Download It`ll be a long, hot summer And it`s already 95 degrees

Cenkos News
21st May 2012
Long Hot Summer
As we pass through May, it appears that Europe could be
in for another “long hot summer”. In the 1958 movie, the
interrelationship between family members, residents of
Frenchman’s Bend and newcomer Ben Quick (Paul
Newman) is complicated; but nothing in comparison to the
relationship between members of the Eurozone! The
movie concludes with father, Will Varner (played by Orson
Welles) and son reconciling after Will was trapped in a
barn that had been set alight by his son. In Europe we
certainly have the environment for the fire, but can we find
reconciliation?
It'll be a long, hot summer
And it's already 95 degrees in
the shade
With apologies to Girls Aloud
Marine Le Penn Celebrates: The Guardian
Source: Cnn.com Rise of the Greek far right
So far this summer we have had the collapse of the Dutch
Government, the fall of the centre-right (Sarkozy), rise of
the left (Hollande) and also the far-right (Marine Le Pen) in
France, the rejection of austerity (big surprise!) and the
inability of Greece to form a Government. This leaves two
key Eurozone countries without leadership, another ablaze
and plenty of others (Spain, Portugal, Italy and Ireland) on
the brink. GaveKal published a great quote from Michael
Cembalest the CIO of JP Morgan recently “by the time a
member country see a GDP decline that rivals the US
Great Depression, suffer youth employment greater than
50% and elects communists and neo-nazis to its
Parliament, something has gone horribly wrong”.
BBC 2 recently aired “Michael Portillo’s Great Euro Crisis”,
which I found fascinating because it highlighted, despite
the pain and austerity imposed on the populace (from
central bankers to Greek electricians), just how pro-Euro
members of the Eurozone remain. After much discussion
– during which Portillo inevitably highlighted the intrinsic
problems the Euro faces – he concluded each interview by
asking the interviewee if they would prefer the Euro or the
Drachma/Deutschmark. In every case but one, the answer
was the Euro. This was a revelation for me and I can only
assume that it means that a breakup of the Euro will be
resisted far more vehemently than one might rationally
expect – there is a huge emotional attachment.
From our perspective it is difficult to see how the Eurozone
will remain together. In simple economic terms, never
mind the cultural challenges, the differences are clear to
see. Germany recently posted a positive Q1 GDP figure of
+0.5% whilst most other EMU nations saw declines
Germany has the lowest level of unemployment for 20
years, whilst Spain has 50% youth unemployment and
Greece has ever-increasing queues for soup kitchens.
Germany’s industrial powerhouses are benefitting from
globalized revenue streams whereas the PIIGS have very
little in the way of exports. In addition, the revenues that
they do have are made uncompetitive by the strength of
the Euro (albeit declining of late) and the high cost of
labour. Germany has reduced its overall cost of labour
substantially over the last 15 years, while elsewhere the
trend has been in the opposite direction. Surely le grand
projet is doomed?
And there lies the problem: nobody knows what’s going to
happen and the choices look stark. A break-up of the
Eurozone would, we are led to believe, be a catastrophe.
The corollary, Euro survival, can surely only be
accomplished by the ECB printing trillions of Euros. And
yet such an enormous injection of borrowed cash, while
giving the markets one hell of a sugar rush, would still
need to be paid back – but by whom?
Across the pond, the US economic data hasn’t exactly
been rosy, but it has been steadily improving. This
coincides with good corporate earning numbers for Q1
which also, by and large, beat analysts’ estimates. Put
simply, it isn’t all doom and gloom.
As we have pointed out many times, we do not know how
the game will play out. Indeed, we could easily argue that
a break-up of the Euro would be a good thing and that
markets would react positively. But who’s to know? It
would merely be speculation. For us, investing is not
about guessing and we continue to stick to our knitting:
identifying and investing into sustainable, long-term,
investment themes via funds, stocks and bonds.
Unfortunately, we have to accept that any returns will be
buffeted by a fitful market as investors fluctuate between
greed and fear, driven mainly by the relentless news flow
from Europe.
On the whole, the investment strategy for our portfolios
remains largely unchanged from earlier this year. While
there is a good likelihood that the summer will be both long
and hot, we believe that it is important to stay focused on
fundamentals: to hold assets that offer the potential for
strong long-term growth and to buy them at good prices.
Trying to second-guess or time markets in such a
politicized world is futile (although undoubtedly some will
get lucky) and, of course, you stand as much chance of
losing money as you do making it. In our opinion, that isn’t
investing.
Balanced Portfolios*
Our balanced portfolio has been reasonably steady since
equity markets began rolling over on European concerns
at the end of March. Thus far, it has fallen by
approximately half as much as the MSCI World index,
which was down by about 6% mid-month (May 14); the
FTSE 100 was also down by about 7%.
Obviously, giving back some of this year’s gains is
irritating, but the portfolio remains firmly in positive territory
year-to-date (4%+) (again this is based on a mid-month
value) whereas the FTSE is now firmly in negative
territory.
As has been the case for some time now, the core of the
portfolio is focused on the reliable cash flow of great
companies via their corporate bonds and equity. We have
a 30% weighting to corporate bonds and a 30% weighting
to core (typically large-cap, global-brand) equities. A
further 30% of the portfolio is allocated to equities that
focus on our central themes such as healthcare,
technology, emerging markets, commodities, Japan, and
emerging-market debt.
Our portfolios have benefitted in the downturn because we
have avoided exposure to the sectors – financials and
commodities – hit the hardest. We have very little financial
exposure (no equity of western banks) and have reduced
our commodity weighting to approximately 5%.
On the whole, we are relatively comfortable with this
stance (albeit that is never particularly restful in falling
markets!) and are preparing to pick up some bargains in
our preferred sectors, particularly global brands.
Source blogs.dogtime.com
Cautious Portfolios*
Our cautious portfolios have had their ‘risk dial’ turned
down for some time. We have concentrated on where we
see the most value (relative to inflation) coupled within the
least amount of volatility. We see the most compelling
value in corporate cash flow and have positioned our
portfolios towards investment-grade corporate bonds and
blue-chip equity dividends.
Where possible, we have reduced direct Euro currency
risk. However, the global nature of the businesses we
invest in means that they will inevitably have at least some
operational exposure.
We cannot decouple our investments completely from the
Eurozone as it navigates its way through these difficult
times. So we have sought comfort in the fact that we have
aligned ourselves with businesses that have very strong
balance sheets, products that are in demand, global
exposure and management that continues to crack new
markets.
The key to these investments is operational cash flow.
While emotion will continue to whip stock prices, cash
flows will underpin the true value of the company. Once
serenity returns, we expect to see stock prices reflect the
fundamentals.
From an asset class perspective, we are overweight
investment-grade corporate bonds – touching 50% in most
portfolios. Our second largest position is blue-chip
equities at 30%, with the remainder split between
emerging-market and high-yield debt and sovereign
bonds.
The strategy thus far has reduced portfolio volatility while
producing an income stream that competes with the
current rate of inflation (in sterling terms). However, in the
darkest hour of any crisis there will come a time when
riskier assets look too compelling to resist. We are some
way away from this at present, but we will be prepared to
reduce our investment-grade positions and take positions
in emerging-market and high-yield debt when the
opportunity arises. This move will increase the income
yield while giving us quality assets that we have purchased
at a reduced price – thereby increasing the probability of
capital gains.
Growth Portfolios*
Since the end of March our growth strategy has
experienced an elevated level of volatility as global equity
markets have fallen approximately 8%. Growth portfolios
always have a higher weighting to equities in order to
capture long-term growth opportunities so will inevitably
also tend to experience greater swings in performance.
We believe that not all equities behave equally and that it
is possible to identify certain companies, sectors or
regions that demonstrate defensive capabilities, e.g. bluechip companies with global brands, attractive valuations
and strong cash flows. During times of political and
economic uncertainty, such companies can offer some
protection from tumultuous markets. We also have a
weighting of approximately 30% to investment-grade
corporate bonds, which provide a yield in excess of the
rate of inflation and help to protect capital in difficult market
conditions.
Away from the Eurozone, economic data remains
encouraging and we intend to use further market
weakness as an opportunity to reduce cash levels in
favour of over-sold, good quality companies. Moreover,
our (very) long and (very) hot summer will undoubtedly
provide plenty of opportunities!
Mark Bousfield
Cenkos Channel Islands Investment Management Ltd.
* Portfolio commentaries reflect our model portfolios and are not
representative of all mandates.
Cenkos Channel Islands is a trading name of Cenkos Channel Islands Limited (“CCIL”), Cenkos Channel Islands Investment Manage ment Limited (“CCIIML”) and the registered business name of Cenkos Jersey
Limited (“CJL”). Cenkos Investment Management is a trading name of CCIIML. CCIL is licensed and regulated by the Guernsey Financial Services Commission and is a member of both the London Stock Exchange
and the Channel Islands Stock Exchange. Registered Office: PO Box 222, Level 5, The Market Buildings, Fountain Street, St Peter Port, Guernsey, GY1 4JG. Registration No. 42906. CCIIML is licensed and
regulated by the Guernsey Financial Services Commission. Registered Office: PO Box 222, Level 5, The Market Buildings, Fountain Street, St Peter Port, Guernsey, GY1 4JG. Registration No. 49397. CJL is
regulated by the Jersey Financial Services Commission in the conduct of Investment Business Registered office: PO Box 419, 13 Broad Street, St Helier, Jersey, JE4 5QH. Registration No. 99050
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