In March of this year we met with a whole host of UK fund managers and the one presentation that stood out was William Littlewoods’s of Artemis. This is because of his very aggressive call on shorting the OZ dollar , based on his premise that the Australian housing market markets was an accident waiting to happen and that if China were to sneeze , Australia could very easily catch the flu. Up until very recently he would have taken a lot of pain on that call, for the Ozzie dollar continued to rally all the way till 1.09 to the US dollar. However, lately he might be starting to feel a little more relaxed, as the currency has weakened quite a bit in the last few weeks. In fact Gavekal argue in a recent research note that there is more pain to come and the currency is very vulnerable. They argue that the private sector ( ex mining and finance ) has been struggling of late and that if you strip these two out of the numbers, the economy is a lot weaker than many would realise .This is best evidenced by retail sales which have turned negative in 2011 and house prices which are now flat year on year.
The Central bank has also been very aggressive on rates ( another reason for the strength of the currency) , but if the central bank were to raise rates by another 50 bps , QBE ( a large mortgage insurer) reckons that one in five homeowners would not be able to repay their debt. So it hard to see the central bank rising again, with house prices under pressure and debt servicing levels higher than that of the Americans during the sub-prime era. If currencies chase ever rising yields, this argument is less in favour of Australia than it used to be Bottom line: For those who have been long Ozzie dollars for the last year, banking the 25% gains against the dollar might be a prudent investment.
( Source : Gavekal)
Gold – a friend of tyrants?
The FT is our must read in financial markets and yet again this morning they have come up with some fascinating insights. The article that caught my eye this morning was on the role of gold in assisting tyrants.
As many of readers will know, Muammer Gaddafi’s liquid assets are being frozen throughout the world, as no financial institutions (or least none of any reputational repute) want to be seen to be dealing in assets that belong to his regime
But the one thing that the international community can’t easily control or freeze access to and that is gold and apparently Gaddafi is sitting on pots of it; in fact it is reported to be about as much 143.8 tonnes of gold, according to the latest data from the International Monetary Fund.
Those reserves, among the top 25 in the world, are worth more than $6.5bn at current prices, which should be enough to support a small army of mercenaries for months or even years. Unlike other central banks which hold their gold in vaults in London, New York or Switzerland, Libya’s bullion is believed to be is in the country, according to people familiar with the country’s activities in the gold market.
To raise large amounts of money, Col Gaddafi would have to transport the bullion out of Libya .Prior to the outbreak of violence the gold was sitting at the central bank in Tripoli, but who knows where it is now. It could easily be moved and be smuggled into Chad or Niger and then swapped for cash, food and guns.
We live in a world today in which is it getting increasingly difficult for criminal to hide their assets, which means that gold could be the ultimate “store of value” for despotic leaders. It will probably not come as a surprise to see that Iran has been steadily increasing its gold in recent years. Who knows who else is stockpiling gold?
One has to wonder how much gold Mugabe is sitting on.
By now most of our readers will have read about the horrific events unfolding in Japan and I thought it might be helpful to share some of the insights we have managed to glean on the Japanese investment landscape. I do hope none of our readers see this as us being insensitive at a time of such great hardship for the Japanese people.
The best comparison for Japan is the Kobe earthquake of 1995, which measured 7.2on the Richter scale and effected 6% of GDP and 14.5 million people. The recent earthquake of Miyagi and Fukushima is equivalent to about 3.5% of GDP and has affected about 4.5 million people, so clearly is has affected a lot smaller area, despite it being a larger earthquake. These prefectures that have been affected now are known for the production of automotive, precision machinery, electronics and IT. Estimates for the economic damage caused by the Kobe earthquake vary widely (in part because there was a terrorist attack on the Japanese subway in March 1995, which makes it hard to isolate the pure effect of the earthquake) but, if there were a similar impact on these two prefectures, then the total effect on the overall economy could be in the region of 0.3% to 1.3% of GDP. (Source: JP Morgan)
The Nikkei and the Topix both closed down by over 5% this morning, as investors sold indiscriminately. Also looking back to the past, it is interesting to note that the Nikkei lost 8% after the Kobe earthquake; recovered 5% in the days that followed and only ended up being 3% lower 15 days post the earthquake. Furthermore in 1995 shares were trading on a forward PE multiple of 53 in contrast to a forward PE of 14 today, hence for the time being, we are struggling to be too bearish on Japan. History has shown that buying when others are fearful has often proved to be a very good buying opportunity
As I write this blog this afternoon, oil prices continue higher, as the market becomes convinced that problems in Libya are not going to blow over in a hurry. Given this as a backdrop, I thought our readers might find Morgan Stanley’s comment on oil and what level it becomes a tipping point for markets most interesting
“In 2008, oil passing $125 acted as a choking point for equities. MS says the threshold could be higher in this cycle and points out the oil price spike in 2008 acted as a drag on equities only once oil rose above $120. As oil crossed the $100 mark in February 2008, non-financial equities continued to rise in tandem with the oil price, up until the middle of May when the correlation reversed.
The European non-financials index peaked on the 19th May, at which point oil was at $123. Oil rose a further 18% through to mid-July, during which non-financial equities fell 17%. Arguably, the point at which higher oil prices act as a significant drag on equity prices could be higher than in 2008.”
No doubt this time is different and a lot depends how long oil stays high for, but at some point markets are going to get pretty scared by what they are seeing. According to our sources , each $10 increase in the oil prices reduced OECD growth by 0.1% – 0.5% ( depending on who you read ) , so with growth still fuelled ( excuse the pun) by quantitative easing and fiscal spending, higher oil prices are certainly not good news for growth. Couple this with the ECB that seems hell bent on raising interest rates and one gets a horrible déjà vu feeling to 2008.
If Bill Gross of Pimco argues that bonds are expensive, who are we to disagree? In his latest missive which I highly recommend anyone reads (http://www.pimco.com/Pages/Two-Bits-Four-Bits-Six-Bits-a-Dollar) he makes the following points about the bond market in the US “(1) 10-year Treasury yields, whilst volatile, typically mimic nominal GDP growth and by that standard are 150 basis points too low, (2) real 5-year Treasury interest rates over a century’s time have averaged 1½% and now rest at a negative 0.15%! (3) Fed funds policy rates for the past 40 years have averaged 75 basis points less than nominal GDP and now rest at 475 basis points under that historical waterline”. He goes on to argue that bond yields and stock prices are resting on an artificial foundation of QE II credit and that he’s worried that when 30 June arrives and QE2 comes to an end, markets are going to be ugly and he doesn’t want to be around.
Maybe Bernanke read Pimco’s latest commentary because in a recent speech he said he will keep the Fed on course to complete the purchase of $600 billion of Treasuries through June to spur economic growth and hiring. The central bank chief also didn’t rule out expanding the so-called quantitative easing program, saying he doesn’t want to see the U.S. relapse into a recession.
Given this as a backdrop, is it any wonder the dollar is currently so weak? The weakness of the dollar is discussed in today’s FT and they make the interesting point that historically the dollar has been weak during times of rising oil prices, given that it creates excess petrodollars in circulation. In fact this was the case in 2008 as well and it was only actually when oil prices started dropping mid 2008 that the dollar began its rebound. So maybe it has nothing to do with the Fed and all to do with oil. Either way, it is brave person who would bet against the dollar, given that at current levels on a trade weighted basis, the dollar is cheap and is due a bounce.
It’s early March and today marks a special occasion, as we officially begin the MitonOptimal Blog, in which we hope to enlighten and hopefully entertain you, on our views and thoughts on financial markets. This Blog will be written on ad hoc basis by the MitonOptimal Fund management team, namely Joanne Baynham, Scott Campbell and Roeloff Horne.
Kicking off, we would like to share our thoughts on the political issues surrounding the Middle East and whilst the dust appears to be settling (and risk markets are rallying once more), we still think considerable risks remain. This is not because of Libya, as we think it is only a matter of time before Gaddafi gets the boot (proverbially speaking that is), but conflict in Bahrain worries us. This is not a country that is starving; GDP per capita in 2008 was $28245 (source: World Bank), but what they are fighting for is democracy, the right to govern themselves, without a minority government being in control. The parallels with Saudi Arabia are quite disturbing, especially when one discovers that they too have no democracy and unemployment is comparable to Libya’s and Egypt. According to the FT this week, there is less opportunity, less social as well as political freedom, but (and here is the rub), as great an awareness of global and regional change courtesy of satellite television and the internet. More than a million Saudis have been educated abroad, often to a high level.
Given this as backdrop, the latest $36 billion in gifts given by King Abdullah of Saudi Arabia to the Saudi people (via 15% salary increases and debt write offs), looks likes a desperate bid to calm his subjects. Note too that a similar “bribe” was made in Bahrain and the people still made to the streets. Bottom line: the odds are favourable for higher oil prices.
BREAKING NEWS!
The good news is that in the month of January 2011, all of our funds have performed particularly well. This shows signs of a positive trend and a bullish market. All of our funds saw growth over 7% for this time of year. Although we are only midway through February, the signs are that we could well be in for a bumper first quarter this year.
