YAP – snippets

To offer some practical support with the ideas outlined in the Deep Dive article series I started at the beginning of this month, I have decided to pass on to subscribers some condensed notes of the material I see in my own reading. Some of my news feeds are only available to those who can pre-register as financial services professionals, supplying some supporting data about their occupation, so I may get earlier or more specifically focused data that could have an impact on strategic investment themes.

I would also claim that I can more quickly add some qualitative interpretation and keep out most of the ‘noise’, a skill I wrote that everyone ought to try and develop.

These notes will be highlighted for your attention by the title used above (Your attention please or YAP – snippets)

Here are a couple of items to kick off:

End of an era for equities?

Some information coming from the large American banks, who are in the main announcing record profits this year, is along the lines that this second very good year for US equities is the last for a long time to come. One source is quoted as saying that over the next 10 years returns will average 3%, or 1% adjusted for inflation. The reasons given for this I have not studied in detail but low GDP growth, lower interest rates, geo-political risks etc. are included.

Predicting stock market returns for 10 years is of course an entirely frivolous exercise. So on the face of it this is ‘noise’. But I wonder why some heavyweight market players have chosen to put out this commentary? They must have an agenda, as they also know that 10 year projections were too much even for Joseph Stalin whose 5 year plans are the stuff of legend.

I suspect this a device to manage expectations. US equities are valued highly and with some good reasons. Yet the US looks more and more like it did at the start of the 20th Century, after which is took a World War (in which the US was only involvedt to a limited degree) and another 25 years for a total collapse. As everything happens faster 100 years later, maybe they see some serious problems sooner rather than later (starting with Trump’s second term?)

So maybe it’s worth parking this rather silly pontification as a sign that someone has noticed slight stress cracks in the structure of the current manifestation of market led capitalism?

UK markets shrinking to irrelevance?

This item is I think more credible. It is suggested that the current low value of UK listed businesses, in the main, which makes them targets for takeover by mainly US based private equity and other non-listed entities (eg sovereign wealth funds) means that the overall size of the UK market is diminsihing significantly.

You will have probably read about the takeover of Hargreaves Landsdown, the bid for Right Move, potential failure and renationalisation of water companies and so on. I have said for several years now that owning UK smaller company funds run by managers who like to own takeover targets (like the ones at Artemis) is a good way of benefiting from any UK ‘bargains’ grab by the wolves of Wall Street.

As the UK market fell out of fashion once the Brexit quagmire became apparent, the relative weight of the UK in global indices shrunk, asset allocations in multi-asset portfolios got reduced and generally the UK got to be seen only as an angle on Europe by global investors. Furthermore, the UK Stock Exchange – to its credit and reflecting a genuine motive of protecting the less-informed public – did not relax its rules and allow the outragaeous ‘rip-off’ investment vehicles known as SPACs. As is generally well known, one of the things that the private equity market hates most is effective regulation.

For the UK market to retain its global status when important firms are being taken over, there needs to be significant new listings or IPOs. That has not been happening. Furthermore some firms are actually looking to move their listings away from the UK, like HSBC who want to split up the business and relist a big part in Hong Kong. There have been debates on listing loactions at dual national firms like Shell, Reckitt Benkeiser and Astra Zeneca in the past and they could resurface.

What are the implications for UK retail investors?

In the short term, there will be good money made if you own funds with a mid cap, small cap or special situations focus, because the manager may well have bought into fims that become takeover targets.

In the longer term, investors will need to look at their strategic asset allocations to the UK, at least to see what sort of specific focus shoud be applied to UK listed assets. Hint: the UK market is well known for paying high dividends and for the fact that some of the biggest owners of UK shares are pension funds which need high yield. So perhaps equity income fund have a more enduring attraction? It could be that the UK gets reclassified as the world’s default defensive value investing play?