Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession.

The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief.

For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again.

Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago.

It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true.

Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over.

When the DotCom bubble burst in 2000 it was equally obvious that something unsustainable was over. Inevitable events have a way of happening. It was shocking to watch but not in the least surprising.

The financial crisis that began in 2007 was much worse because only a tiny handful of people could imagine that the banks that looked after your savings could just disappear overnight. And they very nearly did. It takes years to recover from a shock like that (unless you are an investment banker in which case you just pretend that it never happened). The banks themselves are still crippled investments.

The June 2016 vote for the UK to leave the EU was certainly a moment when something that everyone had taken for granted turned out not to be true. Two and a half years later, it continues to generate the impression of a collective nervous breakdown which in turn fuels much negative speculation about economic prospects and creates gleeful commentary from its victims about anything that smells even slightly of bad news.

Yet here we are in January 2019 and are any of the alarming headlines remotely surprising? Donald Trump is in everyone’s face – China looks unstable and untrustworthy (perhaps that’s why its stock market has halved since 2015) – the EU economy is slowing and its governments are getting buffeted by populism – Brexit is blah blah – traditional retailers are losing out to internet shopping – Facebook sells your data – people in India and China don’t all want to spend $1000 on an iPhone – seriously, could someone rouse me from my snooze when something interesting happens?

None of this resembles a moment when everything you thought turned out to be wrong. On the contrary, we are all being deafened by people shouting “I told you so!”

Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain.

I am trying to keep an eye on all those risks plus some others that I don’t know about. But my verdict on the current “bear market” is that it is a noisy dancer but lacks teeth. Consequently my verdict on falling prices is that the shares are cheaper than they were when they were more expensive. And that makes them more interesting than the snooze news.

I have been trying to buy the following mid-cap UK shares with strict price limits on down days.

In no particular order:

Dairy Crest







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