US and global equities surged on news that the US House of Representatives passed the tax reform bill, Cisco and Walmart posted blowout earnings and a potential bidding war emerged for Fox’s media assets. The rally on Thursday followed a week of carnage in the US high yield debt markets, flattening of the US Treasury yield curve and losses in the major stock market indices worldwide.
The 227–205 vote in Congress on tax reform illustrates the political polarisation in Washington. This means there will be a tough political battle for tax bill in the Senate, even among Trump foes in the Republican party. The GOP controls just 52 Senate seats, the Democrats will oppose the rich dude/corporate tax cuts with their usual loony left passion and Wisconsin Senate Ron Johnson has announced he will vote against the bill. If Theresa May faces a revolt in Westminster, Trump could well face a Republican revolt in the US Senate. This will be a Lehman scale shock for global financial markets if it happens, as I expect it will.
The military coup against Robert Mugabe in Zimbabwe means the South African rand is an obvious short. After all, Jacob Zuma’s ANC is very close to Mugabe’s ZANU – Patriotic Front. Mugabe turned Zimbabwe into a personal fiefdom and an African financial basket case. The former Rhodesia has huge economic potential if the military establishes a credible technocratic government. Mugabe leaves office with a 200% inflation rate, a 90% unemployment rate and capital controls. The economy is hostage to Chinese state owned companies beholding to Beijing and tribal tensions between the Matabele and Shona people that predate even the arrival of Cecil Rhodes, let alone Ian Smith. Could Harare be the next frontier fairy tale? Stay tuned.
In Europe, I expect profit taking in the Euro Stoxx 600 index to test 384. The earnings and economic growth momentum that made European equities a must-own has now abated. The upward revision ratio in European earnings has fallen to 51, the lowest since late 2015. The 40% rise in oil prices since June will hit margins, as will the rise in the euro once corporate FX hedges roll out. The real problem in Europe is the mediocre profit results at major banks like Credit Agricole, UniCredito, ABN Amro, BNP Paribas, Société Générale and Deutsche Bank. Awful trading results and a flattening euro yield curve do not help nor does the prospect of the Italian election.
I was stunned to see Walt Disney trade higher to 104 even though it missed on both revenues and profits. Obviously, investors are electrified by the new Star Wars trilogy, a new streaming service to compete with Netflix and new TV series based on priceless content at franchises like Marvel, Pixar and Lucasfilms. Sports content ratings are a blowout. My trading range on the Magic Kingdom, executable via Chicago options, is 96 – 110.
I see significant money making opportunities in Singapore, US and British real estate investment trusts. Amazon’s (and ecommerce’s) insatiable appetite for warehouses and distribution centres make industrial REITs the segment darlings du jour. Shopping mall shares are a disaster, down 18–20% even while industrials like Prologis are up 25% and scale new highs. US industrial real estate has pricing power I cannot ignore.
I believe Hong Kong property developers are now a screaming short. Li Ka-shing, Asia’s wealthiest billionaire, sold his Central flagship skyscraper to a Chinese state firm for $5.2 billion, a world record for a single building, or HK$ 33,000 a square foot. Brokers are scrambling to resell entire floors at up to 50,000 Hong Kong dollars as the Chinese buyer seeks to finance the trophy asset. This is insane. This is Tokyo, 1989. The Hong Kong interbank offered rates has surged. Banks will raise the prime rate for the first time since 2006. Hong Kong’s stratospheric home price index has begun to sag and number of transactions have plunged, invariably an ominous sign. The Fed rate hikes will be a kiss of death. Yes, this time the wolf is here in Central!
Russia is an emerging markets Cinderella at 6.8 times forward earnings, 14% earnings growth and a 5% dividend yield. Yes, Putin is still in Crimea, the cyber-espionage hacking scandal will not go away. Yet the Russian economy has emerged from recession. Lukoil and Rosneft will raise their dividends. Sberbank has been a fabulous winner. A hundred years ago, Lenin and Trotsky overthrew the last Romanov Tsar and Alexander Kerensky’s provisional government. The USSR was a 74 year nightmare for Russia and the world. Yet there is profit potential in Russia’s equity index fund.
