Monthly commentary
Monday mashup – too much cash in the system?
I was prompted to read the explanation offered by NS&I (National Savings) on their web site after being alerted to it by my co-attorney who was trying to deal with a savings certificate maturity for my elderly father. In essence it says they are too busy to cope because everyone wants to put money with them.
I personally have long ago given up looking for the best interest rate on my deposit money, but I don’t have that much outside of my pension fund and trading portfolios. Some of my readers will have large sums on deposit and want to see some return on it. Would you be dealing with NS&I when their ISA savings rate (which seems to be their main promotion) is 0.1%?
I realise, of course, that most people will treat the 1% tax free return on the Premium Bond prize fund as enough to take a punt. The limits for Premium Bond investment are now generous enough to soak up quite a large chunk of reserves. I suspect it is sale of these bonds and the potentially accident prone (from an administration point of view) decision to switch prize payment to direct bank credits only that is behind NS&Is recruitment of an extra 260 staff.
With even august and secure institutions like Nationwide Building Society offering 0.5% (according to my quick scan of Moneyfacts) on their triple access account, then there would seem to be no reason to put money with NS&I other than in Premium Bonds. Or is there?
I suspect the large number of people who currently have much more money to hold on deposit than the FSCS protection of GBP85000 may get very tired of dividing their money up between multiple institutions.
I notice that many of the best interest rates on offer as shown on Moneyfacts are from some pretty new or specialist banks. One would need to know something about their security before making large deposits with them, I suggest.
One I checked out just because I knew of it from some years back – as a lender. That was Hampshire Trust plc. It appears to be totally sound as a business but it does specialise in development finance lending. Its reserves are well in excess of the statutory minima and it has a good chunk of liquidity on call with other banks. Having said that, in my personal judgement, a severe and sustained collapse of the property market might leave this bank with serious problems. You may take a different view after reading the company’s accounts.
My suspicion is that with interest rates being low and being likely to stay low, some people are valuing security and the certain ability to get their money back as more important than the odd fraction of a percent on the interest rate.
If you have the time and can do the research, and don’t mind dividing your money into GBP85k pockets, assuming you have more than that, you will get rewarded with a few quid in interest (after tax on larger sums, of course).
But I reckon that NS&I is sucking in plenty of funds from the public to help with the governments record borrowing, and in the main it is borrowing from citizens at virtually no cost. NS&I is the only absolutely secure home for a surfeit of cash.
Monday Mashup – equity market funds separate dramatically.
I have said for years that I don’t get a feel for how equity markets will start the year (with the implication that would tell me something about the market psychology) until the third week of January. Last year at this time, I thought the world had gone mad because markets were heading up at astonishing rates. The Covid crisis – not really foreseeable until the end of January, brought that to a halt, of course.
I wrote about Covid for the first time on January 27th 2020 with what I am pleased to see was some prescience, but I concluded that the value of financial assets is in the end only dependent on demand. Because vast sums of liquidity have been poured into global economies, that demand had been sustained, even amplified.
So what about 2021?
My gut feeling is that markets had been factoring in good things from a Biden administration (more public spending, more liquidity to feed into asset prices), post Brexit clarity in Europe and progress with vaccinations, BUT that enthusiasm is maybe stalling. I don’t have much evidence in terms of performance numbers – that is just my experience in watching daily index movements and my own portfolio components.
I decided to look for some recent performance numbers from fund managers with very different styles and stock ownership.
| FUND | 1 month | 3 months |
| Axa Framlington Technology | 3.85% | 8.67% |
| Black Rock European | 1.45% | 11.7% |
| Blue Whale Growth | -2% | -4% |
| Fundsmith Equity | -1.3% | -0.32% |
| Baillie Gifford Global Discovery | 12.27% | 22.49% |
| Man GLG Undervalued aAssets | 5% | 27% |
What do you make of this? Have Terry Smith (Fundsmith) and Stephen Yiu (Blue Whale) lost the plot? I think not. Here are my conclusions:
- The managers that chase the momentum ‘(hoped for) growth stocks’ like Tesla, Ocado and Netflix think we have business as usual. This means that overvalued shares have just become more overvalued.
- Some investors have realised that there are VERY cheap shares available in the UK and started to buy value. This is a normal cyclical change that was predictable – I wrote about it some months back.
- The European market has indeed benefited from Brexit having actually happened. Again no surprise there.
- The aforementioned managers Smith and Yiu are taking the view that the global stocks worth buying are those that look like good value on deep analysis and are losing out at this stage because they are not chasing momentum. That is again something that often happens to good managers ahead of an inflection point, but it is not a guarantee that they are right.
I am not offering advice on what to buy and sell – these were just examples that I chose without any specific logic – just the knowledge that the funds shown are quite different in terms of manager style and objectives.
However, I think you will work out what funds are moving from expensive to even more expensive and that some cyclical changes are happening.
My feeling about being invested in markets is similar in a way to what I experienced in my younger days when I drove my sports cars very fast – I enjoyed the thrill while it lasted and the car was well prepared and the situation chosen so that the odds of an accident and a speed camera were small, but I always had a nagging nervousness that an unexpected but potentially possible crash (or a fine) would be a serious one!
Of course, I am much older and more sensible now, so take a more prudent view to both investing and driving ;-).
Monday mashup – the (US) researchers view of 2021
I commented in a member only blog post last week that I was little taken aback by the apparent optimism of Morningstar research professionals who presented a view of the US economy’s prospects for 2021. In fairness, they used plenty of supporting data, although of course, no-one has future data! Analysts will be using trend patterns and other statistical methods as well as economic and market theory to extrapolate the future.
Here are some extracts from their QI Market Outlook documents that I thought might be of interest. You may raise an eyebrow at one of two predictions!
- US GDP will rebound by 4.7% in 2021.
- Vaccine distribution (in the USA) will roll out in the first half of 2021 and be widely distributed by the third quarter.
- Interest rates (again USA) will stay lower for longer with federal funds rates at 0% until 2024, but longer term rates may drift up this year – a relevant point for fixed income funds with long duration.
- The huge amounts of corporate debt issued in the USA will slow down as the pandemic ends.
Morningstar’s market valuation standard has the US Equity market 8% over-value, driven by the mega-caps like Apple and Tesla. Tesla and Netflix are unsurprisingly reported to be hugely over-valued (around 150%). Value shares are on the other hand looking to be under-priced, especially at the smaller cap end of the market.
It is anticipated that 2021 will set new records in private equity fund raising.
SPACs (see my separate comments on these funding vehicles in the Watching Brief for January) have raised a large amount of capital which can be geared up to fund plenty of acquisitions (at high prices?).
Oil and energy stocks are the most ‘still’ sold off with the sector down more than 20% over 2020. The analysts expect the global glut of oil to get soaked up and the sector (in the USA) to recover.
All the above suggests a ‘back to normal’ US stock market with reasons to buy into oil and energy companies. That is something you may have noticed in the top 10 holdings of UK recovery and opportunity funds.
The pessimists’ camp – much reported in the UK news media that I see – takes the view that there are many red flags and other behavioural indicators that a market meltdown is more than likely, so making subtle calls on asset classes, stock sectors and so in is a bit irrelevant. This point of view ‘feels’ right to me, but that may be a result of my UK (and thus Brexit influenced) point of view.
Personally, I am 60% or more in the pessimists camp, but less so than I was 6 months ago. I suggest that no-one can know for sure what will happen in 2021 so a carefully balanced mix of good value assets, with diversification across the main classes and prudent use of cash reserves remains appropriate in the near term. If the optimists are right, there will be time to get more money to work in the right assets later in the year.
One theme that is rather more relevant to European than US stocks is ESG. The sustainability theme will be the most important for some years now, in my judgement. So if you want to buy funds, look for value, small cap and sustainability! Europe may well be a better place to start than North America or Asia Pacific. Not quite a needle in a haystack, but a challenge.
Monday Mashup – from the crypt
The ‘hook’ in my title is just to indicate that I am going to join the BBC in making Bitcoin and cryptocurrency the subject of a brief comment this week. Bitcoin’s value hitting a new record high value makes it topical.
I don’t intend to explain what cryptocurrencies are – that can be done at so many different levels and I think requires more professional graphics and video skills than I can offer if it is to be presented in an understandable way. The BBC’s posts in the finance section of their website are one quite useful introduction. Beyond that, you can go as deep as you like with some Googling.
What I want to remind readers is that although Bitcoin and many other offerings like it are called currencies, they are in reality better described (at the moment) as commodities. Their pricing is not determined by the same factors that influence the value of the US dollar or the Pound Sterling – global trade flows, central bank interest rates, government debt issuance and so on.
Governments can increase the supply of their sovereign currency at will, and to a large extent decide on its relative value (the Chinese are infamous for doing that). Because of the way crypto currencies are created using a computer process known broadly as ‘blockchain’, increasing their supply is a slow and IT resource (and electricity) intensive. That is quite different.
This makes cryptocurrencies a recognised store of value in limited supply that is usually securely stored, but can be stolen, which is hard to use for day to day financial transactions (but can be so used with the right accounts), the value of which is not within the control of central banks and which varies in value solely on the basis of supply and demand.
Just like gold bullion, in other words.
In general, cryptocurrencies are more like commodities than cash. As such they may be suitable investments for some people.
The issue that I worry about is that some hundreds of years ago, central banks realised that if they accumulated large amounts of gold, they ‘took back (some) control’ – where I have heard that phrase before? No doubt they will be asked by their controlling governments to do the same with cryptocurrencies.
In the meantime, you can expect some elements of the American Wild West, or even the European piracy boom of earlier centuries to prevail. So if this sort of investment appeals to you, do your research and make sure you know what you are getting and how you can liquidate it back to boring old bank deposit money.