Monthly commentary

Wait for it….

25th November 2019 by Mark Potter Leave a Comment

I will not comment on markets and investment matter in general today for two reasons: I can’t think if anything to say that will not be covered in my December Watching Brief in a few days time and apart from the local election in Hong Kong having proceeded peacefully (good news), nothing much new has happened.

The publication of the manifestos of the main political parties is fanciful as ever, with ‘commitments’ that make for good headlines. At least this time there is out and out socialism from Labour and therefore a contrast with the gently shifted Tory ‘almost more of the same’ offering. The polling data is now so clearly indicating a Tory victory that the media punters are covering their backs with pieces worrying about sudden changes in the last fortnight of the campaign!

Just read an exciting political party manifesto

We will just have to wait and see..

Following publication of a Long Read piece introducing passive investment concepts, I am researching the multi asset fund market, focusing on the low cost passive options as this is where retail investors’ money if flowing now, often on the advice of IFAs who want to shift all the investment work somewhere else and still maintain their own fees for doing very little of use!

I can see merit in such funds, if only in certain situations, but if you put your whole portfolio in a good selection of properly reviewed low cost passives in a risk adjusted mix, you would certainly not need to pay an adviser thousands of pounds a year. Even the IFA trade press is admitting that much now.

Monday Mashup – instrument check

18th November 2019 by Mark Potter Leave a Comment

The global economy, political scene and the business cycle are virtual, rather undefined entities that get measured and assessed by different people and organisations in different ways. We know that changes happen that will alter the value of our investments, but the process is continuous, not linear and often only accurately observed with hindsight.

When I comment on markets, I try to look forward, using my experience and knowledge of the underlying processes to take an educated guess at what is coming next. Before I commit to an opinion, the first thing I do is think about what I know now, right at this minute. In simple terms, I do an instrument check, like an airline pilot would before executing a take off, landing or major manoeuvre.

Keeping an eye on the background data is essential

The readings change, of course, over time much as they would when a plane is climbing or descending, so my predictions vary.

That may seem contradictory, but remember that a well constructed portfolio. once in place, is designed to cope with the short term variations and will deliver in line with its objectives over the longer run even when the facts change in the shorter term. It may just need a bit of course correction.

The short term readings are more of immediate interest to those with new money to invest or who are carrying out a formal portfolio review, to see if a course correction is now appropriate.

I thought it would be useful to highlight in this short post the key instrument readings I can observe at this point in time:

Interest rates across the globe are more likely to go down than up – making fixed income a more rewarding investment short term.
In broad terms, global equities are not cheap but taken as a whole with potentially lower interest rates, they are not ridiculously over-priced.
Inflation is subdued, helpful to central banks in setting lower interest rates. Employment growth is possibly slowing, with the effect of that usually being less inflation pressure.
A brake has been applied to hugely over valued IPOs and at least a modicum of common sense about new issue pricing may have taken hold.
Markets have almost got used to pricing in the risks of Brexit and the ups and downs of US/China trade talks – the economic effects have in many ways already fed through, so are partly ‘in the price’.
A new and hard to measure risk to markets, especially in the Asia Pacific region is the political uncertainty in Hong Kong.

These are the main facts. There are other readings in my peripheral vison, but apart from the last bullet point, these readings make me a little more optimistic than I was a few months back. The Hong Kong situation would prompt me to reduce my market exposure temporarily to the Asia Pacific region, just as one would throttle back cautiously if one saw a temperature gauge heading for the red over heat zone .

Monday mashup – did Nige blink first?

11th November 2019 by Mark Potter Leave a Comment

A couple of my readers have commented that global stock markets are not turning as positive as one might have expected following what seemed to have been the first signs of resolution of two of the major uncertainties: Brexit and the US/China trade war.

I suppose one can understand a lack of joy about the apparent progress in the trade talks as a single Trump tweet could write off weeks of careful work by officials.

My confidence about the likely result of the Uk General Election has not been taken on by the markets, at least not until today. With the Tories miles ahead in the polls and even traditional Labour voters not wanting to vote for Jeremy Cornyn, one would have thought it was a racing certainty for a Tory majority of some size, and that would allow a closing strategy on Brexit to become clear. I think businesses and investors are now more keen just to know what they will be facing, as opposed to worrying about what it will actually be. Many will have decided what they will do either way by now.

What has changed today and instantly pushed up the Pound and the UK ‘home’ market (The FTSE 100 suffers when the Pound goes up) is Nigel Farage’s announcement that he won’t field candidates against the Tories where they would be expected to win (as I understand his position at this time).

He must have accepted that his future, which only exists if the Brexit party has at least a few MPs, was looking to be a short one if he had election results that comprised a number of also rans in seats that were gifted to Labour or the Liberal Democrats when the Brexit vote got split. He maybe even thinks this noble gesture will get him a job with the Government later (not likely in my view).

Time will tell, as ever, if this is proof that Boris and his ‘oppos’ have made enough of the right calls to get themselves 5 years in power. Given that Labour has made some genuinely Socialist policy proposals, the City will be more relieved than usual if the chances of a Labour victory are further reduced.

My feeling is that there is an opportunity to make a tentative start at buying into funds with exposure to the sort of UK businesses that have been subject to undervaluation because of Brexit uncertainty as opposed to their actual business models. Today’s figures on the UK economy 3rd quarter were also not too bad.

Watching Brief – November 2019

1st November 2019 by Mark Potter Leave a Comment

Pottering About

I have recently been so bold as to try and define the Conservative government strategy on Brexit and their potential to govern in practice. I was right to suggest that a General Election was their principal objective, ideally post Brexit with the public not contemplating remain or second referendum issues, but they failed to achieve the October 31^st exit.

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Monday Mash Up – Stalled Saturday and Grumpy Trumpy

21st October 2019 by Mark Potter Leave a Comment

I have decided not to carry on numbering these posts as that would not be very helpful if anyone (including me) wants to search in the history for a particular rambling or rant in the future.

Brexit again

It now makes sense to keep a daily watch on developments and market reactions, especially the direction of the FTSE250 (easily checked on the BBC web site, Business/Market data).

Although a deal being approved by Parliament is in reality only a small step, because the transition period is likely to end without Britain having a new trade deal with Europe and there will be another cliff edge, the markets will be looking for the real Johnson objective to be satisfied (the General Election being called).

As only a contrarian (and one more contrarian than me!) would predict anything other than a decent Tory majority, I would suggest that markets will take that as a positive development. Rather paradoxically, as there will be economic negatives from Brexit, the government and central bank reactions are highly likely to be stimulus by money printing and borrowing. In the short term that is good for bonds.

I will write a longer piece about why I am interested in Corporate Bonds after a long period of ignoring them. But a Brexit deal and an election will possibly also be good for certain equities, so be prepared to dip a toe in the water of the UK Smaller Companies sector and maybe look at some recovery or opportunity funds if you have plenty of cash.

The Incredible Sulk

Not my invention, but the moniker used for POTUS Trump by the Guardian’s political sketch writer.

A few years back, I had the unpleasant experience of trying to deal with someone who I eventually worked out had narcissistic personality disorder. Such people, mainly men, are surprisingly common, I have since found out. Having had that experience, I can to a large extent predict or at least understand how dear Donald will behave.

Such people will swear black is white, will deny that what they said or wrote yesterday is in any way a given fact and generally do anything to preserve the perception they have of themselves as being faultless and adorable. They have trouble believing that anyone could doubt their superiority and deal with it by rubbishing any opponent aggressively because they really believe that such morons and weaklings must be inferior as they have not appreciated the genius of the great one they are trying to criticise.

Academics suggest such people frequently rise to the top in business, politics and the entertainment industries. I bet you can name one or two!

How can such people be stopped from causing chaos and damaging other innocent people? The answer, I found out, is to present them with a situation where they can see that their reputation with be destroyed, given the absolute nature of the facts and the failure that will be attributed to them.

Is it possible Donald Trump is not perfection itself?

That is why Mr Trump withdrew his proposal to have the G7 meet at his resort in Florida, quite quickly. It was not that he was worried about the conflict of interest accusations – he knows in his own mind that they don’t count much with the public – in fact the sort of people who vote for him admire someone who can make a quick buck, in any way. That he has made clear quite often: morality does not matter to such people.

What he was scared of was the resulting publicity that revealed this was a failing business venture, big time – fact. He can’t get round that, even admit it to himself. Reading it is very painful, so he withdrew his proposal to remove the focus.

Why do I make this argument? Because in the end someone will unravel everything about his Presidency with a wall of facts – probably to do with tax. When that happens, the global economy will heave a sigh of relief.

Monday Mash Up 004

7th October 2019 by Mark Potter Leave a Comment

If you read the ‘start the week’ data on the Bloomberg business news website today, you might conclude that nothing much was going on – everything is calm and nobody is worried about anything.

But if you happened to have looked at the same site yesterday, being a Sunday, you would have seen a more thoughtful set of bullet points. They highlighted the fact that Germany is going into recession, politicians in Europe think the UK is now just playing a blame game and does not want a Brexit deal, there are potential difficulties coming up with the US/China trade talks and that maybe the US economy has now joined the global slowdown.

The last possibility can hardly be a surprise, given that anyone who knows anything about economics from a GCSE student upwards would have predicted that as a likely outcome of US policy on global trade.

Some readers may have thought it odd that US stock markets seemed to react positively to weaker US employment growth, one of the data points underlying the suspicion that the US economy is now braking.

That is because the possibility of a slowdown should, in theory, lead to lower interest rates in the US and the basis of equity share valuations is, at a fundamental level, connected with interest rates, Broadly speaking, lower interest rate expectations are good for equities because they are good for bonds.

If you print too much money, you can’t juggle with it because it drowns you!

This however is a mechanical relationship, so may not always correctly predict the prospects for equities in the medium term. If there is too much inflation at the same time as a slowing or even shrinking economy, suggesting that horror or horrors – stagflation, then the prospects for shares are really rather poor. Furthermore, the use of monetary loosening to boost asset prices is rather taken for granted, It is questionable as to what outcomes might follow if interest rates can only go down further by becoming negative.

So we should not join in the markets excitement about lower interest rates and assume that, as I have suggested before, central banks, will always be able to bail out ill thought-out political policies, or fantasy financial constructions in the corporate banking sector.

One might think of quantative easing as a bit like paracetemol. It lowers the pain if used judiciously, but take too much and you will get some fairly horrible major organ damage.