Its Not Harry

Comment and opinion for retail investors in the UK

Monthly commentary

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.

Watching Brief – June 2020

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Pottering About

As I write this month’s briefing, I am seeing headlines in the various media sources that I read which for the first time in months are not about Covid-19, but about social unrest in the USA. Such uprisings are not new in the USA, although the current President’s leadership during the crisis seems rather feeble to this distant observer.   

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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.

Monday mashup – bring me sunshine!

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Although the news media that I see, which is not just UK based, reports that the majority of the population in the UK have found the new social distancing rules and lockdown release somewhat contradictory – which they obviously are – my friends and relatives have been taking advantage of the relaxation to get out and enjoy good weather. Anecdotal reports are that the usual beauty spots are quite busy.

My take on the UK government approach is that they have adopted a policy adapted from the US: leave the decision making as far away from the leadership as possible. If it all goes well, the top politicians will claim credit for trusting the ‘great British/American/etc people and their good sense’. If it goes horribly wrong, it was the peoples’ fault – you just can’t trust the plebs.

Whatever my opinion, the fact is that the re-start of work in the UK and in a more logically developed context in other European countries is good news for the economy as activity generates outputs, taxes and reduces commercial trading losses. This might offer support for the general recovery in share prices, one would think, but then we just don’t have all the data yet for the damage done by the lockdowns.

Off to the shops?

My thinking at the moment is partly based around some certainties. We know that since the 1920s the capitalist system had been able to use its understanding of irrational mass psychology to get people to consume. In fact, enough time has passed such that one might say humans are born as consuming units! That means there surely will be pent up demand for consumption that will burst out as lockdowns are released.

The people charged by the producers of goods and services to direct demand in their direction (the marketing industry) is already working flat out at getting us to book flights again, dream about holiday destinations, buy extra medicines, new clothes and so on. This I see in my own on-line media consumption every day and that is after I have systematically blocked a great deal out. The pressure to consume is a tidal wave.

Another highly relevant fact is that people everywhere have paid down large amounts of credit card debt during the lockdowns and therefore have ‘plastic’ money to spend. Others will have saved money due to lower outgoings on travel and so on, or just getting concessions to miss mortgage repayments. Many of those people will not have lost much or any income, so are in effect able to spend a build up of reserves.

Some businesses, high street retailers for example, may have been too badly damaged to recover even with the equivalent of Christmas levels of turnover. So also may many service businesses serving the leisure, recreational and travel industries. That is another certainty – we already have the evidence.

The businesses that can survive will have less competition and may well have lowered the cost of their business debt while government driven money printing has been going on. That implies better profits, although that may drive price inflation.

So, there is a strand of analysis that is really positive. But...

We can’t yet know how many people will be unemployed long term, how governments will adjust taxation to repay the gigantic debts they have blown up, or even if the pandemic is really coming under control permanently. These are just a few of the worries I have.

I bring these conflicting strands together by concluding that there will be some shares worth owning from now on and fund manager selection is really important at this time – unusually, more important than asset class selection.

Having said that, as a hedge against the negatives I mention above, re-inforced by the devaluation of ‘fiat money’ (the money printed by states), an asset that appeals is physical gold.

I think the markets agree with that. The gold bullion price is subject to all sorts of influences that are unpredictable, not least it being a reserve resource that has to be cashed in when speculators make a cock-up! Nonetheless, the average trend in the gold price is upwards and not closely correlated with the developed equity markets.

Lockdown ended, sun shining, all out for the beach?

In summary, I can see some rays of sunshine, but coming as I do from one of the UK’s premier seaside resorts, I know that quite often, just as you have got your towel laid out and covered yourself in sun tan lotion, the clouds race in and the raindrops commence!

I will buy my metaphorical bucket and spade and new swimming trunks, but also a windbreak and an umbrella.

Monday mashup – parallel universes

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Is this a dream?

I have to confess at the start of this piece that whilst I am more than happy to offer you a report of the latest thinking on asset allocation decisions from the experts at Morningstar and my take on their observations, I do so whilst at the same time finding it impossible to rationalise the disconnect between the valuation of global shares (in the main) and the likely economic conditions that will prevail over the rest of this year.

I am not suggesting that I know when the Covid-19 pandemic will end or how it will progress. I am simply observing that what has happened already – ie the known level of economic damage – cannot be seen in any conceivable way as leading to anything other than recessions in all main global economies.

I think we know that much for certain, yet stock market players seem to believe they can see their way through that to justify valuations that were already overly high before any of us even knew what Covid-19 was.

What has just changed?

As I have suggested before, the medical news about the pandemic leads the economic news, so countries that have see a downturn in new cases, or even been able to contain the spread to very modest levels (like New Zealand) are able to relax quarantine restrictions. That is good news of course, but hardly implies a restart of the global economy.

Perhaps more disturbingly, in those countries where the more hard-faced capitalists or free market libertarians have sway (eg the USA and maybe the UK) or egotistical near dictators run the country (eg Belarus, Brazil), the vulnerable elements of the population have been thrown under the bus of perceived national interest (economic or pseudo patriotic).

Are we heading off in a new direction?

That being the case, we enter a new phase. If relaxing lockdown prudently or imprudently restarts some consumer activity, the depth of the recessions will be mitigated in the short term at least.

But if the pandemic accelerates (and I think few people understand exactly how dramatic that would be), then the alternative outcome would be even worse than the one that has come to be universally called ‘unprecedented’.

For the moment, some people obviously want to invest money. They may be better judges of the situation than me. If you were investing now, you might like to see what has happened in markets so far this year.

Observations from the Morningstar team in Europe

Commentary from MorningstarDownload

I have provided above a link to the full commentary for those who are interested. It is 11 pages long but includes various interesting charts. As I had the advantage of listening to a webinar giving the writers’ views directly, I offer the following extracts for your enlightenment.

  • The initial heavy sell offs in equities were reinforced by concerns about the willingness of central banks to inject liquidity and stimulate money flows. That prompted a classic rush to safe haven assets like US Treasuries, but investors soon started selling off government bonds to raise cash.
  • For a short period the only asset anyone wanted was cash. I think this was partly because people could see companies wanting to borrow and being prepared to pay much higher rates of interest just to build cash flow reserves, so plenty of attractively priced bonds were going to be issued and the big players wanted to take those up, having made large profits when the same thing happened in 2008.
  • Gold was generally an asset in favour, with a short interim sell off (possibly caused by central banks raising liquidity, but that is my speculation).
  • So at a high level, assets that sold off most were equities and high yield bonds. Emerging market equities sold off the most (they almost always do in such a situation) but the UK was not far behind because the UK is currently a market unpopular with international investors because of Brexit uncertainty.
  • In the ‘active vs passive’ funds comparison, good growth funds in the very biggest names and technology did much better than the index trackers, but most other equity funds did worse. This is hardy surprising as many trackers are automatically heavily exposed to the mega cap shares (ie largest companies).
  • In Europe earnings downgrades (ie company profit expectations) were the worst since 1974.
  • The momentum factor (good stocks keep doing well, bad stocks keep doing badly, to simplify) continued to be a noticeable influence.
  • ESG (Environment, Social and Governance) filtered stocks were favoured. This is a trend I have commented on repeatedly.

In summary, you will have had the least painful investment experience in the last 3 months if you had a portfolio biased towards large companies, technology stocks, quality companies (a vaguish concept) and those with strong ESG ratings. And plenty of cash.

I think my readers will not be overly surprised to learn that portfolios built that way look stronger in the current climate and in my view all those factors are relevant for the near future.

In the medium to long term, one ought to be able to pick up bargains that result from this shift. Momentum as a factor has had a very long run while value, companies out of favour but with strong business models, has been hugely negative.

There will in time be a refocus on companies that will do well in a recovery. They may still be in the more modern industrial sectors, have high ESG rankings and be assessed as having some ‘quality’ factors, so I am not saying that current criteria will cease to be relevant, but I think the target companies will perhaps be smaller. That concept may inform your fund research.

Monday mashup – markets buffeted

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Since I wrote my May briefing a couple of market trading days ago, the upward trend has reversed and the news over the weekend that the legendary Sage of Omaha, Warren Buffet’s Berkshire Hathaway fund has taken big losses and he has sold all his airline stocks at a loss is hardly cheering. What perhaps is more significant is his comment that he is not putting money into the market because he can’t find anything attractive to buy.

I read an article by a financial journalist making the same points as me about the hollow value of start-up companies. The writer, whose elegant prose proved why he is a journalist on a national paper and I am an investment analyst, added one point I failed to make: the reason many start ups grow so fast is that they offer customers $10 worth of services for $5 and that makes it pretty easy to acquire customers. And burns capital at a terrifying rate.

I have to confess I once did that! My then employer’s marketing department had set its managers targets for selling all sorts of accounts – just because that is what marketing departments do. My branch was not well placed to open the required number of “little saver’ childrens’ accounts per month because of our location and client base. That of course was not an excuse that satisfied the regional sales manager (ex-insurance company).

The reaction of anyone who has ever has to account to a sales manager

We had access to certain promotional goodies, so I ordered up the full allowance of Parker ball point pens and then sent out into the pedestrian precinct the better looking young members of staff wearing the sashes provided for events, telling them to offer a pen to anyone who had kids with them if they would open an account for one Pound.

Of course, as the pens were worth more than twice that even in the 1980, the outcome was a 100% success. My branch was even awarded a commendation in the monthly marketing bulletin.

If only I had understood that corporate operations were frequently that stupid, I might by now be a billionaire!