Its Not Harry

Comment and opinion for retail investors in the UK

Markets

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.

Markets get real

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The sharp sell off in global stock markets is no surprise to me.  I have been pessimistic for some time and especially so in recent weeks.  My October Watching Brief anticipated the problems that would come from rising US interest rates and better returns from medium dated US treasury stocks.  Morningstar published a video yesterday saying almost exactly what I wrote at the start of he week.  There is some consensus that the sell off is for genuine logical reasons, an actual change in the underlying facts, not just the need for a ‘correction’ to bank profits and so on.

October is often a month when markets get jittery and I have said to many clients when I was an adviser that I always see October and January as the two most risky months for investors.  

So, is this just volatility that can be safely sat out?  It depends of course on your investment time horizon and cash flow needs.  As I explain in articles elsewhere on the site, all investment planning objectives need to be assessed in terms of the need for cash flows.  So, if you have not prepared for a sell off and you are going to need cash in the near term, your adviser ought to telling you to get on with selling investments that are rich with decent gains as soon as possible.  If you have an adviser, give them a ring now.  If you are running your own portfolio, it is time to assess the risks carefully.

Of course, I don’t believe that you should sell your whole portfolio in the hope of buying back into markets at a lower price.  That sort of ‘timing’ speculation  only ever works if you get lucky.  Not even the best investment managers in the world can consistently sell near the top of markets and buy at the bottom.  But if you do raise some cash now and don’t need to extract it for spending later, you will have some liquidity to pick up any bargains that come along if there is a real rout.

The market pendulum always swings too far at the end of the cycle, both up and down.  So a swing down into a bear market will be overdone, at some future date.  Then we can all look to new money making opportunities – there are not many to be found at the moment.