BREXIT special. Does politics affect asset prices?

BREXIT special. Does politics affect asset prices?

15 Mar 2016

A STUPID ARGUMENT THAT YOU WILL CERTAINLY HEAR ENDLESSLY One of the most commonly and confidently asserted falsehoods is that markets hate uncertainty. Without uncertainty there would be nothing for markets to price. The pricing of assets is about probability. All questions of probability involve uncertainty. If you ever meet someone who believes in certainty sell them something because they will overpay. Politicians, particularly conservative or establishment ones, often try to scare voters with the unknown. In the current “Brexit” debate, the stayer camp is accused of conducting a Project Fear campaign. One of the central points of this argument is that foreign investors will be put off by the uncertainty that would result from Britain voting to leave the EU. This ignores the fact that almost everything in Britain already seems to be owned by foreigners. Politicians and other public commentators like to pretend that trophy assets are quintessentially British long after they have been sold off.  Witness the farcical outbreak of faux patriotism when a takeover of AstraZeneca by a U.S rival was suggested. The reason why there has been so much foreign investment in Britain is, ironically, politics. More specifically, it has been the lack of interference by politicians in ownership rights. British politicians do not, by and large, confiscate privately owned assets. The downside of this is that rather a large number of exotic individuals with wealth accumulated in dubious circumstances are attracted for this very reason. And there are more on the way, according to today’s news. “Ultra high-net-worth investors from Iran are poised to go on a buying spree of properties around the world – and London is likely to be the top location.”  City A.M. 15 March 2016 This is in many ways very annoying and even shameful unless you happen to be the legal vendor of an asset that has just been sold for a price beyond your greediest dreams. We can’t have it both ways, though it would be gratifying if there were some kind of effective test to verify that the funds used for the purchase had been lawfully acquired. This is supposed to be the function of money laundering laws but these appear...

Report on Q3 2015

Report on Q3 2015

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...

Report on Q3 2014

Report on Q3 2014

4 Oct 2014

The stock market remained nervous, reportedly seeing below-average turnover in Q3. The trend that began in Q2, of the shares of smaller companies performing worse, continued. The FTSE 100 fell by 1.7% and the FTSE 250 by 2.9%. For the third quarter in a row, yields on European government bonds fell to previously unimaginable lows. German 10 year Bund yields have fallen below 1% (now 0.93%). To put this in some context, 10 year Japanese bond yields were around 1.9% before the financial crisis bit in 2008. Japan is considered to be the reference case of a country suffering from long-term deflation. Its 10 year yield is now 0.53%. Since June 2008, Japanese yields have declined by 72% and German by 80%. As I have noted before, the bond markets are shrieking the news that global growth has made a long-term shift to lower levels. Many will argue that this is bound eventually to be reflected in lower corporate profits. It is hard to argue with that but wrong to assume that share prices are consequently too high. When yields on all financial assets are falling, investors are paying higher prices for them. A dollar of corporate profit literally becomes more valuable than it used to be. Many stock market commentators, seemingly obsessed with short-term news and the aphrodisiac of growth, appear to be incapable of understanding this. Given that the cloud of deflation continues to hang over the world (see above), the traditionally nervous month of October will probably produce plenty of gloomy headlines. In my post about the supermarkets, I pointed out that, when operating leases are included as liabilities, Morrison was much cheaper that Tesco and Sainsbury. Well, the gap has reduced but not necessarily as anticipated. Morrison’s price has fallen but the others have fallen further. Tesco’s accounting practices have caught up with it and I must say that, as yet, there is no price at which I would buy it. At last I have noticed the beginning of a backlash in the press against Lidl and Aldi – our nostalgia for the 1970s must surely be limited. Sainsbury has promised a strategic review, a development that appears to have...

ICAP – a secret utility company?

ICAP – a secret utility company?

14 May 2013

ICAP released its 2012 results today. They were agreeably dull after a number of blows to the share price coming from stories about regulatory investigations including reports that it was being linked to the Libor scandal. At first sight, the statement from CEO Spencer suggests a pretty bad year: This has been an extraordinarily tough year in the wholesale financial markets. Trading activity across all asset classes was negatively affected by a combination of cyclical and structural factors including the depressed global economy, a low interest rate environment and lack of clarity around some aspects of regulatory reform. ICAP’s financial performance reflects these extremely challenging conditions. So how bad were the numbers? The answer is that compared to the mood of that statement (“extraordinarily tough year…..extremely challenging conditions”) they were delightful. Operating cash flow was down from 25% of revenues in 2011 to 24% i.e. it was high by the standards of most businesses. The dividend is maintained (for a yield of >7% at yesterday’s close) and after the payment of dividends, capex and restructuring charges, net debt fell by £100m (ICAP now has a net cash position). ICAP is treated by the stock market as if it is a cyclical business (and Michael Spencer does not seem to discourage this view) but its numbers say that it is practically a utility company. A conventional utility company also produces reliable operating cash flow but is burdened with much higher capex requirements. National Grid makes a somewhat higher operating cash flow margin (33%) but invests a formidable 25% of its revenues in capex. Centrica, which is highly regulated (and regularly grilled on the Today programme,) makes an operating cash flow margin of just 13% and will generally invest 5% of its revenues in capex. ICAP spends 3-4% of its revenues on capex but therefore retains much more of its 24% operating cash flow margin for other purposes (shareholders). Moreover, the ICAP capex is directed at electronic trading platforms which, other things being equal, continue to raise group operating margins. Every time I write about ICAP it is trading at around 327p though it has ranged from 280p to 355p this year. I am in the...