Gavekal Capital: 2014-06-08

Friday, June 13, 2014

Will Higher Rates Threaten the UK Housing Market?

Following Mark Carney's warning on mortgage debt and rising interest rates in the UK earlier today, homebuilders and home improvement stocks have (not surprisingly) underperformed:

Persimmon
image
Kingfisher
image

While one day's movement is not usually a major concern, the 7% and 4% declines, respectively, in Persimmon and Kingfisher will likely result in violations of their support in the longer-term point-and-figure charts:

image
image

Performance by Country, Without the Noise

As regular readers know, we use relative strength point-and-figure methodology as one input in our process.  One of the main benefits of the system is the ability to see beyond short-term fluctuations in the price of a stock.  We can apply this process to country indices as well, allowing us to focus on areas with more promising overall trends.

MSCI Asia Pacific
image
image
image
image
image

MSCI Europe
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image

MSCI North America
image
image

Thursday, June 12, 2014

German Defense: Spending Spree?

A Bloomberg article today (here) highlighted the potential need for Germany to invest more in its defenses, in light of recent geopolitical instability.  As a percent of GDP, defense spending has been falling since the early 1990's.  However, if we look at absolute spending levels, yearly totals have recently matched or even exceeded those reached more than 20 years ago:

image

While we have no special insight into government contracts or specific agreements, we are able to see which MSCI Europe Aerospace & Defense companies might have benefited from increased spending on national security. As a whole, the group has performed well among its Industrial peers over various time periods:

image

A look at the constituents of this group shows positive price performance over the last month with more mixed results when other time slices are considered:

image

In our point-and-figure methodology, we can see the mostly positive trends over the last year or so-- but, as the table above points out, many of those are being tested:

image
image
image
image
image
image
image
image

In addition, sales and earnings estimates are not overwhelmingly positive:

image
image

Perhaps Germany has chosen different vendors for its defense needs?  It is worth noting that the average European company in this group spends about 3.3% of sales on R&D while those in North America spend slightly more at 3.5% of sales.

image

New Highs Have Recently Expanded

Breadth has improved somewhat in the market recently. During this latest burst higher over the past three weeks, the MSCI World has experienced an expansion in new highs across a variety of time frames. This is a positive sign for the stock market but from an absolute level new highs are still generally lower than previous peaks.

image

image

image

image

image

image

Digging Into Dividends - Who Actually Pays Dividends

Q: Which sector in the MSCI World Index has the highest percentage of companies paying a dividend?

A: No, it's not your "bond proxy" sectors like Telecom or Utilities. No, it's also not coming from the financial sector. The answer,surprisingly, is the Consumer Staples sector.

97.5% of all consumer staple stocks pay a dividend. What may perk investors interest even more is that the Consumer Staples sector actually has the second lowest payout ratio, only behind the Energy sector, at 29.7%.

image

image

The Consumer Staples sector also has the highest percentage of stocks raising dividends and the highest percentage of stocks that are "net raisers" (percentage of stocks raising dividends minus the percentage of stocks cutting dividends).

image

image

Finally, the Consumer Staples also has the best track record of dividend increases over the past 3, 5, and 10 years. Over a quarter of all Consumer Staples stocks have increased their dividends for 10 consecutive years. This is substantially larger than the 11.1% of stocks in the MSCI World index that have increased their dividends for 10 consecutive years.

image