Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Monday mashup – did Nige blink first?

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A couple of my readers have commented that global stock markets are not turning as positive as one might have expected following what seemed to have been the first signs of resolution of two of the major uncertainties: Brexit and the US/China trade war.

I suppose one can understand a lack of joy about the apparent progress in the trade talks as a single Trump tweet could write off weeks of careful work by officials.

My confidence about the likely result of the Uk General Election has not been taken on by the markets, at least not until today. With the Tories miles ahead in the polls and even traditional Labour voters not wanting to vote for Jeremy Cornyn, one would have thought it was a racing certainty for a Tory majority of some size, and that would allow a closing strategy on Brexit to become clear. I think businesses and investors are now more keen just to know what they will be facing, as opposed to worrying about what it will actually be. Many will have decided what they will do either way by now.

What do we make of that….?

What has changed today and instantly pushed up the Pound and the UK ‘home’ market (The FTSE 100 suffers when the Pound goes up) is Nigel Farage’s announcement that he won’t field candidates against the Tories where they would be expected to win (as I understand his position at this time).

He must have accepted that his future, which only exists if the Brexit party has at least a few MPs, was looking to be a short one if he had election results that comprised a number of also rans in seats that were gifted to Labour or the Liberal Democrats when the Brexit vote got split. He maybe even thinks this noble gesture will get him a job with the Government later (not likely in my view).

Time will tell, as ever, if this is proof that Boris and his ‘oppos’ have made enough of the right calls to get themselves 5 years in power. Given that Labour has made some genuinely Socialist policy proposals, the City will be more relieved than usual if the chances of a Labour victory are further reduced.

My feeling is that there is an opportunity to make a tentative start at buying into funds with exposure to the sort of UK businesses that have been subject to undervaluation because of Brexit uncertainty as opposed to their actual business models. Today’s figures on the UK economy 3rd quarter were also not too bad.

Monday Mashup – toothless regulators

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This week I am not writing about the investment markets, but the system of retail investment. We all have a risk if the people we give our money to negligently mis-manage it or even run off with it. There are systems in place that are supposed to protect us in a country with a highly developed financial services industry, but do they work?

Covering all angles

I will start with an allegorical situation. I own a house in a country where burglaries are reportedly (from the insurers) less common than in England, but as I live in a remote area I have a good electronic security system, pay a modest sum to a security company to send out 2 armed employees promptly if it is triggered and as a backstop have a normal house contents insurance (with a discount because of the security arrangements).

Here I am training and improving my CV ahead of applying for a job at the FCA

It all works – I know because I accidentally triggered a smoke detector in the small hours and had 2 large uniformed guys appear and ask me for ID docs and my password! I suppose you can get burglars in pyjamas!

I tell you this because that is how the retail investor buying funds ought to be protected in the UK – with proper security systems that respond

We pay for our own protection

Our money goes into OEICs, which are run in line with a prospectus and have an ACD (authorised corporate director) who is charged with making sure the securities are looked after and the fund manager behaves. That is the first line security system. You pay for it directly in your fees.

There is also the FCA (the regulator or response force). They are supposed to understand the market operators, monitor them, identify risks and discipline or even close down bad actors You pay for it indirectly in your fees.

Then there is the last resort insurance policy – the Financial Services Compensation Scheme. This is widely used as a ‘catch all’ to make up for all the bad practice that the FCA failed to notice. If you think adviser fees, bank charges and insurance premiums have gone up a lot lately, one reason is to pay for the escalating cost of FSCS levies – so you maybe pay for that too.

The Woodford case

In the case of the Woodford Equity Income fund, it appears that Mr Woodford was able to invest outside of the stated objectives of his fund and in breach of the FCA rules. Other industry practitioners could see that was happening and it was reported by specialist journalists. The ACD must have known it was happening, The FCA should have known it was happening.

The security system and regulation failed. Investors who are annoyed (understandably) are suggesting that they will sue financial advisers and Mr Woodford’s firm (not much use if it is closed down). Who is holding the ACD and the FCA to account?

The FCA are in my direct personal experience incapable of acting on specific warnings of potential fraud. The ACD model is being challenged by some who point out that the European SICAV model would offer better protection. But of course we are supposed to be having a bonfire of regulations post Brexit! If that happens, then it will be truly ‘caveat emptor’ – buyer beware. The current system frequently fails, but it is better than no system at all.

Watching Brief – November 2019

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Pottering About

I have recently been so bold as to try and define the Conservative government strategy on Brexit and their potential to govern in practice.  I was right to suggest that a General Election was their principal objective, ideally post Brexit with the public not contemplating remain or second referendum issues, but they failed to achieve the October 31st exit.

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Monday Mash Up – Stalled Saturday and Grumpy Trumpy

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I have decided not to carry on numbering these posts as that would not be very helpful if anyone (including me) wants to search in the history for a particular rambling or rant in the future.

Brexit again

It now makes sense to keep a daily watch on developments and market reactions, especially the direction of the FTSE250 (easily checked on the BBC web site, Business/Market data).

Although a deal being approved by Parliament is in reality only a small step, because the transition period is likely to end without Britain having a new trade deal with Europe and there will be another cliff edge, the markets will be looking for the real Johnson objective to be satisfied (the General Election being called).

As only a contrarian (and one more contrarian than me!) would predict anything other than a decent Tory majority, I would suggest that markets will take that as a positive development. Rather paradoxically, as there will be economic negatives from Brexit, the government and central bank reactions are highly likely to be stimulus by money printing and borrowing. In the short term that is good for bonds.

I will write a longer piece about why I am interested in Corporate Bonds after a long period of ignoring them. But a Brexit deal and an election will possibly also be good for certain equities, so be prepared to dip a toe in the water of the UK Smaller Companies sector and maybe look at some recovery or opportunity funds if you have plenty of cash.

The Incredible Sulk

Not my invention, but the moniker used for POTUS Trump by the Guardian’s political sketch writer.

A few years back, I had the unpleasant experience of trying to deal with someone who I eventually worked out had narcissistic personality disorder. Such people, mainly men, are surprisingly common, I have since found out. Having had that experience, I can to a large extent predict or at least understand how dear Donald will behave.

Such people will swear black is white, will deny that what they said or wrote yesterday is in any way a given fact and generally do anything to preserve the perception they have of themselves as being faultless and adorable. They have trouble believing that anyone could doubt their superiority and deal with it by rubbishing any opponent aggressively because they really believe that such morons and weaklings must be inferior as they have not appreciated the genius of the great one they are trying to criticise.

Academics suggest such people frequently rise to the top in business, politics and the entertainment industries. I bet you can name one or two!

How can such people be stopped from causing chaos and damaging other innocent people? The answer, I found out, is to present them with a situation where they can see that their reputation with be destroyed, given the absolute nature of the facts and the failure that will be attributed to them.

Is it possible Donald Trump is not perfection itself?

That is why Mr Trump withdrew his proposal to have the G7 meet at his resort in Florida, quite quickly. It was not that he was worried about the conflict of interest accusations – he knows in his own mind that they don’t count much with the public – in fact the sort of people who vote for him admire someone who can make a quick buck, in any way. That he has made clear quite often: morality does not matter to such people.

What he was scared of was the resulting publicity that revealed this was a failing business venture, big time – fact. He can’t get round that, even admit it to himself. Reading it is very painful, so he withdrew his proposal to remove the focus.

Why do I make this argument? Because in the end someone will unravel everything about his Presidency with a wall of facts – probably to do with tax. When that happens, the global economy will heave a sigh of relief.