This month: Where to invest in 2012

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Notice: Mr. Patel is not restricted from owning individual securities or derivatives. The newsletter contains Mr. Patel’s own opinions and is provided for informational purposes only. You should not rely solely upon it for transacting securities, and you are encouraged to seek the advice of a qualified professional before you make any investment. None of the information contained herein constitutes, or is intended to constitute advice or recommendation of any particular security or trading strategy or a determination that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein duly be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

The Essential Comment and Analysis

In this section we distill the most important and essential information from all our sources – to cut through the noise and deliver what really is moving the markets. It’s a top-down perspective.

It remains an uncertain and frightening world. Having returned from India, Malaysia, Singapore and Dubai, I return to hard data matched with a hard look at people and businesses on the ground. I remain calm and somewhat optimistic. But don’t just take my word for it, see the hard data and analysis below.

You will note that Goldman Sachs’ forecasts in some areas have been overly optimistic but the underlying fundamentals have not changed. I agree with the Equity, Energy and Metals forecasts below in broad terms but will show specific charts below.

Where are the billionaires putting their money? Bloomberg’s survey of billionaires found the following:

You will therefore want my comments below about gold. I am assuming you don’t want to buy a Picasso. You will also want to see my analysis of corporate bonds and where the world’s richest sovereign fund puts its money – and we can too.

Key Markets

In this section I evaluate the key global markets and their likely direction.

Despite its cheapness (see below), the monthly FTSE 100 chart suggests at best a fairly broad sideways move for now over the next month. That does not stop interim swing trading and I shall examine that shorter time frame separately. For the next six months I expect a flat to 2% return. For 12 months, a 10% return.

The Nifty (India) monthly chart shows the strength of downward force on the MACD. This will depress any upward move. However, we have no problem being bullish over a 3 year period and think now is a good as time as any to enter if you are looking at a longer time investment time frame, rather than trying to time the market.

I see the S&P 500 as flat based on the technicals but I remain bullish based on the valuation. Although the MACD is below its signal line and falling, it is quite flat which should have only a benign effect on the price.

If you want the Goldman Sachs perspective – their top 2012 trades:

TOP 2012 TRADES

1. Short European high yield (long protection iTraxx Europe Xover index Target 980bp)
2. Short 10y German bunds (target yield 2.80%)
3. Long EURCHF (Target 1.3500)
4. Long Canadian Equities (S&P TSX) vs Japanese Equities (Nikkei), fx unhedged (target 120)
5. Long Global Rebalancing Basket (Long CNY,MYR vs GBP, USD) (target 107)
6. Long July 2012 ICE Brent Crude Oil Futures (target $120)

The Essential FTSE 100 & 250

Medium-High Risk: Which are the strongest longs and shorts for day traders (D), swing traders (S) and investors (I)?

Bellway: Bullish. Target 900p, stop loss at 710p. The rising MACD and price move suggests that although there will be some profit-taking, the upward bias is intact.

Lamprell: Target 350p, stop loss 225p. For day traders, the short-term trend is up; the weekly trend is also up which is positive for swing traders; but for investors the trend is down.

Cranswick: Bullish. Target 800p, stop loss 680p.

Home Retail Group: Short. We don’t see the recent rally in HOME lasting. Too much fundamental and technical weakness; in particular the monthly MACD is falling strongly.

Pace: Short. Pace will at best go sideways beyond the rally seen. I can’t get past the longer term weak technicals. Sure the daily chart is showing a sharp rally, but longer term it takes more time to turn around.

I don’t want to be bullish on the fundamentals for the Banking sector, but Barclays is bullish based on technicals and the strength of the bank.

Talvivaara: Weekly chart has potential based on MACD. The price break out upwards is not strong enough as yet to say it will continue.

The problem is the MACD on the monthly continues to fall sharply and that is a drag on the weekly share price.

With Ferrexpo – sell into strength because the monthly chart MACD shows downward momentum. When that happens a simply rule like when the price makes a 1 day low (i.e. lower than yesterday’s lowest) sell short. The stop loss is the high of the previous day. This is a day trading strategy requiring close observation but when you know the trend is down it can work well for picking up points.

Rotork: Expect a pullback on profit taking, perhaps as low as £16 support, but we are bullish for a 3 month outlook. So short-term day traders and swing traders will short weakness, and medium term 3 month investors should be long.

Phoenix: A 2 month target of 600p based on momentum. A stop loss of 510p.

ICAP: Expect a range from 225-260 over next 2 months.

Standard Chartered: Down trend is still down so do not turn bullish on this one yet. Swing traders try the ride to 1525. Longer term investors go long above 16 only.

IG Group is a medium to high risk play to reach 550p with a stop loss at 475p. The reward/risk looks favourable given momentum.

Antofagasta: Longer term downward pressure on price prevents any definitive upward price breakout. Range-bound and good for swing trading until then – i.e. several days up, several days down.

QinetiQ: Bullish. The day, weekly and monthly charts are all showing upward bias making this an attractive long for day traders, swing traders and investors.

Berkeley Group: Bullish for day, swing and investors due to daily, weekly, monthly charts.

Premier Farnell: Day Traders go long; swing traders long; investors avoid. In the next two months expect a 200p to 160p range.

Kazakhmys: Day Traders go long; swing traders long; investors avoid.

Bovis Homes: Bullish. With the daily, weekly and monthly MACDs and stochastics showing room for more upward price moves, I am bullish and of strong conviction on this one.

The Essential Small Caps and AIM

High risk: Which are the strongest longs and shorts for day traders (D), swing traders (S) and investors (I)?

Enterprise Inns: D up; S up; I neutral. Target 45. Stop loss 30. With rising technical indicators and a price break out as well as price momentum, we continue to follow the upward trend on this one.

Mecom: D up; S up; I neutral. Target 210p. Stop loss 160p.

Based on their value/growth ratings and their price trends I am bullish for day trades and swing trades on the following:

The Essential US Markets

Key perspectives on US markets: short/long term trades and investments.

Below I have listed those North American stocks which are undervalued based on their 10 year PE ratios. I also show you what price upsides you would have if they returned to those average 10 year PEs. Given that I name some very large cap companies, you can see that the risk can be mitigated too. Of course sometimes PE is low because there is no confidence in the company. But in other cases, it is usually just that they are undervalued.

With the Dow, I am not expecting a year-end rally. Although the weekly chart suggests a move up, with the MACD rising, the monthly chart is not as positive and will act as a dampener. Fundamentally, as I have already said, I am positive long-term based on the low valuations.

Focusing on steel prices, we do not see the recent rise in Arcelor Mittal advancing much further. The price is down some 80% since 2008. The company needs to control costs and digest acquisitions. Selling out-of-the-money call options is attractive.

For Microsoft, despite recent price rises, we still see it falling back to its $24 base because the MACD on the monthly chart will weigh down on the price. Below is the weekly chart.

Looking at Apple after Jobs – shorter term weakness, but I am expecting a rise. It’s not a strong conviction, but something I will need to keep a close eye on. Whilst the fundamentals are strong, the technicals - MACD in particular - suggest weakness.

I am particularly interested in cheap, large cap, growing stocks with good yields. This means those with relatively low PE, above the norm dividend yields, and 5 year compound revenue growth. And I want them to be up in price over the past year. Names meeting this for a potential 12 month holding:

• Alliance Resource Partners
• Atlas Pipeline
• Companhia de Saneamento Basico
• KLA Tencor
• TIM Participacoes

The Essential Value/Growth UK Stocks

I analyse which UK stocks exhibit year on year revenue growth, and are undervalued and generate relatively attractive income. The idea is we have 3-in-1 (i.e. value, growth and income). These tend to be medium risk, to be held for 12 months with a 25% stop-loss from entry.

From the Alpesh Patel Special Edition Value/Growth filter the following stocks look attractive long-term buys.

Charter below you will note has a ‘9’ on a Value/Growth rating so is especially attractive.

GB Group also looks attractive on the Value/Growth rating but the MACD on the monthly chart is worryingly toppy. So I am saying long, but keep a close eye.

With Highland Gold Mining I would want to see a decisive break above 200 to go long on this one.

Kier Group also showed up in the Value/Growth filter and the chart below shows why; namely a rising MACD and price with room to go up to reach previous MACD highs.

For NCC, I have marked on the chart my expectations. Whilst the MACD on the weekly chart is set to rise, the monthly chart is showing weakness – but my conviction is for a 12 month continuation of the trend of since 2009.

Based on fundamentals and technicals, Park Group is probably the most attractive of all the stocks currently in the Value/Growth filter.

Polar Capital too shows attractive fundamentals and technical indicators – with rising MACD on weekly and monthly charts and the stochastics reinforcing the same.

The Essential Commodities Analysis

What do we need to know about key commodities – trading across differing time frames?

For me the chart below sums up why I expect oil to be a 2012 long trade.

Oil: Bullish due to supply issues despite concerns about economic growth in Europe. Global growth is buoyant.

A stronger dollar as flight from Euro means gold prices will continue to find it difficult to breach $2000 per ounce.

The Essential ETF Analysis

For medium risk investors looking for instant diversification and simplicity in their portfolio.

Returning from Malaysia – I would want exposure to the country.

And returning from Dubai – I have uncovered an interesting ETF with strong fundamental and technical reasons to back it:

The US pharmaceuticals sector remains attractive and this ETF offers one-stop diversified exposure:

The Essential Emerging Markets Equities

High Risk: Key perspectives on EM markets: short/long term trades and investments.

Tata Motors remains a favourite - especially for a 12 to 24 month holding.

There remain a whole load of Chinese stocks that can be shorted on the US markets – I fear the over-exuberance of buyers into anything with ‘China’ in the name has resulted in a downward trend now.

The Essential Forex Analysis

What do we need to know about key forex crosses – trading across differing time frames?

What to be long and what to be short in 2012 – this chart sums up the recent trends. I mentioned in an earlier newsletter that the Malaysian Ringitt is an easy long trade. The diagram below shows if you are long MYR and CNY (Chinese Yuan) and short USD and GBP – you have been in a lucrative trade for a number of years. It simply reflects a long-term rebalancing. And in 2012 will continue.

For 2012 we are also long EURCHF – looking at the technical explains why. The MACD and Stochastic on the monthly chart indicate a rise to 1.3500

On cable broadly expecting over the next month the dollar to strengthen:

A Euro will continue to buy fewer pounds – the reasons being obvious!

With USD/EUR I expect a long position to do well. Despite volatility as the Europeans announce how they will yet again try to solve the debt crisis, the broader trend is weaker Euro.

The Essential Data and What You Should Know and Do

I repeat this key data in each newsletter and highlight any change in view in red. In the noise, what is important is often lost. It is vital an investor keeps focused on the most important facts.

Equity Earnings – Are we making profits?

View unchanged from last month: Corporate earnings remain strong and beat our overly pessimistic views. This is essential for rising equity prices. This provides a base for equity prices. This is data which people overlook. But it is hard honest data.

Debt - What is the truth?

View unchanged from last month: The debt is not good, but when I look at the ratios below I see countries with AAA ratings and high debt/equity ratios. So either the analysts are overly optimistic, or the journalists are overly pessimistic. I am siding with the AAA ratings. That says I am not overly worried about the level of debt. It is not good, but it is not drowning – not least because Euros can and should be printed to pay debt as a last resort.

Equity Valuations: UK and US – cheap and if so, when to exit?

View unchanged from last month: Equities are undervalued based on earnings and offer a high risk premium.

US equities are also undervalued – so when do you exit? The chart below suggests if ever you get a 15% return on S&P – you exit.

The forecasts below show greater optimism than I have, but I am optimistic based on valuations so it is gratifying to see Goldman Sachs Asset Management agree with me, especially as they send this information to the most influential family offices and funds.

The chart below confirms the relatively low valuation of the S&P over two decades.

Volatility is here to stay

View unchanged from last month: Increased global equity market volatility is here to stay. So either you invest for a longer time frame, or you use machines to trade very short term or you keep a very close eye and strict money management rule enforcement on your 2 day to 3 week investments – because those are the most volatile dangerous periods

Gold: Where in 2012?

View Unchanged from Last Month: The essential floor for the price of Gold is the value of the dollar. And we do believe that the dollar has a lot of downward pressures. Any month of course the dollar may appreciate, especially as it still has some safe haven status, but sooner or later the Euro will devalue, and then we anticipate the Dollar will follow suit. This is not necessarily imminent, but we do expect gold prices to have a floor because of likely dollar falls. The one thing that would prove us wrong, would be if the world fled to the Dollar as a safe haven more than anyone anticipates.

West or East or Commodities?

View unchanged from last month: We find the Abu Dhabi Sovereign Wealth Fund’s asset allocation statement very telling in that it puts into perspective the overly negative view people have about the West. Clearly the balance of power may be shifting East, but it has a long, long way to go yet and the West remains a major investment priority.

Target Strategic Asset Allocation:

Asset allocation is used to help achieve the risk/return objectives of the total portfolio. The Strategic Target Asset Allocation Benchmark is designed to reflect ADIA’s (Abu Dhabi Investment Authority) vision of the world over the medium to long term.

By Region Range

• North America 35.0% to 50.0%
• Europe 25.0% to 35.0%
• Developed Asia 10.0% to 20.0%
• Emerging Markets 15.0% to 25.0%
• By Asset Class Range
• Developed Equities 35.0% to 45.0%
• Emerging Market Equities 10.0% to 20.0%
• Small Cap Equities 1.0% to 5.0%
• Government Bonds 10.0% to 20.0%
• Credit 5.0% to 10.0%
• Alternative 5.0% to 10.0%
• Real Estate 5.0% to 10.0%
• Private Equity 2.0% to 8.0%
• Infrastructure 1.0% to 5.0%
• Cash 0.0% to 10.0%

The chart below also explains why the US is considered an important safe haven. It still has the biggest companies.

Emerging markets equities

We do hold that emerging market equities are cheap on a price earnings basis. This is because the earnings are stronger than analysts’ cautious estimates.

Should I be worried about Europe?

Below is the reason I am not worried about Europe. In GDP terms, Greece is equivalent to Washington and Italy to California. And California is pretty much bust! So given that both the EU and US are about the same economic size – I see no reason to be so much more worried about the EU than the US.

Another reason I am less worried is that goods exported to the Euro area by major economies is about the same last year as is has been in the last decade. In other words – the Euro crisis has not led to exports collapsing for countries exporting to EU.

Yet another reason, if you need it, as to why I don’t need to worry about Europe – is because the world itself is set to grow in 2012 and 2013. Imagine that!

What is safe for yield, but not Government bonds?

The answer for me all year will be corporate bonds which are rated better than the US Government. They are listed below. These give you safety but a small amount of risk. Of course returns will not be huge, but that is the point.

About Alpesh

A. Independent

Alpesh runs his own FSA regulated asset management company – he does not work for vested interests.

B. Awards

Alpesh’s investment book was selected top 10 Business Books of 2000 in the Independent Newspaper.

Alpesh won the Asian Achievers Media Award in 2003 presented by Rt Hon Patricia Hewitt MP.

C. Managing Money

Alpesh’s Asset Management company, Praefinium Partners Ltd manages money for institutional investors.

D. Industry Testimonials

Alpesh’s books have testimonials from Chairmen of the world’s largest derivatives exchanges and CEOs of the world’s largest brokerage houses

He was asked by the International Federation of Technical Analysts to provide their Annual After Dinner Speech in 2003

E. Prominently Published

Alpesh started writing the weekly ‘Diary of an Internet Trader’ column in 1999 for the Financial Times. Six of his books have been published by the Financial Times and three by MacMillan

F. As seen on TV!

Alpesh Patel was for 3 years Bloomberg TV’s paid in-house 'Online Trading' Specialist hired by the MD of the Channel to present shows weekly.

G. Financial Magazine Editor

For two years Alpesh was editor of e-Shares, part of the award-winning Shares magazine and is Consultant Editor of Financial Voice, part of the national Asian Voice paper.

H. Academic Credentials

Alpesh was a Visiting Fellow in Business & Industry at Corpus Christi College Oxford University.

I. Global

Alpesh’s Financial Times column was translated into German by FT Deutschland and syndicated globally.

His books published by Financial Times have been translated into German, Spanish, Chinese, Russian, French and Polish.

He has lectured from Beijing (invitation of the Chinese Government) to Guatemala, India, Spain.

J. Institutional

Alpesh has been invited to teach the investor clients of Goldman Sachs, American Express, Schwab, E*Trade, CityIndex, Deal4Free, Cantor, Barclays, LloydsTSB, and the list goes on.

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