highs by quarter end. Notably, the US equity market was less affected, only giving up 2.5% of its year to date gain.

    With Greek banks shut, its political system descending into chaos and uncertainly regarding the forthcoming referendum - markets were unsettled. It is moments such as these where being able to look through the short term volatility and make rational decisions is essential. As we noted in our ‘Stick to your principles’ investment note, we appreciated the volatility that the potential Greek default would cause but equally viewed it as a short term distraction from the improving fundamentals that would support markets over the remainder of the year.

    We stuck to our principles, made some small changes to our fund selection detailed below but overall maintained our asset allocation and outlook. At the time of writing we have seen a resolution to the Greek issue (for now) and are enjoying a significant relief rally which we hope to be able to discuss in more detail next quarter.

    The benefits of diversification

    Such situations as these reinforce our belief and ethos that creating diversified portfolios with multiple sources of return offer greater comfort during times of market stress. When one asset class declines, others can often rise. Even within a declining asset class there are often geographical and sector opportunity.  For example, whilst we have no direct exposure to the Greek stock market, we do to the broader European markets where we have seen attractive valuations and growth potential. Alongside this, however, we have exposure to the United States (which held up well compared to Europe) and to Japan. Our aim is to reduce the volatility (or risk) of our portfolios and dampen the impact of single market capitulation. This we successfully achieved in the second quarter as our portfolios out-performed their benchmarks.

    A more defensive stance towards equity markets

    As mentioned above our equity exposure remained relatively unchanged during the quarter, although we did reduce our overall exposure as the market appreciated during the early months. This reduction took us from a marginal overweight/neutral position to a marginally underweight/neutral position. By this we refer to the exposure to a given asset class against the exposure implied to the same asset class from the risk-profiled benchmark for a portfolio.  For example, if a balanced risk portfolio has a neutral equity exposure of 50% we may have reduced exposure from 53% (mildly overweight) to 47% (mildly underweight).  Our decision to reduce equity exposure was in part reaction to the volatility creeping into the market and the strong performance posted in the prior months.  

    At a sector level, as the quarter drew to a close we reduced our exposure to mid-capitalisation biased income focused funds which have served us so well, in favour of funds that focus in the larger capitalisation big-name stocks. We expect this process to continue into the third quarter. Many of these stocks (larger capitalised) are in unloved sectors which have under-performed the broader market this year for a number of reasons, including the commodity and energy market rout. One such fund is the Investec UK Alpha Fund which focuses on the value, large cap sector. The fund is run by Simon Brazier who believes in investing in good firms that possess a sound business model, strong balance sheets and employ CEOs that will drive the firm to become the top performing company in their sector. 

    The investment process is a straightforward one which allows the manager freedom of mandate and is based on idea generation from the manager’s experience, company meetings and external and internal research drawn from the considerable global research resources of the firm. Fundamental research analysis is carried out to determine valuations which are challenged and debated with all members of the team. The best ideas are used to construct a high conviction, risk-aware portfolio that is monitored by the EMA third-party risk system which assists in modelling. The manager has full discretion, responsibility and accountability for portfolio construction and balances the final allocation with consideration to benchmark, business and portfolio risk.

    Whilst Simon has only recently taken the helm of the fund, he has a good track record of performance in his previous role as head of equities at Threadneedle (now Columbia Threadneedle). He outperformed the FTSE All Share in every year from 2010 to 2014, where the relative performance was accrued steadily and consistently. We are buying this Fund for prevailing market conditions.

    Conditions for fixed income remain unfavourable

    In contrast we continue to remain underweight in the broader fixed income markets, especially the government bond market which we reiterate (as we have for some time) is highly susceptible to future interest rate rises. It is interesting that the bond market dynamic in many developed nations has changed during the great quantitative easing experiment. The long held view that equity and fixed income markets are negatively correlated, for example, (when one goes up, the other goes down) has been seen to have been broken with both now often moving in concert.

    However, as investors contemplated the withdrawal of quantitative easing and possible future tightening, bond market volatility has increased and exceeded that of equity markets. We have taken opportunity of this volatility to modestly increase our sovereign debt exposure on market dips. We believe this will not only offer some short-term return potential but also add further protection to our portfolios.

    Not all that shines is gold!


    Our view on the commodity sector remains unchanged.  We believe the medium term fundamentals remain poor and hold no direct exposure. Interestingly despite its recent ‘rally’ oil prices remain weak and could come under further pressure given US stock piles are at fourteen year highs. Additionally, the possibility of lifting Iranian export sanctions will likely further increase supply, with little or no further demand. Gold continues its malaise given the strength of the dollar and low-inflation expectations. As an aside, even with the decline in gold prices there has been a few beneficiaries of this generally cited ‘safe haven’ asset – Russian investors have enjoyed an 80% gain in the value of their USD denominated gold holdings given the recent collapse of the Ruble.

    Further investments in ‘bricks and mortar’

    During the quarter we increased our already overweight property exposure, believing the attractive yield still generated by the sector is a compliment to our other holdings and an ideal substitute, for now, to our underweight fixed income exposure. We continue to be focused on the very diversified and quality end of the commercial property space, principally in the UK. The funds we invest in are large with hundreds of investments in warehouse, retail parks, and other commercial premises. To increase our diversification even further we have added a position in the Standard Life Global Property Fund. The fund is designed to give investors access to the best global opportunities within the real estate market. The main bulk of the fund’s investments are in direct ‘bricks and mortar’ properties, with satellite holdings in a number of real estate investment trusts (REITS).

    By ‘Bricks and Mortar’ we refer to investment in real, physical buildings.  As we are all aware the buying and selling of properties can be a fraught and cumbersome affair often taking far longer that we initially anticipate.  It is important therefore to invest in highly diversified funds with many varied (and hopefully uncorrelated) underlying properties.  We anticipate this will improve the liquidity of the fund and allows us to realise our investment more efficiently.   REITS, by contrast are closed-ended funds traded on the stock exchange that can invest directly, indirectly or into the shares of property related companies.  They are very liquid but can be highly affected by the vagaries of the equity markets and general sentiment rather than by the underlying value of their property holdings.  Consequently they often trade at a discount or premium to their underlying asset value.

    The manger of the Standard Life Fund starts by investing at the country sector level with markets displaying underlying price inflation, steady consumer growth and a buoyant property market with positive year on year capital appreciation. Once these macro markets are identified, the team looks for investment opportunities with the right indicators such as underlying value, average lease length, tenant default rate and opportunities within the structure to yield greater rental income. If the market identified presents attractive investments, but also regulation and taxation headwinds, then the fund will switch into listed real estate investments to ensure the underlying investor in the fund still gains access to the portfolios best ideas.

    Overall however we remain very vigilant to any turnaround in this market as the funds in poor market conditions can quickly trend to illiquidity.

    Absolute return offers consistent performance

    We remain overweight in the absolute return sector, viewing our investments as both alpha-generative and, again, a good substitute for our reduced fixed income exposure. The sector has not performed as well as one would have expected over the quarter due to the high volatility and stock correlations we have encountered. Long term however, we believe these ‘all weather’ investments have the potential to add above inflation return to portfolios.

    In conclusion

    We have a mildly positive equity outlook for the remainder of the year and 2016. We see good ongoing potential in the equity markets and will seek to exploit the opportunities presenting themselves through the divergence in monetary policy across the globe. We see opportunity in both the European and Japanese equity markets and, in broader geographical terms, the larger and mega capitalization stocks that have underperformed their smaller mid-cap compatriots. Given the heighted currency volatility we have experienced this year, we will continue to focus on situations that offer the ability to hedge out the currency effect and allow us to capture the full market gains on offer.

    The gorilla in the room remains the debate over when the US Federal Reserve will announce their first interest rate hike, as this will set the tone for the investment landscape for many years to come. We are positioning our portfolios in expectation of this move but believe the recent economic releases, including weaker harsh-winter induced lower GDP growth in the Q1 and a noted fall in inflation, plus the knock-on effects of the Greek ‘Grexit’, could  be enough to defer any change in interest rates until the end of the year at the earliest. We remain vigilant for this and other events we see on the horizon.


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  • Stick to your principlesJuly 2015

    “We have to fight for principles. We could maybe set them aside in the short term. But in the medium and long term, we will suffer damage that way.” Angela Merkel, 29th June 2015

    Those are my principles, and if you don’t like them…well, I have others.” Attributed to Groucho Marks in 1983

    Chucking the rule book out with any or all principles in the short term is not unfamiliar behaviour in the EU and maybe that’s why we all expected a deal by now. Perhaps this was a tad too optimistic because it’s been a busy start to the week in the wake of the breakdown of talks between Greece and its creditors at the weekend when an eleventh hour deal was expected.

    It now seems that Greek Prime Minister, Alexis Tsipras, may have jumped the gun by walking out when he did due to his objection that the package on offer from the Troika did not include any debt relief, without which Greece cannot meet its payments.  This is something that Mr. Tsipras believes would be impossible to get through his fragmented and agitated parliament. Unfortunately, he seems to have walked out before playing to the rules of the game the EU had in mind.

    Jean Claude Juncker, President of the European Commission, said that he felt “betrayed” by Mr. Tsipras and that, if only he had accepted the austerity measures in principle, the final offer from the EU, including debt relief and growth measures, was about to be sprung. That offer has now been withdrawn.  Instead, Mr. Tsipras opted for a snap referendum on Sunday 5th July.  The exact wording has yet to be seen but, from a Greek perspective, the question is essentially “Do you want to accept the EU offer?”.  The EU were rather it was “Do you want to stay in the eurozone?”. Incidentally, there is some speculation as to how Greece will print 16 million ballot papers and 8 million envelopes by that time, let alone ship in all the necessary election officials.

    It’s all a bit shabby and nobody comes out of this looking particularly good.  We note this morning Mr. Junker’s comment “If they vote No, it would be disastrous for the future. No would mean they are saying no to Europe”.  Bad for whose future, he doesn’t say. And when he says “Europe” we think he means “eurozone”.  Still, when you’re trying to convince a confused electorate to vote a certain way on a non-existent deal which has already been withdrawn, maybe anything goes.

    Meanwhile, global stock markets have fallen a few percent and there has been the familiar rush to perceived safe haven of government bonds. The calling of a Greek referendum this coming Sunday is fraught with uncertainty, which investors hate, and so we expect the market to remain pretty jumpy for the rest of the week. However, the stock market falls that we have seen are far from the panic of previous chapters in the never ending Greek saga.

    There are a number of reasons for this.  Firstly, the private sector is far less exposed to Greek debt than it was in Q3 2011, which was a very difficult time for everyone worried about economic contagion from an exploding situation which had no precedent.   The risks are now far better understood and quantifiable. 

    Secondly, the state of the global economy, and Europe in particular, is in much better shape today than it was then.  The US economy, the first out of the mire of the post Lehman crisis in 2008, has recovered so well that, until last week, everyone was more concerned about the Federal Reserve raising interest rates in order to not get caught behind a curve of rising inflation.  The UK economy is ticking along nicely, and we were sufficiently confident in Europe to invest TAM client portfolios late last year; an investment that has worked very well for those eurozone investments that were either currency hedged or even un-hedged given the euro posted its best quarterly gain against the dollar for almost four years underling the single currency's reliance in the face of the Greek crisis. 

    Thirdly, it is true that Greece, in the grand scheme of things is very small.  It is just 1.8% of EU GDP, and 0.4% globally.  The bailout sums themselves are not particularly large in absolute terms.  The real risk here is political and it is longer term.  If Greece left the Euro, it would set an uncomfortable precedent that the single currency is reversible.  If you are of the opinion, as Nigel Lawson (ex-chancellor of the UK Exchequer) was, that adopting the Euro was allowing Federalism by the back door, then it is logical that if one can abandon the currency, then one can abandon the EU stated mission of “Ever closer union”. 

    This well illustrated by the way that the USA expresses its incredulity that the EU won’t just sort Greece out and be done with it.  From the White House perspective, Greece is a geographical linchpin between Europe and the mounting problems around it; Russia, Balkans, Middle East and North Africa. For the sake of a few billion, why not just do it? 

    The EU has some justification, however, in their view that if you allow one member of the union to break all the rules and principles, then Greece leaves the Euro anyway and the door is open to everyone else who doesn't fancy a decade of austerity and 50% youth unemployment.

    In our opinion, on balance, a Yes vote looks the most likely outcome but anything can happen. Even with a No vote, Greece does not necessarily leave the Euro.   Furthermore, compared to the gains made in the TAM stock, bond and property investments, very little has changed even with these market falls.  To our mind, we would be inclined to see any market turmoil this week as an opportunity to increase our exposure to equities.  We see no reason why investors will not come out looking for higher yields in both stocks and bonds when the fundamental global economic backdrop remains positive. These are the principles we are sticking with.


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  • Keep your eyes on the roadJune 2015

    It would appear that the Greek authorities have blinked first and come up with a proposal that will allow the EU to throw in the towel whilst still keeping some degree of self-respect. With the FTSE 100 index down a few hundred points from the high, about 5%, in only a month, we believe this is an opportunity to reiterate the longer term reasons why we think equities will recover from this short term dip.

    Stock and bond markets have learned over the last few years to treat good news as bad news and vice versa. Good news on the economy implies an end to QE and, ultimately, rising interest rates which erode the real future value of returns in equities. Conversely, bad news on US employment, or lower than expected inflation, serves to keep interest rate expectations pinned back.  In this regard, the negative UK inflation rate in April was sobering. But it has already bounced back to positive territory and both the Bank of England and Chancellor Osborne have been vindicated in their determination to look though this period of “low-flation”, brought about mostly as a result in the fall in oil, and start preparing the ground for rate rises, probably in early 2016.

    If this assumption is broadly correct, and if other economic indicators such as unemployment and wage growth improve in the second half of 2015, then we can expect this to result in higher bond yields as the year progresses. In the meantime, with base rates still pinned at 0.5%, the Gilt yield curve will likely continue to steepen, with longer term interest rates rising, as it has done over the last 6 months; a so-called “bear steepening”.

    In a market obsessed with the short term, one can be forgiven for expecting this scenario to be a hostile environment for equities.   However, there have been more than a dozen periods since 1980, which technically counted as bear steepening, during which the FTSE All Share did marginally better than during other periods. It wasn’t much, about +0.1% per month, but in a world of low returns, it’s a more meaningful return than when interest rates were 5.5% back in 2007.  This is an important difference from previous periods of rising Gilt yields because it sets the agenda for a honeymoon period whereby the opportunity for equities, supported by the reality of an improving economy, outweighs the impact that implied higher rates has on future earnings.

    Furthermore, in absolute terms, nobody expects the Bank of England to raise rates to pre-2008 levels. Markets are expecting no more than two quarter point hikes by the end of 2016, which would bring the base rate up to 1%, still below the end-2016 forecast inflation rate of 1.6% and well below the Bank’s target inflation rate of 2%.  As such, we would also expect that the Government and Bank of England will be keen to justify rate hikes as a “lifting of emergency measures” and more of a return to normality rather than a concerted effort to curtail rampant inflation which, we believe, will be absent.

    In such an environment, good news on the economy could change to being genuinely good news for stocks because, whatever the merits of an improving economy, company earnings will still have to deliver growth in order to support the more elevated valuations to which we have become familiar, particularly in defensive stocks.  If investors deem the UK to be sufficiently reflationary and buoyant, something indicative of a steepening yield curve, then they may deem the risk of a move into more equities, and even cyclicals, well worth the risk.

    In conclusion, we believe the recent sell off is yet another reflecting weak sentiment as a result of unremittingly negative news headlines for Greece and by extension the eurozone project, political or otherwise.   Indeed, the TAM investment team increased exposure to UK equities by buying the Investec UK Alpha Fund and we are confident that the UK stock market will recapture recent highs in the second half of the year.

     


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  • Real estate’s safe house for ‘bond refugees’May 2015

    Cast your mind back to the 2008 crisis. It seemed, the only thing outpacing the unsecured mortgages being underwritten was the speed at which they were being re packaged and issued back to Wall Street. Out of the ashes of this turbulent time in global economics has grown an asset class that while watched with a cautionary eye is starting to show signs of stability, growth and, most of all, a source of yield that today’s fixed income markets are struggling to deliver.

    Abdallah Nauphal, CEO of Insight Investment, argues that the mainstream market landscape has changed so much that it has heralded a new era for the investment industry. Yield hunters being forced out of their comfort zone in the search of superior returns.


    The commercial property sector is positioned to provide that alternative. As investors shrug off the ratings agencies and wade into high yielding corporate debt, the commercial property markets are also positioned to benefit as ‘bond refugees’ move up the risk curve.


    Looking out of my window at the Square Mile, I see numerous cranes towering over the City, all building the structures of tomorrow. Green buildings, sustainable properties each commanding rental premiums with slower balance sheet depreciation, longer leases, and higher capital values not to mention some very quirky designs. I often wonder what piece of household equipment is going to be built next to rival the cheese grater and the walkie talkie.


    Michael Morris CEO of Picton Capital believes the commercial property sector is still valued at a 26% discount to the heady days of 2007 and, as such, is still seen as a comparatively cheap asset class versus the more conventional equity and fixed income sectors.


    Schroders has seen commercial rental income growing uninterrupted for the past 68 months and expect it to continue to yield double digit returns into 2015.


    With growth metrics such as falling unemployment, rising GDP, low borrowing costs and moderate wage inflation, the UK economy is now in the top six developed economies. In 2014, and into 2015, we have seen this growth story playing out in commercial rental yields. TAM invest with real estate fund managers who are seeking to diversify their property portfolios. Investments into industrial, office, logistics and retail markets with varying rental yields are made, not only to fully capture this broad growth in the rental market, but to provide the investor with an actively managed, secure investment, resulting in a blend of increasing rental yields with underlying capital appreciation.


    Indeed, we can see this story playing out over the cobbled streets of the City with London positioning itself as a global player in accountancy, law, media and technology. London has seen a rise in the professional talent pool applying to work in the capital as a result. What makes commercial real estate an attractive market is that demand is outstripping supply. With banks drip feeding their property portfolios onto the market whilst holding back on future project funding because of more stringent capital adequacy requirements the City landlords are holding all the cards, or should I say keys!


    This growth is not confined to London, it can be seen in most of the major UK business hubs, where a large portion of our funds are invested. Government initiatives aimed at increased competition between UK cities has helped to develop commercial and retail markets that attract some of the market leaders in commercial business. With low, regulated supply from banks unwinding their property portfolios, combined with rising demand for commercial rental space, the property market outside of London has also seen a substantial rise in yields and asset appreciation.


    We are seeing a similar story developing in Europe with property performance in 2015 predicted to increase its 2014 gains. This is widely being attributed to two factors. One being the introduction of QE acting as a ‘rising tide that lifts all boats’ driving commercial rental demand up as businesses expand.  Secondly, with the German 10yr yield at less than 0.1%, the German 5yr at 0.08% and with Netherlands, Austria and Finland issuance of negative debt all becoming common place, investors searching for yield in these markets are eyeing up the alternative. That being the prospect of commercial property funds yielding around 4% without the added risk of having to dance near the door in the fixed income ball room. Knight Frank predicts commercial retail sales in Europe to reach up to EUR 180 billion in 2015.


    TAM has been increasing investment in UK and European property funds through 2014 and into 2015. This strategy has proven a reliable and diversified approach for our client portfolios. For an asset manager with the belief the fixed income market is carrying a level of risk not seen before, the property market has given us an opportunity to provide our clients with equivalent yields while diversifying portfolios into another asset class.


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  • Winner Takes It AllMay 2015

    So who saw that coming?  Well, hats off to the “well groomed” Glaswegian pensioner, who remains anonymous, who bet £30,000 on a Conservative majority at 7/1.  A member of the TAM investment team also had the same bet but, sadly, only a mere tenner. With Ladbrokes poised to pay out around £2 million to those who backed a Conservative majority, quite a few others guessed right as well.  All the speculation is over and there’s a lot of news to digest, not least of which is the resignation of three party leaders; Nick Clegg, Ed Miliband and Nigel Farage, and a few others to consider such as Ed Balls, who lost his seat, and Vince Cable.

    As the Labour party now search for a new leader, David Cameron is assembling a cabinet with a very different look and feel and quite a few new faces.  One senses a determination to quickly undo Lib Dem influence and the market has taken this on board.  Shares in banks rose strongly on Friday as the prospect of higher bank levies must surely be curtailed. Shares in power companies also rose as the defeat of Labour removed any likelihood of price capping. 

    Overall, the result has been good for UK stock and bond markets.  The FTSE 100 Index is up to 7,050.00 and the UK Government Bond yield fell from recent highs. Underlying all of this is a relief rally in Sterling, something we had positioned for ahead of the election.  Foreign involvement in UK markets is essential in a stock market containing major international names. But if there’s one thing that would’ve kept them away, and Sterling in the doldrums, would’ve been a result fraught with coalition bickering and an uncertainty hanging over the future of the British economy for years to come.  Good news is great, bad news can be dealt with but the uncertainty of a cobbled together alliance would’ve been the worst possible outcome for investors.  The Conservative majority removes all of that.  

    George Osborne will remain as Chancellor, again, something that markets will welcome as a better devil that they know, and he will be keen to implement a new budget ahead of the summer.  We suspect this will something along the lines of confirming a commitment to austerity whilst taxation stays about the same but with an intention to lower taxes in the future contingent upon a stronger economy.

    In terms of Government policy the winner takes it all. The Boundary Commission changes, blocked by the Lib Dems in coalition is now back on the agenda.  The Bill of Rights, also blocked, will now be up for grabs and as part of a wider agenda to come to a new deal with Europe.  This will naturally lead into a debate on Europe and the UK’s membership of the EU which Cameron must now deliver, probably in 2017.  This could give international investors pause for thought because an exit, based on the UKIP victory in the European elections, makes it a possibility.  It could’ve been a protest vote, we will find out.  In the meantime, it’s a problem in the post for Sterling and so the current relief rally may not be very long lived.

    The other big story from the election is, of course, the SNP victories in Scotland which came at the expense of Labour, contributing to their loss.  Despite this, we do not believe that another referendum on Scottish independence is looming over the UK in this parliament and that the actual adoption of greater powers, such as Scottish home taxation, is not something that is wanted or necessary overnight.  This could be a very stable government and a stronger Sterling tells us that this is how global markets now see the UK, for now.

    TAM client portfolios are carrying a larger amount of cash than they have done for some time but as this was mostly as a result of taking profits in Japan, in Yen, and from the US equities, in US dollars, the boost to Sterling has added to performance.  We also added Gilts which have benefitted as well and where we see lower yields for a couple of quarters at least. 

    We may re-allocate some cash into equities and we continue to like property in the non-equity part of portfolios.  Now that the election is behind us, we must turn our attention to international markets and the US in particular from which the UK will always take its lead whatever the outcome of the election.  US employment and payroll data came out last Friday when we were glued to our TVs but delivered a set of numbers described by many as a Goldilocks figure which is neither too hot nor too cold and would, on the face of it, give the Federal Reserve all it needs to raise rates in September.  This is not, we think, something to be feared with the way client portfolios are currently positioned and we believe that there is the potential to build on the good relative performance experienced this last year. 


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  • It's the final countdownMay 2015

    TAM portfolio positioning ahead of the UK general election

    "Democracy is the worst system devised by wit of man, except for all the others” – Winston Churchill

    So the election is nearly upon us and stock and bond market attention has shifted to what we may wake up to on May 8th. If the 2010 election is anything to go by, the first result out of the 650 constituencies will be known around 11pm in the evening on 7th May and, if you’re feeling up to it, you could watch the results coming in until it’s all wrapped up around 5am the following morning.


    This, however, is likely to be just the end of the beginning because, failing a 1992-esque shock, we are heading for a hung parliament with no single party winning 321 seats.

    If this is the case, and if the Conservatives have more votes than Labour, David Cameron, as the incumbent Prime Minister will remain in power and have until 21st May to form a working coalition that can pass a Queen’s Speech on 27th May. If Labour have more votes then, as far as the media and electorate are concerned, Cameron will be deemed to have lost the election and it is very likely that he would leave No.10, leaving Labour to negotiate a workable coalition between the Lib Dems and SNP.

    Current betting suggests that Cameron will hang on and form another coalition with the Lib Dems. This would be the quickest way to establishing a government. If an additional deal needs to be struck with the Democratic Unionist Party (DUP) then we will not have any clarity until the following week. Remember that in 2010, it took Cameron and Clegg 5 days to form a coalition that he could take to the Queen and, at this point, it’s worth noting that if Nick Clegg fails to hold onto his constituency seat of Sheffield Hallam, then this severely hampers the chance of any coalition at all and the Conservatives may face the prospect of trying to run a minority government. 

    Chart courtesy of Liberum Capital Ltd

    Markets

    The FTSE 100 is trading round 7,000, a level it got to in March and has remained throughout most of April, close to all-time highs. This strength broadly mirrors that of the US, European and Japanese stock markets and owes a lot to the continuation of low interest rates. 

    However, these gains are not underpinned by strong economic data to the same extent we saw in 2014 and so we decided to take profits in late May to bring TAM portfolios back to underweight in equities and clients will notice the increase in Sterling cash.

    This is very much a defensive move implemented at a time of uncertainty in a number of other areas, notably the eurozone but also China and emerging markets. Furthermore, the raising of Sterling cash has come at a time when the exchange rate against a rampant US dollar appears to have bottomed out. To the extent that some weak sentiment towards Sterling is attributable to an uncertain election result, we believe the growing awareness that no-change in government is the most likely outcome, we do not expect Sterling to materially fall from here.

    We believe this leaves TAM clients well placed to benefit from a strengthening of Sterling in the event that the status quo of the current coalition remains in power.

    Details of exactly how a new coalition would look may remain unknown for days but we would expect a “relief rally” in Sterling because a result that represents the least possible change to government policy would bolster the confidence of foreign investors to remain invested in the UK.

    TAM client portfolios have enjoyed a good first quarter, comfortably outperforming their benchmarks. We think it is currently prudent to stay underweight in equities due to a number of concerns both here and globally. However, as always, we stand ready to invest again fully where we believe that the opportunity outweighs the risk.



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  • Japan – Rise and shine!April 2015

    Over the years, one has learned to be a little wary of putting out bullish investment notes on Japan. The financial writing landscape is littered with the graves of bull notes written by those who thought this time was different.  Headlines such as “The sun also rises” were often penned at the end of impressive stock market rallies but on the eve of a major sell off.  More often than not, this reflected the sincere belief that Japan was about to “de-couple” from the economic ups and downs of the USA, or was immune to the fickleness of the US consumer as the emerging market middle classes took their place.  There was a school of thought that wonderful things awaited Japan as it moved from a reliance on industrial manufacturing towards an economy balanced by domestic demand and service industries. It was a nice idea but was hopelessly unrealistic due to a number of economic and demographic factors which were unique to Japan and remain stubbornly embedded in the make up of the country today.

    It wasn’t always investors’ fault for getting it wrong.  There were numerous policy errors during the two lost decades of stagnant growth.  It seemed that if there was a decision that could be taken by either the Bank of Japan or the Japanese government that could wreak havoc in the economy or cause foreign investors to sell, it was usually jumped on with both feet.  The resulting chaos often involved overwhelming selling and share prices being locked “limit down” with a maximum price decline being implemented but with no shares sold.  Such was the life of a Japan fund manager. 

    But one had to avoid slipping into a bunker mentality because on the rare occasions that the sun did shine, the stock market could be up 25% in a year.  At such times, it was often prudent to dispense with one’s stock picking hat and instead reach for the chart books because the only thing that mattered in the short term was owning the “right” stocks.

    For example, over the years, throughout the 90’s and Noughties, if the Yen was weakening, foreign buyers piled into the Japanese exporters, many of them familiar household names such as Sony, Canon and Toyota, which were those internationals most likely to benefit from a weak Yen and an increase in the value of their repatriated profits from around the world. The fund manager’s desk bible, the Japan Company Handbook helpfully showed each company’s export ratio; a data point rarely questioned even as company managements got better at currency hedging or moved production overseas, mitigating the positive effects of a weak Yen. But facts didn’t matter very much, you just had to own them if you wanted to be along for the ride.  If you were in the hedging business yourself as an investor, you could also hedge your currency exposure back into your own, thus avoiding the two-steps-forward in stock gains and one-step-back on the falling Yen.

    Broadly speaking, the “two steps one step” is what happened from around May last year when the Yen weakened by 17% from $/¥102 to $/¥120, sparking renewed foreign investor interest in Japanese equities. Over the same period the Topix index raced up over 30%.  A classic and familiar reaction to a weaker Yen.

    The first stage of the rally was supported by large foreign inflows which naturally gravitated to the large cap exporters; the obvious beneficiaries of a weak Yen.  But things have changed. 

    In the last five months the Yen has been remarkably stable despite the consensus forecast for further weakness.  Partly this view is formed by the enormous amount of money printing under the Bank of Japan’s quantitative easing, and partly due to the widely held view that the US dollar must strengthen as a result of an inevitable rise in US interest rates, which we are still waiting for. 

    Yet the stock market has gone on to new post-Lehman highs.  One of the main reasons for this has been the additional buying of equities by Japan’s national Government Pension Investment Fund (GIPF), who have made major changes to their asset allocations away from bonds and towards equities.   This fund, at $1.2 trillion, is the largest retirement fund in the world and, combined with the $850 billion of savings of Japan Post, a similar savings institution, a shift from 12% equities to nearer 20% represents a huge undertaking of share purchases.  Actually, we have some “Abenomics” to thank here. The appointment of ex-Health Minister Yasuhisa Shiozaki, a reformist, into the oversight role to the GIPF was made by Prime Minister Abe. 

    This is encouraging because it vindicates the criteria (Stable Yen, domestic companies and reflation) upon which TAM invested in the Schroder Tokyo Fund in early May last year and which has been a very profitable for the unhedged Japanese investments that we bought for most TAM client portfolios.  

    As we have stated before, the reformist agenda has a long way to go in Japan and “Abenomics”, under Prime Minister Abe, is not a panacea for the ills of the nation. One must remember that of the “three arrows” of policy changes, the first two of fiscal stimulus and monetary easing, were relatively easy to implement compared to the third: structural reforms.   Furthermore, the success of the first two is a mixed bag if the macroeconomic indicators are anything to go by.  It is true that there are some reasons to be positive on the economy and we are encouraged by signs that wages, which have stagnated for decades, may finally be on the rise.  But this may be happening anyway as a by-product of rising corporate profits filtering down to employees.  If so, so much the better. 

    But in terms of what informs our investment decision in a market that has notably outperformed other developed markets over the last year, we are of the opinion that there are no quick fixes in Japan and that the unusual influence of huge domestic pension fund allocations into equities, justifies some element of profit taking. We will maintain a reduced position in Japanese equities and a mild overweight in equities overall, however. 

    We are now on the eve of the first quarter US corporate results season and, although not viewed as importantly as the third quarter, initial expectations are not high.  We believe it is sensible to take some profits in Japan as well as other regions and reassess the situation after some key upcoming events, notably the US Federal Reserve interest rate decision and, of course, the UK election.

    Picture: These two characters spell the word “Nihon” in Japanese, which means Japan.  It is spelt using kanji which, in this case, is the same as Chinese. The upper kanji is “Ni” which also means “sun”. One might see it as a representation of the sun above and below the horizon. The second kanji is “Hon”. It is very similar to the symbol for a tree except for the addition of the small lower horizontal stroke across stem which often denotes a root.  Thus “Hon” means “origin”. From this is derived “Land of the rising sun”, or Japan.







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  • FTSE playing footsie with its 1999 recordMarch 2015

    Break Up, break out or break down?

    It’s December 30th 1999, the FTSE 100 has just closed at a record high of 6,950.60. At the time the world was full of promise as it entered a new millennium only for everything to be turned on its head as we suffered the 2000 Dot-com crash. Today Greek contagion and UK deflation concerns have had the index treading water at the 930 – 940 mark with brief breakthroughs past 950. It seems we are just waiting for that final risk-on indicator to push the index to new highs. Economists, strategists and chartist await with bated breath, all ready to wax lyrical on what this means for not only the UK stock market but the UK economy should we break old highs and push further into new territory.

    Fundamentally one might be able to draw the conclusion that more than 15 years later, the FTSE 100 has only managed to reach its previous peak telling us we haven’t moved an inch up the valuation scale for 15 years. We reached this point in 1999 with the tech bubble and dropped sharply, we reached this point again in 2007 with the financial crisis and again dropped sharply. But with the FTSE briefly breaking the 6,950.00 high in February should we be asking ‘third time lucky’? 

    It’s certainly worth noting the disparity between the large cap FTSE 100 index, and the more mid cap- FTSE 250 and the FTSE All-Share when looking at returns. Despite the headline index not moving higher in 15 years we cannot discount the dividends that would have been held if we owned the underlying companies directly. If we account for these the index would actually be 66% higher. Of all the UK stock market indices the FTSE 100 is probably the least representative of the UK economy given global nature of the companies it holds such as Mexican mining company Fresnillo. Research data from Capital Group has shown at present 77% of company earnings from the 100 index are actually generated outside the UK. The FTSE 250, for example, an index of the next 250 largest company’s sees a far higher percentage of UK domestic business, the return here has over the past 15 years has grown at 302% with dividends re-invested. The relative depressed growth of FTSE 100 against its peers could be considered an indicator of the performance of the global economy, and we have all seen the challenges many countries still face. 

    In 2000 Irrational valuations during the “tech bubble”, a China led commodity boom (look where that’s ended up) and then in 2007 the debt fuelled spending spree the world went on all served to inflate the FTSE only for it to come crashing back down.

    This time around there are many factors working in our favour; On valuation grounds the index looks more attractive; Research by Hargreaves Lansdown shows that back in 1999 the index was trading at x27 times earnings, today it is much lower 16x; in 1999 interest rates were at 5.50%, today they are a historically low 0.5%. By definition the composition of the index changes over time; the current 18% exposure to energy and basic resource companies, for example, has acted as a drag on the index given the recent rout in oil and commodity prices. Negate the effects of these and the index would have powered through current levels. 

    In a post 2008 environment in a world of global economic stimulus and artificially stimulated growth European Indices, the German and French stock markets broke through their millennium peaks in 2007 and now trade 45% to 65% higher whilst the S&P 500 is trading up 2.27% over its 1999 close. 

    The debate here is can the FTSE this time around shrug off the macro headwinds and look to the global consumers increasing wage packets, low price inflation and tax reliefs from falling oil prices to push it through into unchartered territory at 7,000 and beyond. Many global investors are now using the FTSE play as a bet on the global market due to the index’s ever increasing international revenues. Ignoring the longevity of the present stock market rally (dating back to April 2009) we believe there is still more to be had from this equity run. 

    Investors appear to be stepping over our politician’s attempts to create another perplexing Westminster coalition and rolling up their sleeves and buying into companies in the belief that valuations might not be particularly cheap but they are not significantly overstretched and somewhat more attractive than saving at the local high street bank generating significantly more yield than sovereign bonds. This in turn could drive our index on to further highs. If only our Greek friends would stop rocking the Eurozone boat and making everyone sea sick we could watch this self-propelling cycle with a little more clarity. We remain long term optimists based on present fundamentals. 

    Our job at TAM is to evaluate both sides of any forecast. Whilst the FTSE is trading at an all-time high and we believe that over the medium term it has more ground to gain as economic indicators point to a broadly healthier global economy we must, however, consider at all the options. History dictates there is a pivot point here we must watch with care.

    Should our hopes of a global breakthrough not crystalize and indications of a possible 3rd retreat from the 1999 peak begin to take hold we are more than ready to structure our portfolios slightly more defensively via reducing a portion of our overseas investment risk and seek to protect our client’s positions in the down turn with an increased play into the FTSE index and possibly go underweight equities for the first time in a very long time. 

    In conclusion, election woes aside we believe there is ample opportunity for the FTSE 100 to move higher over the course of the year and as such we are keeping the faith. Whilst we see a short term dance played out around present levels at all-time highs we favour the FTSE 100 breaking up into new territory from here, notwithstanding some contingency planning.

    So watch this space as we are, we think, at crucial inflexion points!

     


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  • A Russian WinterFebruary 2015

    As a Russian winter bites a new cold war begins. With the crisis in Ukraine potentially tipping back into open warfare and the EU looking to escalate sanctions this is a short piece on the Russian economy and its population’s ability to withstand the current sanctions and austerity measures to live in Mr Putin’s newly coined “Mafia state”.  

    I think many would agree much of the current sentiment in Russia goes back post world war 2 to historic global events such as the collapse of the Berlin Wall, the Cuban missile crisis and Mr Gorbachev watching Americans dive into makeshift nuclear bunkers to the tune of a rattling ICBM shaped sabre. It would appear in today’s society the “us and them” sentiment is very much alive for many Russians and the present economic fracas going on between the Russian bear and the west finds its roots in this earlier era of political and military tension. 

    Recently Pro Putin intellectuals in Russia believe in the populations “ability to put up with economic hardship if they felt it helped Russia stand as a great power”. A Levada centre poll in the country had Putin’s overall approval rating within the population at 85%.

    The western nations have managed to link arms (some more enthusiastically than others) under a cohesive banner of economic sanctions whilst the Kremlin’s spin doctors have sought to open up old wounds by painting this as another story of western marginalisation to the point of economic warfare. Yesterday Ashton Carter the front runner for the new US defence secretary stated he was “inclined to support Kiev with heavy weapons”. All of this has served to radicalise Putin’s support base to rally behind the notion of economic austerity in return for Crimea and a rally to the cause.  

    Debatably a lot of this support for their Premier is a concoction of national pride mixed with fear and awe of the state. Putin’s most stand out rhetoric post Crimea was to frame NATO as the enemy intent on chipping away at Russia’s frontiers and shine a spotlight on political opposition with this quote -  

    “Information-related activity aimed at influencing the population, with the goal of undermining the historical, spiritual and patriotic traditions of defending the fatherland” 

    Bloomberg’s Leonid Bershidsky concludes - “Political opposition is now classified as an activity worthy of a military response” 

    Worryingly this could be seen to clear the way for Putin to implement, execute and sustain any and all economic or military strategies in defence of Russia. Mix this with an 80% support base consisting of Russians who are ready for belt tightening austerity measures and the cocktail you get is a heady mix. This unified population looking for the Russian Premier to call the shots, we should deem a “Red Russian”. 

    The Ukrainian premier recently stated in words echoing back to 1939 – 

    “No one should have any doubt that the ambitions and appetite of the aggressor exceed the boundaries of the Ukraine” 

    Economically Russia are certainly paying dearly to walk this line. This week we have seen Russia as an investable entity, downgraded to “junk” status, 417,000 foreigners opting to leave Russia. All a sobering thought for a super power (as Russians would still have us believe). Indeed combine a diverse array of sanctions from a unified west and introduce an unrelated and poorly timed crash in the global oil market and you can only have what can be described as the perfect storm for an oil exporting nation such as Russia.

    What have we seen happening to the Russian economy as a result? 

    Instigating measures to ban travel and the odd, small, asset freezing of personal assets snowballed causing the USD/Rub to collapse down to 1/67Rub from roughly 1/33Rub this time last year. The Kremlin raised overnight interest rates from 10% to 17% to stave off further capital outflows that amounted to $151billion in 2014. This aggressive fiscal tightening served to bolster the falling currency for not much more than a fleeting moment. Global investors noted that even with an economy busting 17% interest rates the Kremlin couldn’t stem the outflow deflating its own currency. The rating analysts at S&P who downgraded debt to “junk” status forecast a total contraction of -2.6% on Russian GDP in 2015 with analysts at the European Bank for Reconstruction and Development forecasting an even more bearish -4.8% decline over the same period if the oil situation did not stabilise and the present sanctions remained in place. 

    In an attempt to feed the insolvent Banking sector and state owned oil industry the Kremlin’s printing press has announced another $15Billion injection to bolster the countries gaunt balance sheet. These levels of continued bail outs can only go so far though (unless you are the ECB of course). The countries previously buoyant reserves dropped by $133 Billion last year leaving a balance of $379 Billion to see them through the present economic malaise. Analysts at S&P believe this level of economic decline could see Russian reserves totally spent by Q1 2017. What from there for the big bear?

    Stark figures paint a black picture for 2015 for the Russian economy. In the light of the recent downgrade, global markets pushed the rouble down further and elevated projected capital outflows in 2015 up to $100 billion.

    In the mind of a contrarian, and a brave one at that, this could be a buyers’ market? 

    I would say for this to be the case we would need to need to see a retraction of military involvement in the Ukraine and a more buoyant oil market, as a starting point. This would however serve to contradict my entire observation of the Russian psyche of not backing down. The hundreds of pro-Russian troops labelled “Moscow-backed terrorists” now operating Russian made high tech weapons systems in Ukraine seems far from settled.  With OPEC announcing no intention to taper output to protect the price of crude it could be argued that a contrarian buy strategy is folly. Whilst in the eyes of two of the major rating agencies Russian debt is still “investment grade” – but only just – it would on the face of it have as much attraction as investing in the Greek banking sector. As a cynic, what money on you might start to see a lot more Russian delegates in Greece over the coming months as Mr Tsipras could be Putin’s “aide de combat” in preventing further EU sanctions?

    If the Russian stance remains unchanged and the kremlin’s staunch political agenda intact, the clock could well be counting down on how long we can expect to see Russian population accepting the Crimea and the Ukraine as a viable swap for seemingly permanent austerity measures. 

    Conclusion - TAM holds no emerging market or Eastern European exposure but continues to invest in European growth post Mario’s announcement of a 1.1Trn fiscal package in the core Euro states. We continue to watch the situation in the Greek periphery and the headwind this might bring to a Eurozone recovery and the potential for a Greek/Russian build of relations.

    We have remained underweight energy funds totally in 2014 but have recently added to exposure at higher risk end of our Growth and Adventurous portfolios. 








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  • Q€January 2015

    • €1.1 trillion total.
    • €60 billion a month for 18 months.
    • 80% of potential losses to be borne by national banks.
    • 20% of potential losses to be borne by ECB.
    • Option to extend based on 2% inflation target.


    If size matters then Mario Draghi may just about have delivered. The €1.1 trillion quantitative easing programme announced on 22nd January is bigger than markets had hoped for given the opposition he faced from the German Bundesbank and a large number of the German and Dutch hawks on the Governing Council. But in absolute terms €1.1 trillion over 18 months is less than half what the Bank of England undertook with their own QE programme. Furthermore, it is unlikely to deliver as big a bang for their buck because it has come so late in the game when the eurozone has already fallen into deflation and facing the prospect of a triple-dip recession.

    The delay is unsurprising given the amount of open hostility faced from the wealthier northern eurozone nations. As we wrote in Q4, the collapse in eurozone inflation, combined with worsening employment and slowing economic growth is actually what Draghi needed in order to overcome Bundesbank opposition and give him the ammunition to finally pull the trigger. The timing appears to have worked. Even Angela Merkel avoided making direct criticism of the ECB in her speech at Davos saying “I think it is important we are not tempted to buy time and avoid doing structural change” which was more of a thinly veiled swipe at the heavily indebted Mediterranean states who stand to benefit most from a lower cost of borrowing that QE creates and, in the case of Greece, agitating for further concessions on repayment terms. 

    Other northern European politicians were rather more outspoken. The Dutch VVD party (predominantly Eurosceptic centre right coalition) said “Dutch taxpayers should not be made liable for the debts of the Italian state”. German newspapers also opened up overnight with varying levels of outrage that QE, and the risk sharing that comes with it, opens the way to eurobonds by the back door and, in doing so, let’s off the bailed out states off the hook for years of excess.

    We believe that the size of the QE is as much as Draghi thought he, and the Latin bloc that supported him in the Governing Council, could get away with. However, despite the decision having been brought about by a majority vote, there are some important caveats relating to who actually wears any potential losses. As a nod to German concerns, 80% of the asset purchases will sit with the national central banks themselves and only 20% with the ECB. This isn’t a very satisfactory outcome for instead of keeping both sides happy, it feels more like the worst of both world’s for the 80% on national bank books opens up the door to a fragmentation of responsibility within a currency union, whilst the 20% looks, to the eurozone creditor core, like the thin end of a very expensive and morally wrong wedge. 

    But stock and bond markets reacted positively to the €60 billion a month cash injection which will run for 18 months until September 2016. German equites are up around 4% since the announcement with the Euro weakening 1.5% against the US dollar and reaching the lowest level against Sterling for seven years at €1.33. The 10-year Spanish Government bond yield, which moves inversely to bond prices, hit a record low of 1.46%.

    The reaction is not just about the headline size of the QE programme. Crucially, Draghi has left the door open to extending the plan in September 2016 if inflation is not running at a pace consistent with the ECB’s 2% inflation target. This is an interesting notion given that much larger QE programmes in the USA, UK and Japan have not succeeded in getting any of their central banks inflation figures up to a similar level. 

    Of course, there are other deflationary factors at work but QE is not the great panacea for all the ills of the global economy. The transfer mechanism to translate newly printed money into stimulus that results in growth and inflation also requires a pick-up in corporate and household borrowing. And that means confidence. Confidence for companies and consumers to borrow and spend, and confidence of banks to lend to them in the first place. It is here that the TAM investment team will be looking for an indication that QE will ultimately work and not just in Europe, but in the other major developed economies where this remarkable financial experiment has taken place.

    In conclusion, we believe that there is a longer term benefit to investing in Europe which goes beyond the recent headlines and the announcement of QE. The transfer mechanism to stimulus is not always fully appreciated and we believe that current programme will ultimately displace funds out of low risk assets and into equities. We will retain our existing positions in Europe including those that we have recently added to on a hedged basis to protect against a falling Euro currency.



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  • Great ExpectationsJanuary 2015

    A review of 2014 and outlook for 2015

    “Spring is the time of year when it is summer in the sun and winter in the shade.” Charles Dickens, Great Expectations

    If you were a stock market strategist harbouring secret desires to be a writer of novels or soap opera storylines, you might have been tempted to write the entire chapter or script for 2014 in advance, for there were plenty of reasons to feel confident that the problems of the global economy in 2013 were at least well understood and, possibly, that markets would be more predictable in the year to come.  

    Indeed, the consensus view had great expectations that equities would enjoy a year in the sun whilst treasuries and gilts caught a chill.  This view was so strong as to make any deviation from the expected plot almost unthinkable.  With all the essential characters in their place, the year started with equities and bonds behaving more or less as expected.  Equities made a push to new highs while sovereign debt struggled as the market waited for the big bond sell off.

    However, in the spring, there was a twist in the plot which threw the two asset classes into a different relationship with bonds rising hand in hand with equities which, despite odd bouts of profit taking, repeatedly tried to recapture the highs.  This was driven, in part, by an expectation that the US and UK economies were steaming ahead but reinforced by the slightly unconventional thinking that any bad news would be met by further stimulus from central banks desperate to keep momentum going – i.e. more buying of bonds.  This happened despite the one thing that was definitely going to script; the winding up of the Federal Reserve’s bond buying program which many believed would be bad for bonds.

    If you were overweight equities, the year went rather well if you kept your nerve, avoided obviously bad investments and bought opportunistically on dips.  If you didn’t hold many treasuries or gilts, your relative performance took a hit but you might be, on balance, content that the absolute gains to be made from them were limited because yields were so low to begin with.  A bit like a man with his feet in the oven and his head in the freezer might be described as being, on average, happy. 

    That’s not to say that there weren’t plenty of things for markets to worry about and, as we said at the start of the year, there were likely to be periodic setbacks spooking markets as a result of any number of well flagged issues which are as familiar today as they were then, with a handful of new entrants.

    Naturally, this list remains relevant for 2015:

    • Strong US dollar. Bad for emerging markets.
    • Fear over eurozone disinflation/deflation.
    • Chinese property bubble.
    • Ukraine. Sanctions between US, EU and Russia.
    • Falling oil price.
    • Ebola
    • Brazil. Or rather economic slowdown in 3 of the 4 BRICs.
    • End of US Quantitative Easing.
    • Fear of rising interest rates in US and UK.
    • Middle East: Syria, Iraq, ISIS, Iran.
    • 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.
    • Expensive equity valuations.
    • Expensive bond valuations.
    Things worth being concerned about…
    After conducting an audit of this list of dreads, we concluded that the three main culprits worrying the markets in 2014 were the first three above highlighted in bold. Everything else on the list was given high profile coverage in the media but, whilst we don’t doubt their sincerity in wanting to deliver newsworthy stories, we concluded that this is where we saw the greatest threats to the positive outlook for equities that we held here at TAM. There is a fourth, a freshly invigorated character halfway down the list, in the form of the European Central Bank (ECB) who makes an unwelcome return every few months to unnerve skittish markets.

    The ECB and lack of action…
    Global markets have been waiting for in vain for the ECB to undertake some kind of stimulative QE all year although it’s a debate that’s been hanging in the air since before 2012.  The lack of action in implementing this under the direction of its president, Mario Draghi has been frustrating, but expectations have ratcheted up significantly as eurozone inflation numbers have fallen towards zero, much to the apparent bafflement of the ECB who steadfastly stuck with a 2% target despite all the evidence that it was time to act.

    Alas, as we all know, the ECB is not a central bank that enjoys a clear mandate over a fiscal and currency union.  And that means that one has to reach for the complicated flow diagram attempting to explain who actually bosses any one of the following: Europe/European, Union/European, Council/European, Commission/Eurozone. Hitherto, the will they/won’t they debate has revolved around whether the ECB could implement QE in the face of the objections of the German central bank, the Bundesbank.  This time, with the eurozone now in deflation it looks like this time is different.  Mario Draghi is all fired up to start up some kind of QE in the hope of kick starting inflation and economic growth. 

    Markets want full fat QE
    We think the ECB will overcome the objections of the German authorities and implement some kind of quantitative easing in the next two months, possibly as early as 22nd January.  We say “some kind” because global stock and bond markets will expect it to include the purchases of sovereign bonds. But this is by no means a certainty if the ECB is to be judged on past performance. After all, let’s not forget Mario Draghi’s famous statement that the ECB “would do whatever it takes” to defend the Euro. This was nothing more than lip service and it has effectively not cost the bank a single cent.
    However, bond yields have fallen further since Christmas, which naturally extends to UK Gilts and US Treasuries, reflecting the heavy expectation that now is the time. For the amount of money being bandied about as what will be necessary to move the needle on growth and inflation, the view is that it will have to be something north of a trillion Euros; an almost incomprehensible number outside the world of central banking. And the only asset class that that could possibly take that amount of money is well beyond the relatively illiquid corporate bonds currently being hovered up from the back books of European banks keen to bolster their balance sheets. Markets will be expecting the ECB to target buying of pan-eurozone Government bonds. Anything less may result in a short term sell off in sovereign debt and is something the TAM investment team will be watching daily.

    The big caveat…
    Euro QE may do wonders for the values of peripheral bonds yields (Greek 10-year bonds are yielding 14.0%, for example) but, with some short dated bond yields in Germany already in negative territory and their 30-year bond yield now less than 1.0%, and, furthermore, Spanish bonds yielding less than their USA counterparts, one has to ask if the prospect of ECB quantitative easing is already in the price of the core eurozone bonds.

    With a twist…
    Whilst the potential for corporate and household borrowing may, in theory, be boosted by lower rates, we do not expect this to offset the deflationary pressures of falling oil and food prices, particularly with the high levels of unemployment evident across the eurozone. Low inflation, we believe, is here to stay but the effect of a flood of cheap liquidity on asset prices, by which we mean the stock market, could be very positive for European equities.

    There are naysayers on this point but one must consider the way in which money flows. QE may not immediately benefit company profits and the consumer, but it could be very good for asset prices in a “risk on” market looking for a return greater than zero, which you get on cash.

    The paradox of low interest rates and low inflation
    The TAM investment team have for some time been considering an alternative view of the current relationship between interest rates and inflation.  The conventional wisdom is that a growing economy will eventually lead to inflation and that your central bank will stand ready to raise interest rates if inflation rises too quickly.
    But what if the Bank of England, for example, is actually causing low inflation by holding rates low? Consider a simplified scenario several years ago when interest on deposit was around 6.0% or 7.0%. You might, if you had some savings, consider treating yourself to a new car.  Now the dealership is all ready and waiting with a sticker price on the car out front which is a bit higher than last year. Why? Because they know your average car buyer has earned a bit of interest in the last 12 years and maybe feeling a little bit better off.
    This thinking resonates with what’s been happening in Japan since the 1990’s. A persistent absence of inflation over this time has kept prices virtually unchanged.  There now exists an entire generation who have never experienced rising prices.  Interestingly, this same generation have, broadly, never sought a pay rise from their employer. Consequently, union membership has fallen because the need for their collective bargaining capacity has been made redundant.

    Reasons to be cheerful…
    On a positive note, and reflecting the equity portfolio overweights that we have maintained throughout 2014 in UK and US equities, the economy and corporate earnings grew faster than many expected and unemployment fell. It would’ve been nice to see stronger wage growth but, when it didn’t come, it gave the Federal Reserve and the Bank of England the excuse to do what they were going to do anyway, which is nothing.
    Rates stayed low and so the prices of Gilts and Treasuries, which move inversely to interest rates, stayed strong throughout the year and went even higher into the final quarter as there emerged renewed concern over eurozone economic growth and deflation worries, compounded by the collapse in oil prices, which ultimately suppresses prices further.
    We bought Japanese equities early in 2014 which performed well despite a weakening Yen limiting the gains for Sterling and Dollar based investors.  However, this is a familiar scenario as foreign investors typically buy the well known exporters that may benefit from a weaker Yen, such as Toyota, Canon and Sony. However, we believe that we are now best positioned to benefit from the reflationary policies being implemented and are invested more towards financials and real estate, for example, which should benefit in an improving domestic economy.
    Throughout the year, we have maintained a good mix of investments in large multinational companies in addition to well researched small and mid-sized companies.  As interest rates stayed low, we also stayed invested in income generating funds that we have held since 2008 for their superior yield.

    Steady performance despite a volatile 2014
    As we reflect on our outlook for 2014 and what we thought would happen last year, the TAM investment team made the right calls on all the asset classes either wholly or in part. UK Equities took their lead from the economic fortunes of the USA which led global stock markets despite an initial fear that all the good news was already baked into valuations.

    Considering the UK stock market for example, starting from a December 2013 FTSE 100 Index level of 6,749.09, and factoring in 7.0% earnings growth and about 2.3% of dividends, it was conceivable that our expectation would come good that the FTSE would break up decisively above 7,000.  For a majority of companies within the index, this is pretty much what happened unless you were a mining or oil exploration company, two sectors that make up a quarter of the FTSE All Share index and dragged the FTSE average down.

    Happily, not only were TAM equity portfolios overweight the US, where these sectors make up proportionately less of their stock market, the UK equity investments in TAM portfolios were very underweight mining and oil which were naturally exposed to the economic slowdown in China initially, but also to the remarkable collapse in the price of oil where the price of Brent crude halved and has now dipped below $50 per barrel. Avoiding these sectors made the difference between following the FTSE to a 2.7% loss and making a +4.0% to 5.0% achieved by the TAM equity portfolios.

    TAM clients are not exposed directly to the weakening of the Russian Rouble. Our emerging market investments have long excluded Russia from the “BRIC” (Brazil, Russia, India, China) investment area.  Without the rule of law, valuations are meaningless, and whilst Vladimir Putin may attempt to turn the currency collapse to his advantage, Russia remains uninvestible, in our opinion.
    With Russia already out of the BRIC trade, we have a very cautious view of emerging markets.  Whilst the bull case focuses in improving corporate governance and the ability of managements to self finance along western-style agreements, we are concerned that any progress could be offset by the strengthening of the US dollar in which a lot of emerging market debt is issued thus raising the difficulty of emerging market companies to fund interest payments.

    We continue to be underweight sovereign debt in the US and UK
    We remain underweight Gilts and Treasuries because regardless of whether the UK or US raise rates first, we believe they will go up.   Unemployment continues to fall and whilst we accept that wage growth could be better, both central banks know that running interest rates at close to zero is not consistent with economies growing at between 3.0% and 3.5%. We are conscious that UK bond yields are also inextricably linked to their eurozone cousins, such as German bonds, but with these yields practically zero or even negative, we cannot justify a bullish outlook for Gilts unless the economic outlook turns particularly dire, which we do not envisage.
    As 2015 is a UK election year, it’s tempting to wade into the political debate and the ramifications of a resurgent SNP, an unstoppable UKIP and the possibility of a grand coalition government post the election.  But, broadly speaking, the TAM investment team are more interested in the actions of central banks.  With the ECB about to start QE (in our opinion), the Bank of Japan implementing an almost unbelievable amount of QE, the Bank of England knee deep in QE and the Federal reserve winding up QE, we may as well talk about them collectively rather than apart.
    Let us be clear, QE is not the great panacea for the ills of any economy and without a combined contribution from Government policy combined with genuine reform, no central bank can fix everything on its own because high level printing of free money is a world away from the pocket of the consumer who represents ultimate demand.
    However, the money that it provides must ultimately end up being invested in asset classes that are liquid enough to absorb it.  At the highest level, this mean bonds, equities and, to a lesser extent, property.

    Overweight property in bricks and mortar…
    We have added property to client portfolios generally and to “bricks and mortar” investments in particular.  These are investments in physical property assets and the revenues that they generate. Whilst we are fully aware of the sky high prices commanded by London and, to a meaningful extent, the South East of England, we believe there are a great many opportunities in the secondary non-prime market in the rest of the UK.  Our investments will also stretch to certain properties in Europe on a highly selective basis, conscious of the problems facing the eurozone as a whole.

    Staying overweight equities in 2015
    We have, over the last few years, noticed that market sentiment and commentary appears to have adopted a calendar year mentality. It’s an interesting perspective and not without merit for there is a certain seasonality to geopolitics which commands greater attention from stock and bond markets that inevitably take their guidance from policy by governments and central banks.

    Furthermore, with investors fixated on signs of genuine economic growth, bullish expectations are heavily reliant on third quarter company earnings results in October for they throw light on economic activity through the summer months but give guidance as to the state of the consumer in the all-important run up to Christmas and the retailing bonanza.

    This year may have a slightly different feel because of the collapse in oil prices.  Shares in the oil majors have obviously suffered as a result but, broadly speaking, the 20% fall in the value of the sector does not fully factor in a halving of the price of oil itself.  Taking both this and analyst forecasts into account, it appears that oil prices are expected to stabilise and even rise before the end of the year. It is early days but we note that one or two developments in the sector such as the bankruptcy of the first of the high cost producers in Canadian shale gas.

    Nearly all TAM clients have exposure to some equities whatever their level of risk.  We have maintained a positive view on equities for a few years now and have don’t anticipate changing tack now. The equity investments themselves have broadly outperformed their benchmarks. Where they have matched the broader equity market, they have done so with less risk and avoided the worst sell offs that have hit stock markets in the face of any number of geopolitical shocks.

    We believe that the time of reckoning is upon the eurozone but anticipated action by the ECB may well be positive after months of speculation and fear of the worst.  In addition to retaining a positive outlook for UK and US equities, we will also stay poised to buy into sharp market sell-offs if we believe the opportunities outweigh the risks.




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