Monday Mash Up 005
Today’s post is more of the ‘thought for the day’ variety than a news update. With the Brexit talks reaching a real climax and the US and China still talking trade, I can’t add much of any value on the prospects for markets. My weekend comment on deflating soufflés looks to have been appropriate.
What has come up in a couple of discussions with NotHarry readers recently is something I thought worth emphasising with a brief post.
If you invest in a multi asset portfolio, actively managed or just a fixed asset mix of passive index trackers, you will be getting a diversified range of assets with built in risk controls based on the most up to date investment thinking. That does not necessarily mean the fund will deliver what you want (the reasons for that are for a longer article) but no-one could say they are not designed in line with good practice.
So why would you want more than one fund adopting such an approach? I suppose advisers would say to diversify your risk further? But if the two or more multi asset funds have similar asset mixes, are aimed at the same risk profile (hopefully yours) and statistical examination reveals that over long periods their prices have consistently moved almost exactly in line, what has been achieved? Zilch.
One fund may be called 80/20 and another Active Market or similar names implying something about the asset mix, but that is not diversification! One may use passives and other invest (more expensively) in the multi fund managers’ in house sub funds. They may even have slightly different stated objectives.
Believing that is enough is a schoolboy error – just assuming that multi asset funds are different because they have different labels. If one of a selection of funds is more expensive and it delivers no diversification whatsoever, it is an utter waste of money!
After the major stock market decline of 2000-2002 I assisted a very upset pensioner take a complaint to the Ombudsman service. He had been put in pension drawdown, arguably with good reason and assured his investments were diversified. In fact, they comprised a UK managed fund (virtually all UK equities), a UK equity fund and an international equity fund (with a UK weighting in it). Of course they were all very closely correlated and he lost so much money his pension income almost halved. He won substantial compensation, fortunately.
Nearly 20 years on and people are still being misled by advisers who don’t really know what risk management means.
Deal or No Deal?
As Noel Edmunds might have said, before his whole life was taken up suing Lloyds Banking Group (quite rightly in my view).
Readers will have noticed big jumps in stock markets and Sterling when the news broke that a possible Brexit deal is back on the cards.
This many strike you as odd, in that markets have not sold off that much relative to where they were when Mrs May was trying to get a deal through and I read the news as saying Boris will present something very similar to what was on offer previously but if course as a triumph. As one wittier commentator put it, the threat of No Deal, ‘do or die’ gave the UK the extra clout to make the concessions required.
The markets are certainly right to think that for investors Brexit with a deal is a better option than leaving without. But what this jump shows is that any sort of good news is now seen as wonderful, not that really great prospects await the UK economy in the immediate future. We may simply spend a year heading towards another cliff edge – the end of the transition period.
However, if markets go up, we as investors are bound to be happy. Unless you are really confident in placing trades and are confident enough to buy Exchange Traded Funds (ETFs), then the ‘forward pricing’ of OEICS means that you can’t really buy into such a rapid intra day price jump because the higher price will be what you buy at, after the jump has been priced in.
In fact as relief rallies are at risk of collapsing like an unlucky participant’s soufflé in a TV cooking contest, attempting to time the market on one day’s news is not recommended!
Monday Mash Up 004
If you read the ‘start the week’ data on the Bloomberg business news website today, you might conclude that nothing much was going on – everything is calm and nobody is worried about anything.
But if you happened to have looked at the same site yesterday, being a Sunday, you would have seen a more thoughtful set of bullet points. They highlighted the fact that Germany is going into recession, politicians in Europe think the UK is now just playing a blame game and does not want a Brexit deal, there are potential difficulties coming up with the US/China trade talks and that maybe the US economy has now joined the global slowdown.
The last possibility can hardly be a surprise, given that anyone who knows anything about economics from a GCSE student upwards would have predicted that as a likely outcome of US policy on global trade.
Some readers may have thought it odd that US stock markets seemed to react positively to weaker US employment growth, one of the data points underlying the suspicion that the US economy is now braking.
That is because the possibility of a slowdown should, in theory, lead to lower interest rates in the US and the basis of equity share valuations is, at a fundamental level, connected with interest rates, Broadly speaking, lower interest rate expectations are good for equities because they are good for bonds.
This however is a mechanical relationship, so may not always correctly predict the prospects for equities in the medium term. If there is too much inflation at the same time as a slowing or even shrinking economy, suggesting that horror or horrors – stagflation, then the prospects for shares are really rather poor. Furthermore, the use of monetary loosening to boost asset prices is rather taken for granted, It is questionable as to what outcomes might follow if interest rates can only go down further by becoming negative.
So we should not join in the markets excitement about lower interest rates and assume that, as I have suggested before, central banks, will always be able to bail out ill thought-out political policies, or fantasy financial constructions in the corporate banking sector.
One might think of quantative easing as a bit like paracetemol. It lowers the pain if used judiciously, but take too much and you will get some fairly horrible major organ damage.
October 2019
Pottering About
Having just moved on from a career in building society branch management, I was actually training for another job in October 1987 when the stock market crashed, as well as there being a memorable hurricane. That probably explains why I always feel nervous about stock market prospects at the beginning of October. I was already interested in investment markets at that time and looking forward to getting more hands on with the markets.
Monday Mash Up – Empty Chaired?
I love that relatively new expression ’empty chaired’ to reflect the media event where someone decides not to turn up (chickens out?) and their place is shown empty.
Now I am not chickening out of offering a point of view this week but as it the start of the month, I am working on the rather more detailed ‘Working Brief’ which is for subscribers only. I think the people who pay to keep this service deserve an advantage, so the free to all Monday commentary will always be missed on the first week of the month.
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