I’m writing this sitting in an enormous mall in Dubai (again!) and thinking about what I am going to talk about at the upcoming Master Investor Show – one where the omens are good for a record turnout. This particular shopping mall has a ski slope, and it reminds me of the snow that characterized last year’s show. Praying for no repetition!
On the surface, there hasn’t been much movement in major markets in the past year (with the exception of China, which has been motoring), but there has been furious paddling under the unusually calm waters.
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In the US, corporate buybacks have more or less single-handedly maintained some vague momentum for equities – though overall, American markets are barely up. A slowing of the rate of quantitative easing by a Fed rattled by emerging signs of economic softness has also contributed to modest buoyancy, as has the fact that valuations have become more moderate simply as a result of earnings growth.
In Europe, a panicking central bank in Frankfurt has read the ominous runes of recession in countries such as Italy, France and even Germany, and hit the switches on the printing presses once again. This has led to a good bounce in European equity markets in recent months, one which has probably run its course given anaemic earnings and the still considerable problems of the eurozone. It has also reemphasized the Japanification of the eurozone; endless amounts of “free” money have imperilled the banking system and rendered growth sporadic and fragile.
The announcement this past weekend that Deutsche Bank is likely to merge with Commerzbank is an indication of just that. These two banks, once behemoths, are also-ran and really kaput, and their combination results in nothing more than a higher risk concentration for the German government when it has to bail them out. This is a bit like hooking two broken locomotives together and hoping for miraculous traction.
Europe’s banks overall (excluding the UK) are still broken – indices of their combined share prices are down by more than 90 per cent in twenty years – and will likely need further recapitalisation.
Weathering the blitzkrieg
In the meantime, the UK economy has weathered a blitzkrieg of hostile verbiage – commentary which has attempted to talk it into self-prophesizing doom – and has weathered it well. It has also borne up against a Brexit negotiation of apparently enormous incompetence, and yet here we are, with modest growth, improved public finances and a City still sitting on its golden perch. And the pound – highly tipped by me in recent months – has risen to a two year high against the euro in recent weeks and looks poised for further gains.
I do think that UK shares look attractive at the moment and I will highlight some of them in my talk at Master Investor. The country is “cheap” and that’s why new money, in particular from Asia, is beginning to flood in. The UK is still by far the biggest recipient of Foreign Direct Investment (FDI) in Europe, and I bet it will remain so for the next decade at least.
Whatever happens with Brexit, an imaginative government (chance should be a fine thing!) should now be flattening taxes and instituting a bonfire of the regulations that cause the sludge that so many private businesses have to go through before they can generate the wealth the nation so urgently needs.
Time for rotation
Because the Fed, under newish Chairman Powell, has moved to a dovish stance, or at least a milder one, emerging markets have latterly been doing quite well. And deservedly so, as they were very cheap and in much better financial shape than they were in the last crisis.
But they have moved up sharply, and that is why I think that it’s time for rotation. I have been a bull of China, and while it’s done very well recently, now may be the time to take profits, and to rotate into India, where Mr. Modi looks set to retain power. The economic giant that lies somewhere in the heart of the country will surely emerge to astound us. I will have some Indian recommendations at the Master show on April 6th for investors to consider.
In my talk, I will be dissecting some of the main themes that preoccupy our portfolio team, in terms of opportunity for both gain and loss. As the world moves faster, so does the cycle of creative destruction, and it will be my pleasure (in the case of Facebook) to describe how such tectonic plates will alter the investment landscape in coming years.
Although central banks are keeping things afloat through a persistent and aggressive use of monetary tools, the economic outlook for the world remains murky. This doesn’t mean that a recession is imminent – it probably isn’t, with the exception of the eurozone. It just means that the sea of liquidity that has been conjured up to avoid economic collapse has also led to the ruinous misallocation of capital almost everywhere.
An exciting – but dangerous – time to be alive
Zombie companies have been preserved in financial aspic; banks labour under the misery of negative interest rates and still high non-performing loans; and populists, of the left in particular, trumpet a rising inequality (not verifiable by the facts). This is why died-in-the-wool Marxists in Britain’s Labour party were thought just a little while back to be a possible government in waiting. That won’t happen, in my opinion, but the fact it was even considered possibly says a lot about the easy money age we live in.
The fact of the matter is that real wages are rising, economies are generally OK (major exceptions being China, which is still a worry, the eurozone, and of course the wrecked outliers like Venezuela) and stocks are better value than they were, particularly against bonds.
In order of preference, I would buy gold and silver and all associated stuff with precious metals; then Japan (still got 25,000 as a target on the Nikkei, and the yen is way undervalued); then UK stocks on a selective basis; then India. I would short darling stocks which are clearly overvalued (more on that at the show) and most bonds.
There are meta themes that are important for investors to understand and I will try to elucidate on three or four in my talk. This is an exciting time to be alive, but it’s also a dangerous one, and the reconciliation of the twin needs of thinking ahead and of generating enough of a return to live comfortably in the meantime, before the golden harvest of long-term thinking is reaped, will be the goal of my advice.
See you at the Master Investor Show!
Jim Mellon
Happy Hunting
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