1999-2000:
A Period of
Regular 'Fine Tuning'
1999-2000:
A Period of
Regular 'Fine Tuning'
by Allen Keyte, Editor
World Affairs Review
Based
in the United Kingdom, Allen Keyte has been editor of World Affairs Review
for 20 years. Below Mr. Keyte offers his Investment Outlook for 1999.
The
key issues highlighted for 1998 were:
With
the exception of an oil supply issue (other than over supply!) these issues
have dominated thinking over the last year and, indeed, so will they in
1999.
In
December 1997, I said "All the talk by central banks centres
on the control of inflation. And yet the very measures that they take, by
increasing interest rates to calm economic growth, virtually guarantee a
move towards recession".
I
would have preferred that they listened rather than acting in a blinkered
way.
I
have continually pointed out the errors of their waysagainst a background
of Japanese and Far Eastern collapse, followed by escalating problems in
Brazil. We needed, and indeed should have had, lower interest rates from
the beginning of 1998. The delay means that interest rate cuts will be too
steep and too fast to last. So again we shall move back towards a "bust"
scenario.
It
remains to be seen if the panic measures now being taken by central banks
will have the desired effect. The sad thing is that it did not need to happen.
But the very panic measure now being taken may imply that there is a lot
more bad news on the way that we do not yet know about.
With
this in mind I have recently undertaken some covert research.
What Does Alan Greenspan Know?
A single
interest rate cut is looked upon as a prudent "nudge" to the economy.
Two further cuts in quick succession start to look like panic particularly
against reasonable economic figures. Are there about to be more hedge fund
failures to cause major dislocations in the markets?
Only Buy Value
Avoid Hype
We
are headed for deflation, or at best "dis-inflation". In recent
world history we have only suffered around 40 years of inflation. It is
a relatively modern phenomena. So why the preoccupation with inflation when
there are other things to consider?
The
global profits outlook is pretty awful. Almost every day new downgrades
are announced and warnings given. This is not the stuff of a bull market.
Asia: More Blood
Or Rebound?
Despite
the rebound in Asia, there could be a lot of blood still to come. The rebound
has come because of high levels of global liquiditywith more buyers
than sellers and a shortage of quality stock (exacerbated by share buy-backs).
If you want to move back into Asia (which does offer value) then select
from the better economies of Hong Kong (still in deep recession) and Singapore.
You
could also buy a portfolio of emerging market debt. On some you will lose,
but overall the gains should substantially outweigh the lossesand you should
get some good yields.
Questions Over
The U.S. Market
The
U.S. has suffered a 10.8% increase in broad money supply figures, which
normally implies that inflationary trends are building. But, consumer prices
are either at 1% or falling! Is this a "head of steam" building
as a precursor to a serious bear market? I think that we shall have to waitand
be cautious. U.S. mutual funds are clearly supporting the markets. but profits
are fully displayed and appear extended at these levels.
Index Funds And Risk
Globally,
there appears to be a large concentration on fund managers moving into tracker/index
funds as a way of achieving `benchmarks' on their managed funds. They also
have the nerve to suggest that indexing reduces risk. Of course it doesn't.
All that happens is that indexed funds go up and down with the indexjust
as quickly. Perhaps what it does mean is that they do not like picking stocks
or sectors and prefer mediocrity!
Window
dressing will start shortly, with moves (probably too late) towards bonds
and cash, as a way of escaping from what is developing into a classic bear
squeeze. Meanwhile these characteristics of markets swinging ever more violently,
upwards and downwards, by 20%, or so, is likely to continue.
UK and European Opportunities
Europe,
with the introduction of the Euro, should be looked upon (shorter term)
as a relatively safe haven. The Euro gives it a sort of protected region
look. A bit introspective, but there we are!
At
present levels (UK: FTSE-100 at 5582) many blue chips are high risk
although there are some bargains. My selections of Barclays Bank
and ICI (Chemicals) have already performed exceptionally.
A smaller pharmaceuticals that I like is Medeva which is a generic
manufacturer and marketing company.
Meanwhile,
the small- and mid-cap stocks look like a much better value although I am
in no rush to buy. Incidentally, in January 1998, I forecast that the FTSE
100 index would stand at 5768 at close of business on 30 November. 5 minutes
before close it was standing at exactly that level! Then it fell to 5744
and I missed the champagne!
Japan:
Playing A New Game?
The
present level of the Nikkei Dow (14639) appears to be discounting banking
and political problems. The political situation may have further to go before
it is sorted out and therefore that the economy can be taken by the scruff
of the throat to enable it to move ahead!
A
little understood area is that of cross-share holdings between Japan's industrial
giants. it is estimated that this accounts for 50% of the marketand results
in sharp jolts when levels fall.
The
latest wheeze is that the government is trying to get these cross share
holdings put into pension funds to give them longer term stability and to
(a) remove this danger from the market and, (b) assist pension funds to
become fully funded. It's really a case of "smoke and mirrors"because
nothing would really changebut it could start the move towards a greater
transparency of corporations and their earnings. The Bank of Japan is heavily
involved together with the Finance Ministry in trying to push thisaccording
to a very good informant!
Where To Invest
In A Period Of
Falling Interest Rates
Many
government bond issues have seen good rises and more will follow. Interest
rates are set to fall sharply over the next few months and that is why value
will show up quicklyif it has not already been discounted.
Corporate
bonds (watch quality) will also
do well. But then, too, will good quality equities that can exhibit strong
balance sheets and earnings (in recession as well as boom times) if they
pay, and continue to pay, reasonable dividends. This is why the search for
quality (of earnings and cash flow) is vital.
We
are in a textbook worry period with high market volatility (up or down by
20% in short time frames). You should see price earnings ratios improve
(as interest rates tumble) and quality dividends look "mouth watering".
Be ready to seek the bargains and buy them.
Asset Allocation
The
classic Schoolboy Portfolio indicates that you put 20% of your assets
into each of five different areas or asset classes. In eight out of nine
years this would produce better rewards than almost anything else! So much
for asset allocation! But, in case this is the ninth year (!) we must have
a strategy.
Looking
purely at potential of markets, based on where they are and where they have
recently been, the following comes out:
I am
not saying that this will happenbut that is what risk versus reward
shows could happen.
Currency
risks: The British Pound is in limbo until a decision is made
on entry, or not, into EMU. The probability is that it will weaken a little
from present levels of $1.67 to $1.60 and DM 2.60.
The
Greek Drachma is looking interesting and could appreciate strongly
as it converges with EMU ready to join the Euro as soon as it can. A reasonable
speculation.
The
Swiss Franc still profits from its safe haven image. It is likely
to be looked upon as a "safe haven" in the event of any trouble/weakness
in the Euro.
The
US Dollar has proved to be quite volatile and the signs of a weakening
economy are coming through. It should fall somewhat against the Euro and
Swiss Franc, but rise against the Yenwhich looks set to fall universally
as required to help jump start corporate Japan.
Ideas Crystallized
Buy
government bonds, and good quality corporate bonds (BBB or above). Will
benefit from lower interest rates. Perhaps 50% of your total.
Buy
equities with proven earnings and continuing high cash flows (even in
recession) on large market corrections. Perhaps 15%+.
Cash
holdings should be fairly high to enable fast decisions to be made.
Keep debt low in case recession becomes depressionyou will then maintain
maximum flexibility. Perhaps 25%.
Consider
buying equities in Japan and the Far East, as well as emerging markets.
They are all generally near their bottoms and any further shake-out will
signal a definite medium term buy. In the meantime consider `drip feeding"
some funds into these marketsbut not more than 10% of your total.
Avoid
hyped mutual funds and particularly index tracking funds.
Evaluate
real estate for value. Look upon it as a medium term in income generator.
But do not buy until the economic direction is known. In recession, that
is when you will be able to use cash to purchase in "distress"
sales. One man's misfortune is another man's fortuneso long as he plans
carefully.
1999
is one where things will be difficultof that there can be no doubt. I intend
to guide you through this period in a very "hands on" way.
I
shall try to offer specific guidance on how and when to take particular
actions with your portfolio. Opportunities are beginning to show themselves.
There
are only two options at times like this: either you stay invested and ride
out the `bumps' or you try and 'fine tune' according to prevailing conditions.
I believe that 1999-2000 will be a period of regular 'fine-tuning'.
Editor's Note: Allen Keyte is editor of World Affairs Review, 1
year, 12 issues, $175, Bramley House, Woolstone, Cheltenham, Glos GL52 4RG,
England. Mr. Keyte is also CEO of Keyte & Company Ltd., an investment
advisory firm specializing in global opportunities and changing conditions.
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