3 Jan 2025

The UK indices fell by 1-2% in Q4. If the stock market is a reflection of how investors feel about the UK’s economic prospects, it is not a very pretty sight. Over the year the FTSE 100 rose by 5.6%, the All Share by 5.5% and the FTSE 250 by 4.7%. The UK ten year gilt yield rose from 4.1% to 4.6%, implying lingering worries about inflation and meaning that the cost of servicing the UKs vast debt is likely to be as uncomfortable as ever. I have noticed that my stockbroker is now offering me direct access to government debt issues. From memory, the last time this was done was in the 1990s. This is welcome to me but also carries a faint whiff of desperation. The rise in US ten year government bond yields matched those of the UK (4.0% to 4.55%) while other European yields rose more gently. German ten year yields, at 2.35% (from 2.2%) suggest that investors in Europe are more worried about low growth than inflation.  A number of UK companies made cautious comments about their prospects, typically allocating some blame to the now notorious budget effort by the UK Chancellor Rachel Reeves. In particular retailers are dismayed by the rise in employers’ NI contributions as well as the expected increase in minimum wage. My portfolio suffered warnings from Shoe Zone, Kingfisher and Pets At Home. Shoe Zone (18 December) Consumer confidence has weakened further following the Government’s budget in October 2024, and as a result of this budget, the Company will also incur  significant additional costs due to the increases in National Insurance and the National Living Wage. These additional costs have resulted in the planned closure of a number of stores that have now become unviable. The combination of the above will have a significant impact on our full year figures Kingfisher (25 November) Solid underlying trading in August and September; weak market and consumer in the UK and France in October, impacted by uncertainty related to government budgets in both countries Pets At Home (27 November) In the October Budget, the government announced planned changes to the National Living Wage and employers National Insurance Contributions....

28 Aug 2019

Anyone who cares to investigate can discover that the equities that you probably own directly or through your pension scheme are equitable only with each other. Benjamin Graham, the so-called father of modern investing, called them “common shares” which is a better clue. When a company is wound up this typically means that it has run out of money and run out of people who will lend or give it more cash. Equities represent any surplus assets that are left when all other creditors have been paid off. Every other creditor ranks above the owners of the common shares. First are secured creditors like banks or bondholders who have lent money on fixed terms. If the company defaults on those terms it can be forced into formal insolvency, though sometimes the secured creditors will accept equity in return for a further cash injection, if they judge that their best chance of getting their money back in the end is to keep the business going. In those circumstances they will be issued shares on such favourable terms that existing equity investors are diluted to the point of worthlessness. This is happening now in the case of Thomas Cook. After secured creditors have been paid in full, anything left goes to so-called preferential creditors, including employees, and then to the luckless trade creditors and HMRC. You can infer that common shareholders will usually be completely wiped out. Unsurprisingly, people who invest in equities very rarely think about the risk of insolvency and losing all their money. We all dream of the day when the theoretical value of those surplus assets explodes upwards. Bond holders may get their money plus interest back but as Benjamin Graham pointed out many decades ago, common stocks have “a far better record than bonds over the long term past”. It has widely been accepted as a fact that equities are the answer for a long term investor. Cautious share owners look for sustainable dividends that can rise as the company grows; the more optimistic hope for rising share prices as well. Those are the two elements that drive the long-term performance of common stocks observed by Graham. But stock market investors...