Comment and opinion for retail investors in the UK
I have recently seen data from the investment trade press recording what sort of investment funds have taken in the most money so far this year. That is a good indication of what advisers are recommending to clients and to a lesser extent what DIY investors are doing with their money.
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.
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 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.
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!).
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.
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.
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.
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.
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.
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.
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.