Two weeks ago, we commented upon Mervyn King’s bleak outlook for the UK economy and the consequential problems for stock markets. His remarks have now been echoed by the Deputy Governor, Charlie Bean, who said: “Unfortunately, these encouraging signs, I hesitate to identify them as ‘green shoots’, do not tell us much about the strengths and durability of the subsequent recovery.” Gordon Brown, who clearly thinks that nobody, including the Bank of England, loves him any more, felt the need to say to the Bank of England “Lighten up”.
In the previous issue, we also said that FTSE’s bear market rally may have ended. The evidence since then is in support of that statement, given that FTSE has done nothing since but go sideways. Below we re-publish the FTSE chart from two weeks ago together with the latest one which has now formed a triple top at 4,500. If we were sitting on major gains from being long equities these past three months, we would look at any weakness from here as a signal to get out quick before we give them all back.
Did those very same thoughts come to the mind of Sheikh Mansoor, who sold the Barclays Bank shares held by Petroleum Investment Corporation, the Sovereign Wealth Fund under his management? The original investment of £2 billion last year initially suffered a massive, heart-stopping loss. So the considerable profit of £1.4 billion must give him enormous pleasure and not a little relief.
FTSE, at current levels, is very extended. Since early March there has been no meaningful pull-back, so the odds really are quite strong that from here we will see a strong decline which may lead to a re-test of the March 2009 low.
Doubt about the genuineness of the stockmarket recovery also comes from Lowry’s Buying Power and Selling Pressure Indices. Richard Russell, the veteran writer of the Dow Theory newsletter, said that on the 9th March, the start of this rally, the Buying Power Index was at 120 and the Selling Pressure Index was at 884. The latest levels are 157 and 875 – a decent strengthening of Buying Power but virtually no easing of Selling Pressure. In a genuine long term recovery from a major bear market, one would expect Selling Pressure to collapse. So, it looks as if all we have witnessed these last few weeks has been a speculative bounce from an over-sold condition. That over-sold condition has now worn off, leaving the market primed to return to its journey south.
You will see from the model portfolio that the RBS Bear Note is still held. This provides a geared return if FTSE declines; on FTSE strength the investment loss is one for one. We have previously reported that the key FTSE level at which this investment would be brought into question is 4,600. If we see a close above 4,600 a decision would have to be made about the validity of our bearish view. So the next two weeks might deliver a key decision moment. However, for both fundamental and technical (chart) reasons we believe the Bear Note will prove to be a big winner.
This year, western economies will for the very first time, account for less than 50% of world GDP. By 2012, it will be as little as 45%. As recently as 2004 it was as high as 60%. The emerging markets super cycle led by China, India, Russia, Brazil, etc., holds good and we believe it is entirely possible that they are in the early stages of new primary bull markets. Clients’ portfolios have profitably held Chinese stock market investments. As can be seen from the Shanghai B chart below there is nothing at this stage to cause concern. The interesting news out of China is that the manufacturing sector has expanded for the third consecutive month.
We are in the process of remodelling the portfolio with the aim of reducing exposure to UK gilts and increasing exposure to emerging markets. This change is likely to take place quite soon. Brazil, Russia and India charts are below.
In the previous issue we drew readers’ attention to Dr Copper. We said that if level 4880 was exceeded, it would be a positive signal for copper to go higher, which in turn would be an indication that commodities and emerging markets are prime investment opportunities.
Giving added weight to our view is the Baltic Dry Index chart which clearly demonstrates that something is most definitely stirring. By closely monitoring Dr Copper and the Baltic Dry Index, together with commodity prices and emerging markets’ price action, we can keep a finger on the pulse to ensure that investments are held not just for appropriate reasons but in line with the developing conditions.
We certainly envisage that, over time, our stock market exposure will be mostly elsewhere than the developed world, the upside for economic growth and asset price appreciation in emerging markets should be outstanding and leave the developed world’s markets in their wake – the stars may well be coming into perfect alignment for this view.
• This article was written by Full Circle Asset Management,
as published in the threesixty Newsletter
on 5 June