Its Not Harry

Comment and opinion for retail investors in the UK

Markets

Brexit – implications for investors now

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The stock market reaction to last night’s drama in the House of Commons is muted so far, both locally and globally (I write this at around midday on January 16th). Sterling has strengthened which has been explained by no less than Mark Carney as evidence that the markets believe that a Hard Brexit is less likely and a delayed Brexit is on the cards, allowing a more sensible deal to be done.

I was a Remainer and given that I have chosen to live in Europe as an EU citizen, I can only confess to blatant self interest. I also voted for the first time ever in 1975 to join the EEC and still believe in the post war idea of a stable Europe being more likely with formal economic and social unity. I know that is not an argument everyone likes but I see much good week in week out in the projects for young people that are made possible by the EU.

As a financial and investment expert (sorry Mr Gove), I did and still do genuinely believe that Brexit was always going to cause economic damage to the UK in the short term. If anyone ever wants to know why, I can explain in great detail! Over the longer term, I can see both sides of the argument. I would have preferred the threat of a Brexit referendum to have been used in collaboration with the other EU countries who don’t like the Brussels set up, to seek reforms. Also I would have preferred some honesty all round.

I do agree with something said by many – that the decision of the referendum ought to be carried through, unless there is a second referendum as a result of a genuine public desire for one. It is not for Parliament to simply stop the process because the Government has proved to be an utterly incompetent negotiator. I suggest it is better for Brexit to happen, the consequences be dealt with (and I think they will mostly not be happy) and perhaps a new relationship with the EU established after a period of reflection.

Here I point out roughly where I live and why I can see Europe and the UK a little differently.

I understand very well the arguments for and against EU immigration because my parents and sister live in Lincolnshire and I personally know people of all ages who have come to the UK from Eastern Europe (many have returned now but some hold very well paid jobs in major businesses and public bodies) and also seen first hand that working in the UK has been an economic choice for young people with English language skills. It is definitely not the first choice any more for the brighter kids and places like Germany, Norway and even the USA will be getting skilled young workers who would have come to the UK.

What can investors expect? The first point I need to repeat is that Mrs May’s deal and whatever replaces it, unless that is a Hard Brexit, represent the beginning of the exit process, not the process itself. There will be many hurdles to overcome, some bonuses and some unexpected complications. Change involves risk and cost – always! So I remain pessimistic about levels of volatility, especially as currency exchange rates are much more a part of the risk assessment that they used to be. I am not rushing to invest anywhere in the world.

On the plus side, Britain has a developed economy with strong control mechanisms and an enterprise culture so a sell off on grounds of uncertainty only will throw up bargains as excellent businesses will have their share prices marked down below the levels justified by their profit and dividend paying potential. That implies a case for investing in the UK in stock picking ‘special situations’ and smaller companies funds.

Personally, I have already dipped my toe in the water by buying a small weighting in a leading UK small companies fund and been rewarded by a sharp loss to date! That is often what happens when one tries to see through the fog and into the future. More often than not, an initial set back precedes several years of excellent returns!

Worse and worse, or opportunity knocks?

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I have to close the year with a blog post noting, after looking at my own portfolios, that the serious risks I have emphasised since the early Summer have wrought even more havoc than I expected. I am known as an optimistic, so when my comments had started to turn pessimistic I had been told that things must be really bad. Indeed they are.

Of course, I am pleased that some of the ‘insurance’ built into the portfolios is working well, notably the highest ever weighting to cash. The ‘works when you need it most’ holding in the Jupiter Absolute Return fund is also doing what it should. No one who reads my words of acclaimed wisdom should be needing to sell assets at the moment.

When will it get better? Not soon in my opinion because none of the major political risks have reached a hiatus. But if things get much worse, there will shortly be a great opportunity to start in to the next 10 years of making money – as long as you have cash and courage!

So, the optimist in me still lives on! There is always opportunity around the corner when there is a sell off and this time I hope we are all ready for it.

Happy New Year!

Spot the trend!

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If I told you I am using wood pellets from Russia to heat my house you might instantly think I am eco minded or getting a government subsidy or both.  The former is true but not the latter but neither are the actual reason:  the house I bought had a granular pellet boiler installed already because that is the most practical fuel option.  Russian wood pellets are the best quality and the price is sensible.

The reason why you might have guessed at the reasons I suggested is because you may be aware of a trend towards using bio-mass as a fuel on the basis of the (contested) argument that it is carbon neutral.  Trends reflect a general direction of change that has impacted enough people or processes or just data to suggest a long term impact.  The word trendy implies keeping up with changes in fashion that have become set in.

Knowing about trends in a mathematical or statistical sense is useful when looking to assess the likely direction of stock market asset prices.  In fact there is a whole industry built around the concept, called generally ‘charting’.  The number one blunt instrument of the chartist is something called the ‘moving average’ which seeks to strip out short term ups and downs in valuation and show how the direction of data is progressing in a nice smooth way.

There are different ways of adding such ‘trend’ lines to charts and the various methods of interpreting them.  The interpretation can sometimes  seem as improbable as astrology but as one might assume human behaviour across a very wide base of participants does not change much, patterns might exist, I concede.  I would however suggest that most charting methods are in fact naïve and useless because they do not account for the exact features prevailing in the financial climate of the time.

Graphs and charts are only any use if you know how they were constructed and how to interpret them

Where the trend is useful is in looking at turning points, which can never easily be detected at the time they happen.  Looking backwards and spotting quite soon the start of a new trend (an inflection point) can help one see what risk and opportunities are current. Investment fund managers often claim they are good at seeing inflection points in share prices.

An easy way to make some personal use of this concept without being a statistician is to get up a graph from a news service like the BBC of a major stock market like say the FTSE 250 (this is broader based than the 100) over a long period like 5 years.  Such charts are drawn with not too many data points so short term oscillations disappear. That can be very informative.  If you do it now, you will see we are well into a ‘bear’ market but could have some way yet to go down the slope!

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?

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.