Report on Q1 2016

Report on Q1 2016

8 Apr 2016

Following a nervous rally in Q4, in Q1 the UK stock market was merely nervous. For the first time in seven quarters, the FTSE 100 (-1.2%) outperformed the FTSE 250 (-3.0%). This is a small indication that investors were becoming more worried about the outlook for earnings, I suppose. Since the Fed made the first tiny upward move in rates (0.25% in December), the economic smoke signals have deteriorated. Janet Yellen has publicly backtracked on the outlook for more rate rises this year. The ECB has signalled that more stimulus may be needed. Then there is China, Brexit and, most particularly, blah blah.     

As usual, market commentators think that equity prices should reflect their view of the world. As usual, they miss the fact that equities are merely assets that compete with the value on offer elsewhere. The implicit secondary purpose of QE (the primary purpose was to bail out the banks) is to make the value of every other investment so unattractive that people begin to invest directly in riskier ventures that are more likely to help the economy. That’s the theory on which, despite its having the weight and robustness of a Twiglet, the world seems to be relying.

How’s it going? Well, the price of “safe” investments has climbed to yet more prohibitively unattractive levels. The yield on German 10 year Bunds was 0.63% on the 30th December 2015 and 0.14% on 30th March 2016 and is thought by some to be heading negative. Well, why not? The Bank of England started its QE purchases of gilts in March 2009. At the time, the average UK dwelling cost £157,500 (its low point of the last ten years). In March 2016, the average dwelling cost £224,000 a nifty rise of 42% or 5.2% compound over seven years. No wonder that most Britons think that housing is the best possible investment and that we must have a housing shortage. Memo to everyone: house prices have been inflated by a deliberate and unprecedented policy of monetary easing, not by supply shortage. This is not going to end well.

How about the next stage? Are people helping the economy by making riskier investments? Today’s newspaper (8 April) carries the story of Rebus Group, a claims management company that raised £817,790 from individual investors through the Crowdcube website but collapsed shortly afterwards. According to the Daily Telegraph there are 1,750 claims management companies out there (whaaatttt????) trying to get us to pursue compensation for personal injury or miss-sold PPI. Desperate investors are drawn to desperate business. I thought that crowdfunding was supposed to involve popular support for worthy ideas. Even a solvent claims management company can hardly fit that definition.    

I can promise you that if you want to make a riskier investment there is an army of rogues out there waiting to help you. It is arguably more sensible to spend your money, or to give it away, while you and others can enjoy it. To some extent this is happening. Household family spending has been rising since 2012 with the biggest rise in the category known to the ONS as “transport” but which actually means that people have been buying cars. In 2014 new car registrations rose by 9.3% (to c.2.5 million a year – it was 1.8 million in 2009).

One could argue that the relative restraint in equity prices is something of an anomaly. All the main UK share indexes are down over the last year. And as I have discussed elsewhere, companies are behaving cautiously with their cash which is a friendly attitude for dividends if nothing else.  

Sainsbury is buying Home Retail Group, implying that it agrees with my positive view of the attempts by Argos to turn itself into an internet-driven business. Satisfaction was snatched from the clutches of disaster as HRG’s share price had been driven down by short selling hedge funds holding the view that Argos was a chav emporium that would be doomed by the new minimum wage. This man went to the same college as me but clearly doesn’t get down with the people like I do.

Elsewhere I have been buying Tesco corporate bonds. I am not a fan of Tesco shares because the company loaded itself up with lease liabilities by pretending to be a property company. Equity is the lowest ranking liability that gets paid out last. But the 2029 bonds (which obviously rank above equity) have a 6% coupon and were for sale at slightly below par (100) in February (they’re now c.101). 

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