Newsletter No. 12 16/06/2017

 

Good Afternoon,

 

The UK

This week the FTSE 100 has retreated slightly and is now trading around 7450. Sentiment has been affected by several factors including political uncertainty, FX markets, commodity prices and some interesting economic figures.

Oil continued it’s move south with Brent Crude currently trading around $47 a barrel, down from $50 just two weeks ago. The main reason for this week’s slide was figures coming from the U.S; the American Petroleum Institute reported that crude inventories rose by 2.8 million barrels last week, while analysts forecast a decline of between 2 million and 3 million barrels. There is an interesting correlation between U.S oil production and the price of oil, the chart beneath highlights this over the year to date.

 

shale

 

On the currency markets Sterling has been choppy, which is understandable given the circumstances, however GBP is currently trading up for the week vs a basket of major currencies. This is mainly due to the release of the Monetary Policy Committees (MPC) May meeting minutes which revealed that the vote on interest rates was 5 vs 3 in favour of holding at current levels. 5 vs 3 doesn’t sound that impressive but it’s the closest we have been to a rise in the borrowing rate during the last 6 years.

Tuesday’s inflation data was fairly upbeat. CPI came in at 2.9% and RPI at 3.7%. Both numbers outstrip earnings growth, but you do not need to be an economist to know that. Under normal circumstances you might expect the MPC to move to a rising rate stance (currently 0.25%), but with the economy seemingly slowing and the uncertainties of Brexit upon us I feel they have missed the boat. In my opinion the BOE could regret not raising the rate last month. Moving forwards they don’t have much to play with when it comes to stimulating growth further down the line should our economy come under pressure.

Something that will surprise you: Following a lunch meeting at the King St Townhouse (very nice by the way if you’re looking for somewhere to eat in Manchester) I found myself thinking no please not again…. The meeting was with a political analyst from Blackrock; yes the same Blackrock that George Osborne works for, his view is that once the Parliamentary summer recess is over we will likely see another general election.

Similar circumstances transpired in 1974 when Labour’s Harold Wilson won the election in the February of that year but not an overall majority. He called a second election in the October to get a stronger mandate to govern – he achieved a majority of three. The difference is that this time I have been informed that the current PM Theresa May will have nothing to do with it. I guess we will have to watch this space.

 

Europe

Negotiations over Britain’s exit from the EU will begin on Monday.

Brexit Secretary David Davis and the European Commission’s chief negotiator Michel Barnier agreed during discussions in Brussels on Thursday to start formal talks over the UK’s departure on 19 June.

It had been suggested the start of negotiations could be delayed by the failure of any party to win a House of Commons majority at last week’s General Election.

The EU’s opening position takes the most expansive possible view of Britain’s obligations. In recent months the commission has significantly increased its original estimate for the Brexit bill after countries such as France and Poland demanded a tougher approach. The figure that’s being branded about at the moment is 100 billion gross. That’s made up of €86.4bn from the UK to honour financial commitments it made as a member state. In addition, Brussels wants Britain to cover €11.5bn of contingent liabilities, should for instance Ukraine, Greece or Ireland fail to repay loans and also meet €1.7bn in development funding pledges. That takes the total gross liabilities the EU wants the UK to take on to €99.6bn

The net figure is considerably lower at €60.2bn. The net figure is arrived at by subtracting the value of assets that the UK has funded in the EU that in essence they are buying back off us.

If you have ever wondered how much the vote to leave the EU will cost each of us then here is a quick bit of maths using the net figure to illustrate;

60,200,000,000.00 (cost to leave the EU) divided by 65,140,000 (UK population 2015 consensus)

The above sum equals = 924.16 Euros each. Based on today’s exchange rate of 0.88 that’s equivalent to £808.95.

However that number seems a bit unfair as it doesn’t represent the working population of the UK. Based on Junes labour market figures from the Office of National Statistics (ONS) the figure for people currently in work stands at 31,950,000.

If we re-calculate using the new figure then the total rises to £1884.19 per person. A costly negotiation whichever way you look at it.

I look forward to the battle commencing! I’m sure there will be plenty to talk about over the coming months.

 

USA

The US Federal Reserve has raised its key interest rate by 0.25%, the second increase this year. The central bank voted to raise its key rate target to a range of 1% to 1.25%. That’s the highest level since 2008, when policymakers cut rates to encourage borrowing and spending after the financial crisis.

It cited continued US economic growth and job market strength as reasons for raising its benchmark interest rate.

 

Share analysis

Last week I talked about the basics of technical analysis and ways you can spot a trend in a share price chart. This week I will go a little more in depth and look at moving averages. Moving averages help smooth out erratic share price movements and by eradicating day-to-day fluctuations it can make trends easier to spot.

The most common type of moving average is the simple moving average, which simply takes the sum of all of the past closing prices over a time period and divides the result by the total number of prices used in the calculation. For example, a 10-day simple moving average takes the last ten closing prices and divides them by ten.

 

ma

 

The above shows both a 50-day and 200-day moving average. The 50-day moving average is more responsive to price changes than the 200-day moving. In general, traders can increase the responsiveness of a moving average by decreasing the period and smooth out movements by increasing the period.

Many technical analysts often look at multiple moving averages when forming their view of long-term trends. When a short-term moving average is above a long-term moving average, that means that the trend is higher or bullish, and vice versa for short-term moving averages below long-term moving averages.

In summary moving averages are powerful tools for analysing securities. They provide a quick glimpse at the prevailing trend and trend strength.

 

Recommendations

 

With recent weakness in the tech sector this week’s recommendation is to add some exposure to it.

 

Falls in US stocks Alphabet (Google), Amazon, Netflix, Facebook, recently floated Snap Inc (now back at its listing price) and the UK’s Micro focus provide a good buying opportunity. All of the named stocks can be held directly or another option would be;

 

Scottish Mortgage Investment Trust

Scottish Mortgage is an actively managed, low cost investment trust, investing in a high conviction, global portfolio of companies with the aim of maximising its total return to its shareholders over the long term. The trusts top ten holdings are as follows;

 

 

1 Amazon.com 9.30%
2 Tesla Inc. 7.20%
3 Illumina 6.00%
4 TENCENT HLDGS LIMITED 5.90%
5 INDUSTRIA DE DISENO TEXTIL SA 5.60%
6 Alibaba 5.10%
7 Facebook 4.80%
8 Baidu 4.30%
9 Alphabet 3.80%
10 Ferrari NV 2.60%

 

I also think that Europe is looking rather attractive at the moment. With the political risks subsiding the inflows to European equities have been quite staggering. My choice for growth would be;

 

TR European Growth

The company’s objective is to achieve capital growth by investing predominantly in small and medium size European companies (excluding the UK). The trust yields around 1%.

 

Please note there will be no newsletter next week due to annual leave, the next update will be on 30/06/2017 unless something presents itself in the meantime.

I hope you enjoy the sunshine this weekend!

Thanks for taking the time to read my newsletter,

 

Karl Townsend ACSI

Stockbroker

For and on behalf of

Arnold Stansby & Co. Limited

Telephone: 0161 832 8554   Fax: 0161 834 7710

Members of the Stock Exchange

Authorised & Regulated by the Financial Conduct Authority

 

 

A word about some risks: Investing in the bond market is subject to certain risks that fixed income securities will decline in value because of changes in interest rates, and the risk that the manager’s investment decisions might not produce the desired results. Bonds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rates, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

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