No pain, no gain!

no pain no gain
Yes it’s that time of the year again where many of us change our diet, join a gym or take up running to get fitter. As many personal trainers and sports coaches say ‘there is no gain without pain’. Which got us thinking. Global investors, in their quest to achieve long term gain have experienced quite a lot of pain so far in 2016. However, investing in equities is a marathon, not a sprint.

Besides exercise, changing your diet and eating more healthily by avoiding fatty or high sugar content food, may not guarantee a longer life but may help prolong it. Likewise with investments, for avoiding the ‘known flight risk’ and ‘basket cases’ can help protect value, something index tracking funds are unable to do.

We constantly check the health of our companies to ensure that we remain invested in businesses that can grow value for shareholders over the long term. We particularly like companies that have the potential to make themselves fitter, by ‘shedding a few pounds’. This could be from the way they source raw materials, to energy savings or by investing in more efficient production facilities. When times are more challenging ‘every little helps’.

What have we been watching?

‘Stock market crash, £50bn wiped off share values, the Chief Executive of BP speaking to us from Davos warns of difficult times ahead’. Yes, market conditions are challenging but isn’t it funny that no one reported £50bn added to stock market on the subsequent rally? Furthermore, if you ran a company whose main product had fallen in value by 75% from its peak would it not feel like the end of the world?

Equity markets across the world have fallen significantly with UK, French and Japanese stocks down more than 20% from their 2015 highs, the common definition of a bear market. In the USA, the S&P 500 has fallen by 10% so far this year. However as we have said before what you don’t hold is just as important as what you do hold. For example, the UK quoted miners have fallen in value by 60% from their 2015 high and by 18% so far in 2016. At one stage in 2014 they made up almost 8% of the FTSE 100 index, today that is under 4%. For any UK index tracking fund, or portfolio with lots of mining investments that has to hurt.

China Flag
Official Chinese Q4 GDP data provided a brief respite before worries resurfaced about a further depreciation of the Chinese currency which prompted weakness in other global markets. The IMF, added to the misery by lowering its forecast for global economic growth for 2016 to 3.4% and for 2017 to 3.6%.

China’s economy grew by 6.9% in 2015, broadly in line with the official target of ‘about 7%’. While the slowest rate of growth for 25 years, Chinese premier Li Keqiang said that weaker growth would be acceptable as long as enough jobs were created. Forecasts are currently around 6.5% growth for 2016 although many analysts believe the underlying growth rate is much lower based on weak electricity consumption and rail freight data.

Just when it was beginning to feel like the end of the world, one of the central bankers came to the rescue of global markets. A bit like a western movie where the wagon train is surrounded by Indians, like the US cavalry, ECB president Mario Draghi came charging to the rescue just in the nick of time. He signalled that the ECB was prepared to launch a fresh round of monetary stimulus at its next meeting in six weeks. This helped global markets rally off recent lows and the FTSE All Share Index which had fallen over 4% at the start of last week clawed this back.

British Flag
In the UK, unemployment fell to its lowest level in more than a decade in November. However, wage growth slowed marginally to 2%, its lowest level since February 2015.

CPI inflation ticked up to +0.2% in December with core inflation up +1 .4% mainly due to a significant rise in airfares. BoE governor Mark Carney announced ‘now is not the time to raise interest rates’. Many analysts are expecting no change in UK interest rates until the latter half of 2016 or even into 2017. Sterling dropped to a seven year low against the US Dollar and continued to weaken against the Euro as the BREXIT issue focused minds before gaining after the ECB comments.


The eyes of the world remain firmly fixed on China, including those of central bankers who, may not be in such a hurry after all to return to normalised monetary policy. At the moment, markets seem to have focused on the falling oil price and pain for oil producers. Has some of the recent selling pressure come from the sovereign wealth funds of oil producing nations forced to raise cash to cover fiscal deficits at home?

The other issue is the amount of US Dollar denominated debt held by emerging economies and China. With the US interest rate cycle having turned and the resulting US Dollar strength will Chinese companies seek to replace more expensive US borrowing by renminbi debt? This would result in further capital flight and continued depreciation in the Chinese currency. Elsewhere, the supportive noises from the ECB are encouraging but cannot hide the problem in Europe from the mass influx of migrants that has weakened the political position of Angela Merkel, the pivotal figure in EU governance.

Against this, those countries and households who are major consumers of oil (USA, Europe, Japan and China) should be materially better off. Within the USA, the manufacturing sector does face headwinds due to the stronger US Dollar, the shale oil industry is having a very tough time and there is concern about the US economy’s ability to withstand interest rate rises but the economy is not heading for recession.

Many of the danger signs that typically point to an impending recession are not present. However, we continue to watch the global bond market, and particularly the high yield bond sector which is vulnerable to default which could hit parts of the global banking system. The global bond market is big enough to knock the world back a step if debt defaults were to rise materially and investors were to redeem fixed interest holdings. The other concern for us would be the danger that a fall in share prices led to a decline in confidence amongst companies and their management teams which, in turn led to a slowdown in investment. This has happened in the oil and mining sectors given the massive fall in commodity prices but we don’t detect any changes in investment plans elsewhere or by our management teams at this early stage.

The key question is what is last week’s global equity market volatility telling us? Is it reflecting a significant slowdown in the global economy? Is it a consequence of an adjustment to the change in capital flows following the US interest rate rise? Or, is it a healthy correction in the valuation of risk assets? The signal from the BoE that now is not the time to raise interest rates and from the ECB that it is prepared to undertake more QE and subsequent market reaction tells us that global investors are addicted ultra- low interest rates and the QE drug.

In the meantime, despite all the uncertainty, we do know one thing for sure and that is that low oil prices should be good news for many oil consuming regions of the global economy.

Finally, the trailer for the new ‘Dad’s Army’ film has been released which we thought is timely. As Corporal Jones says ‘Don’t panic! Don’t panic!’

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This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

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