Its Not Harry

Comment and opinion for retail investors in the UK

Markets

Trumping the markets

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I would expect investors to be wondering if the very real negative outcome of the G7 economic summit and the sham positive outcome of the Kim/Trump summit will have any impact on investment markets.

The lightweight answer is that as usual short term reactions are not connected with logic, economics or reality.  Asian markets reportedly went up because the developments in North Korea are ‘positive’, when in fact nothing will change that influences the climate for business in the Far East.  Developed markets, the larger company elements of which are highly dependant on global trade, are treating a potentially serious interference factor in the global trade mechanisms as if it just won’t happen.

As I have commented before, trade tariffs, embargos and sanctions have very unpredictable results because of the complexity of world trade.  If you put petrol in your diesel car, nothing happens to start with.  I know this, because I have done it twice! 

But later on the car reacts and in the end, if you don’t clean out the diesel immediately, you will have a non-functioning engine and at least a damaged diesel injector pump that is very expensive to repair.

I think the lack of impact on global markets of the break down in the free trade consensus may be just as dangerous, even if nothing happens straight away.

As for North Korea – well it may be an exploitation opportunity for a few mainly US corporates at some future date, but I can think of many more interesting investment stories.

Ciao!

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As anyone who has holidayed in Italy knows, this little word can mean hello or goodbye and is widely used in other cultures too.

Recently Italian bond markets made the financial news and it was very much a quick hello and good bye.

The political situation in Italy looked all of a sudden to be very shaky and ‘spreads’ on Italian bonds or loan stocks shot up.  In fact there was moment when global stock markets started speculating about a new Eurozone crisis.

What does it mean when ‘spreads’ move up?  It means that the difference between the interest rate investors expect to be paid to lend to the country of Italy (in this case) and its institutions and businesses, relative to the rate they require to lend to say the UK or US or Germany,  move up to reflect perceived extra risk.

For example, say an Italian bank was offering a 5% return on a fixed term bond the last time it borrowed money from the money markets, but now no-one will buy the bond unless it pays 6%.  In that case the spread has gone up 1% or 100 bps (basis points), assuming all other countries are borrowing at the same price as before.

The change in Italy mattered a lot to some investors running bond funds.   Italy is large industrialised country with some great businesses (not just food, cars and wine!)  but it has not got  a great reputation for security and stable government and so bond fund investors have been happy to own Italian loan stocks and pick up a bit more return that reflects the lower credit quality than say Germany.  But imagine you bought Italian bonds at prices that on average are giving you a 4% return in total if held to maturity.   If spreads shoot up the market might want 6% or even 7% returns over the period during which you are going to have to wait for your bonds to mature.  That makes your bonds very unattractive and in fact their value as a tradeable asset will have fallen very significantly overnight.

In the end a new pro Euro government has been installed, albeit the first really different government in Europe since the Greeks rebelled against austerity.  Markets calmed down, but expect to be hearing more about Italy in the financial as well as the culinary media!

Sell in May and go away?

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This phrase will be known to many investors.  It originates from the times when most City stock traders were from aristocratic or at least rich backgrounds and so they left the City for the ‘house in the country’ in May and came back in September – the ‘come back on St Leger’s day’ second part of the phrase.

As someone who spends a lot of free time reading classic books, I have always been fascinated by the way writers, sometimes themselves investors (or the offspring of unsuccessful investors!), recorded investor behaviour.  Anthony Trollope is a very interesting source on this subject especially in his bitter satire “The Way We Live Now”.

Readers of this blog will know I am utterly convinced from years of observation and quite a bit of reading  that human behaviour is at least to some extent predictable and undoubtedly drives share and fund prices as much as basic economic theory.

So, as the evidence is that on average the suggested course of action suggested would give better results in more years than not, I am not going to dismiss the saying as trite nonsense.  It may well reflect the general momentum of market trading.  On the other hand for the last couple of years it would have been a bad move to sell out of markets in April or May.

Taking into account where we are now, a thinking process I constantly stress needs to be applied when making investment decisions, the odds must be on banking at least some profits or keeping cash on the side ready to invest later.  My monthly reviews for subscribers will make more specific observations.  I would think there are plenty of reasons for taking profits from portfolios incrementally anyway, given the high levels of political risk around at present.

Of course, investors in funds can expect those fund managers who have the scope to hold cash or near cash in their portfolios to make the call for them.

Other longer pieces on the site discuss the merits of cash as an asset and of course the need to take a long term view.

May Watching Brief now published

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This is the regular market commentary that I have always intended to publish.  I have altered the format completely, so it now feels much like the presentation I would have made verbally to clients if I had been reviewing their portfolios as part of their service contract when I was their IFA.  That would have fed through to any necessary fund switches, sales or additions.

This change is the result of feedback received, so I hope it useful.  I have not restricted it to Member Only this month, so non-members can see if it might be helpful and justify signing up!  Here is a link.

Of course, this cannot be the same as a full review with an IFA, because that would conclude with personal recommendations, which I do not offer.  But if you have an IFA, this will give you something to take to the review meeting, or even to prompt an extra phone call.   If you are making all your own decisions and you are a subscriber, feel free to contact me if you want to disagree, or want to see any more evidence!

 

Ebb and Flow

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I have the pleasure of looking over the River Neris from the terrace along one edge of my house.  The restful and usually peaceful view often assists my thinking.  As anyone familiar with the great works of literature or even the main religions of the world will know, there are not many tales that don’t at some stage involve a river. Two of the great rivers of the world get a mention in the very first chapters of the Bible, the very pen name of Mark Twain is derived from the language of the river and there are more examples of books that feature rivers heavily than I could possibly list.  See how many you can think of!

I mention this because a large powerful ever flowing river is a good analogy for global stock markets.  Most of the time it flows along with the level varying not much from day to day topped up by occasional rain and supporting the activities of all sort of dependent beings from fishermen and ducks to factories and hydroelectric schemes.  But at times the level changes more than usual and I have noted this happens in two main ways, which is the same for stock markets.

A less common but very noticeable event is a sudden increase or drop of several meters in the water level.  This is prompted by a single event or series of closely linked events – exceptional rainstorms or a call to release water rapidly through the dam of the downstream hydro electrical system, for example.   Generally such a rise or drop is reversed very quickly.  The 1987 stock market crash, or the correction in Summer 2015 would be analogous events.

More commonly there is a seasonal change in the long term weather pattern and the river rises gradually to eventually reach a flood level or declines until near drought conditions prevail.  In both the flood and drought outcomes the consequences are serious, but are only appreciated right at the end of the long process.  On  a day to day basis, the changes are not very noticeable and not even consistently in the same direction.

This is how it is with markets most of the time.  A very sharp correction can often be reversed almost immediately.  Long slow declines or periods of steady appreciation can seem almost endless and indeed the ‘inflection’ point when an underlying change in the long term background conditions is rarely detectable until after the event.  However, large amounts of money are made and lost by investors who are in reality not even paying much attention.

In my view we have passed the inflection point for the long rising market that started in 2008.  The conditions have changed – liquidity (a very appropriate word) is now flowing less freely and will be further constrained and the overall volume of wealth in the system is already shrinking.   Investors need to understand that and expect not to make money from rising river levels, as suggested by the famous saying “a rising tide floats all boats”, but from seeking out protected pools and rivulets fed from long nourished underground springs.  That requires rather more effort in exploring and researching.  Doing nothing will likely see wealth declining over a period of several years.