Markets

Monday Mashup – vanishing assets?

6th January 2020 by Mark Potter Leave a Comment

I am indebted to one of my readers for pointing out that the management of the Premier Defensive fund and its sister the Sentinel Defensive fund changed late in the Summer. I had not spotted that the long term manager Paul Smith had left ‘for personal reasons’.

The Premier fund has been handed over to his deputies but the cheaper Sentinel fund is being transferred to another external manager, Atlantic House.

I used the Sentinel fund myself and indeed still own it in my cautious portfolio element. I liked it because Paul Smith was an expert manager of a specific sort of investment trust share class, zeros, or zero dividend preference shares to give them their full name. These assets were very suitable for stable short term returns if managed by an expert like Paul.

Recently less and less ‘zeros’ have been issued so that very narrow asset class has virtually disappeared. I don’t think Paul ever claimed to be an expert in short dated corporate bonds, which is the job Premier seem to have given him as an alternative, so perhaps his departure was inevitable. I would not want to own the Premier fund now. There are cheaper alternatives for getting access to short dated corporate bonds.

The Sentinel fund may have an alternative future because as far a I can tell Atlantic House have a good record in using derivatives to control volatility and volatility control is what defensive funds are all about. I will follow with interest what they do with the fund.

I read that even ordinary shares on the main UK markets are being ‘disappeared’ at record levels, some 21 billion Pounds worth in 2019. The buyers responsible are mostly private equity firms, many from overseas.

Having less shares in issue is a reduction is supply, so a useful counterweight to new issues like the huge block of Saudi Arabian oil shares recently made available. So this ‘shrinkage’ may be a good thing.

Monday Mashup – instrument check

18th November 2019 by Mark Potter Leave a Comment

The global economy, political scene and the business cycle are virtual, rather undefined entities that get measured and assessed by different people and organisations in different ways. We know that changes happen that will alter the value of our investments, but the process is continuous, not linear and often only accurately observed with hindsight.

When I comment on markets, I try to look forward, using my experience and knowledge of the underlying processes to take an educated guess at what is coming next. Before I commit to an opinion, the first thing I do is think about what I know now, right at this minute. In simple terms, I do an instrument check, like an airline pilot would before executing a take off, landing or major manoeuvre.

Keeping an eye on the background data is essential

The readings change, of course, over time much as they would when a plane is climbing or descending, so my predictions vary.

That may seem contradictory, but remember that a well constructed portfolio. once in place, is designed to cope with the short term variations and will deliver in line with its objectives over the longer run even when the facts change in the shorter term. It may just need a bit of course correction.

The short term readings are more of immediate interest to those with new money to invest or who are carrying out a formal portfolio review, to see if a course correction is now appropriate.

I thought it would be useful to highlight in this short post the key instrument readings I can observe at this point in time:

Interest rates across the globe are more likely to go down than up – making fixed income a more rewarding investment short term.
In broad terms, global equities are not cheap but taken as a whole with potentially lower interest rates, they are not ridiculously over-priced.
Inflation is subdued, helpful to central banks in setting lower interest rates. Employment growth is possibly slowing, with the effect of that usually being less inflation pressure.
A brake has been applied to hugely over valued IPOs and at least a modicum of common sense about new issue pricing may have taken hold.
Markets have almost got used to pricing in the risks of Brexit and the ups and downs of US/China trade talks – the economic effects have in many ways already fed through, so are partly ‘in the price’.
A new and hard to measure risk to markets, especially in the Asia Pacific region is the political uncertainty in Hong Kong.

These are the main facts. There are other readings in my peripheral vison, but apart from the last bullet point, these readings make me a little more optimistic than I was a few months back. The Hong Kong situation would prompt me to reduce my market exposure temporarily to the Asia Pacific region, just as one would throttle back cautiously if one saw a temperature gauge heading for the red over heat zone .

Monday mashup – did Nige blink first?

11th November 2019 by Mark Potter Leave a Comment

A couple of my readers have commented that global stock markets are not turning as positive as one might have expected following what seemed to have been the first signs of resolution of two of the major uncertainties: Brexit and the US/China trade war.

I suppose one can understand a lack of joy about the apparent progress in the trade talks as a single Trump tweet could write off weeks of careful work by officials.

My confidence about the likely result of the Uk General Election has not been taken on by the markets, at least not until today. With the Tories miles ahead in the polls and even traditional Labour voters not wanting to vote for Jeremy Cornyn, one would have thought it was a racing certainty for a Tory majority of some size, and that would allow a closing strategy on Brexit to become clear. I think businesses and investors are now more keen just to know what they will be facing, as opposed to worrying about what it will actually be. Many will have decided what they will do either way by now.

What has changed today and instantly pushed up the Pound and the UK ‘home’ market (The FTSE 100 suffers when the Pound goes up) is Nigel Farage’s announcement that he won’t field candidates against the Tories where they would be expected to win (as I understand his position at this time).

He must have accepted that his future, which only exists if the Brexit party has at least a few MPs, was looking to be a short one if he had election results that comprised a number of also rans in seats that were gifted to Labour or the Liberal Democrats when the Brexit vote got split. He maybe even thinks this noble gesture will get him a job with the Government later (not likely in my view).

Time will tell, as ever, if this is proof that Boris and his ‘oppos’ have made enough of the right calls to get themselves 5 years in power. Given that Labour has made some genuinely Socialist policy proposals, the City will be more relieved than usual if the chances of a Labour victory are further reduced.

My feeling is that there is an opportunity to make a tentative start at buying into funds with exposure to the sort of UK businesses that have been subject to undervaluation because of Brexit uncertainty as opposed to their actual business models. Today’s figures on the UK economy 3rd quarter were also not too bad.

Watching Brief – November 2019

1st November 2019 by Mark Potter Leave a Comment

Pottering About

I have recently been so bold as to try and define the Conservative government strategy on Brexit and their potential to govern in practice. I was right to suggest that a General Election was their principal objective, ideally post Brexit with the public not contemplating remain or second referendum issues, but they failed to achieve the October 31^st exit.

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Boris’s plan matures

17th October 2019 by Mark Potter Leave a Comment

I wrote at the beginning of the month that Boris Johnson was going to maximise his chances of winning an election and I have to hand to him and his team – he has done it with some skill.

He has done what most English people I know think was necessary – tell the DUP that he can do without them if they are not going to offer any flexibility. That has allowed him to cut a deal and the fact that to do it, he made modest concessions will not do him any harm as most people are now just longing for the end of the process. The Europeans seem happy with it too.

He can put it to Parliament not really caring if they reject it – a rejection will now be seen by the majority of the British public and the right wing press as churlish and the EU heads of state will give up on the British democratic process.

If the deal is passed (which I think is the lesser probability without a big block of Labour MPs disobeying their Whips), then all well and good and although the path ahead is not easy, at least everyone at lasts knows that they can make a start.

If the deal is not passed, the PM will write a letter requesting an extension, but the EU will refuse it, in my judgment and I think in the minds of his advisers. I think the Tory stategists have always seen this as the ultimate scenario.

They (EU representatives of all sorts) have pretty much said that much in advance. If the only reason this hard fought deal does not go through is Parliament, then in their view no deal will ever go through so what would be the point of yet another extension.

I fear the short term consequences of a No Deal Brexit, but only because of the lack of a transition period. Most elements of the withdrawal agreement will have to be negotiated in other ways in any case. Planes must fly, people must travel, food and medicines must move. These are not optional. It is the likely chaos of sorting things out quickly that is a concern.

Leaving with a deal and a transition period will I think see a decent bounce in the price of UK and European shares. Leaving with no deal will have effects I really can’t predict, but I would be pessimistic.

Whatever happens, Boris will look to be the man who tried hard, Parliament will look at best foolish and at worst in need of wholesale changes. I think that will mean an election will see return of a Tory government with a big majority. I hope it is one that is really as ‘one nation’ as Boris claims he is.

Note that this an attempt at an objective assessment, not my personal approval of what has happened! As an investor, one has to put one’s own politics to one side and for the most part live with the politics of the markets.

Deal or No Deal?

12th October 2019 by Mark Potter Leave a Comment

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!