Markets

Monday mashup – the pale horse rides out

24th February 2020 by Mark Potter Leave a Comment

A reference that those of you with a religious education will recognise as apocalyptic, the rider on the pale horse of Revelation dispensing Plague amongst the weapons of Death. An idea that has not dated much in 2000 years.

I have been preparing material for my March newsletter but all the reference material I have on hand was researched by people looking at data for the last quarter of 2019. There is no doubt useful evidence about the usual changes of direction is asset allocation to be reviewed, but the story that overwhelms all that is obviously the Covid-19 outbreak. The question for the moment is not where to invest, but do we want to be invested in global markets at all?

I am nervous – there are strong headwinds for equities

As a teaser for my March newsletter (subscribers only), I can tell you that the basically sceptical political opinion that I have referred to in the past which in essence is that the US wants a war with China is now being adopted as an economic argument by a well regarded economist. Add to that the locus of the virus outbreak (and the unsurprising propaganda that this is CIA sponsored germ warfare – being tested outside the US for a change), one has to be concerned about the potential impact for markets that are priced on the basis of everything going well or even better than it has been.

In such a situation, I am asking myself, do I want to buy equities with cash on hand? No, to be honest. Do I want to sell existing holdings to secure past gains? A little bit, but I know very well the risks of being out of the market and being scared of getting back in until the best gains have passed one by – I am no less human than anyone else. As long as I have plenty of cash, I am happy to let the portfolio take a hit short term.

What is new is that for the first time in my long investment life I am investing in physical gold, not the actual raw metal, but using exchange traded commodity shares. These are a specialist and potentially risky asset, so not recommended for non-professionals, but there are other ways to access commodity price movements if you see the logic of using that as your diversifier on this occasion. Using funds that invest in gold miners is one way – that also has pros and cons. Something to think about?

Subscribers can call me to discuss this in more detail.

Perhaps the virus will die out quickly like SARS and MERS. I suggest you watch your portfolios more often than usual and if you are using an IFA, get their take on the issues raised. Not my standard guidance and not something that will be good for your neves as a permanent strategy, but these are unusual times.

There is some good news in that the main central banks and political powers appear willing to pump credit into the system. We will pay for that later!

Monday Mashup – runaway train?

20th January 2020 by Mark Potter Leave a Comment

My reading of assorted public and specialist media over the last week or two has revealed that many commentators see the current valuation of many US shares in particular as too high on normal valuation bases. I read an article saying a new valuation basis may be needed. The last time I heard an American fund manager talk about a ‘new paradigm’ in stock market pricing was ahead of a market crash so that sort of viewpoint rings warning bells.

But as my readers will recall, I was saying this sort of thing a year ago and yet 2019 was a really good year for equity investors. So maybe this time things are really different?

The end of any bull market is different to previous ones, that much I would concede!

What other actual facts are worthy of examination to help explain what is happening? Markets are going up when really they should not. Here are a few for you to ponder on:

Markets will always be cyclical – but inversion points are only obvious after the event

The US Government is about to issue 20 year Treasury stock for the first time since the mid 1980s. This reflects the fact that the US debt is astronomic and tax cuts are being paid for not by GDP growth or public sector savings but by borrowing. That is like you and me maxing our credit cards to give the money to our rich uncle. We know where that would end up.

In a world where populism is rampant, central banks are so afraid of recessions that they will use every tool in their nearly empty box to keep money circulating. This means that they are beginning to own more and more debt securities. This is good for bond prices as there are forced buyers in the market.

In a very simplistic analysis, we can say that Governments are issuing bonds (borrowing) and their own central banks are immediately buying them up. This could be argued to be money printing with no interest cost! Like you borrowing money from your grand-kids piggy bank.

As was proposed by eminent economists when the idea of quantitive easing was first proposed, the eventual consequence of this sort of policy has proved to be inflation in asset prices, so those with assets have become richer. The weakness of labour forces, even in a full employment market plus the application of technology (the real new paradigm) and the globalisation of manufacturing has for now kept the lid on inflation. This is good for equities.

For investors, who own assets (both bonds and equities), this would appear to be very good news – policy is feeding the asset price machine with lots of money and the pipes directing it to benefit the bulk of the population are all closed.

True, if there are hints of the banks wanted to start taking money back out of the system, people get scared pretty quickly, as in mid 2018. But banks trashed their reputations 15 or so years back and no-one objects when they concede to populist government pressure to bump up global credit limits.

It is even possible that some world leaders, fearing elections or even revolutions, are doing what the people that keep them in power (in the media and at the top of the wealth range, or in charge of/supplying their armies) would like them to do, irrespective of the long term consequences – no need to name names.

As long as this continues, investing in equities and bonds will be a nice earner. But I fear that much as happens to the person who pays off one credit card by drawing on another, something that works for many years, the end consequences are bankruptcy and the selling off of assets.

In the global scenario that could actually accelerate the transfer of political power from West to East. It is interesting to note which countries are running surpluses and quietly buying up the assets of debtor nations. If you have grand children, encourage them to learn Chinese.

I have to concede that we probably should stay in the markets for the ride, but if there are any signs of it becoming a train wreck, bailing out sooner rather than later would be essential. Excuse the mixed metaphor!

Of course, asset diversification and hedging risk with adequate cash reserves would be as useful a defence as ever. Personally, I am still retaining a very heavy cash element in my asset base.

Translation service

6th January 2020 by Mark Potter Leave a Comment

I wrote some time back that I would occasionally explain in ordinary English the industry specific jargon and clichés that you may see in newspapers or other media reports. Here are a couple that are doing the rounds at the moment:

Markets are climbing the wall of worry – there are a great many reasons to expect markets to fall back from overly confident price levels, but momentum is keeping them climbing and that is how it will be. This one makes me think of Humpty Dumpty!

Bull markets don’t die of old age – there is no fixed period for the optimistic, raising prices (bull) stock market cycle. Although there is no doubt a cycle, it does not occur in neat sine waves with evenly spread peaks and troughs. The current bull market might be a longer one than usual – that is the hope. This one makes me think of The Who’s song My Generation (‘I want to die before I get old’) and the 75 year old Roger Daltrey!

My cynical observation is that when you see these phrases in regular use, people are looking for reasons not to be rational about obvious risks. Geo-political risk just got more serious.

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.