Its Not Harry

Comment and opinion for retail investors in the UK

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Monday mashup – did Nige blink first?

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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 do we make of that….?

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.

Monday Mashup – toothless regulators

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This week I am not writing about the investment markets, but the system of retail investment. We all have a risk if the people we give our money to negligently mis-manage it or even run off with it. There are systems in place that are supposed to protect us in a country with a highly developed financial services industry, but do they work?

Covering all angles

I will start with an allegorical situation. I own a house in a country where burglaries are reportedly (from the insurers) less common than in England, but as I live in a remote area I have a good electronic security system, pay a modest sum to a security company to send out 2 armed employees promptly if it is triggered and as a backstop have a normal house contents insurance (with a discount because of the security arrangements).

Here I am training and improving my CV ahead of applying for a job at the FCA

It all works – I know because I accidentally triggered a smoke detector in the small hours and had 2 large uniformed guys appear and ask me for ID docs and my password! I suppose you can get burglars in pyjamas!

I tell you this because that is how the retail investor buying funds ought to be protected in the UK – with proper security systems that respond

We pay for our own protection

Our money goes into OEICs, which are run in line with a prospectus and have an ACD (authorised corporate director) who is charged with making sure the securities are looked after and the fund manager behaves. That is the first line security system. You pay for it directly in your fees.

There is also the FCA (the regulator or response force). They are supposed to understand the market operators, monitor them, identify risks and discipline or even close down bad actors You pay for it indirectly in your fees.

Then there is the last resort insurance policy – the Financial Services Compensation Scheme. This is widely used as a ‘catch all’ to make up for all the bad practice that the FCA failed to notice. If you think adviser fees, bank charges and insurance premiums have gone up a lot lately, one reason is to pay for the escalating cost of FSCS levies – so you maybe pay for that too.

The Woodford case

In the case of the Woodford Equity Income fund, it appears that Mr Woodford was able to invest outside of the stated objectives of his fund and in breach of the FCA rules. Other industry practitioners could see that was happening and it was reported by specialist journalists. The ACD must have known it was happening, The FCA should have known it was happening.

The security system and regulation failed. Investors who are annoyed (understandably) are suggesting that they will sue financial advisers and Mr Woodford’s firm (not much use if it is closed down). Who is holding the ACD and the FCA to account?

The FCA are in my direct personal experience incapable of acting on specific warnings of potential fraud. The ACD model is being challenged by some who point out that the European SICAV model would offer better protection. But of course we are supposed to be having a bonfire of regulations post Brexit! If that happens, then it will be truly ‘caveat emptor’ – buyer beware. The current system frequently fails, but it is better than no system at all.

Watching Brief – November 2019

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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 31st exit.

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Monday Mash Up 004

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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.