Comment and opinion for retail investors in the UK
I wrote this last month: ‘The better news is that October averages out as amongst the best across the whole US stock market’.
As of October 30th, the main US market is down 4% over the month and European and UK markets are also in the red. Even the Japanese and Indian markets, which had been doing rather better are down a similar amount.
Thus is the nature of averages!
Over a period that was maybe a couple of years back – I can’t exactly recall – one of the propositions I regularly put forward in discussions about the relative economic strengths of the USA and China was the idea that the Chinese could seriously impact US financial policy by dumping their then huge holdings of US Treasury stock.
With US bond yields hitting levels that don’t seem fully justified by the market expectations of medium term interest rates, I have been struggling in discussions to explain to subscribers why, with recessions ever more threatening in developed economies, no-one was buying bonds. Stocking up on longer duration bonds would be the logical thing to do when the market cycle is where it is now.
As the section heading suggests, this month’s commentary is going to be something of a pot pourri of news and comment.
I hope at least one or two snippets will help my readership to better understand what is happening in markers, what that signifies and how to make any minor course adjustment in your portfolio planning journey.
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.
I recently viewed a webcast which took the form of a panel question and answer session with a professor and post doctorate researchers from MIT in the USA, addressing the implications of generative AI (GIA), the correct technical phrase for ChatGPT and all the other “intelligent” on line offerings that may follow it.
This is the current hot topic in technology news, so is bound to interest investors who believe we increasingly live in a digital economy.
As I started to write this month, at least one potential crisis had passed with an outcome that markets will find acceptable. The US politicians have reached an agreement (subject to Congressional approval) on funding the US public debt for a full 2 years more.
Bad news is the fact that the war in Ukraine is building up to a critical point and we cannot know what the consequences will be. Plus, a welter of news from China suggests that it has economic problems on a scale not anticipated and which the Chinese Communist Party (CCP) may have trouble managing.
The push me/pull you trading in markets that we have seen this year is further sustained by the news that recessions might be avoided in some developed markets (good) but that means interest rates will stay higher for longer (bad).
For once there is some genuinely good news about a major business, which will be owned by many funds popular with readers, doing exceptionally. This is Nvidia, the tech company set to benefit hugely from the rush to invest in AI. It is looking like another Tesla for the moment, which means it will likely end in tears, but we can hope our fund managers will ride the bandwagon and book some profits.