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...

2 Oct 2015

According a chap on Bloomberg TV, $11 trillion was lost from the value of global equities in Q3. The FTSE 100 fell by 10.2% and the FTSE 250, as usual doing better, fell by 5.8%. In the three years since I set up this website, the FTSE 100 is up by just 5.6% and the FTSE 250 by 42.2% which is a shocking disparity. The FTSE 100 is the top 100 companies by market capitalisation and contains many international banking, pharma, oil, mining and commodity businesses. The FTSE 250 is companies ranked from 101 to 350 and contains more domestic household names. I suspect that these companies are of a more easily manageable size and have more scope for growth. That may be a story worth looking at more closely but there is an interesting question to ask at once: if you own a tracker fund (as I do in a small way) what is it tracking? Most UK tracker funds follow the FTSE 100 or the FTSE All Share. Over the last five years, the FTSE 100 is cumulatively +8.4% and the All Share is +15.2%. These returns exclude dividend payments. The tracker fund should retain the dividends (after it has taken its fee) to boost the fund performance, so tracker funds should really beat the index (shouldn’t they?). These performance statistics indicate that the question of what your fund is tracking is rather important. And guess what? Over the last five years the FTSE 250 is up by 57.5%, an amazing outperformance of the other two indices. Over the last ten years it looks like this: FTSE 100 + 11%, FTSE 250 + 110%, FTSE All Share +21%. These are remarkable numbers. You might wonder why there are so few 250 trackers on offer. It might be because it’s much easier and cheaper to track an index that consists of 100 large shares rather than 250 medium-sized ones.  Or you might prefer your own conspiracy theory. Government bond markets did not share the sense of near-panic that infected equities. German 10 year Bund yields fell from 0.84% to 0.61%. UK 10 year gilt yields from c.2.1% to 1.8%. Nothing much to smell...

6 Jul 2015

In Q2 the FTSE 100 fell by 3.3% but the FTSE 250 was up by 2.8%. In the first half year of 2015, the FTSE 100 was flat but the 250 was +9.2%. This divergence is probably indicative of two factors. The FTSE 100 is heavily weighted with banks and resource and mining stocks, few of which have looked like attractive investments for some years. The 250 is more reflective of UK PLC. Second, despite nervous headlines about (in no particular order) Greece, China, the interest rate cycle and the various consequences of terrorism, large companies have not benefitted from any move to perceived safe havens. Blue chip oil and pharma companies yield 5%+ but the average investor doesn’t seem to care. To put it another way, investors are not particularly nervous. European bond markets have normalised to some extent. The UK 10 year gilt yield has risen from 1.6% to 2.1%. Way back in September 2103 I recommended (and bought) a gilt, UNITED KINGDOM 1 3/4% TREASURY GILT 22. It was trading at 92. Having touched 103 in Q1 it now trades at just under 99, yielding 1.9%. This is not yet tempting me to get back in but it’s movement is worth following. Very little happened to the share prices of the major food retailers in Q2. They have all begun to tackle their structural problems. My view is that the market is now ignoring a trickle of good news. While Tesco is taking small steps at the start of a very long road – because Tesco needs to overhaul its financial structure – Sainsbury reported that the performance in its large stores had improved in June. It implied that the appeal of discount stores like Aldi and Lidl was waning slightly. Wishful thinking, perhaps, but Sainsbury is making an effort and its new joint venture with Argos is interesting. Morrisons has a new chief executive, David Potts, who seems to be making the right noises. When the (dull) Q1 numbers were released he said: “My initial impressions from my first seven weeks are of a business eager to listen to customers and improve“. He seems to be as good as his...

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...

30 Mar 2015

In Q1 the FTSE 100 rose by 3.3% and the FTSE 250 by 6.4%. The FTSE 250 is probably more sensitive to the domestic economy (or at least to how investors are feeling about it). The FTSE 100 has larger more global businesses including, of course, oil companies and banks, which received another kicking in the recent budget. That last point is a salutary reminder that investors will have to judge political risk in Q2 as the general election arrives 7th May (though the formation of a government may take weeks if the polls are correct in suggesting that no party will win a majority). I strongly doubt whether the economic outlook will be materially changed regardless of who wins. There is very little room for manoeuvre and it is painful to watch politicians trying to pretend otherwise. But where the banks have been led others could follow, particularly if the next government includes Labour. Utility companies have already been singled out to be sacrificed to the mob. No politician appears to understand that electricity supply is a very long-term and expensive commitment. It may be true that utilities are greedy cash cows but they will not invest the vast sums needed in next generation energy supply if they are treated like political footballs. Labour also wants to limit the profits available to companies who provide services to the NHS. I have no idea what they mean by this (drug companies? nursing agencies? hospital retail concessions?) but I am pretty sure that they don’t either. The point to bear in mind that stupidity is no bar to persecuting businesses that can be successfully vilified. Gilts had a relatively quiet quarter with yields falling from 1.72% to 1.57%. Last week I took profits on 25% of my gilt holdings. This was a small insurance against the political scene, but looking across the sea and seeing Irish 10 year bonds yielding 0.76% it is clear that most of us are missing something. Core eurozone bonds i.e. those of Germany saw 10 year yields fall from 0.54% to 0.18% and as I write the seven year German bonds have a negative yield. ECB QE now looks even...

7 Jan 2014

The FTSE 100 rose by 4.4% in the quarter for a full year gain of 13.9%. The FTSE 250 (that’s companies from 101 to 350) performed twice as well in 2013, rising by 28.8%. There are never truly hard factual reasons why share prices move but it generally remains the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is also probably the case that smaller companies are less well known and consequently deliver more surprises. Note that in bad times they typically deliver more bad surprises which point takes us back to why large stocks do better when investors are nervous. It is reasonable to conclude that confidence improved in 2013. The mood implied by the yields offered by government bonds rose from clinically depressed to merely grumpy – in the case of the UK this was from 2.0% in January 2013 to 3.0% now. In the US the rise was slightly sharper, from 1.8% to 3.0%, but it was much the same story. The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery. Analysts sometimes name this “Goldilocks” (not too hot, not too cold) and it feels like a very comfortable investment environment. Comfort eventually causes complacency and this is exactly why it is wrong to commit one’s investment strategy to an opinion about the future, no matter how tempting. Investment is always about how probability is priced. Consensus rarely offers compelling value. I am pleased though not surprised to say that my satellite index of companies with female executives quite dramatically extended its outperformance against the FTSE 250. After the first nine months of 2013, the FTSE 250 was +25% but the 27 companies with female executives had risen by 35%. After the full twelve months, those numbers were +29% and +46% respectively. As for the shares that I recommended this year, in Q3 I wrote that I was surprised that Enterprise Inns rose by 40% in Q3. In Q4 it was much quieter, rising by 6.5%. I am not attracted by the value of the company now and I don’t...

2 Oct 2013

The FTSE rose by 3.9% in the quarter (Q1 +8.7%, Q2 -3.0%) meaning that year-to-date it is +9.2%. I didn’t recommend a single new share in the quarter. This is partly because I was away in France, but is also because no compelling new ideas turned up. City analysts are expected to come up with recommendations (usually ‘Buy’s) regularly but real people don’t have to. To some extent, this reflects my current view of the stock market. The most likeable companies are generally priced accordingly. As I mention repeatedly, value is always relative and shares must always be compared to other asset classes. On that basis, there is not so much to worry about. UK house prices are creeping higher from unaffordable levels, encouraged by the government’s reckless Help to Buy scheme. (I heard the PM complain that the average income is unable to buy the average house. You might think that the solution is to raise the average income or lower the average house price or preferably both, but the answer from our government is to play “let’s pretend” and to forward the problem into the future, as usual). With growing numbers of people hooked up to the life support of the 0.5% Bank Rate, the chance of regular savings accounts bidding for your money are also about 0.5%. The only practical rival to equities in Q3 was, surprisingly, government bonds. On 10 September I recommended one. UNITED KINGDOM 1 3/4% TREASURY GILT 22 was trading at 92 then. This is an investment to tuck away for the long term but in the short term it has risen to 93.78, which, for a gilt, is pretty exciting. Shortly before the end of Q2 (12 June), I suggested a yield portfolio of twelve shares. From that date, they have returned 6.1% (including dividends) against 2.3% for the FTSE. So my implied caution has worked out quite well. The only stinker was Ladbrokes, thanks to a profit warning derived from its concerning failure to manage its online business. That having been said, its cash flow remains good and it has pledged to maintain the dividend. Today (167p) it yields more than 5% so I am,...

3 Jul 2013

The recent correction in world stock markets was widely attributed to comments made by Ben Bernancke on 22 May, such as this: Asked whether the Fed would curtail the pace of its bond purchases by the September 2 Labor Day holiday, Bernanke said simply: “I don’t know.” The word of the moment is “taper” meaning “to reduce gradually” indicating that one day the Fed will buy fewer long dated assets through its QE programme until the day arrives when it will buy none at all. This vague prospect is thought to have caused the US S&P 500 to fall by 6%, the FTSE 100 by 12% and the Japanese Nikkei 225 by 20%. In theory QE might be reversed. Instead of being a buyer of assets the Fed might dispose of them as confidence rises. That day is hard to imagine now, given the panic that would presumably ensue. Financial markets in the US speak very loudly to the senior executives of the Federal Reserve and the recent historical evidence of the latter standing up to the former is negligible. This implies to me that QE asset purchases are likely to be strung out for as long as financial credibility permits and that many of the purchased assets will be held to redemption. The persistence of QE provides short-term gratification to financial markets (the words “short-term” are probably redundant – markets know no other kind of gratification) but as I have argued elsewhere it probably has a negative effect on the rest of the economy – liquidity turns to ice when its primary purpose is to prop up zombie banks. All this and more applies in the UK. The Bank of England’s relationship with HM Treasury (effectively the government of the day) has long been the subject of interesting debate but in practice it has been subjected to increasing statutory control since it was nationalised by the Atlee government in 1946. The Blair government famously gave it the power to set interest rates, a move that was spun as allowing it to pursue monetary stability independent of interference from politicians. Yet, read the bank’s own summary of that 1998 act: In 1997 the new...

4 Feb 2013

“The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine.” So said Bill Gross in January 2010. Mr Gross (who works for Pimco) is the best known bond investor in the world. He is the only fixed interest specialist invited on to the Barron’s Roundtable. When he made that comment, 10 year Gilts yielded 4%. Eighteen months later their yield had fallen to 1.5%. As it turned out, Bill Gross was warning people away from a gilt-edged buying opportunity. To be fair, the stellar performance of gilts, as well as US Treasuries and German Bunds, required the normal rules of value to be suspended. The era of very low bank rates, negative in some cases in nominal as well as real (inflation adjusted) terms, accompanied by quantitative easing (the process by which central banks purchase long-term assets for cash)has resulted in investors and savers becoming increasingly desperate for yield. People who are desperate for yield will gradually accept both lower returns and higher risks. By any sensible standards, the UK state is rather high risk. While it is true that a sovereign government with its own currency will never actually go completely bankrupt (because, in popular terminology, it can print its own money – an option no longer open to e.g. Greece), uncontrolled borrowing will lead straight to devaluation and inflation. The main worry about investing in the UK is not default: it is getting stuck with an asset whose price falls painfully, leaving the choice of selling at a loss or continuing to hold paper that yields well below the prevailing levels of interest rates and, most damagingly, inflation. The history of the UK economy can be seen in the nominal yield of gilts and the price movements. The first gilt I ever bought was issued in April 1992. It had a nominal yield of 8.75% and a life of 25 years i.e. it will redeem at par (100) in 2017. It is hard now to imagine that the government would offer investors a guaranteed 8.75% for 25 years: that is because the equivalent offering today (there actually is a 4.75% 2038 gilt out there) yields 3.2%....