Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

September 2019

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Pottering About

As we get to the end of a stock market ‘season’ – the Summer quarter – I thought it would be useful to look back and see what has happened in the last year or so. 

I usually see no merit in reeling off a lot of numbers telling you how much each market moved last month, quarter or even year. 

What I think will be interesting is to see to what extent markets have ‘priced in’ the risks we have known about for most this year (Brexit, tariff wars and slowdown in Germany, for example) and to try and work out if markets, like the British public have got overly used to the never ending political uncertainties. 

If markets are just taking the risks as ‘baked in’ then we might have to worry about that.

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If you smell a (dead) rat, there usually is a dead rat.

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I have twice in my life owned thatched cottages. They look great, are well insulated and a bit quirky. But the roofs are teaming with wildlife, especially rodents.

Now if the sound of mice and rats running around on your bedroom ceiling starts to get to you, you turn to methods of elimination, or to be realistic, suppression. That usually involves poisons and the problem with a poisoned rat is that it dies slowly and it can crawl up and die in your roof. That is a sort of revenge, post mortem. You will know the dead rat is there, pretty soon. The appalling smell will tell you. How long it takes you to find the corpse will be a variable.

What my repeated experience of this aspect of country life told me was that if you think you smell a dead rat, there always is a dead rat.

I make this point because sometimes I come across an investment in someone’s portfolio that looks to be too good to be true. I investigate it in the way I suggest everyone does in my article on screening for funds – using Google and reading everything you can find that cross references the fund, the management group and the manager.

Sometimes, there are hints of unusual investment strategies, assets that can’t easily be valued and ‘charismatic’ personalities. These are for me rat-like odours.

I recently checked out a bond fund run by a London based asset management company that has not been around that long. The fund had delivered exceptionally good results. The fund management house is associated with a large French bank, so looks solid.

The problem is that the management group seems to like investing in private loans to the businesses of effectively just one individual, who has a far from pristine track record for paying the money back. Furthermore, the fund manager and this person seem to have a close personal relationship.

On top of that, it is accepted that these private debt assets are illiquid and that their value is somewhat ‘notional’. The fund has been closely scrutinised by an experienced financial journalist, prompting a defence pointing out that it has plenty of more conventional liquid assets and no plans to restrict withdrawals.

I think the smell is too strong for me to be tempted by the remarkable returns and awards cabinet of the fund manager. I may be completely wrong, but investing here is one risk I would not be taking.

The last DJ?

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Readers know about my interest in gardening and may have noticed the odd reference to classic literature in my posts once in a while, but I can’t recall referencing my huge enthusiasm for music, especially from the 60s-80s (my extended ‘yoof’).

Here then is first – more making a point than a real rant!

Recent discussions I have been having with a couple people who have noticed their IFA doing less work and then wanting to shove their money into portfolios managed by someone else made me think people might be amused, even disturbed to listen to the song “The Last DJ’ by Tom Petty and the Heartbreakers (2002).

Google or YouTube it and listen to the lyrics.

A song about radio – and about public service everywhere.

Dumb and Dumber

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If you stand on a level crossing and you think you can hear a train coming, you might move off. If you can actually see a train coming, you would be a fool not to move off. If you see trains coming from both directions, you need to get moving immediately.

This idea came to me as I read back through my posts of the last 16 months, since the site went live. 2 themes come up again and again: Brexit (of course) and the US President’s enthusiasm for trade tariffs. These are the 2 trains heading inexorably towards our portfolio valuations. For once we might have a market setback with 2 co-incidental causes. Two political choices that may seem pretty dumb with hindsight.

Reader’s know where we are with Brexit. So this time I am passing on that topic. It keeps my blood pressure down.

Time to get out of the way?

This post is intended to draw your attention to the now noted heavy down valuation of the the Chinese currency (renminbi/yuan) against the US dollar. This is the not altogether unexpected way in which they have dealt with US tariffs. They naturally get less dollars for their goods but as they own plenty of US Treasuries (now worth more in local currency) there is at least for them some sure fire hedging.

What this means is that US consumers may not have seen much of a price rise but are just paying more tax (not that they will understand that, I fear). Chinese imports to the US have not fallen, but US exports to China have (now more expensive by a double hit, currency and retaliatory tariffs) and I have read of some severe stress in parts of the US agriculture sector.

That means President Trump may lose votes rather than gain them, but that is not my concern.

This situation has some similarities with the 1997/98 Asian Tiger crash that spread to impact the global economy. In 1994, China devalued heavily to undercut prices in the economies of its Pacific neighbours and that was the key factor in destroying their fragile economies, whose debt was linked to the US dollar. Once their currencies (starting with the Thai Baht) devalued away from the greenback, almighty recessions followed.

There are not exact parallels, but the impact of Chinese goods becoming cheaper will not only be felt in the USA – something I pointed out a long time ago. And more than that – competeing with the Chinese will be more difficult for everyone. That is a parallel.

So, I hear the 2 rumbles that have been building over the last 18 months getting louder. Time to take evasive action? I am.