WAR IN THE MIDDLE EAST IS IMMINENT - WHAT WILL BE THE EFFECT ON ASSET PRICES

 

6 October 2024

Here is Joseph Wang including geopolitics in his markets weekly report (and seems to be taking sides for the point of view of the investor, though he does say he's saddened by these developments in the Middle East).

The main point he is making is that Israel sees this as a generational opportunity and the window will likely be closed by the next presidential election. So if they're going to do anything they will do it now. "Now" means in the next couple of weeks!

Markets weekly 4 October 2024

But he doesn't actually go into what might be the effects of an all-out war between Israel backed by America, and Iran, on asset prices.

So in summary, here's what analysts, reading from previous wars, are saying we could expect:

1. Short-term sharp decline due to global uncertainty and market fear.

2. Oil price spike leading to higher costs, inflation, and pressure on corporate profits.

3. Sector-specific effects: Energy stocks may rise, while tech, consumer, and industrial sectors could face declines.

4. Safe-haven assets such as gold and US Treasuries would likely see inflows, while equities would experience outflows.

5. Long-term recovery possible, but dependent on the length and scale of the conflict and its impact on global trade and energy supplies.

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THREE FACTORS THAT INFLUENCE THE PRICE OF GOLD

6 August 2024

place holder photo

THESE FACTORS INFLUENCE THE PRICE OF GOLD

This article looks at the factors influencing the price of gold and applies this to the current situation of major turmoil in the market.

A. Factors influencing the price of gold

According to Ramin Nakisa of PensionCraft, three main factors influence the price of gold:

1. Real Interest Rates

   - Explanation: Gold prices are inversely related to real interest rates. When real interest rates (interest rates adjusted for inflation) are low or negative, the opportunity cost of holding gold decreases, making it more attractive to investors.

   - Impact: Lower real interest rates increase the price of gold, while higher real interest rates tend to decrease it.

2. Inflation

   - Explanation: Gold is often considered a hedge against inflation. When inflation rates rise, the purchasing power of currency decreases, and investors turn to gold to preserve value.

   - Impact: Rising inflation typically drives gold prices higher as investors seek to protect their wealth.

3. US Dollar Strength

   - Explanation: Gold is typically priced in US dollars, so there is an inverse relationship between the value of the dollar and the price of gold. When the US dollar weakens, gold becomes cheaper for investors holding other currencies, increasing demand.

   - Impact: A weaker US dollar generally leads to higher gold prices, while a stronger dollar tends to lower gold prices.

These factors collectively influence gold prices by affecting investor behavior, the perceived value of gold as a safe haven, and its attractiveness relative to other assets.

B. Price of gold in today's market turmoil

Let's see how the above plays out in the real world.

1. Summary of Gold's Recent Performance

• All-Time Highs: Gold reached new all-time highs by the end of the week, 16 August 2024.

2. Potential Drivers of Gold Prices

• Multiple Factors: Gold prices are influenced by various drivers, with the three sighted above as the main factors, including:
  • Fed's Balance Sheet Size
  • Monetary Policy
  • Geopolitical Risk
  • Momentum
  • Inflation
• Current Focus: The weaker dollar is likely the main driver for the recent increase in gold prices.

3. Dollar Influence

• Weaker Dollar: As the dollar weakened, particularly with the euro rising above 1.1, gold tracked this movement and went higher.
• Interest Rate Cuts: The market expects significant rate cuts by the Fed, leading to a smaller interest rate differential between the US and other countries, contributing to the weaker dollar and higher gold prices.

4. Geopolitical Factors

• Middle East and Eastern Europe: Ongoing conflicts might have some impact, recent understandings suggest an increase in geopolitical risks, although many believe potential negotiations to de-escalate tensions will succeed. A major war will drive gold higher, driving risk off behaviour across all markets.
• Insider Knowledge: There’s a possibility that certain market participants might act on insider information regarding geopolitics and this might be the case here.

5. Monetary Policy and Central Bank Activity

• Global Rate Cutting Cycle: We are in a global rate cutting cycle, which generally supports higher gold prices due to easier monetary conditions.
• Central Bank Buying: Recent data suggest that major buyers like China have not been active in the gold market, so this surge may not be driven by central bank purchases.

6. Market Sentiment and Momentum

• Trend Followers: Markets like gold are influenced by trend-following strategies, where momentum can lead to further buying and push prices higher.
• Economic Policies: Some speculate that market reactions to Vice President Harris’s economic proposals, which could lead to stagflation, might influence gold prices, though this seems unlikely.

7. Outlook on Gold

• Positive Long-Term View: Despite potential volatility, there is a positive long-term outlook on gold, with the weaker dollar being a significant factor to watch.

This summary highlights the complexity of factors influencing gold prices, with a particular emphasis on the role of a weaker dollar in the recent surge.

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SUCCESSFUL STOCK PICKING STRATEGIES

10 July 2024

BOOK SUMMARY

INVEST

Guide to a successful stock picking process

 

Step Description

1 Identify Market Trends

2 Fundamental Analysis

3 Company Research

4 Valuation

5 Technological and Innovation Focus

6 Monitor Corporate Activity

7 Diversification

8 Risk Management

9 Continuous Learning

10 Patience and Discipline

Plan

In part A, we will summarise the book by Simon Thompson published in 2018.

In Part B, we will draw out the step by step guide to the process, outlined above.

In Part C, we will detail the original process guide from the earlier work published in 2013.

 In Part D, we will then compare the two guides and identify significant improvements, giving the reader new points to focus on.

A. Summary of Successful Stock Picking Strategies, 2018.

1. Introduction

- Simon Thompson is a recognised expert in small-cap stocks, having consistently outperformed the market with his Bargain Shares Portfolios in Investors Chronicle.

2. Core Strategies

- Big Picture Investing: Emphasises understanding broader economic and technological trends to identify promising investment opportunities.

- Technological Investments: Highlights the importance of investing in companies at the forefront of technological innovation, such as Manchester & London, a technology-biased investment trust.

- Corporate Activity: Identifies companies likely to be taken over, which can provide substantial returns for investors.

3. Case Studies

- The book includes 26 detailed case studies explaining the rationale behind successful investments. These case studies provide practical insights and a step-by-step guide on applying these strategies.

4. Practical Insights

- Thompson shares his criteria for selecting stocks - focus on fundamentals such as strong cash flow, growth potential, and the ability to capitalise on emerging trends.

5. Performance Record

- Thompson's portfolios have delivered impressive returns, with notable examples like a 46% gain in his 2016 portfolio over two years and a 30% increase in his 2017 portfolio within 12 months.

6. Awards and Recognition

- Simon Thompson has been awarded the Small Cap Journalist of the Year Award multiple times, underlining his expertise and success in stock picking.

B. Summary of Simon Thompson's Step-by-Step Guide, 2018

1. Identify Market Trends

   - Understand the Bigger Picture: Focus on economic and technological developments.

   - Spot Emerging Sectors: Identify industries poised for growth, such as technology and renewable energy.

2. Fundamental Analysis

   - Evaluate Financial Health: Examine company balance sheets, income statements, and cash flow statements.

   - Profitability Metrics: Look at earnings per share (EPS), return on equity (ROE), and profit margins.

   - Debt Levels: Assess debt-to-equity ratios to ensure manageable debt levels.

3. Company Research

   - Management Quality: Research the track record and expertise of the company's leadership.

   - Competitive Advantage: Determine if the company has a sustainable competitive edge (e.g., patents, strong brand).

4. Valuation

   - Price-to-Earnings Ratio (P/E): Compare the company’s P/E ratio to industry averages and historical values.

   - Price-to-Book Ratio (P/B): Assess the company's market value relative to its book value.

   - Discounted Cash Flow (DCF): Estimate future cash flows and discount them to present value.

5. Technological and Innovation Focus

   - Adopt Early: Invest in companies leveraging new technologies and innovations.

   - Sector-Specific Drivers: Identify key drivers within sectors, such as advancements in AI for tech companies.

6. Monitor Corporate Activity

   - Mergers and Acquisitions (M&A): Look for companies that are likely takeover targets.

   - Insider Buying: Track insider transactions as a signal of confidence in the company’s future.

7. Diversification

   - Portfolio Management: Spread investments across various sectors and companies to mitigate risk.

   - Rebalancing: Regularly review and adjust the portfolio to maintain the desired risk-reward balance.

8. Risk Management

   - Set Stop-Loss Orders: Protect against significant losses by setting predetermined sell points.

   - Position Sizing: Allocate capital wisely to avoid overexposure to any single investment.

9. Continuous Learning

   - Stay Informed: Keep up with financial news, market trends, and new investment strategies.

   - Review Past Trades: Analyse previous investments to learn from successes and mistakes.

10. Patience and Discipline

   - Long-Term Focus: Prioritise long-term growth over short-term gains.

   - Emotional Control: Avoid making impulsive decisions based on market volatility.

By following these steps, investors can build a systemat approach to stock picking and aim to achieve consistent long-term success in their investment portfolios.

C. Summary of Stock Picking for Profit, Step-by-Step Guide, 2013

Skip the 2013 book summary in order to focus on the guide.

1. Market Research

   - Trend Identification: Focus on industries with strong growth potential.

   - Economic Indicators: Monitor economic conditions that affect market sectors.

2. Company Analysis

   - Fundamental Analysis: Evaluate financial health through balance sheets, income statements, and cash flow.

   - Management Evaluation: Assess the expertise and track record of the company’s leadership.

   - Competitive Advantage: Identify unique strengths that give the company a market edge.

3. Valuation Techniques

   - Price-to-Earnings Ratio (P/E): Compare the company’s P/E ratio with industry peers.

   - Discounted Cash Flow (DCF): Project future cash flows and discount them to present value.

4. Risk Management

   - Diversification: Spread investments across different sectors to mitigate risk.

   - Stop-Loss Orders: Set predetermined sell points to limit potential losses.

5. Continuous Monitoring

   - Regular Reviews: Keep track of the company’s performance and market conditions.

   - Adjustments: Make necessary changes to the investment portfolio based on ongoing analysis.

D. Advances in the 2018 Guide Compared to the 2013 Guide

2013 Guide (Stock Picking for Profit)

   - Focus on Fundamentals: Emphasis on traditional financial metrics and company-specific analysis.

   - Case Studies: Use of historical examples to illustrate successful strategies.

2018 Guide (Successful Stock Picking Strategies Guide)

   - Technological Focus: Increased emphasis on identifying companies leveraging new technologies.

   - Sector-Specific Analysis: Detailed analysis of specific sectors, particularly technology, and how they drive stock performance.

   - Corporate Activity: Highlighting the importance of corporate activities like mergers and acquisitions.

   - Broader Economic Trends: Greater consideration of macroeconomic trends and their impact on stock performance.

Further info

IC Interviews: Simon Thompson

Wednesday, December 7, 2022

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