Comment and opinion for retail investors in the UK
As the section heading suggests, this month’s commentary is going to be something of a pot pourri of news and comment.
I hope at least one or two snippets will help my readership to better understand what is happening in markers, what that signifies and how to make any minor course adjustment in your portfolio planning journey.
It has for a long time seemed bizarre to me that investment markets react to data published by assorted goverment and private statistical organisations as if it was gospel truth. Market valuations across the globe will vary by trillions on a daily basis just because a number comes in ahead or below some sort of expectation – even when that expection is no more than a few telephone calls cobbled together to generate an average prediction by the likes of Reuters or the FT. What’s more the data that moves markets is quite often corrected later and interestingly, the corrections receive little passing comment and rarely move markets!
This is yet another of the human behaviourial aspects of short term market valuations that investors need to understand so that we do not get overly worried about the random hazards of transaction timing and short term portfolio valuation swings.
A headline in today’s FT intrigued me. I can’t see the full article because I am not an FT subscriber, but the implication is that the fact that many large Americam corporations use accountancy tricks to re-allocate revenue, including that generated in the UK, through the Dublin financial centre (a sort of freeport) is resulting in inflation of EU data on corporate incomes. I suppose that may even count in the GDP calculations – I don’t actually know.
The technical details of what is happeneing don’t really matter. What this brings to our attention is the fact that economists and investment strategists (a sort of ‘astrologist’ that some investment houses employ!) often make predictions based on data that is collected unscientifically, is too narrow in range, is not actually the data relating to the economic factor being assessed or is just educated guess work, or even just a reuse of a ‘concensus’ number.
I saw some charts yesterday showing the predictions of all the major global banks about this year’s growth in the Chinese economy. They were laughable, even though they were no doubt produced by teams of people who were collectively earning many millions in salary. The numbers centred around what the Chinese government itself predicts (free data) and went up or down over the last 12 months according to news coming out of China. That is about as clever as me saying the car is slowing down because my foot is on the brake pedal, or we will be going faster soon because I pressed hard on the accelarator!
The long term value of shares will always revert to the actual valuation of cash flows (ie profits and dividends). Short term valuations are the result of speculation and algorithmic trading and importantly human reactions to news flow which sometimes is based on the flimsiest of factual or pseudo factual reasoning.
We can benefit from this understanding by working out what the market does not want to acknowledge is good value because the data thought to relate to the assets in question is simply misunderstood or inaccurate. At the moment, there are shares in the UK that fall in that opportunity set.
You probably know the old stock market axiom: When America sneezes, the world catches a cold. It seems reasonable that problems in the world’s largest economy are likely to have an infectious impact on at least its main trading partners.
I am not sure anyone has ever transposed the world’s second largest econony, China into a similar adage. Maybe this: When China coughs the world gets a pandemic. Too much irony?
I have written about problems in the Chinese economy several times this year and my take on how that impacted asset allocation calls. I have excluded China focused funds from my portfolio and gone even further in reducing weightings in Emerging Markets and Asia Pacific because of the risk of local contagion.
There are of course some funds in these sectors with no direct China exposure and they have been doing rather better recently but my comment about the impact on main trading partners remains applicable, I suggest.
What we saw at the start of this week was something I think is new – global markets in general sold off solely because the (not new) bad news from China was at the top of news feeds.
We can expect the Chinese government, with its advantage of autocracy in economic policy, to take steps to ensure that Mr Xi can say his growth targets have been met. Unlike Mr Sunak in the UK, he has virtually no risk of not seeing his targets met because if necessary he can change the way the statistics are published, as has just happened with youth unemployment data in China (it has vanished from official published counts).
However, many economic prognosticators will have built their models for global ecomic growth on the assumption that China would likely boom coming out of zero Covid. Not only does that look highly unlikely now, but there is a more serious property crisis emerging that could have domino effects on financial markets in China and even beyond – emerging market bond funds, for example.
This is what has troubled markets this week and adds to a febrile August to date. However, August often seems like that to me and it is probably one of the least useful months of the year in which to take the temperature of markets. So don’t panic!
I find it useful to have a look at market returns around the globe halfway through the year and so present below some approximate data (Source: Yahoo Finance).
| INDEX | Year to Date Change (local currency) |
| FTSE 100 | No change |
| FTSE250 | (-5%) |
| S&P500 | +1% |
| Bitcoin | +73% |
| Nikkei225 | +28% |
| Hang Seng | (-10%) |
| DAX/CAC (averaged) | +13% |
| Gold futures | +10% |
| £/USD | +5% |
| £/JPY | +16% |
Of course, all data taken over a short discrete time period must be viewed with caution, especially noting the significance to percentage returns of where the starting point happened to be – Bitcoin was not exactly flourishing in late 2022, just to pick one example.
I recently viewed a webcast which took the form of a panel question and answer session with a professor and post doctorate researchers from MIT in the USA, addressing the implications of generative AI (GIA), the correct technical phrase for ChatGPT and all the other “intelligent” on line offerings that may follow it.
This is the current hot topic in technology news, so is bound to interest investors who believe we increasingly live in a digital economy.