Insight: The ECB Danger

The European Central Bank (ECB) started its Quantitative Easing (QE) program early 2015, where they buy sovereign debt from countries in need of liquidity to help the Eurozone economy recover and to control inflation. There have been many discussions about whether the ECB should have stepped in. Of course, only time can tell if the ECB made the right decision about QE, but it may be wise to be aware of the dangers of QE.
First, QE may seem safe, as it is helping the Eurozone economic stability, it may in reality create higher risks. The QE program lowers yields on bonds, making them less interesting investments. As a result, investors may look for other assets which have a higher expected yield such as stocks, which drives the stock prices up. But this higher stock price is not a real reflection of the underlying value of a stock, its price is only inflated due to the higher demand for higher yielding assets. But the QE program can't be continued for ever, so when the ECB announces to gradually stop the QE program, bonds will become more attractive as their yields go up again. Meanwhile, the stock market will suffer as stock prices were over-optimistic and investors start selling their stocks to switch to the bond market again. The question that remains is not if the stock market will react badly towards the end of the QE program, but how badly it will react.
Second, there may be low interest margins for financial institutions. We learn from the experience of the US and Japan QEs that margins tend to be narrower, which gives banks less space to manoeuvre in the financial markets. This puts a strain on their liquidity creation, because banks become less willing to lend to more riskier clients (this can also be positive as the risk of defaults declines, but that's another story). The major pitfall is the harm it may cause the small and medium-sized sector, which is the major part of the economy. This is contrary to what QE is supposed to achieve.
In the end, QE will definitely have some (short term) advantages, but it remains unclear whether the long term effects of this program will be that positive as well. Be aware of the pitfalls of QE!

Spotlight: Huawei Technology

The Chinese telecommunication company Huawei Technology (SHE:002502) has attracted lots of attention recent years. This may not be surprising as Huawei is currently the largest telecom company in the world. Which brings us to the question: is Huawei stock still attractive?
One of the first dangers of this stock is of course the Chinese bubble. Moreover, the volatility of Huawei stock has increased heavily the past year. Huawei was trading at 34 Yuan ($5.35) in June, only to drop to 15.80 Yuan ($2.48) early July and eventually rebounded to 31 Yuan ($4.88) mid-July. What's striking is that at first Huawei seemed to suffer big time in the Chinese crisis, but quickly rebounded between a band-with of 25-30 yuan ($3.90-$4.72). So Huawei has experienced heavy stock price fluctuations, but seems to be able to cope with the crisis to a certain level. The problem for Huawei could be its domestic market. If the disposable income of the Chinese working man also declines then Huawei will have to drastically revise its growth expectations. However, the Chinese bubble may be more of a crisis in the financial world and may have less social-economic impacts.
          There are of course also opportunities for Huawei as they sold about 40% of their produced units overseas. With a growing demand in Europe and the US in value smartphones (smartphones of good quality for a lower price), Huawei still has more market share to capture in the Western countries. But Huawei has to be aware of its image. Chinese safety standards are simply not as high as in the Western countries, which raises some questions about how easily Huawei phones can be hacked. Some even go as far as stating that Huawei shares its technology with the Chinese government so they can spy on anyone with a Huawei phone. Of course Huawei denies these allegations, but it puts a strain on the willingness of some Western consumers to buy Chinese phones.
What may be key as to why Huawei is an interesting investment is the vast amount they are spending on research and development. In 2014 they've spent a total of $6.6 billion on R&D, which is more than IBM, Facebook or Apple did. Even with this expenditure on R&D, they still managed to be highly profitable ($4.49 billion in 2014). Compare this with a company such as Amazon.com which also spends a lot on R&D, but fails to be profitable. Hence, Huawei is a company with lots of potential (in overseas markets), it may produce new innovative products that can conquer a market, while they already make a solid profit. The Chinese market may cause some trouble, but if you handle a long-term investment strategy, Huawei is definitely a stock you want to have in your portfolio.