My Market Themes Sat 18/01/20

18th Jan '20 by Edmund Shing

6 comments 917 reads

1. Macro: UK about to cut rates? Poor December retail sales

A poor end to the year for the UK economy – not good at all for the nation’s shopkeepers, with a surprise drop in December retail sales. Well actually, not rally such a surprise if you had been reading the trading updates from UK retailers, which has been by and large a dire affair.

Even the mighty value for money Primark had a tough Christmas trading period. with sales down 0.5% over the lead-up to Christmas, even with market share gains to boot.

But before we get too gloomy about the state of the UK economy, households are still generally in good form with average wages still growing well above inflation and with house prices resuming their steady rise once again, according to official government data (see below).

So my guess is that this surprise plunge in retail sales will at least partially reverse in the months ahead, and could well be aided by a Bank of England base rate cut, now priced by markets at around 50% for January following a fall in inflation figures (CPI below the Bank’s 2% target now for 5 months in a row).

Elsewhere in the world, the Phase 1 limited trade deal signed between the US and China at least marks a de-escalation in the trade war between the two nations, which is good news for global trade even if it does nothing to resolve the fundamental power struggle between the two countries, and should help to support global growth in 2020.

The JPMorgan Global Composite PMI shown below is evidence that economic activity globally hit a low point in October 2019 (on this PMI measure, a reading above 50 signifies growth, below 50 recession), and has recovered over the last two months, which is a good support for risk assets like stocks and shares.

2. Stocks: Why I am getting nervous?

Hints of euphoria: Stock markets are enjoying a good start to the year, carrying on the strong momentum from the end of last year. But even for a confirmed long-term bull like me, I have to admit to becoming nervous. I start to see small signs of euphoria creeping into small pockets of…

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letap73

18th Jan '20

Great work again. However the graph in 4, starts with a year where the valuations on the S&P500 were stretched - it was a bubble year. Assuming that 2020 is an "average" year then the red dot for 2001 - 2020 will shift further right on the graph, thus implying a much less rosy picture.

Anthony127

Edmund
I note that your reasons for being nervous are related to the US (including cult stocks like Tesla and Beyond Meat) and European Stocks.

You do not mention Britain as a cause for concern. My view is that there is still a degree of value in British Stocks. Today's Economist magazine states that since Jan 1st 2019 the Dax is up 27.2%, the CAC 40 is up 27.5% and Italy's FTSE MIB is up 29.7%. The FTSE 100 is up by a comparatively miserable 13.6% despite the recent Boris bounce. On this basis and on the basis of countries relative PE multiples I think that there is still value to be realised in British Stocks and less reason to be nervous in that sphere.

With regard to Sylvania Platinum I think the Palladium price momentum certainly seems like a good reason to own the stock but the stock does qualify for the James Montier "Cooking the Books" screen and wonder whether that may be a legitimate cause for concern.

Thank you for your thought provoking commentary.

William K

Thanks Edmund. Useful analysis. I've been following the precious metals for a while now and investing in them directly by ETFs and indirectly with £SLP. I've recently added Anglo American (LON:AAL) to my portfolio because of its association with Palladium (as you mentioned). The other metal of interest is nickel which is needed for electric car batteries. That seems reasonably cheap at the moment after a price surge earlier in the year. Do you have any views about where nickel is heading over the next 12 months?

Edmund Shing

Hi letap73,

it is a good point. But if we take the end of 2000 instead (S&P 500 lower at c. 1380), and say that the S&P 500 hits c. 3400 by year-end 2020, that would then imply a higher compounded 20-year prior return of around 7%.

Even then, reading off the left-hand scale, taking the lowest point would still give a projected 10-year return 2020-2030 of around 13% CAGR! So yes lower, but still surprisingly high...

Edmund

Nick Ray

20th Jan '20

I was intrigued by the 20-year prior returns versus 10-year forward returns for the S&P so I tried it for the FTSE and got a similar graph (although there is not a lot of data since FTSE has only been going since 1984.)

But then I got a bit suspicious and simulated a geometric brownian motion process with the same mean and standard deviation and got a similar plot! But if you run it for 100,000 days you get a much more reasonable elliptical "blob".

What is happening is that the individual points have overlapping data since they only move by one year, which is why they tend to form "strings". But if you look at completely separated data periods there is no pattern correlating future returns to past returns after all. (Foiled again!)

dfs12

Excellent stuff. This is a fantastic new addition to the site. Thanks Edmund.

My Market Themes Sat 18/01/20

1. Macro: UK about to cut rates? Poor December retail sales

2. Stocks: Why I am getting nervous?

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Edmund Shing

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