Market Update

This week Blacktower brings to you the latest market update from David Miller, Executive Director of Quilter Cheviot and Fund Manager of Nexus Global Solutions Portfolio. David is a highly acclaimed Fund Manager in London who we work closely with when it comes to running the wealth of our clients.

It was a good week for equities, with the Nasdaq Index now higher than at the peak of the technology bubble in March 2000. Bond markets weakened a bit on profit taking and the yield offered by 10-year German government stock doubled, but only from 0.08% to 0.16%, so not as dramatic as it sounds.

In general, sterling assets attracted buyers, disappointing those in search of a pre-election disaster story. US corporate earnings are showing the adverse effect of the strong dollar and in China the authorities are using monetary policy in an attempt to prop up growth. Greece continues to teeter on the brink with news that state bodies are now legally obliged to transfer all assets to the Bank of Greece. Greek yields swung around in a range above 20% compared to 5% a year ago. So far so normal in the modern world …

More news that consumers behave in a prudent way

US retail sales have now fallen three months in a row and, on this side of the Atlantic, there is confirmation from my favourite serial entrepreneur that the leisure sector is picking up the benefit of the lower petrol price windfall.

General retailers in contrast can’t get away from ‘everyday low prices’ on the internet. An interesting insight from the same source went some way to explaining why companies are being slow to invest spare capital.

Consumer behaviour is changing so rapidly that companies are finding it hard to be certain how to invest for the future. Consumers have become laissez-faire capitalists courtesy of the internet. Those in authority, whether governments, central banks or the corporate world, are struggling to adapt.

From an Australia-based investor, news that the house price to income ratio is now approaching 8:1, interest only loans are preferred and rental income is negative in real terms. The big banks are leveraged 25:1 and are borrowing foreign currency at low rates of interest to fund long-term domestic liabilities. The fact that this information comes from someone who lived in Ireland for a few years around the property collapse adds weight to his nervousness.

In contrast, UK specialist engineering companies appear to be in rude health selling top quality products in all parts of the world. Disappointingly, most of these are privately owned, often by the founding families and so difficult for the rest of us to invest in. It is hard to imagine that the new government, however it is made up, will do any deliberate damage to this sector.

A few years back, I visited Calgary to speak at a conference about European issues, but found myself learning about the shale revolution from those that were doing it. The intricacies of horizontal drilling are a joy to behold. I also remember one of the speakers explaining that if the BP operators in the Gulf of Mexico had let the cement dry for just a few more hours, they might have saved themselves countless billions of dollars.

Anyway, in the last few days, the great and the good of commodities have been meeting in various parts of the world and so the airwaves are awash with forecasts both optimistic and pessimistic.

This is a long-term game and so I suppose brave assumptions about the future have to be made. Cutting through the jargon, the sequence of events seems fairly straight-forward; first find something valuable, and then having made sure that you own it, extraction, transportation and storage become the critical factors prior to the final sale.

In many parts of the world, including Australia and the shale areas of North America, investment in new supply has been axed and, in the case of oil, production is falling quickly enough to meet moderately higher demand. The oil price has been in an uptrend for the last couple of months in anticipation. Perhaps the takeover bid for BG makes sense after all.

For the moment, markets are likely to remain preoccupied by such matters as geopolitical risk, domestic politics, trillion dollar central bank interventions, fractional changes in interest rates and mega takeovers, but, at the end of the chain, consumers have the final say and we neglect their collective common sense at our peril.

David Miller – Best Industry Commentator at City of London Wealth Management Awards 2014
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