Monday, 21st December 2015
“’Twas the night before Christmas, when all through the house
Not a creature was stirring, not even a mouse;
The stockings were hung by the chimney with care,
In hopes that St. Nicholas soon would be there;
The children were nestled all snug in their beds,
While visions of sugar-plums danced in their heads;
And mamma in her ‘kerchief, and I in my cap,
Had just settled down for a long winter’s nap,
When out on the lawn there arose such a clatter,
I sprang from the bed to see what was the matter.
Away to the window I flew like a flash,
Tore open the shutters and threw up the sash.
The moon on the breast of the new-fallen snow
Gave the lustre of mid-day to objects below,
When, what to my wondering eyes should appear,
But a miniature sleigh, and eight tiny reindeer,
With a little old driver, so lively and quick,
I knew in a moment it must be St. Nick.
More rapid than eagles his coursers they came,
And he whistled, and shouted, and called them by name;
“Now, DASHER! now, DANCER! now, PRANCER and VIXEN!
On, COMET! on CUPID! on, DONDER and BLITZEN!
To the top of the porch! to the top of the wall!
Now dash away! dash away! dash away all!”
As dry leaves that before the wild hurricane fly,
When they meet with an obstacle, mount to the sky,
So up to the house-top the coursers they flew,
With the sleigh full of toys, and St. Nicholas too.
And then, in a twinkling, I heard on the roof
The prancing and pawing of each little hoof.
As I drew in my hand, and was turning around,
Down the chimney St. Nicholas came with a bound.
He was dressed all in fur, from his head to his foot,
And his clothes were all tarnished with ashes and soot;
A bundle of toys he had flung on his back,
And he looked like a peddler just opening his pack.
His eyes — how they twinkled! his dimples how merry!
His cheeks were like roses, his nose like a cherry!
His droll little mouth was drawn up like a bow,
And the beard of his chin was as white as the snow;
The stump of a pipe he held tight in his teeth,
And the smoke it encircled his head like a wreath;
He had a broad face and a little round belly,
That shook, when he laughed like a bowlful of jelly.
He was chubby and plump, a right jolly old elf,
And I laughed when I saw him, in spite of myself;
A wink of his eye and a twist of his head,
Soon gave me to know I had nothing to dread;
He spoke not a word, but went straight to his work,
And filled all the stockings; then turned with a jerk,
And laying his finger aside of his nose,
And giving a nod, up the chimney he rose;
He sprang to his sleigh, to his team gave a whistle,
And away they all flew like the down of a thistle.
But I heard him exclaim, ere he drove out of sight,
HAPPY CHRISTMAS TO ALL, AND TO ALL A GOOD-NIGHT!”
Clement Clarke Moore – poet – 1779-1863
As 2015 dawned investors’ hopes and aspirations seemed unlimited – None more so than in the UK? Growth in the US and UK looked very positive: the EU’s PR machine worked overtime in Frankfurt and Brussels, with Merkel et all extolling the virtues of the EU’s recovery, with the ECB’S printing press ready to roll if required. The Shanghai Composite was particularly vibrant, but the party ended in June 2015 – though 150% up in a year! The fact that China’s economy was visibly coming off the boil was conveniently ignored – the ‘ostrich syndrome’; if we don’t worry about it too much, it will go away!
At much the same time Nikkei punters were being egged on by a weaker Yen, thanks to the FED teasing the market with the threat of higher rates for months on end. Then there was Abenomics, which looked like arrant nonsense to many, but was certainly potent enough to get Japanese investors wound up. There are more than just a few who nap the Nikkei to be a star performer in 2015. I wish them well. The Hang Seng was, of course, for much of the year, a very accurate barometer of market confidence. Also Australia’s ASX was geared to the success of minerals and mining stocks.
Set out below is a table of the performances of the major indices. I will make general comment but much of this missive will be focusing on the UK.
Here in the UK we started 2015 full of aspirations with a bit of ‘sound and fury!’ However an understandable correction waited in the wings in the early weeks of 2015 when oil dropped from $65 a barrel to $52. But then the FTSE 100, on reasonable earnings and no logical alternative asset class competition ploughed its way to a record 7104 at the end of April. But it never had the legs or the conviction to push on.
Soon warning bells in the shape of distress signals affecting growth in China that threatened a meltdown. Oil prices continued to fall sharply; that rattled the market’s confidence. Add to that ridiculous drawn-out unsubstantiated threats from the FED to raise interest rates, after 9 years, which made for a very strong dollar, thus trashing emerging markets that brought about a change in sentiment and the cocktail for investors was becoming quite heady and almost toxic. Investors suddenly realised that stock markets were not delivering growth, thus triggering a fall in the FTSE 100 to 5900 in August. Unfortunately the surprising result of the General Election was only of temporary impetus value for equities, however positively business perceived the election of the Tories with an overall majority perceived it to be.
Clearly share buy backs, lower dividends and willingly conceived gargantuan M&A activity to penetrate wider markets helped exacerbate the retrenchment of equities in September and October. This was followed by a dramatic cut in resource prices – iron ore, nickel, and copper and to a lesser degree gold, which helped larrup the mining sector – down average of over 50% in 2015. Without heady M&A activity, many believe equities would have fallen much more than they did. How Astra Zeneca did not bite Pfizer’s hand with US drug titan’s £55 a share bid remains a mystery and as for Shire being forced to resist Abbvie overtures thanks to Obama was unfortunate. Both US companies were paying Top Dollar.
After September’s recovery to 6500, we have seen the market drift on the back of oil dropping to $40 a barrel, and mining stocks falling off a precipice. Add very average growth, diluted dividends and almost certainly a FED rate, which eventually transpired last week and this provided a compelling argument to lighten up portfolios – Here we are at 6000.
What else dramatically affected the performance of global equity markets? Dealing with China, markets never quite knew where they were with the authorities. They threw the kitchen sink at their problems using currency manipulation, banks to provide liquidity and brokers to massage the stocks market when it fell about 70% in double quick order – sadly not very affective. No one knew how economical the Chinese government was being with the truth. This regrouping was more than just a re-adjustment. It was swingeing. The general consensus is that the worst period for decline in growth took place in the first quarter.
Markets have failed to embrace ‘forward guidance’ either in the US or the UK and there is little doubt that M/S Yellen’s FED’s prevarication over hiking rates did irreparable damage to emerging markets and regularly prevented orderly markets prevailing. Thank God the FED finally got its act together last week, though frankly the fundamentals have not changed in terms of cautious sentiment towards equities globally. I am a fan of the BOE. The Bank of England has tightened up regulation well, significantly and justifiably. Most would salute Mark Carney Andrew Bailey. Minouche Shafik and Sir Jon Cunliffe. However there are few fans of ‘forward guidance’ here in the UK. This facility has been a hindrance rather than a help. Frankly it has added to confusion and volatility this year. Equities required little added encouragement to behave either violently or irrationally. The increasingly enormous influence brought to bear by technology and programme trading on the main bourses now constitutes over 40% of volumes. So confusion is already there in abundance without added distractions such as ‘forward guidance.’
The P/E ratios of the FTSE 100 and S&P 500, just as examples at 15X and 18X respectively were starting to look quite rich in terms of being fully valued. Without so many major deals in terms of M&A activity, which have totalled globally $3.24 trillion in 2015, I suspect equity markets would be lower in terms of value. With no inflation, creating profit margins has been tough; therefore the need to penetrate wider markets by way of acquisition, has been paramount. The US has been the standard bearer with huge deals involving Charter/Time Warner, Pfizer/Allergan, Dell/EMC, GE/Alstom, Heinz/Kraft, Anthem/Cigna and Dow Chemical/DuPont for openers. Here in Old Blighty Shell/BG is testing shareholders to their limits and BT/EE was in its own field a £12 billion coup.
In terms of individual performances in the UK, mining was a real drainer – the sector down by 60% with Anglo-American down 75%. Banks continued to court adverse publicity in terms of PPI, LIBOR and FX transgressions involving billions of pounds worth of fines and retribution, let alone the cost of fresh capital. RBS is down 23%, HSBC is 10% light and even though the taxpayer owns less than 10% of Lloyds Banking Group, it shares are easier by 5.6%. Tesco’s year has been one to forget – down 28% with Morrison down 16%. The bright spots of the bigger ‘cap’ stocks have been Hargreaves Lansdown in its first year in the FTSE 100 – up 46%, from the FTSE 250 Betfair up 156%. It is interesting to note that the FTSE 250 as an index is still above the Plimsoll line this year – up 6.9%. The outlook for 2016 suggests that stock picking will be the name of the game. In other words companies that have growth potential. The health and media sectors are perhaps those with scope. Ryanair has been a great little ‘Arfur Daley’ – up 48%. The reason for the DAX and CAC remaining above the Plimsoll line was the introduction of QE by the ECB in March of this year.
The Panmure ‘Conviction’ list for 2015 did fairly well but I will leave their analysts to present their credentials with their offerings for next year. There is valuation out there but stock selection for growth will be key! Those that know a great deal more than I do are also very upbeat about European equities in 2016! We shall see!
Merry Christmas and a prosperous New Year!
Market Commentator – Panmure Gordon & Co