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August quiet for investors? Not this year

In his new weekly column, Robert Pires, the chief executive officer and chief investment officer of Bermuda-based investment firm BIAS, offers some insight into the thinking of a fund manager and the process through which he and his team make investment decisions in the fast-moving environment of the international financial markets.

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It's been a harrowing two weeks in global stock markets. Usually August is a quiet month when staff is encouraged to take their vacations. Not this year!

We saw huge swings in the markets and our portfolios were not immune from these swings. We have taken advantage of this sell off by increasing at lower prices higher conviction themes in technology, healthcare, and home building and dumping lower conviction calls in emerging markets and energy. We have held for several months a turnaround stock which has been slow to perform — American Airlines. It was the top performer in our growth portfolio last week, up 5.13 per cent despite a market that was sharply down. Patience paid off on that one!

Both our equities growth portfolios and the dividend income portfolio beat the S & P Global Index on the week, albeit markets were down.

This morning stocks in our portfolios are sharply higher with a few exceptions. If this is sustained through the day our portfolios will be well ahead of the indices at the close of the day.

The big debate in this morning's strategy meeting was whether the Fed would increase the Fed Funds rate this month. The Young Turks on the team think they will. They say the increase is already priced in the US Treasury yield curve and therefore the impact of higher rates is already filtering through the economy.

Employment continues to improve and from their perspective the Fed's objective of achieving non-inflationary employment is being achieved. I accept their points but disagree with them on the timing of the hike.

The Fed has yet to meet its inflation target of 2 per cent although it is closely approaching with CPI at 1.8 per cent. I would consider a rate hike as a possibility this month if the financial markets weren't so rattled by the weakness in China. I think the rate hike is more likely in December for the same reasons the youngsters suggest, but believe at this time the last thing the Fed can risk is adding fuel to a market sell-off ahead of the Christmas shopping season.

Christmas sales are essential for retail to make a profit and you don't want the consumer going into the holiday season worried about the state of the economy. That would throw cold water on consumer spending which makes up more than two thirds of US GDP.

So again this week is steady as we go. We have import prices, jobless claims, and the University of Michigan Confidence Index announced later this week. Import prices are expected to be down as a consequence of a stronger US dollar. Initial jobless claims are supposed to come in slightly lower which is a good signal for the economy and the Michigan Confidence Index should be slightly lower but still at a good level.

So the team will be allowed to argue their position on the Fed Funds hike tomorrow morning again. They are after all very bright and much quicker witted than me. What we all agree though is that a hike is likely to take place this year — my view is December — for no other reason than that the market expects it, the Fed has suggested that it will take place, and the market needs to perceive that Fed is in control and that it is confident that the US economy is definitely in recovery.

Robert Pires, MBA, CFA is the chief executive officer of Bermuda Investment Advisory Services Ltd. He can be contacted at rpires@bias.bm.

BIAS CEO Robert Pires

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Published September 09, 2015 at 9:00 am (Updated September 08, 2015 at 8:37 pm)

August quiet for investors? Not this year

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