Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

YAP – Proof of the pudding?

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Recent volatility in global stock markets has, as ever, attracted media attention, because it mainly involves sell-offs. I thought it would be useful to see how different types of assets, such as we may actually own, have performed since the first hint of nervousness at the start of August.

To do that I am going to use short term data, obviously. I need to remind readers that short term data is NEVER a useful indication of relative OR absolute future performance. It can also be down right misleading. The data I am using is over one month ending about now, so it starts AFTER the August sell off. Relative to that starting point performance it will look much better that if I had, for example, been able to use 6 week data.

My objective is only to observe the direction of returns from various funds during this period of nervousness, leading to exaggerated volatilty. So one month data is ideal, specifically for this objective.

Does diversification actually work is the sort of sell-off we have seen lately?

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YAP – utter disgust!

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I thought that the market had moved away from focusing solely on the ‘will they, won’t they’ question about interest rate decisions from the US Federal Reserve. I was wrong.

Some mildly weak economic data, which could indicate a larger cut sooner will be required has been taken as negative (it ought to be positive for equities and bonds) by markets with sell offs so strikingly dramatic at the start of September just like we had at the start of August.

The similarity in the order of events and the timing at the start of the month makes me wonder if there are elements of algorithmic trading, already a big element of market activity, at work.

As there has been no real change in the prospects for the US economy (the future always has a range of outcomes and analysts are supposed to allow for that), I don’t see this sell off as being any more of a change of market direction than the August one.

Yes – it’s an opinion blog this time

What horrified me was to see Trump openly asking the Fed not to cut, presumably so that the current Preseident Biden can’t claim that his administration beat inflation, and various senior Democrats saying the Fed should cut. All are simply looking to their political self interests – there is not one jot of economic argument being reported, nor any comments about the interests of the American citizens.

I guess no-one is surprised by anything Trump does now, but the Democats appear to have no more moral fibre to me. US politics now functions in a way that makes Anthony Trollope’s satire on British politics at the end of the 19th century look quite mild (‘The Way We Live Now’).

Some may say it’s not really that different in the UK or Europe, but I would point out that the extent to which UK politicians are supported (and influenced) by the money of sectional interests (and they are on both left and right) is on a rather different scale, miniscule in comparison.

US politics does not obviously and observably have a linear relationship with stock market direction so the idea of the US President directing the policy of the central bank (which it sometimes seems like Trump wants to do) is pretty horrifying. But we live in horrifying times.

YAP – markets sell-off

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The sharp sell-off in global stock markets may end up being a very temporary event, but I thought subscribers might appreciate a comment before I leave for ‘riot-torn’ England. The latter picture of nationwide strife would be my conclusion based on the BBC news website, although not from others.

I am aware that the Japanese market has bounced back strongly this morning, but that is not enough news to form any conclusions about what will happen next in other markets.

What I can say is that the sell off we have seen has very little to do with fundamentals, except that tech stocks, notably those connected with AI, had become overvalued. That I have already warned about a few weeks back.

Have we just spotted a black swan? I don’t think so. More a question of the ducks taking off en masse at the shadow of what could be an eagle.

The only evidence that there is any sort of slowdown in the US economy is weaker numbers on employment and the strong numbers before were reported to be upsetting the Federal Reserve and keeping interest rates higher!

The weaker numbers may help the bank make a decision to lower interest rates sooner or even by more but predicting a global recession (which is what markets are said by some to be doing) from such limited data is plain foolish.

It fits rather well with my recent piece on behavioural finance that the FT suggests that markets are at risk of creating a self-fulfilling event by imaging a recession that has not yet happened. Nothing to fear except fear itself etc…..

The next few days will give us more idea of what the ongoing permanent market trend will be, but I see the macro climate as remaining generally benign. If anything, it just got better for fixed income. I hope readers already took profits from their high flying technology funds on the back of my previous observations.

Definitely not a time to panic but a good example of how markets that have run up strongly over months will correct in hours when there is a collective psychological meltdown. If you have a lot of profit on the table, you are very likely to rush to bank it at the slightest hint of bad news and the first to sell gets the best price, so get a move on! It’s just human nature.

YAP – Axa Framlington sold

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Some of my subscribers own the Axa Framlington Global Technology fund and indeed I myself have owned it in the past. Until fairly recently, it would have made most short lists for investors researching a tech specific theme. However, it was announced a little while ago that the long-standing manager, Jeremy Gleeson was leaving. His new post has since been announced – he has moved to Allianz GI to start up a new Technology fund – that will be worth putting on a watch list, I reckon.

Now we learn that the entire Axa Framlington business has been sold to BNP Paribas. That is no surprise.

After spending a fortune accumulating UK investment and insurance businesses (for example, Sun Life, Equity & Law and Framlington), AXA (a mega sized French insurance firm) did an about face (volte-face, I perhaps ought to say in this case!), and began selling off the assets, sometimes to the dismay of their clients, when the purchasers were consolidator administration firms that care more about squeezing margins than good client service.

I am off on my hols!

BNP Paribas have made their own forays into the UK investment market, mainly at the fringes and without gaining traction. This transaction has the feel of an old mate helping out, rather than an enthusiastic purchase with fresh investment and ideas to come. Mr Gleeson’s departure now looks like that of someone who saw the writing on the wall.

Any investment in Axa Framlington funds ought now to be scrutinised over the coming months and some research into alternatives undertaken, in my opinion.

For your information I am away on holiday from August 7th to 14th, so this is likely my last blog post for a fortnight or so.