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Elkstone Private Monthly Bulletin

Elkstone Private – Monthly Update February 2018

Stephen’s Snapshot
The Market – Latest Dynamics

Many analysts are calling the recent stock market move lower a correction rather than a crash, and we would tend to agree. There is no doubt that markets are nervous on the back of concerns surrounding the prospect of higher U.S. rates and still elevated valuations, (when measured against historical averages). However Q4 earnings have been relatively robust (so far) and the outlook for the remainder of 2018 remains generally solid, with the market expecting healthy earnings growth of around 16% for the full year. Wider macro tailwinds continue to help, with the weaker dollar helping U.S. exporters, as well as improved economic growth from both a domestic and international standpoint. Market volatility could indeed be higher this year, but company fundamentals do look encouraging, and with synchronized global growth still largely positive, it’s reasonable to expect that equities will continue to track higher over the medium to longer term.

Stephen is a Senior Investment Manager at Elkstone Private.

Technical Analysis – Our Interpretation – Bespoke View

Post one of the strongest January trading periods on record, February has quickly reminded all market participants that equities don’t just go higher. Perspective is warranted with most major global equity markets up sharply over the past two years, and thus far this correction looks and feels like a healthy pull back. We are encouraged that most of the key trends that have been in place for a number of years held firm though the sell-off. There was limited rotation towards defensive stocks, and Gold and Gold Equities struggled. Soft indicators that there is still an expectation in the market of further upside potential.

Market Performance – Past Month/Year To Date (YTD) – Euro denominated returns

Source: Bloomberg 15.02.2018

This Month’s Chart

“Saudi starting to outperform”   

Chart Source: Bloomberg

Stock market pullbacks, although painful, can often deliver clues as to compelling opportunities for the more eagle eyed investors.

Indeed the recent early February falls saw U.S. shares down by circa 10%, but certain areas managed to avoid the carnage, Saudi Arabia being one such region.

The KSA ETF seeks to track the returns of the Saudi Arabian stock market (expense ratio 74 bps). Top ten holdings include Saudi Basic Industries, Al Rajhi Bank, National Commercial Bank and Saudi Telecom.

In June 2017, MSCI (a leading provider of global equity indices), said that it will include the MSCI Saudi Arabia Index in its 2018 Annual Market Classification Review for a potential inclusion in the MSCI Emerging Markets Index.

Such a move could attract tens of billions of dollars of fresh foreign investment as the country seeks to diversify its economy beyond oil.

As of today, the chart and increasing levels of trading in the shares, (volume lower part of chart), suggest that investors are growing increasingly positive on the story.

Macro/Fixed Income – some things to ponder 

The 10-Year Treasury Yield and why its important…

Chart source: Bloomberg

Treasury bond yields are tracked by investors for a variety of reasons, with the Ten-year Treasury bond used as a proxy for a number of other financial metrics e.g. mortgage rates.

This particular bond also tends to be a good signal of investor confidence. When confidence is on the up the price of the bond tends to drop, and yields move higher – the reason, investor’s believe they can get better returns elsewhere, such as the equities market.

Looking at the yield trend on the above chart, would tend to suggest that investors; (despite the recent blip) remain disposed to investing in higher risk areas for now – such as the stock market.  Indeed the yield, after hitting a low at the beginning of the year has now started to track higher, and from a technical basis has broken through its most recent down-trend.


Valuation Spotlight 

Janet Yellen calls stock market, real estate valuations ‘high’ in last interview before exit as Fed chief – Source CNBC

Despite the recent pullback, the S&P has moved ahead by over 300% since its March 2009 lows. Janet Yellen took over the chair of the central bank in 2004 and over this period, the market has recorded gains in excess of 50%.

Yellen is now retiring, and in a recent wide ranging interview with CBS news she was quoted as saying (regarding valuations); “Well, I don’t want to say too high. But I do want to say high,” she said. “Price/earnings ratios are near the high-end of their historical ranges.”

She also went onto to say that; (commercial real estate) is “quite high” versus the level of rents.

The FOMC, the Bank’s policymaking arm pushed its key overnight interest rate down to near zero for a seven year period, whilst simultaneously expanding its bond portfolio from circa $800 billion to north of $4.5 trillion.

As of today, and despite the recent early February setback, many longer term stock market trends remain bullish, albeit valuations are elevated, but based on Dot Com levels (year 2000 – chart above), certainly have room to move higher over the coming months.

Chart Source: Bloomberg

What’s with the USD…


Chart Source: Bloomberg

The USD is now back at its prior 2015 breakout point and many are wondering will it hold at this key level or move lower.

Certainly the bulls will say that the prospect of rising rates and repatriation of foreign profits by U.S. domiciled companies are two key drivers that could provide a positive tailwind over the coming year.

However a third leg to the story is the ‘fear’ factor. By this we mean funds moving into the USD as a result of its ‘safe haven’ status.

Certainly in prior crisis’ such at the Dot Com crash of 2000 and the Credit Crunch of 2008 the move higher in the USD was both aggressive and abrupt in nature. Therefore movement’s in the ‘greenback’ is something to certainly be aware of in terms of any longer term market correction taking shape.

It is also worth noting that the recent February stock market pullback although sharp, saw little flow into USD’s, suggesting that what occurred was more of a market pullback than a sustained shift into a bear phase…

Notable movers – YTD – Euro Denominated Returns

  1. Nvidia Corp +20.79%
  2. Inc +20.12%
  3. Abbvie Inc +13.20%
  4. Airbus +12.00%                                                
  1. Capita -53.84%
  2. Chesapeake Energy Corp -31.55%
  3. Hennes & Mauritz -18.86%
  4. Expedia Inc -19.09%

15th February 2018

Technicals – Some Charts of Note


Chart Source: Bloomberg

As most bull markets mature, volatility can increase, especially in a phase where a more aggressive squeeze higher ensues. This was certainly the case between 1997 and 2000 where volatility traded well above the historical average but the market continued to move higher. We may be entering a similar period now. Active management will be important in this type of environment.

The Baltic Dry Rate V’s Global Economic growt


Chart source: Bloomberg

The Dry Bulk Index (BDI) is a proxy indicator for dry bulk shipping stocks and is issued daily by the Baltic Exchange in London.

It is calculated using Capesize, (largest dry cargo ships) Panamax, (midsize ships that have the ability to traverse the Panama Canal) and, Supramax (smaller ships with self loading capacity).

Since its establishment in 1985, the BDI has become an important barometer on the volume of manufacturing activity and from there, worldwide trade.

The chart above suggests that after hitting a low point in February 2016, price has been on up, suggesting that as we go to press today, the global economy remains in robust shape.


Who said what

# 1 “No one’s ever achieved financial fitness with a January resolution that’s abandoned by February.” – Suze Orman

#2 “In the ‘old days’, when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake and we have so much good (great) news about the economy! – Donald Trump

#3 “The key to making money in stocks is not to get scared out of them” – Peter Lynch

#4 “Learn every day, but especially from the experiences of others. It’s cheaper! – John Bogle

#5 “My proceeds from the PayPal acquisition were $180 million. I put $100 million in SpaceX, $70m in Tesla, and $10m in Solar City. I had to borrow money for rent.”– Elon Musk



This monthly marketing report should in no way be relied upon or substituted for the exercise of independent judgement. Elkstone has taken all reasonable care in the production of this material, but nothing in this note should constitute investment advice in any shape or form. Nor should it be perceived as giving accounting, tax or legal advice. This report is produced solely for educational purposes only. Individual circumstances differ, and readers should not act upon this content in any way. Readers should consult with their independent and regulated professional advisors before making any financial decisions. Prices can fall as well as rise, and may be subject to sudden and sharp moves. If you invest in the stock or other markets you may not recover the total amount originally invested. Historic performance in no way guarantees or indicates future price performance. Further risks to be aware of include currency and exchange rate fluctuations, which may also adversely impact your holdings. The educational information and opinions presented in this report were obtained or derived from sources that Elkstone deems to be reliable, but Elkstone or its related parties (employees, consultants, management, and directors) makes no representations or warranty, express or implied, as to their accuracy or completeness or correctness. Therefore Elkstone accepts no liability for loss arising from the use of the educational material contained within this newsletter.