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In the 12 months to the end of July 2008, the European High-Yield Index (EHYI) has clearly felt the pain of the credit crunch, with a total (sterling) return of -5.4%. | |  |
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Global equity markets have weakened markedly since the beginning of 2008, with the spectre of rising global inflation unsettling investors already struggling to digest the implications of the continuing crisis in credit markets and a slowing global economy. In this article, we consider the near-term prospects for equities and the longer-term rationale for stock market investment. We conclude that the case for long-term investment in well-chosen equities is strong.
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Whilst we have all become preoccupied by the “will they/won’t they” fine reading of central bankers’ words, we appear to have missed the point. It really doesn’t matter if the US Federal Reserve inserts another syllable into their monthly meeting statement, or if Monsieur Trichet at the ECB says the word “inflation” in his latest utterance slightly louder than the last one, or for that matter whether our own central bank governor Mervyn King fails to wear his spectacles in his latest speech.
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It's funny how we seem to be obsessed with history these days. Although there is a tendency to believe that 'this time will be different', we constantly look at occasions in the past to see if there are similarities with today’s markets.
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So we are progressing nicely now - Goldman Sachs has told us that we should expect a "Super Spike" in the oil price to $200/barrel. This comes on top of warnings from Russia that we should expect oil to hit $250/barrel. What was a parabolic trend for the oil price has gone exponential and now into hyperbole. | | |
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Newton’s investment approach is founded upon the use of themes which represent our ideas about the likely forces of change in the world. Our global, thematic philosophy and process allow us to gain long-term perspective on global financial markets and economies, to anticipate how the world will change and to identify the beneficiaries of such change. | | |
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The oil price has continued to rise strongly during the first half of 2008. In this article we explain what is driving the price of oil higher and we consider the role of market speculators and the implications of a higher oil price for the global economy. | | |
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One of the great intellectual failures of the late
twentieth century was monetarism. This was the
idea that, if you merely controlled the amount of
money in an economy, you could control inflation;
similarly, high inflation followed high rates of
money supply growth. | | |
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With rising energy and food prices continuing to
concern consumers and central bankers, the
spectre of inflation is threatening the bond
markets. There seems no respite from these
inflationary forces. Ordinarily this would appear to
be a very bad environment for government bonds,
but there are some key reasons why the traditional
response could be different this time. | | |
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Newton's global oil and gas analyst Charles Whall has just returned from a visit to the Middle East. His visit convinced him that, while the world's eyes are fixed on the implications of China's burgeoning demand for energy, it is growing energy shortages in the Middle East which, incredibly, are more significant for global energy prices. | | |
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Although financial asset inflation has been making headlines recently, for emerging market ("EM") nations it is the rate of food inflation that provides the greatest cause for concern.
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It would be easy to talk ourselves into recession
and the most extreme of scenarios, and if the
papers are to be believed then we are heading for
the kind of austerity that we have not known since
the dark days just after the Second World War.
Would you believe that the new ‘‘must have’’
product is now a sewing machine so that people
can make their own clothes!
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With Libor rates still elevated and banks still writing off investments, are we in a 'what comes first the chicken or the egg' type situation? Libor won't come down until the banks trust each other, they won?t do that while the economy is slowing rapidly as they worry that the slower economy means they will have to write off more assets, and the economy will not respond to lower official rates if they can?t be passed on to companies and to the consumer.
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Today's announcement that the Bank of England is to create a £50bn facility to swap bonds on the books of UK banks for money market treasury bills looks like the financial equivalent of Mervyn King walking the streets of the City of London with a cart shouting 'bring out your dead'.
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As the de-leveraging story unfolds, the market is throwing up some significant opportunities for the patient investor. The credit markets have been dominated by a relatively new type of investor who bought anything with a rating and then stuffed it into structures that could be levered and sold on.
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We were going to write a piece entitled "Why are we here?", reflecting on how credit got into such a mess, and on the raison d'etre of the monolines and rating agencies, so we turned to sometime existentialist, and sometime goalkeeper, Albert Camus for inspiration.
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There is no doubting that there is a serious problem in the credit markets which could have very real and very long-term effects on the financial system. You only have to look at how corporate bond spreads are behaving to see the truth of this.
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These are uncertain times for the credit markets. Banks in particular have seen their shares stabilise but their costs of borrowing in the bond market rise. Are credit markets turning into the new Weapons of Mass Destruction?
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I had the strange experience of taking part in a well-known cooking competition recently (it's a hobby of mine) and one of the judges presiding over my "invention" managed to spit out both the food and the words "it’s just unpleasant" after tasting it. Never a truer word has been spoken. | | |
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In 2007, it has been as important as ever to
retain perspective in seeking to meet clients’
investment objectives. Heightened volatility in
financial markets has been unsettling, but
I believe that Newton’s long-term investment philosophy and
fundamental, research-based process have proved once more
to have been key elements in overcoming the short-term
uncertainties which afflict financial markets and challenge
investors. | | |
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Oil prices have continued to rise markedly during 2007. Newton's oil analysts, Charles Whall and Giles Parkinson, recently carried out a review of demand and supply in the oil market. They concluded, in keeping with Newton's energy supply theme, that supply would remain tight, with only a "demand event" (such as a US recession) likely to provide any brief respite from a high oil price. | | |
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The US is in real trouble. No, I mean real trouble. There is turmoil and panic. It’s just that nobody has noticed it yet. What I’m talking about is the ability for the US to continue to keep the attention of the world and fund itself. “But we know this!” you say. | | |
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This is a picture of Dubai last week taken from my hotel room on the 31st floor. That long streak pointing up like a finger into the sky is the Burj building. The two wisps extending from the top are cranes. | | |
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Back in March we wrote a piece highlighting the similarities with the ‘Savings and Loans’ (S&L) crisis, which was then updated in August. The basic message was that a fall in US house prices would cause a protracted reduction in US economic growth momentum. | | |
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I have lost count of the number of times that colleagues at various investment management companies have attempted to build their careers on the destruction or collapse of the US economy. Each time they have been thwarted by America’s ability to reinvent itself and move on. This is where Europeans in particular, get the US wrong. | | |
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Many emerging market (EM) countries are facing a new dilemma. The policy change by the US Federal Reserve has come at an inappropriate time for them.
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The current outlook for credit markets seems to hang on one central decision: is the recent financial crisis going to significantly add to the negative effects of the US housing slowdown and de-rail the global economy?
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On the basis that “Talent borrows; geniuses steal”1, I am going to declare myself a genius. We had Andy Lees from UBS round here last week talking about demographics and its effects going forward. | | |
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The past month or so has been a veritable roller coaster ride for investors. Continuing problems surrounding the defaults in the US sub-prime mortgage market have become more widespread than many commentators first expected.
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After the outbreak of the subprime crisis and all the contagion and concern that has gone with it, financial markets' focus has moved to the next key point: will the financial crisis lead to an economic crisis? | | |
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Recent months have seen many European markets achieve new multi-year or all time highs. Corporate earnings have comfortably exceeded the levels achieved in 2000/2001, so valuations have remained quite reasonable.
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Back in March we wrote a piece highlighting the similarities with the savings and loans crisis of the late 80s and early 90s. Since March, the gradual unwinding of the financial engineering has continued, and now it looks like it is about to affect the broader economy.
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The Indian economist and philosopher Amartya Kumar Sen, in his analysis of the rice famine in Bengal in 1943, concluded that the catastrophic food shortage was not because of a literal absence of rice, but was down to the human propensity to hoard in the face of a perceived future shortage.
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If you have it in your heart, spare a thought for the poor old Japanese carry trader; that nervous and exotic creature who for a long time has been borrowing Japanese yen, investing it in any old thing, and then making lots of money out of it.
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