This column definitely revels in its “educated” rants but you can’t say we make some of this stuff up (as much as our questionable sense of humor tells us otherwise). So as we cautioned in last month’s edition and after nearly 2 months of markets tip toing around amidst shrinking volatility and trading ranges, the inevitable happened on September 9th. A hefty fall it was (enough to wipe out 5 weeks of gains prior) as hawkish comments by a U.S. Federal Reserve board member (yes these days all it takes is one who’s name no one can recall) and a sharp drop in oil prices, proved the undoing.
But from a broader perspective, it seemed like a much needed wakeup call (however rude it was) and markets globally, as measured by the MSCI All Country World Index, still managed to edge ahead 0.6% in September and nearly 5% for the third quarter.
US indices overall, while flat for the month, returned 3.8% over the last three months. The technology heavy NASDAQ and Russell 200 Small cap indices were outright winners during this period, up over 8% each! Sector and quarter wise, tech and financials gained while utilities (the star performer for the first 6 months of the year) were the biggest underperformers. An American summer (predictably) and a rate rise prospect (your chances here are honestly better at Russian roulette) drove investors out of the much loved safety play as utility companies are typically highly leveraged. A small change in borrowing costs has a magnifying effect on profitability.
At a quick glance, here’s how the other stock market regions performed for September and the quarter.
September monthSeptember quarterEuropedown 0.8%up 5.2%Asiaup 2.5%up 9.8%Emerging marketsup 1.7%up 8%Japandown 2.8%up 4.9%Australiaup 0.4%up 3.6%
Beneath the upbeat figures however, the winds of banking concern were blowing across Europe as the crisis surrounding the “world’s most systemically dangerous bank” (some have termed), continues to grow. The European banking index, while managing a 10% return for the quarter, plumbed new depths from a post GFC high in June 2015, down a whopping 60% and remained very much under pressure. Deutsche Bank (back to that W.M.S.D. bank - refer above - and yes a cute play on W.M.D.s if you hadn’t noticed) has lost more than half its market value this year alone.
How did this happen? Quick primer – scandals and fines (rate rigging anyone?), tougher post GFC European banking regulations, a difficult restructure to cut sky rocketing costs, and the dreaded low/negative rate environment which according to Banking 101, is quite a challenge to generating revenue! As if that wasn’t enough, the U.S. Department of Justice slapped it with a USD 14 billion fine for its role in perpetuating the GFC – double what it provisioned for it! And why is Deutsche the W.M.S.D bank? Its balance sheet is half the size of Germany’s GDP (Germany are currently saying it’s NOT too big to fail by stating there will be NO bail out), it’s extremely interconnected to very large number of other banking institutions globally via the dirty “D” - derivatives - many trillions of it and a W.M.D. in its own right, and the bank is fast running out of capital.
How did we do? For the September it was a little sombre as fixed interest and infrastructure allocations were flat, property and international share exposures were down a tad. Asian small/mid and large caps slipped 1% to 2% respectively. Domestic small and mid-caps went the same way but local microcap exposures provided a healthy 3.2% relief.
For the quarter however- fixed interest gained an average of 1.6%, property was up nearly 1% and international shares were up between 1.3% and 3%. Our faith in the Asian recovery was rewarded with 4.4% and 6.4% returns between small/mid and large cap shares. But our real success story continues to be local small, mid and micro share managers charting 8%, 6% and a whopping 15% respectively!
Good question! While it’s becoming very clear that central bank actions (via loose monetary policy and/or direct asset purchases) are now largely driving the 2nd longest bull market in history (or at the very least, propping it up), what’s also starting to reveal itself is the possible impotence in the effects that these institutions were hoping for through their policy actions.
If you had the feeling that each rate cut (or pause on the way lower) is not translating itself into the usual amount of investor enthusiasm that the market exhibited for the one prior, then yes, you would be right to note that the law of diminishing returns is now taking centre stage. Moreover, if the very whisper of a possible hike (or even mutiny in the Federal Reserve rate setting ranks!) is enough to scramble investors to the exit (as we saw earlier in September and several other times in the past), a defensive positioning (with a continued tunnel vision focus on pure quality assets) is clearly still very necessary for the foreseeable future.
The global landscape seems fraught with potential landmines whichever way you turn – the US presidential farce (sorry, election), deteriorating relations between Russia and America, the omnipresent and destabilizing threat of terrorism, banking crises in Europe and the Middle East, a Chinese economy swimming in debt– investors will need to quickly adapt to how these and many other risks, play out. Thankfully the BlueRock Private Wealth team is in your corner, taking a cautious approach with how these scenarios materialise over the coming period. Stay tuned.
The theatrics and shenanigans of the GFC may have demonstrated to all and sundry what a bank “bailout” was. Yes the one where governments step in to backstop an institution about to keel over (“too big to fail!” being their famous cry), with taxpayers’ money of course, to help it carry on with business and save the free world. Did it? Or was morally reprehensible behaviour rewarded (and emboldened to continue knowing there’ll always be a soft landing)? We’ll leave that one to you.
A “bail-in” on the other hand, while hardly ever mentioned, is now gaining a few headlines especially when associated with the likes of Deutsche Bank and its predicament. This is where a bank’s creditors (bondholders) and its depositors (yes that’s me, you, and everyone but the Clintons of course) get stung and have to pony up. “Preposterous!!” you say. Legal actually. Just ask the poor depositors at the Bank of Cyprus - those that held more than €100,000 in 2013 - what happened when a banking crisis enveloped their nation.
While without doubt a public relations kamikaze for any bank, when further capital raisings and bailouts (political nightmares themselves)) are off the table and all else has failed and they still want to keep the lights on……… no prizes for guessing who they start hitting up.