Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Pre Christmas bargains?

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With global stock markets continuing to react with high volatility to news flow on the major issues I have been highlighting for some time (trade wars and Brexit), some may be thinking it is a good time to buy cheaper stocks.  Certainly the overall net result of the markets jitteriness has been something that might be classified as a ‘bear’ market.  The accepted definition of that is a drop of more than 20% from the highest point.

If you are buying individual stocks and shares yourself, or investment trusts (where one would expect discounts to be widening), you might find some undervalued examples where the price has been driven down by the sentiment of the market which can be quite indiscriminate and not by the fundamental valuation characteristics of the stock in question.  By characteristics, I mean the probability of good dividends or real business growth funded from successful trading, not borrowing (as always).

If you own funds as I do, you will have tried to select managers who will know well when to make such calls for you.  I always like to have some funds in my portfolio where the overall objective and asset allocation strategy is enhanced by the manager’s personal ability to buy and sell shares at the right price.

On the broader question of whether or not the market is cheap enough to add cash or still so risky that you should be raising cash, I remain reluctant to put money into any sort of asset class from cash but think that current valuations mean that selling is only appropriate if you have near term cash flow needs.  In other words, my mood is one of ‘do nothing’

This is because I don’t really see that the market has come down enough to reflect the risks we have been living with for some time, which are mainly political.  I think the market is saying it fears those risks, but it has not fully capitulated which needs to happen so that when the risks reduce or even disappear, share prices can move up sharply as they usually do.  In the case of the Brexit risk, that could happen if there was a surprising agreement to a second referendum and opinion polls anticipated a Remain result. That would probably benefit UK and European funds.

 However, I don’t see a speedy  resolution of the world trade wars being driven by the US President.  Perhaps Mr Mueller will supply us with that?

When the time comes to re-invest in the UK……(m)

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The media report that over one trillion pounds Sterling has been withdrawn from UK investment funds since the Brexit vote.  This will have undoubtedly been one of the major factors in the relative weakness of UK stock market performance recently, which should have been rather stronger given the help given to many UK listed companies by depreciation of the Pound.

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The investor who observes closely loses less money – an ancient NotHarry proverb.

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I read that Uber lost a billion dollars in the last 3 months (as usual) but is going to be valued at 76 billion dollars when (if?) it floats on a major stock market.  Those two pieces of data do not equate under any system of logic or financial analysis and anyone who invests in the shares on the basis of Uber’s financial performance ought to be having some tests for dementia.  The fact that the business had a period without a chief financial officer running to 3 years is also pretty frightening.

It brings to mind the security company Baltimore Technologies (from Ireland) that listed on the UK stock market during the ‘dot.com’ boom and went into the FTSE 100 at a valuation of GBP13 billion almost 20 years ago, even though it made a minute profit and had in reality only one product that naïve investors thought was an essential to the future of the internet.  The product was good but not that hard for others to improve on.

The shares went from GBP15 to 37p in no time at all.  Small shareholders were then further stitched up (in my opinion) in a corporate raider’s re-organisation.

If ever there was an event that told me not to invest in technology businesses at the end of the last Millennium, it was that ridiculous market listing.  I didn’t and my well-advised clients didn’t either, unless it was on their own whim.  Sometimes a small road sign saying you are about to drive over a cliff is best spotted and acted upon.  It is no good driving too fast and not taking time to look around just because everyone else is and you feel a need to keep up.  The collapse of that part of the market had a domino impact on wider Western stock markets too.  Many people lost very large amounts of money.

Excessive stock market valuations of business that aren’t making a profit but are supposed to be offering something ‘new’ or ‘essential’ is common at the moment.  I would say that is the old road sign being dusted off and put out to warn the observant of major hazards to come.  I recommend at least checking the brakes.

Brexit – crisis point?

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As the Tory party split that everyone expected begins to open up (how far it will go, I don’t know), it is worth taking a sanity check on where we are in practical terms and what if any implications there are for investors.

As will always be the case, the short term relative value of Sterling has been bouncing around on the news flow.  This will impact the valuation of any portfolio that is diversified internationally, as most will be.  That sort of volatility is not really of any relevance on its own because it is ultra short term and can safely be ignored until we see some more concrete outcomes when any long term trend will need to be taken seriously.

The point everyone needs to bear in mind is that the 585 page document everyone is getting wound up about is only the agreement of intent – a political statement as to what the parties think is possible if everyone is to get something close to what they want.  As a negotiated document, it is bound to be a compromise but of course many Brexiteers have believed throughout that you really can have your cake and eat it.  So they are not going to be happy.  Remainers can’t by definition be happy with a document taking forward the exit.

It would have been really useful if the terms of this document were known at the date of the original vote.  If the public had been asked “Do you want to leave the EU with these proposed T&Cs being on offer”, I suspect there would have been a Remain vote.

But that is irrelevant from an investment strategy point of view.  What is relevant is the extent to which government in the UK deteriorates into chaos, assuming that it could, as I do.  There could be a Tory party leadership bid, certainly rejection of the agreement by the House of Commons and I even wonder about a Labour party leadership challenge because if Jeremy Corbyn can’t force a General Election after failure of the government to get the agreement approved, I think his personal credibility will be even further dented.

Even if the agreement is approved (I would not want to bet either way) then that is only a step in the direction of more difficulties as the detailed practical issues start to get sorted out and the transition period runs out – it is not very long if you have a government in chaos internally.

For investors the message must be to allow for continuing high levels of market risk, especially in the UK, but also in Europe.  Japan looks like an interesting alternative, as I have suggested previously, but currency issues always need to be allowed for when investing in the Yen.  I still favour keeping plenty of cash or ultra low risk assets.  The example low volatility portfolio (Long Term Cautious) on the site is a good point of reference as to the sort of funds mix that offers some protection and is available to view for subscribing members.