Monthly commentary

Monday mashup – the pale horse rides out

24th February 2020 by Mark Potter Leave a Comment

A reference that those of you with a religious education will recognise as apocalyptic, the rider on the pale horse of Revelation dispensing Plague amongst the weapons of Death. An idea that has not dated much in 2000 years.

I have been preparing material for my March newsletter but all the reference material I have on hand was researched by people looking at data for the last quarter of 2019. There is no doubt useful evidence about the usual changes of direction is asset allocation to be reviewed, but the story that overwhelms all that is obviously the Covid-19 outbreak. The question for the moment is not where to invest, but do we want to be invested in global markets at all?

I am nervous – there are strong headwinds for equities

As a teaser for my March newsletter (subscribers only), I can tell you that the basically sceptical political opinion that I have referred to in the past which in essence is that the US wants a war with China is now being adopted as an economic argument by a well regarded economist. Add to that the locus of the virus outbreak (and the unsurprising propaganda that this is CIA sponsored germ warfare – being tested outside the US for a change), one has to be concerned about the potential impact for markets that are priced on the basis of everything going well or even better than it has been.

In such a situation, I am asking myself, do I want to buy equities with cash on hand? No, to be honest. Do I want to sell existing holdings to secure past gains? A little bit, but I know very well the risks of being out of the market and being scared of getting back in until the best gains have passed one by – I am no less human than anyone else. As long as I have plenty of cash, I am happy to let the portfolio take a hit short term.

What is new is that for the first time in my long investment life I am investing in physical gold, not the actual raw metal, but using exchange traded commodity shares. These are a specialist and potentially risky asset, so not recommended for non-professionals, but there are other ways to access commodity price movements if you see the logic of using that as your diversifier on this occasion. Using funds that invest in gold miners is one way – that also has pros and cons. Something to think about?

Subscribers can call me to discuss this in more detail.

Perhaps the virus will die out quickly like SARS and MERS. I suggest you watch your portfolios more often than usual and if you are using an IFA, get their take on the issues raised. Not my standard guidance and not something that will be good for your neves as a permanent strategy, but these are unusual times.

There is some good news in that the main central banks and political powers appear willing to pump credit into the system. We will pay for that later!

Monday mashup – from Russia with dividends?

18th February 2020 by Mark Potter Leave a Comment

As financial writers for UK investors go, I can claim to be in more touch with Russia than many. I am currently sitting in my home about 120kms from the border of the Russian enclave of Kaliningrad. Gas coming into my house is from Russia. My car is often full of Lukoil petrol. My partner speaks fluent Russian and her father is now the last retired Red Army officer alive who was a survivor of the Leningrad siege. If I walk down the road to the local health spa, I will hear the Russian language spoken as much as native Lithuanian. I even speak a bit of Russian and know a few Russian jokes.

On the one hand I perceive as a resident the fierce patriotism of a nation that twice escaped Russian domination (Czarist and Soviet) after great hardship and on the other hand I know that the idea of ‘mother Russia’ as a great nation that can’t be bullied is embedded in the minds of native Russians. In fact, when talking with Russians I feel some fellow feeling about nationality, coming from a nation with similar ideas about its status.

When it comes to classical music, Russians seem to feature big time, but what about business?

That does not make me an expert on Russian investments of course. It just allows me to better understand how ordinary people well east of the City of London live and react with their economy and politicians.

It is not possible for a liberal minded Englishman to like the way the politics of Russia operates, but equally I don’t like the politics of the Gulf States and even many aspects of the USA at the moment. But it is important to appreciate that as in places like Dubai, many people in Russia tolerate an autocratic government that broadly does what it likes because they are personally getting richer and they feel some patriotic warmth from the ‘strong leader’ story.

In fact, the Russian state has much in common with the Gulf States – autocratic rule, suppression of religion other that the compulsory approved state one, brutal suppression of dissent, an endemic tolerance, even expectation of corruption and loads of oil and gas! Of course many ordinary citizens in both societies are as charming and cultured as anywhere.

Here I come to the investment point: the recent collaboration of Mr Putin with the Saudis seems to have achieved their shared ambition of keeping the oil price up.

This is a relevant point for investors in many ways, but I am making it in this round about way, because a better oil price very directly means a wealthier Russia and that wealth feeds through to the citizens and into the profits of companies that supply that large population. Investment managers specialising in Eastern Europe point out that if you invest in Russia you get both exposure to energy and financial companies that are run in a Western style and ideally not part owned by the Russian state and also a large consumer base that is getting richer. Dividend payouts from some Russian companies are healthy.

The risks of investing in Eastern Europe are many, of course. Currency, liquidity, political and transparency all jump to mind. But as my experience is that investments in this sector move in a rather different cycle to those in India, another economy with great potential for rather different reasons, an Eastern European specialist fund invested for the very long term would be a valid call for more adventurous investors or as a satellite holding for those using the core/satellite approach that I teach.

Monday Mashup – can we be un-biased?

10th February 2020 by Mark Potter Leave a Comment

The hyphen is not a grammatical slip -up, although I know there is the odd typo in my output; I like to think it puts me in the same category as The Grauniad.

I am referring to the notion of fighting those human psychological processes generally called ‘biases’. A very good fund manager at Jupiter Asset Management (he has just taken over one of Neil Woodford’s old mandates) once said he spent his working days fighting his human biases so that he would stick to his logical and tested investment training, experience and processes.

Common traits, as they have been called in a less academic way for many years and in many contexts of life, can trip up investors at all levels of experience and expertise. I have a T-shirt with the this quote from Mark Twain on it: ” When you find yourself in the majority, it is time to stop and think”.

The point is not that the majority are always wrong or that being a contrarian is a badge of good judgement, but that it is easier to ‘go along with the crowd’ so one ought to ask why are the crowd thinking that way and do we agree with it if we think objectively. The biases that drive the majority view may be many and varied and that is beyond the scope of this post (for a good introduction, search ‘Thinking Fast and Slow’).

A topical example for investors might be Tesla shares, which on any logical or intellectual basis are priced so that the slightest of upsets would result in very large losses for investors, yet professionals are still recommending purchases. In this case the main bias that makes you think you ought to join in the party is the FOMO one – the fear of missing out.

If you were asked ‘would you buy an investment that could lose 40% or more in a few days?’, I am petty sure you would say no, so objectively, you are not going to buy Tesla shares. But you may still wish you had. That is another aspect – the issue of regret.

I have one piece of advice for all investors. It is encapsulated in my guide to investing by way of a proper process and covers the early stages: know your objectives and how much you can afford to lose (your capacity for loss). After you have invested, when you are conducting reviews and when you are tempted to buy something, always run through those steps before letting the biases get the better of you! Un-bias yourself!

Watching Brief – February 2020

3rd February 2020 by Mark Potter Leave a Comment

Pottering About

Virus volatility

As I write, the main issue impacting investment markets is the coronavirus outbreak (nCoV to be accurate). This is not the first scare from this range of viruses as readers may recall: we have had SARS and MERS previously. The numbers infected and the number of deaths are touted in the media in a dramatic way, but actually are not large relative to, say, the number of people who die waiting for treatment from the NHS.

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Monday Mashup – nCoV

27th January 2020 by Mark Potter Leave a Comment

The above abbreviation is I read the correct title for the new form of coronavirus that has been the topic of news headlines for a few days. It is actually called novel coronavirus by the WHO. We have in the past seen outbreaks of other variants from this virus family: SARS and MERS. If you want more data on that, you know how to Google!

A global epidemic could be as damaging as a world war

I am writing about the virus because I have seen headlines like “market sells off on coronavirus scare’. That supposed ‘sell off’ was of course a figment of the sub-editor’s imagination. However, as I wrote a while back when there was more concern about the SARS variant, disease at epidemic levels is a very serious risk for markets. How much risk depends on the effectiveness of the early reactions of the international health authorities to the outbreak and how soon it is contained. There is a point in the progress of an epidemic when it ceases to be manageable.

We have plenty of history to examine when thinking about the implications of rapidly spreading infectious and potentially fatal illnesses. Not long ago I read Defoe’s Diary of the Plague Years (about the plague ahead of the The Great Fire of London) and by co-incidence I just started on one of my Christmas presents, Boccaccio’s Decameron, which to my surprise opens with a long narrative of the impact of the Black Death in 14th Century Italy. I also quite recently saw a documentary about the horrendous Ebola virus (not actually gone away) in Africa.

All this co-incidental research tells me that an out of control illness destroys economies at a phenomenal rate and in a year ot two can cause devastation that could take decades or even centuries to recover.

My understanding of current readiness and maybe more relevant, political will to do something, is that it is good in China, reasonable in adjacent places like Australia and to me at least, unclear in the Western world. It was very noticeable that the initial Ebola outbreak only got the attention and resources it needed from the best specialists in North America when the Americans and Canadians had their own nationals coming home and discovering they had the disease. I would not be so sure that the Orange one would offer the same resources now.

Although the better educated people had a surprisingly resourceful and intelligent approach to dealing with the plagues of the Middle Ages, they had no real medical skill and of course only very limited pharmacology, so whole populations were decimated or even wiped out. We can be more optimistic that this infection will be controlled and the impact minimised. But I have a slight nervousness when I make that assertion. If the disease starts to get out of control, the impact on financial assets would be a heavy one.

During World War 2, a German diarist called John Rabe, who was in Nanking when it was overrun by the Japanese recorded that he bought two genuine Ming vases for one dollar each. There are still many houses in Lithuanian that have been unoccupied since their Jewish owners were murdered and the contents looted in the Holocaust. One reads that Italian towns are selling houses for 1 euro each. In Japan there is a village where the only ‘inhabitants’ are hundreds of stuffed toys.

Financial values are totally dependant on active demand and without people, there is no demand for assets. That is why mass deaths in an epidemic is a great risk to asset valuations.

Monday Mashup – runaway train?

20th January 2020 by Mark Potter Leave a Comment

My reading of assorted public and specialist media over the last week or two has revealed that many commentators see the current valuation of many US shares in particular as too high on normal valuation bases. I read an article saying a new valuation basis may be needed. The last time I heard an American fund manager talk about a ‘new paradigm’ in stock market pricing was ahead of a market crash so that sort of viewpoint rings warning bells.

But as my readers will recall, I was saying this sort of thing a year ago and yet 2019 was a really good year for equity investors. So maybe this time things are really different?

The end of any bull market is different to previous ones, that much I would concede!

What other actual facts are worthy of examination to help explain what is happening? Markets are going up when really they should not. Here are a few for you to ponder on:

Markets will always be cyclical – but inversion points are only obvious after the event

The US Government is about to issue 20 year Treasury stock for the first time since the mid 1980s. This reflects the fact that the US debt is astronomic and tax cuts are being paid for not by GDP growth or public sector savings but by borrowing. That is like you and me maxing our credit cards to give the money to our rich uncle. We know where that would end up.

In a world where populism is rampant, central banks are so afraid of recessions that they will use every tool in their nearly empty box to keep money circulating. This means that they are beginning to own more and more debt securities. This is good for bond prices as there are forced buyers in the market.

In a very simplistic analysis, we can say that Governments are issuing bonds (borrowing) and their own central banks are immediately buying them up. This could be argued to be money printing with no interest cost! Like you borrowing money from your grand-kids piggy bank.

As was proposed by eminent economists when the idea of quantitive easing was first proposed, the eventual consequence of this sort of policy has proved to be inflation in asset prices, so those with assets have become richer. The weakness of labour forces, even in a full employment market plus the application of technology (the real new paradigm) and the globalisation of manufacturing has for now kept the lid on inflation. This is good for equities.

For investors, who own assets (both bonds and equities), this would appear to be very good news – policy is feeding the asset price machine with lots of money and the pipes directing it to benefit the bulk of the population are all closed.

True, if there are hints of the banks wanted to start taking money back out of the system, people get scared pretty quickly, as in mid 2018. But banks trashed their reputations 15 or so years back and no-one objects when they concede to populist government pressure to bump up global credit limits.

It is even possible that some world leaders, fearing elections or even revolutions, are doing what the people that keep them in power (in the media and at the top of the wealth range, or in charge of/supplying their armies) would like them to do, irrespective of the long term consequences – no need to name names.

As long as this continues, investing in equities and bonds will be a nice earner. But I fear that much as happens to the person who pays off one credit card by drawing on another, something that works for many years, the end consequences are bankruptcy and the selling off of assets.

In the global scenario that could actually accelerate the transfer of political power from West to East. It is interesting to note which countries are running surpluses and quietly buying up the assets of debtor nations. If you have grand children, encourage them to learn Chinese.

I have to concede that we probably should stay in the markets for the ride, but if there are any signs of it becoming a train wreck, bailing out sooner rather than later would be essential. Excuse the mixed metaphor!

Of course, asset diversification and hedging risk with adequate cash reserves would be as useful a defence as ever. Personally, I am still retaining a very heavy cash element in my asset base.