Tactical ideas in today's global stock markets

Tactical ideas in todays global stock markets
The easiest directional call in global equities is to remain long the Financial Times (FTSE 100) index in the lingo of the City

By Matein Khalid

Published: Tue 11 Oct 2016, 1:46 PM

Last updated: Tue 11 Oct 2016, 3:55 PM

If bull markets climb a "wall of worry", 2016 proved it. Despite last winter's Chinese yuan spillover, Brexit the bungee jump in crude oil, Deutsche Bank, Italy woes and fears about the Donald Trump circus, the US market has continued to be a winner, though nothing like the money gusher my favourite markets Pakistan, Taiwan, Russia, Indian banks/autos and Philippines property developers proved to be. However, as I see sterling collapse to 1.2350, gold plunge to $1,250, King Dollar on a rampage against the Swissie and the Canadian dollar (my loonie collapse scenario is happening in real time - 1.33 now, 1.36 target), a massive spike in US, German and Japanese bond yields amid prospects for a Fed rate hike and an ECB taper. As a strategist, I cannot afford the luxury of dogmatism. When the world changes, my trades change with it. As Dr Johnson might have put it in Georgian England, leverage, like hanging, concentrates the mind!
The easiest directional call in global equities is to remain long the Financial Times (FTSE 100) index or the Footsie, in the lingo of the City. Almost 70 per cent of British large cap earnings are generated outside the sceptered isle, so the Footsie is a classic beneficiary of a sterling that is getting slammed in the world currency market. Europe will get nasty over Article 50 so I would short names like Easyjet, Tesco, British Land and Ryanair while load up on greenback earners. Rolls Royce, BP, Shell and Pearson PLC. Follow the money to London Town, hedge sterling and surf the Footsie to 7800.
Barclays new CEO Jes Staley (Jes could still one day run the House of Morgan when Jamie Tyranncus is finally booted off the banking Mount Olympus) and his strategy of slashing non-core assets, including sacred cows like Africa. Yet I fear Little England banks like Lloyds and RBS will be hit by slower loan growth, higher funding costs, a grimmer High Street and a free fall in UK property prices as the Brexit talks turn ugly.
In Europe, the spike in German Bund yields on the prospects of a Draghi (or let's face it Bundesbank) led taper consensus in the ECB Governing board, could be a signal to buy my favourite banks in Europe. (BNP in France, ING in Holland, Credit Suisse in Helvetica). The Euro bank Stoxx 600 index has underperformed by a colossal 25 per cent in Europe and a steeper German Bund yield curve could be the catalyst to unlock deep distress value. Insurers Axa, Swiss Re, Aegon and Allianz also benefit from a steeper global debt yield curve.
While I expect the Algiers deal to unravel in Vienna, the logic of squeezing black gold shorts means Brent could well rise to $56-58. While the hottest action is in pure play shale oil E&P firms in West Texas and the drillers, I believe widows and orphans will sleep far easier owning the shares of French supermajor Total SA. The firm has slashed capex from $28 billion three years ago to $10-12 billion next year while reducing its per barrel operating cost to $6, the lowest oil cost producer among the Seven Sisters. I love Total's six per cent dividend (No risk of a cut) and discount valuation to Shell and BP while its Angolan, LNG and Russian (Total owns 19 per cent of Novatek) projects could well deliver five per cent output growth. My put sale strategies on Total are designed to earn $60,000 in premium income on 60 contracts of high delta May 2017 puts on the New York ADR.
Even though the IMF slashed its growth forecasts again, Wall Street wants to accumulate industrial shares on both sides of the Atlantic (though please avoid the value traps of Marounuchi in Japan!) I will reiterate my conviction that United Technologies (UTX) shares simply do not discount Pratt and Whitney's growth potential in narrow body aircraft engines (with long life aftermarket services the usual cash cow), the $9 billion sale of Sikorsky helicopters will finance higher payouts and share buybacks and the China property boom will boost earnings growth in Otis elevators and Carrier cooling systems. The recurrent revenue services model deserves a valuation rerating above 13.6 times forward earnings. This is one of the world's great engineering, technology and product innovation franchises that is no Honeywell.
Researched and compiled by Matein Khalid. Mr Khalid is a global equities stategist and Fund manager. He can be contacted at: mateinkhalid09@gmail.com




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