Back from America and Australia is starting to not look good…
What’s been happening?
The USA, are postponing the debt issues to September 2013 and the bitterness between Republicans and Democrats is continuously increasing.
In Europe, the issues with Cyprus have not yet finished and Slovenia is close to ask for a new bailout. More worryingly, Italy has not yet a functioning government and Germany is fast approaching its election in September 2013. Some cracks are start showing in the German- Franco alliance. French and Spanish unemployment just reached new highs, respectively 27.2%and 10.5%.
In the Middle East, the US has just sold to Israel and the US Arab allies the exact kind of weapon they would need for a pre-emptive strike on Iran.
Moreover the US has just found confirmed proof that chemical weapons have been used in Syria, This always has been the crossing line for a military intervention in Syria.
In Australia, the resource sector has entered such a strong bear market (most of the resources company are back at Global Financial Crisis times!), which, if true, would paint a very dark outlook for Australia.
The Resource Sector is practically the cash flow of Australia. If you translate what is happening to the resource sector to a normal family, it is as if the cash flow is cut by two thirds. If this is true and not a speculative move, within 6 month Australia would be in deep recession. We do think it is a speculative move.
So in all this gloom and doom, what is it that kept this rally going?
The actions of the Central Banks.
The quantitative easing initiated by the US and EU/Bank of England and, recently joined by the Bank of Japan introduced in the system an enormous amount of money and the market, in the end, it is regulated by the simplest fact: if there is more money chasing less stock, the market goes up and vice versa.
There is evidence of a strong debate in the US Federal Reserve or growing opposition to the Quantitative Easing.
The target of the Quantitative Easing has not been reached: the money printing was not intended to stimulate just the market rally, but the real economy. There is evidence in the market that the flow of money went to the share market and not to improve lending condition to the middle enterprise. This means that the Quantitative Easing could scale back.
The institutional players “own money” are constantly decreasing their positions in the markets.
The scope of the Central Bank is mainly stabilizing the system, providing liquidity to the economy, keeping inflation on track and, in the US, lower the un employment.
Their mission it is not making the market rally.
Simply put, the risks are too great to ignore. We are currently maintain all positions and ready to act.
Where to invest?
One company we are comfortable to increase exposure to is BHP. It is now at levels where it comes an attractive income investment and with Woodside getting such a positive result from its capital return to shareholders we believe BHP may look to take similar action.
Where has Finn Been?
I have just returned from a research trip in New York where I had nearly 40 meetings with a variety of investment professionals. I will be providing a separate piece on what I learnt soon.
Did you know?
One of my favourite topics I like to talk about Risk.
I’m very aware there are two risks within managing our clients’ portfolios and one of them is me!
I know you probably don’t want to hear that after you have trusted me with your life savings. But I have always wanted a second portfolio manager within the business in case something happened to me.
The problem was finding a person I thought capable enough. Someone I could entrust with the privilege that I have with looking after your future. After two years of hard searching we have finally found our person.
Fabio is one of the smartest and most passionate investment professionals I have ever met. Hence, I look forward to working with him. He also mitigates the second risk and that is knowledge of international markets. He is originally from Italy and understands the global markets extremely well.