Its Not Harry

Comment and opinion for retail investors in the UK

Education

Monday mashup – a half of two halves

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In other words, global stock markets have had two very different quarters in 2020 so far. Collapse to the end of quarter one, bounce back (in most markets) in quarter two. This in no way reflects what has happened to global economies, of course.

Here is a headline from Trustnet, last week:

Gold, growth and tech: The charts showing what you should have bought in 2020’s second quarter

The article underneath reported on returns from all sectors and geographies.

The market totally out of favour, both for equities and fixed income was the UK. I have been saying for ages that the world looking at the UK now thinks it is a lost cause economically. The risks of Brexit have been compounded by the perceived weak handling of Covid 19 in England (generally the American media thinks Scotland has done better).

Now some readers may think I have ‘gone native’ as I left the UK to live in Europe quite a while ago now. But I am not referring to European commentators in the main, but to US ones. Two analysts at Bank of America even suggested that the UK may have to be re-classified as an emerging market and they supplied data to back up that suggestion. The level of government debt is rising to levels not seen since WW2, for example.

It is easy to report on where one should have invested and I hope my readers have noted my enthusiasm for technology and innovation funds and for gold, but picking the place to invest long term starting now is much harder.

When the media wrote that the Asia Pacific region was a ‘basket case’ in 1996, I started recommending it to investors and they made very good money for over 20 years. I am wondering if the UK is the ‘basket case’ now and therefore offering great value to investors?

What do you think?

Monday mashup – lazy days of Summer?

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Where I live, there have been no quarantine (lockdown) restrictions for some time, except for special situations like going to the doctor or dentist or visiting a hospital when masks and proper disinfecting are compulsory. The weather is warm and humid with thunderstorms and today is a National Holiday – the anniversary of the crowning of the one and only King (Mindaugas).

It feels like Summer in every respect, that time when global stock markets usually go a bit flat as the big players take holidays, volumes fall, politicians stop meeting and messing things up and I suppose everyone usually feels a bit less like working overly hard.

Here is the weather forecast…

This year things will be very different depending on where you are. The relaxing of lockdown restrictions and opening of travel borders will allow many mostly younger people to try and forget Covid-19. That same opening up will, I am sure. re-ignite infection rates in places that were otherwise well in control.

As has already been demonstrated in the USA and Australia, there will not be so much a second wave as a resumption of hostilities. I get the feeling that the fight with the pandemic may be somewhat like the Great War, when gains and losses ebb and flow for years and many lives are sacrificed with the ‘donkeys” (ie leaders) mainly to blame for their ignorant and selfish leadership.

Yet, in spite of all that global stock markets are valuing companies as if nothing happened. This is in my opinion, and that of many others, simply because there is a glut of money (not real wealth) and it has nowhere else to go.

I suspect that over the Summer weeks to come, recent steady increases in share prices will stutter along upwards. The news flow on global economies will be terrible and there will be massive insolvencies and job losses but initially the market will pay no attention.

It is in my judgement certain that fundamentals like the need for businesses to make profits and borrowers to repay debt in a viable capitalist system will re-assert themselves.

At that stage, the market correction may be more dramatic than even what we saw in March 2020.

One can ‘make hay while the sun shines’, but one must get that hay under cover before the hurricane hits.

Monday mashup – PS

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Since I posted this morning, I have read 2 news items that ought to be brought to your attention! My primary source is the New York Times excellent Dealbook daily briefing.

$50 million each way on the Dow?

One is that in their attempts to explain the illogical level of current stock market valuations, some professional traders point to the increase in private traders using the stock market as an entertainment medium in the absence of sporting events to bet on. Add that to the increase in day traders partly driven by on-line stock punting services (some of which must get close to what is legal in term of pumping shares) and it is a credible suggestion of at least a contributing factor.

Something like that happened before the Wall Street Crash, as I recall……

The bigger they are, the harder they fall

The second point is a bit technical but important. It has been noted that the huge Japanese investment/holding company Softbank, which operates more like an investment trust, with its Vision fund as a major activity, has been noted to be buying up bond issues from companies of which it has significant equity stakes.

Now this can be seen in a number of ways but the most negative interpretation might be that it is bailing out cash flow issues to prevent its investment targets going under. With Softbank, which made a fortune by investing early in Alibaba, nothing is a small deal. I wonder if this is another hairline crack in the dam (its disputed deal with WeWork being a slightly worrying to?). Google the name if you want to know more – it makes interesting reading for investors!

This matters not only to Japanese stock market investors because Softbank is a major shareholder in numerous global businesses. If Softbank goes pop, global stock markets would feel the chill.

Monday mashup – adrenaline junkies.

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As a child I was severely asthmatic. This generally meant missing a lot of school but in my case did not stop me exercising. One day, on a walk with my parents, wheezing heavily due to pollen, I tripped and fell off a style. My asthma vanished instantly and I was breathing better than I had all Summer.

The reason was the adrenaline boost from the fall. It is the body’s sure-fire instant booster when it detects a threat (my clumsiness no doubt triggering messaging similar to being struck by a hostile entity!).

Performance boosting drugs may help for a short time, but….

The money being poured into global economies by various organisations authorised to invent credit, most recently the European Union, is adrenaline for stock markets. In these times the stimulus feeds through to share prices as instantly as adrenaline gets to widen your blood vessels.

The relief and feeling of well being can be addictive, but in the end the treatment has to stop or the patient dies from other causes. So it will be with stock markets.

I expect either a stalling or maybe something more dramatic, likely the ‘taper tantrum’ that occurred after the US fed started talking about shutting down the money junkies’ supplies in 2013.

Another possibility this time is that the patient is accustomed to the drug in question and seeks higher doses. You can speculate about where that will take us!

So, enjoy the kicks for now but prepare for some cold turkey.

Monday mashup – burning underwear

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I refer to the childrens’ rhyme about liars, of course. UK citizens have to make their mind up about who is more trustworthy: the Durham police, who say they politely reminded Mr Cummings and family about the lockdown laws, or Mr Cummings who says they didn’t. At least, that is what I read.

This is not directly of relevance to investors but as Boris Johnson is backing Mr Cummings – how could he not, it would be like switching off his own pacemaker – then we might speculate that the incident is going to accelerate the rate at which the British public, like many in the US, begin to see ongoing restrictions on their lives as an attack on their personal freedom. So the behavioural scientists on the SAGE committee of experts tell us.

That in turn raises the question of a possible profile for Covid-19 infections that is a plateau for a while, maybe even an upward sloping one, rather than the anticipated bell curve, falling away to virtually no cases.

Some Twitter extracts I have read suggest a certain frustration is building up in Blighty!

I personally don’t think stock markets will in the short term assess this as a relevant risk. I would suggest that it probably is, but may be mitigated by other factors: treatments that work, better weather, a potential vaccination (still unlikey to be soon in my view), or just something about the way the virus speads that has not been understood.

On the last point, I don’t think enough work has been done on links to industrial air pollution. With my intuitive feel for links between data sets, that has been an obvious line of enquiry for me from right back to the rapid spread in the Po valley in Italy.

So as at today, I would expect markets to sustain the positive mood. What will break that is a whole series of really poor data sets about the ecomonies of the world (a near certainty) or evidence that the pandemic is not over and may even kick off again seriously.

With those facts in mind, I would at this moment prefer to be investing in funds that are being run to be recession and virus proof (or at least have that risk hedged), or if a really cheap ‘sold off’ fund tempted me (as an experienced and adventurous investor), balance the risk by matching the purchase with something super defensive, like gold.

Free hit?

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Assiduous readers will know that I am cautious about Investment Trusts as a form of collective for anyone who does not dig deep into their structure. They have features that might ensnare a less well informed investor.

But that does not mean they are bad investments. One I have vaguely kept an eye on over the years is the JPM Morgan Claverhouse Trust (originally Fleming in my younger days). One of my first ever portfolio investors owned this share when they came to me and as a way of getting a broad exposure to a wide spread of UK shares, it seemed to me to be as good as any and I never recommended selling in it in over 20 years. It has handsomely out-performed the UK All Share index over 10 years.

The trust’s performance during the crisis has been dire – reflecting one of the current hazards of investing in classic UK equity shares that have higher yields. If dividends are cut when investors were expecting increases, share prices take a very heavy fall. Having said that, this trust paid an increased dividend this year. It does have some gearing (ie it has borrowed money), so can pay dividends out of reserves of cash if needs be.

The current manager just made some comments suggesting that now was a great time to buy good British companies at bargain prices – what he called a ‘free hit’ for retail investors. Perhaps a cynic might say he is bound to say that after such a shocking sell off in his portfolio. I would give him credit for a sensible assessment.

I report this because it fits with my recent comments about selecting investment funds (or if you prefer, ITs) where the objective allows a talented manger to buy any stocks irrespective of market capitalisation, sector or geography. Now this is a trust that owns UK listed shares, but the majority of the main holdings are global businesses. And it is ‘go anywhere’ sort of trust except that there will be a focus on dividend prospects.

The manager refers back to the ‘nifty fifty‘ idea of many years back which implied there were just a few really good stocks that you needed to own and you could be sure of reliable returns. He mentions that perhaps 5 would do for now! Of course, he is joking about the FAANGs.

This was the point that I thought chimed with my own thoughts about the right shares being the important call at the moment, not the more asset classic allocation decisions.

I do think managers buying equities can currently pick some great value investments that have been marked down with the crowd, although the growth in ‘factor’ investing means they and we may have to wait a while for the value to be appreciated and prices to climb sharply.

Now is a time to do your research carefully

I have been paying careful attention to the top 10 holdings in the funds I have been interested in recently. Furthermore, data about the fund holdings combined price/earnings ratios, growth rates relative to the market and cash flow generation are at this time highly relevant.

If you are a subscriber and want help in finding and understanding that extra information, feel free to get in touch.