Markets

Monday mashup – a half of two halves

13th July 2020 by Mark Potter Leave a Comment

In other words, global stock markets have had two very different quarters in 2020 so far. Collapse to the end of quarter one, bounce back (in most markets) in quarter two. This in no way reflects what has happened to global economies, of course.

Here is a headline from Trustnet, last week:

Gold, growth and tech: The charts showing what you should have bought in 2020’s second quarter

The article underneath reported on returns from all sectors and geographies.

The market totally out of favour, both for equities and fixed income was the UK. I have been saying for ages that the world looking at the UK now thinks it is a lost cause economically. The risks of Brexit have been compounded by the perceived weak handling of Covid 19 in England (generally the American media thinks Scotland has done better).

Now some readers may think I have ‘gone native’ as I left the UK to live in Europe quite a while ago now. But I am not referring to European commentators in the main, but to US ones. Two analysts at Bank of America even suggested that the UK may have to be re-classified as an emerging market and they supplied data to back up that suggestion. The level of government debt is rising to levels not seen since WW2, for example.

It is easy to report on where one should have invested and I hope my readers have noted my enthusiasm for technology and innovation funds and for gold, but picking the place to invest long term starting now is much harder.

When the media wrote that the Asia Pacific region was a ‘basket case’ in 1996, I started recommending it to investors and they made very good money for over 20 years. I am wondering if the UK is the ‘basket case’ now and therefore offering great value to investors?

What do you think?

Monday mashup – lazy days of Summer?

6th July 2020 by Mark Potter Leave a Comment

Where I live, there have been no quarantine (lockdown) restrictions for some time, except for special situations like going to the doctor or dentist or visiting a hospital when masks and proper disinfecting are compulsory. The weather is warm and humid with thunderstorms and today is a National Holiday – the anniversary of the crowning of the one and only King (Mindaugas).

It feels like Summer in every respect, that time when global stock markets usually go a bit flat as the big players take holidays, volumes fall, politicians stop meeting and messing things up and I suppose everyone usually feels a bit less like working overly hard.

This year things will be very different depending on where you are. The relaxing of lockdown restrictions and opening of travel borders will allow many mostly younger people to try and forget Covid-19. That same opening up will, I am sure. re-ignite infection rates in places that were otherwise well in control.

As has already been demonstrated in the USA and Australia, there will not be so much a second wave as a resumption of hostilities. I get the feeling that the fight with the pandemic may be somewhat like the Great War, when gains and losses ebb and flow for years and many lives are sacrificed with the ‘donkeys” (ie leaders) mainly to blame for their ignorant and selfish leadership.

Yet, in spite of all that global stock markets are valuing companies as if nothing happened. This is in my opinion, and that of many others, simply because there is a glut of money (not real wealth) and it has nowhere else to go.

I suspect that over the Summer weeks to come, recent steady increases in share prices will stutter along upwards. The news flow on global economies will be terrible and there will be massive insolvencies and job losses but initially the market will pay no attention.

It is in my judgement certain that fundamentals like the need for businesses to make profits and borrowers to repay debt in a viable capitalist system will re-assert themselves.

At that stage, the market correction may be more dramatic than even what we saw in March 2020.

One can ‘make hay while the sun shines’, but one must get that hay under cover before the hurricane hits.

Monday mashup – burning underwear

25th May 2020 by Mark Potter Leave a Comment

I refer to the childrens’ rhyme about liars, of course. UK citizens have to make their mind up about who is more trustworthy: the Durham police, who say they politely reminded Mr Cummings and family about the lockdown laws, or Mr Cummings who says they didn’t. At least, that is what I read.

This is not directly of relevance to investors but as Boris Johnson is backing Mr Cummings – how could he not, it would be like switching off his own pacemaker – then we might speculate that the incident is going to accelerate the rate at which the British public, like many in the US, begin to see ongoing restrictions on their lives as an attack on their personal freedom. So the behavioural scientists on the SAGE committee of experts tell us.

That in turn raises the question of a possible profile for Covid-19 infections that is a plateau for a while, maybe even an upward sloping one, rather than the anticipated bell curve, falling away to virtually no cases.

Some Twitter extracts I have read suggest a certain frustration is building up in Blighty!

I personally don’t think stock markets will in the short term assess this as a relevant risk. I would suggest that it probably is, but may be mitigated by other factors: treatments that work, better weather, a potential vaccination (still unlikey to be soon in my view), or just something about the way the virus speads that has not been understood.

On the last point, I don’t think enough work has been done on links to industrial air pollution. With my intuitive feel for links between data sets, that has been an obvious line of enquiry for me from right back to the rapid spread in the Po valley in Italy.

So as at today, I would expect markets to sustain the positive mood. What will break that is a whole series of really poor data sets about the ecomonies of the world (a near certainty) or evidence that the pandemic is not over and may even kick off again seriously.

With those facts in mind, I would at this moment prefer to be investing in funds that are being run to be recession and virus proof (or at least have that risk hedged), or if a really cheap ‘sold off’ fund tempted me (as an experienced and adventurous investor), balance the risk by matching the purchase with something super defensive, like gold.

Free hit?

20th May 2020 by Mark Potter Leave a Comment

Assiduous readers will know that I am cautious about Investment Trusts as a form of collective for anyone who does not dig deep into their structure. They have features that might ensnare a less well informed investor.

But that does not mean they are bad investments. One I have vaguely kept an eye on over the years is the JPM Morgan Claverhouse Trust (originally Fleming in my younger days). One of my first ever portfolio investors owned this share when they came to me and as a way of getting a broad exposure to a wide spread of UK shares, it seemed to me to be as good as any and I never recommended selling in it in over 20 years. It has handsomely out-performed the UK All Share index over 10 years.

The trust’s performance during the crisis has been dire – reflecting one of the current hazards of investing in classic UK equity shares that have higher yields. If dividends are cut when investors were expecting increases, share prices take a very heavy fall. Having said that, this trust paid an increased dividend this year. It does have some gearing (ie it has borrowed money), so can pay dividends out of reserves of cash if needs be.

The current manager just made some comments suggesting that now was a great time to buy good British companies at bargain prices – what he called a ‘free hit’ for retail investors. Perhaps a cynic might say he is bound to say that after such a shocking sell off in his portfolio. I would give him credit for a sensible assessment.

I report this because it fits with my recent comments about selecting investment funds (or if you prefer, ITs) where the objective allows a talented manger to buy any stocks irrespective of market capitalisation, sector or geography. Now this is a trust that owns UK listed shares, but the majority of the main holdings are global businesses. And it is ‘go anywhere’ sort of trust except that there will be a focus on dividend prospects.

The manager refers back to the ‘nifty fifty‘ idea of many years back which implied there were just a few really good stocks that you needed to own and you could be sure of reliable returns. He mentions that perhaps 5 would do for now! Of course, he is joking about the FAANGs.

This was the point that I thought chimed with my own thoughts about the right shares being the important call at the moment, not the more asset classic allocation decisions.

I do think managers buying equities can currently pick some great value investments that have been marked down with the crowd, although the growth in ‘factor’ investing means they and we may have to wait a while for the value to be appreciated and prices to climb sharply.

Now is a time to do your research carefully

I have been paying careful attention to the top 10 holdings in the funds I have been interested in recently. Furthermore, data about the fund holdings combined price/earnings ratios, growth rates relative to the market and cash flow generation are at this time highly relevant.

If you are a subscriber and want help in finding and understanding that extra information, feel free to get in touch.

Monday mashup – bring me sunshine!

18th May 2020 by Mark Potter Leave a Comment

Although the news media that I see, which is not just UK based, reports that the majority of the population in the UK have found the new social distancing rules and lockdown release somewhat contradictory – which they obviously are – my friends and relatives have been taking advantage of the relaxation to get out and enjoy good weather. Anecdotal reports are that the usual beauty spots are quite busy.

My take on the UK government approach is that they have adopted a policy adapted from the US: leave the decision making as far away from the leadership as possible. If it all goes well, the top politicians will claim credit for trusting the ‘great British/American/etc people and their good sense’. If it goes horribly wrong, it was the peoples’ fault – you just can’t trust the plebs.

Whatever my opinion, the fact is that the re-start of work in the UK and in a more logically developed context in other European countries is good news for the economy as activity generates outputs, taxes and reduces commercial trading losses. This might offer support for the general recovery in share prices, one would think, but then we just don’t have all the data yet for the damage done by the lockdowns.

My thinking at the moment is partly based around some certainties. We know that since the 1920s the capitalist system had been able to use its understanding of irrational mass psychology to get people to consume. In fact, enough time has passed such that one might say humans are born as consuming units! That means there surely will be pent up demand for consumption that will burst out as lockdowns are released.

The people charged by the producers of goods and services to direct demand in their direction (the marketing industry) is already working flat out at getting us to book flights again, dream about holiday destinations, buy extra medicines, new clothes and so on. This I see in my own on-line media consumption every day and that is after I have systematically blocked a great deal out. The pressure to consume is a tidal wave.

Another highly relevant fact is that people everywhere have paid down large amounts of credit card debt during the lockdowns and therefore have ‘plastic’ money to spend. Others will have saved money due to lower outgoings on travel and so on, or just getting concessions to miss mortgage repayments. Many of those people will not have lost much or any income, so are in effect able to spend a build up of reserves.

Some businesses, high street retailers for example, may have been too badly damaged to recover even with the equivalent of Christmas levels of turnover. So also may many service businesses serving the leisure, recreational and travel industries. That is another certainty – we already have the evidence.

The businesses that can survive will have less competition and may well have lowered the cost of their business debt while government driven money printing has been going on. That implies better profits, although that may drive price inflation.

So, there is a strand of analysis that is really positive. But...

We can’t yet know how many people will be unemployed long term, how governments will adjust taxation to repay the gigantic debts they have blown up, or even if the pandemic is really coming under control permanently. These are just a few of the worries I have.

I bring these conflicting strands together by concluding that there will be some shares worth owning from now on and fund manager selection is really important at this time – unusually, more important than asset class selection.

Having said that, as a hedge against the negatives I mention above, re-inforced by the devaluation of ‘fiat money’ (the money printed by states), an asset that appeals is physical gold.

I think the markets agree with that. The gold bullion price is subject to all sorts of influences that are unpredictable, not least it being a reserve resource that has to be cashed in when speculators make a cock-up! Nonetheless, the average trend in the gold price is upwards and not closely correlated with the developed equity markets.

Lockdown ended, sun shining, all out for the beach?

In summary, I can see some rays of sunshine, but coming as I do from one of the UK’s premier seaside resorts, I know that quite often, just as you have got your towel laid out and covered yourself in sun tan lotion, the clouds race in and the raindrops commence!

I will buy my metaphorical bucket and spade and new swimming trunks, but also a windbreak and an umbrella.

Monday mashup – parallel universes

11th May 2020 by Mark Potter Leave a Comment

Is this a dream?

I have to confess at the start of this piece that whilst I am more than happy to offer you a report of the latest thinking on asset allocation decisions from the experts at Morningstar and my take on their observations, I do so whilst at the same time finding it impossible to rationalise the disconnect between the valuation of global shares (in the main) and the likely economic conditions that will prevail over the rest of this year.

I am not suggesting that I know when the Covid-19 pandemic will end or how it will progress. I am simply observing that what has happened already – ie the known level of economic damage – cannot be seen in any conceivable way as leading to anything other than recessions in all main global economies.

I think we know that much for certain, yet stock market players seem to believe they can see their way through that to justify valuations that were already overly high before any of us even knew what Covid-19 was.

What has just changed?

As I have suggested before, the medical news about the pandemic leads the economic news, so countries that have see a downturn in new cases, or even been able to contain the spread to very modest levels (like New Zealand) are able to relax quarantine restrictions. That is good news of course, but hardly implies a restart of the global economy.

Perhaps more disturbingly, in those countries where the more hard-faced capitalists or free market libertarians have sway (eg the USA and maybe the UK) or egotistical near dictators run the country (eg Belarus, Brazil), the vulnerable elements of the population have been thrown under the bus of perceived national interest (economic or pseudo patriotic).

That being the case, we enter a new phase. If relaxing lockdown prudently or imprudently restarts some consumer activity, the depth of the recessions will be mitigated in the short term at least.

But if the pandemic accelerates (and I think few people understand exactly how dramatic that would be), then the alternative outcome would be even worse than the one that has come to be universally called ‘unprecedented’.

For the moment, some people obviously want to invest money. They may be better judges of the situation than me. If you were investing now, you might like to see what has happened in markets so far this year.

Observations from the Morningstar team in Europe

Commentary from Morningstar Download

I have provided above a link to the full commentary for those who are interested. It is 11 pages long but includes various interesting charts. As I had the advantage of listening to a webinar giving the writers’ views directly, I offer the following extracts for your enlightenment.

The initial heavy sell offs in equities were reinforced by concerns about the willingness of central banks to inject liquidity and stimulate money flows. That prompted a classic rush to safe haven assets like US Treasuries, but investors soon started selling off government bonds to raise cash.

For a short period the only asset anyone wanted was cash. I think this was partly because people could see companies wanting to borrow and being prepared to pay much higher rates of interest just to build cash flow reserves, so plenty of attractively priced bonds were going to be issued and the big players wanted to take those up, having made large profits when the same thing happened in 2008.

Gold was generally an asset in favour, with a short interim sell off (possibly caused by central banks raising liquidity, but that is my speculation).

So at a high level, assets that sold off most were equities and high yield bonds. Emerging market equities sold off the most (they almost always do in such a situation) but the UK was not far behind because the UK is currently a market unpopular with international investors because of Brexit uncertainty.

In the ‘active vs passive’ funds comparison, good growth funds in the very biggest names and technology did much better than the index trackers, but most other equity funds did worse. This is hardy surprising as many trackers are automatically heavily exposed to the mega cap shares (ie largest companies).

In Europe earnings downgrades (ie company profit expectations) were the worst since 1974.

The momentum factor (good stocks keep doing well, bad stocks keep doing badly, to simplify) continued to be a noticeable influence.

ESG (Environment, Social and Governance) filtered stocks were favoured. This is a trend I have commented on repeatedly.

In summary, you will have had the least painful investment experience in the last 3 months if you had a portfolio biased towards large companies, technology stocks, quality companies (a vaguish concept) and those with strong ESG ratings. And plenty of cash.

I think my readers will not be overly surprised to learn that portfolios built that way look stronger in the current climate and in my view all those factors are relevant for the near future.

In the medium to long term, one ought to be able to pick up bargains that result from this shift. Momentum as a factor has had a very long run while value, companies out of favour but with strong business models, has been hugely negative.

There will in time be a refocus on companies that will do well in a recovery. They may still be in the more modern industrial sectors, have high ESG rankings and be assessed as having some ‘quality’ factors, so I am not saying that current criteria will cease to be relevant, but I think the target companies will perhaps be smaller. That concept may inform your fund research.