Comment and opinion for retail investors in the UK
Having only returned from holiday late yesterday, overdue by 4 days due to a WW2 bomb getting in the way of my travel arrangements, I have not composed my monthly briefing for October yet – it will follow in a fews days.
‘A flyer from 1943 stops a take off in 2023’ was the mild amusement that consoled me as my train returned to its starting point and my flight boarded without me.
[Read more…] about Midweek musings – The fight from the rightNB – I am on holiday for 2 weeks from September 18th, so the next post you see will be the October Watching Brief, which may be a few days late.
One of the most common topics that comes up in my converstations with subscribers is how to judge the right time to buy or sell. It is a perennial worry for investors because it always feels like one could have done better after the fateful decision has been made!
In truth, no-one is ever going to be able to buy at the lowest price or sell at the highest other than by luck. When I started in the investing business, I was told that if you got your transaction within 10% of the most advantageous price more often than not, you were either very lucky or pretty experienced/skilled.
My ‘we’re past the worst’ assessment at the start of last month looks to have been woefully optimistic on the basis of August’s stock market returns, although as I begin to write this with a few days of the month remaining, valuations are heading back up.
What is rather odd is that there has not really been any new macro economic news to deflate the optimism that prevailed in July but indices are showing that markets more or less gave back the gains they made then. It is just possible that investors in the important US markets simply decided to book gains ahead of the usual ‘back to work’ re-assessment that usually happens in September before the always important and generally risky run to the year end. But maybe there are other reasons?
It has for a long time seemed bizarre to me that investment markets react to data published by assorted goverment and private statistical organisations as if it was gospel truth. Market valuations across the globe will vary by trillions on a daily basis just because a number comes in ahead or below some sort of expectation – even when that expection is no more than a few telephone calls cobbled together to generate an average prediction by the likes of Reuters or the FT. What’s more the data that moves markets is quite often corrected later and interestingly, the corrections receive little passing comment and rarely move markets!
This is yet another of the human behaviourial aspects of short term market valuations that investors need to understand so that we do not get overly worried about the random hazards of transaction timing and short term portfolio valuation swings.
A headline in today’s FT intrigued me. I can’t see the full article because I am not an FT subscriber, but the implication is that the fact that many large Americam corporations use accountancy tricks to re-allocate revenue, including that generated in the UK, through the Dublin financial centre (a sort of freeport) is resulting in inflation of EU data on corporate incomes. I suppose that may even count in the GDP calculations – I don’t actually know.
The technical details of what is happeneing don’t really matter. What this brings to our attention is the fact that economists and investment strategists (a sort of ‘astrologist’ that some investment houses employ!) often make predictions based on data that is collected unscientifically, is too narrow in range, is not actually the data relating to the economic factor being assessed or is just educated guess work, or even just a reuse of a ‘concensus’ number.
I saw some charts yesterday showing the predictions of all the major global banks about this year’s growth in the Chinese economy. They were laughable, even though they were no doubt produced by teams of people who were collectively earning many millions in salary. The numbers centred around what the Chinese government itself predicts (free data) and went up or down over the last 12 months according to news coming out of China. That is about as clever as me saying the car is slowing down because my foot is on the brake pedal, or we will be going faster soon because I pressed hard on the accelarator!
The long term value of shares will always revert to the actual valuation of cash flows (ie profits and dividends). Short term valuations are the result of speculation and algorithmic trading and importantly human reactions to news flow which sometimes is based on the flimsiest of factual or pseudo factual reasoning.
We can benefit from this understanding by working out what the market does not want to acknowledge is good value because the data thought to relate to the assets in question is simply misunderstood or inaccurate. At the moment, there are shares in the UK that fall in that opportunity set.
You probably know the old stock market axiom: When America sneezes, the world catches a cold. It seems reasonable that problems in the world’s largest economy are likely to have an infectious impact on at least its main trading partners.
I am not sure anyone has ever transposed the world’s second largest econony, China into a similar adage. Maybe this: When China coughs the world gets a pandemic. Too much irony?
I have written about problems in the Chinese economy several times this year and my take on how that impacted asset allocation calls. I have excluded China focused funds from my portfolio and gone even further in reducing weightings in Emerging Markets and Asia Pacific because of the risk of local contagion.
There are of course some funds in these sectors with no direct China exposure and they have been doing rather better recently but my comment about the impact on main trading partners remains applicable, I suggest.
What we saw at the start of this week was something I think is new – global markets in general sold off solely because the (not new) bad news from China was at the top of news feeds.
We can expect the Chinese government, with its advantage of autocracy in economic policy, to take steps to ensure that Mr Xi can say his growth targets have been met. Unlike Mr Sunak in the UK, he has virtually no risk of not seeing his targets met because if necessary he can change the way the statistics are published, as has just happened with youth unemployment data in China (it has vanished from official published counts).
However, many economic prognosticators will have built their models for global ecomic growth on the assumption that China would likely boom coming out of zero Covid. Not only does that look highly unlikely now, but there is a more serious property crisis emerging that could have domino effects on financial markets in China and even beyond – emerging market bond funds, for example.
This is what has troubled markets this week and adds to a febrile August to date. However, August often seems like that to me and it is probably one of the least useful months of the year in which to take the temperature of markets. So don’t panic!
When I read that the Italian government ‘backtracks on windfall tax after bank shares slide’ (FT), or watch a video explaining how the leadership of the Chinese Communist Party is embarking on a propaganda campaign to boost the perception of Chinese companies and push share prices up, I add that to my collection of evidence that there is no longer such a thing as real democracy. Not that anyone ever said there was in China anyway!