It is because of our personal approach that so many of you have been with us for so many years.
We work with each of you individually in order to inspire confidence, provide security and offer support.
It comes as no surprise to learn that the International Monetary Fund
anticipates global growth to be at least 5.5% in 2021. Impressive though that figure is, it comes
from a very low base and even the IMF acknowledges that lion’s share of that improvement
will only start to manifest itself in the second half of the year. Greater progress must wait until vaccination
programmes reach across the planet.
This is the Achilles Heel of all “me first” nations in the developed
world, because the developing nations have been used to supply goods at bargain
prices in recent years to keep our domestic rate of inflation down. Those nations are least able to afford the
vaccine and have the worst infrastructure to deliver it with inadequate health
services to boot. India is an
interesting case in point. That nation
manufactures most of the vaccines to satisfy global demand and yet it only
began to inoculate its own people on 16th January with the bargain-basement
Oxford teams / Astra Zeneca product. Despite this slow start, it will have treated all 300m of its citizens
by the end of June 2021.
Keeping developing nations at the back of the vaccine queue impacts upon
our own economic performance, global innovation and our freedom to travel – but
it is still great news that the UK has now vaccinated 10% of its
population. Most of them have only had a
single shot of the magic juice, but that is still better than nothing and our
government is on track for immunising the cohort responsible for 99% of
Covid-19 deaths by mid-February 2021. Indeed, Astra Zeneca released a statement to confirm that the UK will
have jabbed between 28 and 30m citizens by St Valentine’s Day despite the
latest EU moves to impede their Belgian exports.
Every effort has been made to be supportive of our government in its
Covid response, even when some decisions have been hard to understand, but the
announcement by our Prime Minister on 26th January that more than
100,000 of us had died even though “we did everything we could to minimise
suffering and loss of life” sticks in the craw. Like the UK, Australia is an island albeit with only 25,667,858 citizens
instead of our 68,089,273. The Ozzies
shut their borders to all incomers as soon as the pandemic was acknowledged and
so their death toll is a whopping 900. Scaling that up to match the UK population the number would be 2,388 and
STILL the UK travel stance is half-hearted and therefore ineffective. Enough said.
Most readers of this update will hold Fundsmith Equity in their
portfolio and so it is not entirely inappropriate to share a direct quote from
the founder Terry Smith’s in his latest annual letter to investors:
“One of the mantras which has been regularly trotted out by commentators
is that the events of 2020 and 2021 are unprecedented. Whilst that is literally
true as Mark Twain observed, history doesn’t repeat itself but it often rhymes.
It is certainly true that most of us have never experienced anything like it,
yet it may not be strictly true that the events of 2020/21 are without
There have been six identifiable pandemics over the past 130 years:
Russian Flu (1889–90) killed 1m
Third Plague (1894–1922) saw 12m deaths
Spanish Flu (1918–19) another 50m died
Asian Flu (1957–58) killed 2–5m
Hong Kong Flu (1968–69) saw another 1–4m die and
Swine Flu (2009–10) felled 0.5m more.
We might be able to draw some parallels from these past pandemics as a
guide for what may happen as a result of COVID.
One of the conclusions that you might draw from the economic effects of
pandemics is that they do not so much cause new trends but accelerate some
existing trends. The most obvious comparator is the Spanish Flu pandemic of
1918–19. The death toll of at least 50 million people caused a reduction in the
workforce which was a factor in the subsequent widespread adoption of assembly
line techniques for mass production. The assembly line was not invented as a
result of the Spanish Flu pandemic — the Model T Ford was put on an assembly
line in 1913 — but it accelerated its adoption.
The increase in productivity this delivered helped to fuel an economic
boom as the cost of production of items such as cars and household electrical
appliances were reduced. That allowed the volume of production to rise and the
products then became affordable to the middle classes for the first time. This
helped to fuel the economic and stock market boom of the Roaring Twenties.
Might something similar happen as a result of COVID Obviously, I do not
know, and fortunately my predictive capability is not the basis of our
investment strategy. However, there are some clear signs that existing trends
have been accelerated by COVID. For example:
• Online working from remote locations using the cloud or distributed
• Home cooking and food delivery
• Online schooling and medicine
• Social media and communications
• Pets — which have become more important in isolation and when their
owners are at home more
• Automation and Artificial Intelligence.
The result is that many people have become more productive. Salespeople
can visit many more clients if video conferencing is acceptable and at
virtually no incremental cost. We receive reports of
factories which we are told are operating with 50% staffing due to
social distancing rules but which have more or less maintained production. I
wonder what conclusion that leads to.”
You will appreciate from this that Corrigans is not the only firm
holding the view that the future for investors remains very bright.
Welcome to the bright new world of 2021: a
world in which the 2020 rhetoric of many politicians will be increasingly seen
for what it was. It is far too easy to address the weaknesses of the departing
President of the USA and his legacy, but it is a sobering fact that he secured
the backing of more Americans than any previous President and yet still failed
to secure a second term. His bombastic style remains extremely popular with the
American electorate and, as the Capitol invasion showed, they want to be heard.
Thankfully, Mr Biden is a centrist
Democrat and so his plans would ordinarily be less contentious than those of
his predecessor, but even those aspirations must be moderated. The rare alignment whereby the Democrats
dominate the Senate and House of Representatives during a Democratic Presidency
will not give Joe Biden a free hand though – far from it – because his party
faces its own tensions between his populist “Blairite” stance and those with
more militant agendas.
As a result the most likely outcome in the
early days will be the easy wins: an extra US$ 1trn fiscal stimulus that will
delight citizens and investors in equal measure, a shift in focus away from
economic isolationism to the more established free-trade practices of old,
rapid acceleration of the medical response to the pandemic and a US$ 2trn volte-face
in relation to global warming. It certainly will not be a resumption of
American global relations as they were in December 2016, but the changes augur
well for investment prospects.
One early-bird beneficiary of this is the
Korean motor manufacturer Hyundai. They diligently announced to investors that
initial talks had begun with Apple about working together to realise Apple’s
aspirations for self-driving cars by 2024. Shares rose 20% on the news.
Fears of an immediate increase in US
Corporation Tax from 21% to 28% are most unlikely to be realised, because the
next President has engaged a team of respected figures. The likes of Janet
Yellen will be quick to point out to him the current fragility of the US
economic recovery and the consequences of any fiscal act which undermines its
progress. This aspiration may have to wait until his second term.
China continues to test the boundaries of
its freedoms, not unlike humans under the age of 26, most recently with the
arrest of another 50 democracy activists in Hong Kong. With no sign of any appreciable change in the
mood music coming from America, the Chinese diplomatic stance is becoming
firmer rather than quailing.
This is also the case in Human Rights
issues: a topic close to the heart of Mr Biden. Almost one in eight if Chinese
Uighur Muslims are essentially enslaved as manual labour in the production of
cotton. The world currently sees but does nothing. Time and scale are both on
their side and so investors may need to match the very long-term patience of
Chinese authorities if they wish to hold assets based in China, because access to
that capital could become an issue.
Another striking example of the new
stridency is China’s adoption of the bully-boy tactics employed by the Trump
administration in all matters relating to trade. Stung by Australia’s referral of China to the
World Trade Organisation for a review of their conduct in the Coronavirus
discovery and their concomitant responsibilities towards the rest of the world,
China has imposed huge tariffs upon a wide range of Australian goods. An 80.5%
tariff upon Barley joins similar measures against wine, coal, lobsters, cotton
(just a 40% levy here), timber and red meat (both effectively banned
completely) to dramatic effect. In 2019 China bought 32.6% of Australian
exports and that currently stands at about 8% because they still need
Australian Iron Ore. The well-known Australian phlegm has led to an impasse,
because they refuse to withdraw that referral to the WTO.
Whilst this is disappointing news for
investors in Australia, it is music to the ears of our Prime Minister and The
Rt. Hon. Elizabeth Truss MP (Secretary of State for International Trade and
President of the Board of Trade) in their search for an “oven-ready foreign
trade agreement” now that the UK has left the EU. After the 1969 referendum that saw the UK
join the Common Market it took another four and a half years to hammer out a
deal that our Mandarins felt comfortable signing (does that sound familiar)
and then a further two years of negotiations before it actually happened. That process saw the UK abandon economic
relations with its colonies in favour of mainland Europe and it should come as
no surprise to anyone that those same colonies are in no rush to assist the UK
in its latest hour of need. It can only
be hoped that the current economic difficulties Australia finds itself in
provide sufficient incentive for their government to strike a deal with the UK
The UK hosts the climate-change summit COP
26 in Glasgow in the first two weeks of November this year. China recently
announced its intention to address its pollution problems rapidly and President
Elect Biden is wed to the idea too. Another recent convert is our own Prime Minister, who is keen to grasp
this opportunity to be seen as a world pace-setter in the most important issue
of our times. His initial pronouncements have focussed upon (very) ambitious
reductions in domestic CO2 emissions and fiscal incentives to encourage
progress in the development of new technological solutions in the UK –
something that this nation is exceptionally good at.
He may not realise it yet, but this is
another good reason to cosy up to Australia, because it has the largest
domestically-controlled ocean rights on the planet and that is going to be
The developed world will have to eat a lot
less of the meat we are accustomed to: at least an 80% reduction, partly
because its production is so damaging to the environment but mostly because we
won’t be able to afford it. Emerging nations like China will price us out of
the market and enjoy the pyrrhic victory of coronary heart conditions that go
along with an abundance of red meat. Fish has already been seen as an unsustainable substitute and so
commercially grown insects are the most likely substitute source of protein in
Beyond that, cereal crops are the next big
polluters and Australia has found that aquaculture (commercially grown seaweed)
is the perfect replacement in most applications. It does the same job of stripping CO2 from
the atmosphere but involves the addition of no chemicals at all, simply using
nutrients carried in the sea, and so it costs very little. This appears much better than Genetically
Modified crops imported from bee-killing prairies abroad.
Meanwhile the length of unemployment
queues grow around the world, playing into the hands of business owners who
then demand greater productivity, refuse pay rises and erode existing Benefits
In Kind. That improved profitability
translates into larger dividends and higher share prices, to the delight of
When this is combined with Fiscal policies
delivered by governments and Monetary policy delivered by Central Banks, both co-ordinated
to stimulate economic growth, the conditions resemble the term “helicopter
money” coined by Milton Friedman in 1969 and recently revived by Ben Bernanke
in 2016. In short, when nations are
throwing money at a problem that cash has to land somewhere and that somewhere
is into the hands of investors.
With no wish to dwell upon past mistakes
made by most governments during this pandemic, the British government has done
remarkably well in terms of vaccinations. You will know from earlier Updates that Blighty was the first nation to
pre-order vaccines and the 320m booked to the UK made us first in line with
every manufacturer. Staggeringly good progress is being made injecting the
nation and so personal freedoms should soon start to be improved to liberate
business efforts to resume economic activity.
From the perspective of our investment
clients, the next three to seven years promise much and active management will
remain key to building upon the successes of the past.
In recent times
all UK retail businesses have had to report their single-use plastic output per
year. Iceland, the frozen food company,
is the first to publish that data. Their
laudable stance is that “if you don’t measure it you cannot be sure what progress
you have made towards any goal”. Last
year Iceland sold products within 32,000 tons of single-use plastic and it
intends to extinguish all such plastic use by January 2023.
firestorm caused by his disruptive negotiating tactics, Prime Minister Johnson
was thrown a lifeline by the Chinese. One of their native businesses has invented a test for Coronavirus which
produces a result in minutes and they can produce enough of them to facilitate
the “Moonshot” target of 1m UK tests per day. It will be interesting to see what price we must pay to prove our Prime
Minster right – a reprieve for Huawei perhaps
shared the conclusions of the latest meeting of the FOMC (Federal Reserve Bank)
late on 16th September and it had an immediate impact upon
investment markets. He explained that
the US had done well in getting unemployment down from 14.7% to 8.4% but it
would be another three years or more before what passes for full employment
will be regained. The Fed believes it
will take more fiscal stimulus to achieve that goal: a real problem at the
moment because Congress remains conflicted and unable to agree upon the shape
or scale of the next burst of governmental support. In the meantime QE continues apace but their
main thrust was that re-employing all those people is going to get a lot harder
was the exact opposite of what the Fed wishes to achieve: the US$ strengthened
while tech-stocks continued their decline.
In the interests
of balance it is worth noting that New Zealand, much praised for their
effective control of the Pandemic by suffering just 25 deaths from their
population of 5m (the equivalent of 325 deaths in the UK rather than the 41,684
at the time of writing this note), has suffered a terrible impact upon its
economy. Everyone knew that there would
be a technical recession – it is unavoidable wherever you look – but the
recovery in their GDP is particularly weak and certainly not a patch on their
The list of “I
can’t stand it anymore” resignations continues to grow for our rumbustious
government, this time with the departure of Lord Green – the Advocate General
for Scotland. Now that the occupiers of
the top legal-job in government representing England and Scotland have gone, it
can only be a matter of time before the Welsh and Northern Ireland counterparts
follow suit so that the politicians can invent any laws they want.
“life after Covid” vary a great deal across the world. On mainland Europe the GDP of Northern
countries appears to be picking up nicely, but the Southern flank continues to
be sluggish. Spain is leading the charge
there with a consolidation in the banking sector, starting with the merger of
Caixa Bank and Bankia to strengthen the combined balance sheet, reduce
overheads (and competition) and improve operating margins, i.e. better news for
investors than customers.
Meanwhile in the
Antipodes and Asia generally, seven-hour sightseeing flights to no-where
costing Aus$700 per person are selling out everywhere. Passengers get to see numerous destinations
like Ayers Rock, the Great Barrier Reef and the vineyards of the Barossa Valley
during the flight. The upside in terms
of pilots keeping their licences because they are actually flying for the
mandatory hours each year, airframes that are not mouldering away into scrap
for want of use and the survival of airlines are obvious, but the Greens are
naturally vocal about this wanton destruction of the environment.
Across the pond
the slide in tech shares continues apace, principally because Congress cannot
agree the next round of Fiscal Stimulus and the narrowing Presidential polls
bring uncertainty. In that context the
decision by Oracle to purchase the US franchise for TikTok makes a great deal
of sense. Oracle now collects US$800m per
year for hosting the service and this boosts their status as a cloud business
considerably, although still miles behind Google, Microsoft and the like.
Still in the land
of the free, the US and China refused to join 150 other countries who signed an
international agreement to distribute Coronavirus vaccines fairly rather than
keep them all for themselves. Some might
question the value of the UK signature on a legally binding document, but it is
better to take part than be shamefully selfish in the face of this pernicious
virus. Perhaps the UK should draw our
own red lines: if the US don’t like us behaving selfishly in relation to the
UK-EU Border and so refuse to countenance a trade deal, we won’t enter a trade
deal with nations that have no moral compass.
remains conflicted about the scope and scale of the next round of American
fiscal stimulus with a predictable drag upon its investment markets, their
Senate did muster the courage to give another US$28bn to US airlines to help
them through the impact of the pandemic. No such relief has been granted in the UK, thanks to EU Rules which ban
all State aid. Could this be a hidden
positive flowing from Brexit
In its attempts
to thrive post-Pandemic, Airbus has just launched three prototype aircraft that
are powered by hydrogen. The exercise
proves the ability to slash operating costs and achieve carbon neutral flights
without the artifice of “offsetting”, simply by engineering ingenuity. In this case the bodies and wings became
double-skinned hydrogen fuel tanks, the fuel cells, electronics and engines
were all adapted to the different fuel and all went well – but they preferred
not to call this “Operation Hindenburg” for some reason.
Hong Kong was
coming to the end of a complete lockdown which has had the desired effect of
rapidly reducing the infection rate. The
authorities there decided to extend the lockdown for another week in an unlikely
attempt to extinguish the virus rather than acknowledge that the populace are
fed-up with the restrictions upon their freedom. It is no surprise that the hospitality sector
are exercised about the change, but the Chinese approach towards this problem
has proven to be immeasurably more effective and enduring than those adopted
France and Spain
remain about two-weeks’ further into the pandemic than the UK, so their
practical experience provides a valuable insight into our likely immediate future. Both Messrs Whitty and Valance announced that
their advice to our Government was that if the nation continues to act in its
current “irresponsible” manner then there could be more than 49,000 infections
per day in mid-October. This is
absolutely true, in the same way that you could win the next National Lottery if
you buy a ticket. It is equally true
(and unlikely) that we might buck our collective ideas up and start to behave
compliantly, but our actual daily infection rate tracks very closely those of
France and Spain. Their experiences
suggest a more likely infection rate in mid-October of 12,000 per day with 50
deaths. Both Intensive Care beds and NHS
Staff will be under renewed pressure in such circumstances but they coped
before and seem certain to do so again while everyone waits for the vaccines.
believe that the UK was too slow in its responses to the threats of this virus:
something that Oor Nicola is desperate to avoid repeating, and so it seems
inevitable that our Prime Minister will announce a resumption of home working
wherever possible this evening, hospitality venues to be closed by 10:00pm and
imminent lockdown measures over large swathes of the union. Those measures have already been built into
investment markets this week and the impact is not expected to be as severe as
that leading down to the March 2020 nadir. Businesses and investors have experience of what the lockdown means in
practice and coping strategies are already in place. Consequently the immediate impact should be
less pronounced and the recovery swifter, so now is the hour to commit capital
you have been saving for a suitable investment opportunity.
surprise resignation of Shinzo Abe on health grounds the most likely successor
as Japanese Prime Minister is Yoshihide Suga, also affectionately referred to
as Uncle Reiwa. The era of Abenomics is
widely considered to have been a relative success and Suga appears wedded to
Abe’s policies. His policies essentially
represent a continuation of the current approach with added measures to control
the strong Yen, raise the minimum wage and encourage overseas workers: a
candidate that investment markets will welcome.
the UK housing market broadly agree that the suspension of Stamp Duty Land Tax
from July until next February has temporarily reversed the price falls seen in
May and June. This “dead cat bounce” has
arisen out of accelerated demand: buyers bringing their deals forward to take
advantage of the tax give-away. Given
the end of the “furlough” scheme on 31st October and the simultaneous expiry of
the “repossession waiver”, the anticipated spike in the unemployment level
brings a fresh headwind to the housing market. Demand for housing has not been stimulated for the long-term and so the
fall in prices will be more pronounced when the SDLT suspension is lifted.
At Jackson Hole,
Jay Powell announced that the Fed was embracing flexible new inflation strategy
that was linked to the average rate of inflation over an unspecified period,
i.e. we will adjust the period to ensure we hit our self-determined target. A very elegant solution to their problem,
because the Fed has been unable to get inflation up to its target of 2% since
2009. It is all a tissue of lies, of
course, but the link to politics is all too obvious. The Fed Committee is meeting this week and is
expected to confirm what it’s boss said, essentially keeping the Fed rate at
its current level for another five years. That ensures interest rates remain low (underpinning Fixed Interest
markets) and it weakens the US Dollar, making life relatively harder for
You may recall
from earlier updates that the UK has underperformed the US by 30% in the last
year. This is because less than twenty
US businesses in the Tech space have seen their share price mushroom whilst
most of the rest has fallen. In the UK our
stock market is lacking in such companies, being filled with “old-world”
businesses like energy (BP, Royal Dutch Shell and so forth) and services and
these are the assets hit hardest by the lockdown. It doesn’t mean that the game is up, merely
that investment conditions currently favour the US market. Each worm gets its turn.
have taken genuine fright at the legislative stance taken by our government,
with predictable results. The 10-year
Gilt yield fell from 0.32% per year to 0.18% and Sterling fell by 4% against
both the US Dollar and the Euro. Another
5% fall is expected if our government gets what it appears to want: a Hard (or
No Deal) Brexit. Whilst this provided
another fillip for domestic Fixed Interest Securities and a technical boost for
UK exporters, it is far from clear who the UK will be able to export to on 1st January because the slide in Sterling is not large enough to offset the World
Trade Tariffs which begin on that same day.
Five former Prime
Ministers and two former Attorneys General (including the one who was pivotal
in getting our Prime Minister into Office) have condemned Mr Johnson’s strategy
and refused to back the draft Internal Markets Bill in Parliament. With a majority of 80 in the House, these
voices from yesteryear were not expected to sway Mr Johnson nor are they
sufficiently widespread to prevent the Bill from going forward to the House of
And so it proved
to be. Voting after the Second Reading
of the Internal Markets Bill showed that 340 of the 364 Conservatives voted in
favour of the Bill. Other parties make
up the remaining 286 seats but there were only 263 votes against the
government. To be fair, as soon as the
government achieved 326 votes they had won the day, but it would have been heartening
for the nation if the input of former Prime Ministers and Attorneys General
carried enough collective weight to persuade thirty-nine or more Tories to
abstain. This suggests that many of the
vocal critics proved to be irresolute and now the dirty-work is left to the
House of Lords, while the London-centric City still believes that a Trade Deal
with mainland Europe remains “two-to-one on”. Let us hope they are more in tune with what is happening now than they
were when the Referendum was being debated in 2016.
On the other side
of the pond, ByteDance has struck a strategic alliance with Oracle for TikTok
rather than bow to Presidential pressure to sell the US arm to Microsoft. This may flow from the interjection of the
Chinese government who excluded sale of the software copyright as part of the
deal. No doubt ByteDance will be able to
engage BoJo’s legal advisers if there is a change of President to avoid having
to honour their agreement, but for now it appears to be One All in the US-China
tit for tat-a-thon.
The addition of
Huawei to the US embargo for any of its businesses to sell any materials or
software to the Chinese manufacturer of the second-most popular mobile ‘phone
on the planet came as no surprise. Massive stockpiles have been accumulated in the expectation of such a
move to ensure Huawei has ample time to identify alternative sources and so the
impact upon international trade will be imperceptible.
One win for the
US though is the capitulation of Daimler in the face of allegations they had
cheated American consumers by misleading emissions stats over many years. Despite their continuing denial of such
behaviour, Daimler’s offer to pay US$1,500,000,000 with a promise not to be
naughty in the future brought an end to proceedings. Exactly the sort of behaviour that any
innocent party would embrace, don’t you think
inability to get individuals to behave in the requested manner, Israel has the
dubious honour of being the first nation to announce a second Lockdown in
response to soaring Covid-19 infection rates. Whether this is a second wave of infections or a resumption of the first
is a moot point: their economy is now frozen for a minimum period of three
weeks and this should be a warning to us all – writ large before the British
public. The same fate awaits the UK very
soon unless we moderate our inter-personal behaviour.
this development both the United Arab Emirates and Bahrain has bowed to the US
carrot-flavoured stick and acknowledged the state of Israel; sorry, that should
have read State of Israel. It all seems
quite odd for any nation to grab land that the United Nations has decreed it
must not invade any further and fail to return land that the same body dictated
it must return to Palestine – and yet still have the full support of the US
administration. How desperately some
people crave election.
our own government is exercised by SoftBank’s decision to sell ARM Holdings – a
Chip designer in Cambridge whose products are at the heart of most smartphones
– to Nvidia: an American tech company. Seemingly it was alright for Britain to sell one of its Crown jewels of
tomorrow’s business world to a Japanese investment conglomerate for US$36bn,
but it is not acceptable for that same investor to sell it on for US$40bn to
our special-relationship buddies in America. It seems quite possible that America is following the magnificent
example set by Prime Ministers Thatcher and Johnson in emasculating potential
competitors to ensure their own long-term survival. How apt, to be hoisted by your own petard.
Our government is
maintaining its robust approach to trade negotiations with the EU, to the point
where yet another artificial deadline of 15th October has been
proposed. As if that were not enough to
irritate the EU negotiators on the eve of the eight round of talks, the
Northern Ireland Secretary of State announced in the Commons that the
government intended to table a Bill in the full knowledge that it breaks
International Law and the agreement that this government and Prime Minister helped to draw up and then signed less than a
For Mr Brendan
Lewis to be obliged to use mealy-mouthed excuses for the conscious crime,
explaining that the breach would only be “in a very specific and limited way”, is
shameful and hypocritical. This is the
same government that currently protests China has breached a fifty-year legal
covenant created when the UK surrendered its lease over Hong Kong twenty-three
caused the sixth senior civil servant to resign since the current term of
Parliament began. On this occasion it
was Sir Jonathan Jones, QC - British government lawyer, Permanent Secretary of
the Government Legal Department. His
resignation letter was astonishingly short, but he was plainly unhappy about
the government strategy and unwilling to be an accessory to breaking the law: a
man of principle.
individual to a position of power is a national expression of our esteem and
confidence. It is incumbent upon such
individuals to repay the honour so conspicuously conferred upon them by a
faithful discharge of their duties; essentially setting an example by their own
conduct that the nation need not hesitate to follow. This shameful plan must not be allowed to
proceed and its authors owe an apology to the nation, let alone the EU. Step forward marionette-master Cummings and his
puppet Prime Minister: your public awaits.
successive months of growth in their Gross Domestic Product (total sales),
China posted a 2% fall in imports during August to the dismay of investment
markets which slipped a little. That
knee-jerk reaction overlooked the fact that China had already bought in
enormous bulk while commodity prices were at record lows and so they are awash
with raw materials for their manufacturers. The rise of Chinese dragons has yet to show any real sign of coming to
In 1687 Isaac
Newton, knighted in 1705, published his laws of motion. The Third Law is usually summarised as “for every action there is an equal and
opposite reaction” and no-one has been able to prove otherwise for three
hundred and thirty-three years. Setting
aside the well-known failure to acknowledge this fact in the current US-Chinese
trade tariff tiff, it is hard to understand some of the steps being taken by
our government in their efforts to lift the Pandemic lockdown.
Although Netflix has announced it saw no business benefit from
homeworking because it substantially lost collective discussion to aid
development, that is not a widely held conclusion. Beyond the manufacturing and leisure sectors
the majority of businesses have seen significant benefits for employer and
workforce alike in terms of productivity and quality of life. Concerns about the safety of mass transit
systems are expected to see enduring changes to the patterns of working
life. One high-profile example is the
decision by Pret-a-Manger to slash their presence within cities and business
districts in preference for urban outlets and deliveries. They realise that the days of being able to
sell very expensive sandwiches to the cash-rich and time-poor city-types in
high volumes are over.
When businesses take hard decisions about the application of their
working capital, it is curious to find the government prevailing upon The Rail
Delivery Group to resume 96% of its pre-Covid timetable. Most businesses are now happy for a
significant proportion of their employees to continue working from home, so
this would appear to be another guaranteed trading loss that our government
will be called upon to underwrite at our ultimate expense.
Having successfully increased the public debt from £700,000,000,000
when they came into power after the latest Banking Crisis was over, our
government has almost tripled our borrowings to £2,000,000,000,000 (just an
extra £237,000,000,000 in the last twelve months). Thank goodness the nation did not retain the “financially
feckless socialists” who had reduced the national debt by almost
£10,000,000,000 during their last term in office before the latest Banking
Crisis arose: imagine how things might stand now!
In plain language, there is no plan to pay those
borrowings back ever. If another party was still in charge and running a budget
surplus, repaying the debt at £1bn a year would take two thousand years – or
just two hundred years if the surplus was £10bn per annum – without anything
unexpected happening to push the plan off course. No government is stupid enough to take that
sort of challenge on because their main focus is always upon “how do we get
re-elected in (currently four) years’ time” and that timescale has no relevance
to the debt pile.
Using the weighted average maturity of current
Gilts (the name given to loans taken out by our government on our behalf) at 15
years (ish) and the corresponding coupon (interest rate) at around 0.5%, this
equates to £10bn per year in interest that our nation must find. Thankfully,
this only represents about 1.4% of the annual tax take, or two years’ worth of
inheritance tax receipts or a mere three weeks’ income tax collected by the
government. You will appreciate that there is no financial imperative as far as
the government is concerned to even think about paying the borrowings off. But that won’t stop them from finding new
ways to tax us in the Autumn Budget statement.
SoftBank is a Chinese company that has investments spread across many
companies and it was awash with cash after selling one or two successful
businesses. It believed that Tesla was a
one-way bet and so SoftBank bought US$100,000,000 derivative options in Tesla despite
the fact that its price to earnings ratio (PE) was on excess of 1,350 when the
long-term average in America is less than 20. In other words, it will take more than 1,350 years for the anticipated
Dividends from Tesla shares to pay back the money used to buy them in the first
place but you can achieve the same outcome with other shares within 20 years.
The SoftBank founder, Masayoshi Son, was sure Tesla would be added to
the Standard & Poors stock market list on 8th September, but
they were not. Had they joined that
index then a huge proportion of fund managers would have been obliged to buy
Tesla shares despite their exorbitant valuation. Failing to secure a listing condemned Tesla
shares to a slide and it is quite pronounced, but SoftBank can afford the loss.
Corrigans eschewed the merits of many Baillie Gifford funds (and their
Investment Trust, Scottish Mortgage) which leapt to the top of the performance
charts in recent times, specifically because their recent success rested solely
upon massive holdings in Tesla. As a
result, your portfolio is not materially affected by this change in market
Days earlier the value of Apple fell by US$180bn in just one day. That is
more than the entire capitalisation of Nike, a mere US$176bn company, or the
UK’s largest plc: AstraZeneca, which is only US$140bn. Despite that bad luck,
Apple’s market capitalisation had risen by over US$1trn in twelve months. Such numbers are staggering and whilst there
is a pause in their progress as the gamblers take some profits, the future of
those tech giants appears rosy.
American search for someone to blame for their economic malaise, its latest
target is the Chinese “chip” maker SMIC. The US plan appears to be that if you can’t beat them, ban them. Meanwhile SMIC can now redirect all the
Semiconductor Microchips it had been supplying to the US (because they are
superior to those available in the rest of the market) to Huawei instead. Quite how this will help America to win the
IT race against China is not clear, but it is a great soundbite for the
A routine pause
has been announced in the 30,000 person trial of the Coronavirus vaccine
patented by Oxford University, because one recipient has developed a potentially
serious side effect during these (final) Phase Three tests. Nil
desperandum though: this is perfectly normal and if it does turn out to be
a recurring feature it is likely to lead to a written warning which says “not
suitable for people who have blah, blah, blah condition”. An independent investigation is now under way
to determine when or if the trial and associated work can continue.
Drax hit the news
again recently, and not Sir Hugo Drax for his part in the James Bond novel
Moonraker. The Yorkshire power station
famously belched coal-fired smoke over the county from 1986 onwards, but no
more. Just 4% of its fuel is coal today
and that is drawing rapidly to an end; replaced by biomass – predominantly wood
pellets. Negative carbon emissions are
expected by 2030, thanks to innovative carbon capture and storage
measures. So we can all breathe more
easily now, because the majority of humanity need not be replaced with a new
master race of 'perfect' human specimens after all.
You may have seen
news of fresh records being created by the tech-dominated NASDAQ index in
America, and its other markets are within 1% of all-time-highs. Although this seems odd when compared against
the atrocious infection and death rates its citizens are suffering under
Covid-19, it is perfectly logical. Investment markets tend to look 12-18 months ahead and traders know that
boom times are ahead for businesses. This, when supported by an extraordinary fiscal stimulus through
increased money supply and the human Fear Of Missing Out, provides the perfect
conditions for profits to be made by investors.
Another 1m per
week joined the jobless queues in America since March, but that dropped to just
963,000 last week. Despite that progress
the Senate has failed to back the proposals made by the House of
Representatives to continue their fiscal easing. That led to another “I can sign my name
across the right hand side of a page” moment in which Mr Trump issued an
Executive Action and this one is a doozie. He deferred payroll tax until
the end of the year and interest upon student loans for longer, created a
mechanism to pay the unemployed US$400 per week (reduced from US$600) if States opt-in to pay US$100
themselves and accept the cost of setting up a means of distributing that money
to claimants. It is good to see that the
smoke and mirrors so beloved of Mr Barnum have not been consigned to history.
There is a real
sense of impasse in America. Federal
eviction moratoriums have formally ended, as has the popular business loan
scheme and additional benefits for the unemployed, but the main stumbling block
appears to be politics. The Democrats
want additional funding for the US Postal Service to cope with the extra burden
flowing from the Pandemic (correspondence, packages being sent such as test
samples) but the President doesn’t want to make postal voting easier for those
who are wary of going to a polling station. It seems he fears “those sort” might be Democrats!
global nature of this pandemic, Chinese exports rose in June by more than 7% when compared to 2019. The Donald will be mortified to learn that
the US trade imbalance with China is worse than ever, despite all his bluster.
At the end of
last year the USA and China signed Phase 1 of the much vaunted Trade Agreement
in which China agreed to buy more US agricultural products. Even Sherlock was not surprised to find that
the Chinese could not honour that commitment as a result of the Pandemic, but
it will still be used as a reason for the USA to stall progress towards Phase 2
during the online talks resuming this weekend.
The tech boom
continues apace with Nintendo reporting a 400% increase in profits and Sony
PlayStation made similar claims too. Meanwhile Jimmy Lai, the billionaire Hong Kong entrepreneur, has been
arrested at his pro-democracy newspaper Apple Daily on grounds of dissent. Such was the fear induced in the natives that
sales of his newspaper rocketed, shares in his business quadrupled in the next
twenty-four hours and then doubled the day after that. Some of this is undoubtedly a “solidarity
boom”, but China is not going to have it all its own way this time around.
There must be
something wrong with either the television set or the internet, because an old-fashioned
thing called “news” threw Coronavirus off the central media stage. Rumour has it that “news” has been there
throughout the whole year, but it was not deemed important enough by the
luvvies within the Main Stream Media to share with anyone. Could the lack of lurid examples of
antisocial behaviour explain the drop in all recorded crimes in the UK this
Within days of
discovering that our government’s decision to ride coach and horses through the
well-established procuration system had led to the purchase and now warehousing
of 15m facemasks that are unfit for the NHS to use, our reverie was disrupted
by an explosion of fertilizer. The same
material that the Irish paramilitaries used to such tragic ends in recent
history was being stored alongside fireworks in Beirut, Lebanon. That only 200 people died amid such
devastation must constitute a modern-day miracle, because the endemic
corruption within that State has yet to see any national response to the
damage; local survivors are cleaning the street up and helping one
another. It is wonderful to find Faith,
Hope and Charity alive and well and living in the Middle East, because who
knows what we are secretly storing or where.
factors are unlikely to be enough to produce a long-term solution for the
Lebanese though. With neighbours that
few would choose, instability across the region, the USA shrugging its
shoulders whilst Russia remains engaged, the UK sending less than £3 per person
as immediate aid and a government that has resigned repeatedly in recent years
only for the faces to change but the story to remain the same, civil war cannot
be discounted. This must be borne in
mind in terms of fund selection despite the humanitarian toll.
A similar outcome
may flow from a different tale closer to home in Belarus, where Alexander
Lukashenko was re-elected for a sixth term of office as President with 80% of
the recorded votes. Ms Svetlana
Tikhanovskaya was quite surprised by the count, as most polls showed her having
more than 80% support in the weeks before the Poll and her rallies were
attended by millions in a country of just 9.5m people. Her appearance on the ballot paper was a
last-moment thing following the arrest of her husband: the leader of the
official Opposition Party. As she says “We
have already won, because we have overcome our fear, our apathy and our
indifference". Twenty-six years in
office may yet prove to be no defence against a nation whose voice is being
ignored, particularly when the police no longer show the enthusiasm they once
did for being the enforcers of their President. Ms Tikhanovskaya fled to Lithuania the next day though to join her
children on grounds of personal safety, urging supportive protesters to abandon
their struggle because their lives and those of their families are immeasurably
more important than any political struggle. Three days later, the protests were still in full effect.
On the good news
front the world learned that Liz Truss, Secretary of State for International
Trade and President of the Board of Trade, is passionate about blue
cheese. Her relentless focus upon the
rights of those dairy producers caused the trade talks with Japan to stall in
the same way that the Japanese - EU trade talks faltered last year over exactly
the same topic. Maybe the Chinese palate
does not share Liz’s taste preferences, but the final observation by the
Japanese as they walked away was that “the UK cannot have a better deal than
the EU”. It does make you wonder
precisely who the UK will be able to trade with if we do close our interim-EU-membership
on New Years’ Eve.
The UK furlough scheme had 9.6m of the 28.4m PAYE
population in receipt of benefits at its peak and now it is winding down to a
close. Before it began 3.9% of that
working age group was said to be looking for work but businesses that have had
little or no income (let alone profit) for the last five months are
ill-equipped to pay 10% of the payroll this month, plus Employers’ National
Insurance of 13.8% and pension contributions of at least 3%. This amounts to more than a quarter of the
wages bill and so a significant proportion of the 33.8% on furlough must expect
to lose their jobs permanently. It will
be another miracle if the government can limit the unemployment rate to just 7% by Christmas, as it hopes to do.
Another ray of sunshine came when our government
announced an extra “provision” of £300m for the 117 NHS Trusts to help prepare
their A&E facilities for the expected winter surge in Covid-19
infection. This is a big number by
anyone’s standards, but a sense of perspective is needed. For 2020-21 the NHS budget is just shy of £130bn, so a one-off “provision”
of £300m represents less than a quarter of one percent. In terms that everyone can relate to, this
would be an extra £1.09 per week for anyone earning the National Average
Earnings of £471 per week. Even Lord
Brian Rix will be spinning in his grave at the implausibility of this farce.
Yet more good news came with the announcement that the UK
had bought another 90m doses of a sixth unapproved vaccine, taking our
stockpile up to 340m in all. It seems
that two shots are needed so that is enough for 170m inoculations; divided by
the six different strains that equates to thirteen jabs (including the ‘flu)
apiece for 28,333,333 of the UK population of 64,000,000. Fourty-four percent of us will have to be
filtered to become “the chosen few” plus the six percent that the NHS know has
already acquired immunity, making half the nation safe. As the other half are young and don’t care
anyway, that’s alright then.
created by America’s resignation as the world’s policeman has created
opportunities for a variety of substitutes. Turkey has been particularly keen to extend its influence in the
Mediterranean and the most recent manifestation of this has been its practical
support for the recognised Libyan government to regain control over its
capital, Tripoli. Having failed in its
attempts to woo the EU, Ankara is finding a warmer reception elsewhere and the
extensive gas reserves owned by Libya proved to be too good an opportunity to
miss. Although the battle was lengthy, Turkish
loss of life was modest and the long-term prize represents a handsome reward.
consequence of the two-year-old trade war between China and the US is the
political impact upon decisions by other nations. One example is the UK government’s reconsideration
of its stance to allow Huawei a pivotal role within the nascent British 5G
network. This followed extensive
pressure from the other side of the Atlantic and it is indicative of a global
split in the governance of the internet through technological rivalry.
monitoring of the pandemic shows little sign of lessons being learned. A significant flare-up of infections has hit
Melbourne after lockdown restrictions were lifted, to the extent that their
authorities describe it as having “explosive potential”. A similar experience is plaguing Galicia in
Spain, Luxembourg, Belgium and Poland, but the Indian health service has sunk
beneath the weight of patients.
Egypt is still in
its first wave of infections and has yet to reach a crescendo. Public hospitals are overwhelmed by the
pandemic to the extent that one Doctor recently told a family that the only
resource not in use within his hospital was the ball-point pen in his pocket. Private health care is available but beyond
the reach of almost every Egyptian, who must weep as they gaze upon the
4,000-bed field hospital built by the Army for Covid-19 patients but still
every hue are proving to be better with words than they are with actions in
terms of rigour towards this virus and the impact will be felt for a long
time. Scientists bicker with the
politicians when the national actions do not accord with their advice and then
clash with one another because some scientific disciplines arrived at different
conclusions to others. The
responsibilities of national leaders are particularly unenviable at the moment
but bold, clear and sustained steps appear essential for the welfare of most
swift changes to the travel rules are, the UK does seem to be taking the risk
of a resumption in the first wave of infections very seriously – and so it
should. By the end of this year 23% of
the workforce will already have been furloughed, suffered reduced income or lost
their job. This has a huge impact upon
familial financial security and also individual mental health, reliant upon a
service pared to the bone in recent decades that is ill-equipped to deal with
the pre-Covid workload, let alone a tsunami of new cases.
zero from the blatant effects upon public services flowing from the post
Banking Crisis austerity, our Chancellor had the cheek to announce pay rises
for a host of front line key workers but failed to increase the budget for
their employers. In a climate where
there is a renewed focus upon the cost of parking at NHS establishments,
potentially reducing the income received
by their employers, it seems likely there must be a reduction in headcount to
pay for the higher salaries. An
interesting way for our government to show our appreciation for their
contribution to the welfare of the nation.
Our government is clearly well-read, taking their lead
from Niccolo Machiavelli who famously urged “never waste a good crisis”. So far they have managed to get legislation
through unopposed to track the location of every mobile ‘phone, double the
number of cycle lane miles in London and ramp them up elsewhere and now they
are embarking upon a national obesity campaign with constraints upon
advertising and certain merchandising. The Nanny-State has rarely had it so good.
Britain has paid £500bn to repair the damage caused by the most recent in an
inglorious succession of Banking Crises. The tally for this pandemic already stands above £300bn and yet our
government insists there will no resurrection of the austerity years, so a
means of paying for their liberal fiscal policy must be found. As someone who has yet to receive the State
Pension, this seems likely to be the biggest target. It takes up the biggest part of the Social
Security budget and the recipients are probably the most rational and accepting
members of the country. Abandoning the
“triple-lock” for increases introduced by cowardy, cowardy Cameron will save a
fortune and relatively quickly cover the latest increase in the Money
Supply. There are bound to be other
measures, such as attacking Inheritance Tax and Capital Gains Tax, but the
borrowed money will have to be repaid from somewhere so the Autumn Statement
from our Chancellor will be particularly riveting.
have drawn attention to the environmental dividend brought by the
pandemic. A resumption of “the way
things were” instantly undoes those benefits and so some nations have grasped
the opportunity for positive change: Australia, France, Germany (now followed
by all remaining EC States, thanks to their €750bn bail-out measures) and South
Korea are leading the way. China and
India both elected to remain as they were for the time being and that also
appears to be the approach adopted by the UK. Failing to adequately prepare for the arrival of the virus is one thing,
but to do so for the enduring climate crisis appears gross negligence –
particularly as it affords the opportunity to build the jobs of the
future. It is also worth reflecting that
making a clean start after the end of the Second World War rather than putting
things back the way they were did Germany no harm, whereas the “make do and
mend” approach that Britain took impeded our economic progress for at least
Meanwhile in La
La land, Jerome Powell confirmed that the Fed remained committed to supporting
the US economy. Statistics remain
unclear about the duration of the economic impact and the direction of travel
for the economy afterwards, but he believes these factors will be shaped by the
national approach to dealing with the virus. Although the Fed hopes for the best whilst planning for the worst, Mr
Powell believes that complacency is the biggest problem. He did not say whether that complacency was
on the part of the President or his fellow citizens.
endless tide of fiscal stimulus drove Tesla shares up to the point where the
forward p:e ratio (how many years you need to keep the shares before the total
dividends you receive cover the cost of buying the shares in the first place)
rose to 350. This is not a typographical
error but a screaming indicator of a share-price bubble. It has not spread to many American shares
yet, but the phenomenon will be watched like a hawk.
Seemingly VW were
anything but alone in misleading its customers, because the headquarters of
Fiat / Chrysler / Iveco have also been raided in the latest episode of
Dieselgate. The list of crooks includes
Audi, Daimler, Jeep, Nissan, Porsche and Renault.
The wings of
Competition Commissioner Ms Margrethe Vestager were clipped once again when she
lost the Corporation Tax case against Ireland and Apple, in the same way that
her similar case against Starbucks also failed. Amazon, Google, Ikea and Nike are also in the pipeline and they will
take heart from the most recent EU Court judgement.
Now that India
and China have properly fallen out and the UK has decided that we don’t need
the cheapest and best tech currently available for our mobile ‘phone system,
China has followed Vietnam’s example and begun cosying-up to the EU. The minor matters of Visas and specific trade duties to protect domestic markets are
the only barriers remaining to a trade deal. It does make people wonder that if China can get from zero to “are we
nearly there yet” in three or four months, what the problem has been with the
UK:EU divorce talks.
On a positive
note for investors, another 1m people are expected to join the ranks of the
unemployed before Christmas. With the
potential for 3m arrivals from Hong Kong beginning in January 2021 – coinciding
with regaining control of our borders to ensure our nation does not get swamped
by the EU risk of unlimited immigration – the band UB40 may well have another
hit on their hands. Hong Kong has long
been recognised as a dynamic island with highly educated citizens who have a
strong work ethic and a better command of the English language than most
Britons. However many do make the
journey to the UK must be thought likely to translate into a corresponding
number being added to the legions of the unemployed – and it is unlikely to be
Hong Kong claimants. These outcomes
strengthen the bargaining power of all employers and so productivity, profit
margins and share prices will all rise.
Yet another piece
of good news is that the UK will have taken delivery of 200m does of Covid-19
vaccine before the end of November from four different sources, each one
dealing with a different strain of the virus. This equates to four inoculations apiece for just over three-quarters of
the population, with presumably the youngsters being left out, but you can now
understand why the government is so keen to get this year’s ‘flu jabs out of
the way early. GPs will make a fortune in
bonus payments if they emerge from Harry Potter’s Cloak of Invisibility to dole
this stuff out.
On the eve before
our Prime Minister had scheduled an announcement about the pace of opening more
retail outlets and hospitality or leisure services, together with the
government view about the extent of social distancing, he had an unwelcome
gift. John W.H. Denton AO,
Secretary General of the International Chamber of Commerce, released a
statement to say that his organisation believed the UK had been slow to
implement lockdown before going on to emphasise that the World Health
Organisation recommendation is a minimum of 2 meters for social
distancing. His members and their
workers were nervous about the possibility of the UK moving to a 1 meter
separation, believing such a change to be too early.
South Korea won international plaudits for the highly effective
approach it took towards the pandemic and the correspondingly light impact it
had upon their country. The arrival of
warmer weather and the holiday season in conjunction with eased restrictions
has led South Korea to announce that it is now being hit by a second wave of
the virus. Their approach remains
unchanged: aggressive Track, Trace and Isolation without any wider lockdown,
because this maximises the effectiveness of their measures whilst minimising
the impact upon wider personal freedoms and the national economy. You have to admit: it sounds like a plan
worthy of consideration.
Post-Brexit trade talks are under way with Japan and they
have insisted upon a six-week guillotine for the discussions. The combined value of trade last year was £60bn
and Britain hopes to increase that figure substantially. Unsurprisingly the Japanese want to sell us
more vehicles and “tech” whereas we want to sell them more food. Even if the ships are full in each direction,
mutual success will tip the balance of payments heavily in favour of Japan.
Great news from McKinsey though, because the day of the
robot is nigh. They are expected to
replace one third of all jobs in America within ten years, extending their
roles from running distributions centres and doing much routine work in
factories to cleaning floors / roads / paths, preparing food, taking orders
before serving in bars and restaurants, deliveries of all sorts – the list is
endless. It seems that the 1927 vision
of 2030 portrayed by Fritz Lang in his seminal masterpiece Metropolis may yet
prove to be uncannily accurate.
Face to face talks resumed for the EU and the UK about
post-Brexit trading relations on Monday 29th June 2020 – a date that
the writer will long-remember. The UK
had already caved-in from their stance of needing the framework of a deal
before the end of June or we would walk away and it seems that the EU is aiming
for agreement by 31st October. That aim is for a “thin” agreement, covering the bare bones, rather than
the comprehensive rules and regulations currently in place. Encouraging signs, nonetheless.
Armed with an independent report prepared by the National
Audit Office in 2017 which said that allowing Head Teachers to run their own
schools instead of the local authority and then trimming the budget every year
for decades had led to £7bn of unfunded repairs being needed to schools in
England alone, our government announced a £1bn fund to pay for such work over
the next ten years – so that’s another job ticked off the “to-do” list then.
On 30th June our Prime Minister will remind
the world about the government’s pledge to spend £100bn on infrastructure. He will focus on the specifics of Hospitals,
Prisons and Roads – all of which is great – but detail about how an unemployed
chambermaid or waiter from the hospitality and leisure sector can lay bricks or
apply plaster may be lacking. Perhaps we
could employ foreigners Oh. No, perhaps not.
All but two of the US States that eased their lockdown
restrictions two weeks ago have seen big spikes in the Covid-19 infection
numbers and so they are all going back into lockdown, despite the exhortation
of the White House to the contrary. Far
from re-starting the US economy, this reckless step has dealt it appreciable
harm and that is why their equity market has responded so badly. South Africa had exactly the same experience
and so has Leicester. It comes as no
surprise to sentient voters, but our leaders seem to be caught on the hop.
Sir Mark Sedwill
has been eased out of his post as a Senior Civil Servant in the crusade to
engage exclusively “yes-men” to advise our government on the most suitable path
for our nation as it addresses the pandemic. This is a dark day for UK politics as a whole and our current government
in particular, as it strips away the independence of our Civil Service which
has traditionally served governments of every hue and provided a degree of
continuity in our lives. The traditional
warning at this point is that “power corrupts, but absolute power corrupts
absolutely”, as demonstrated so elegantly by George Orwell in Animal Farm.
clearly catching though, because India has banned the Chinese mobile ‘phone
applications TikTok, WeChat and dozens more on the grounds that “data is stolen
and taken to servers in China”. Indian
troops were sent to their shared border as a precautionary measure, because
this step eliminated almost one third of the TikTok user base, but Beijing
merely urged the Indian government to engage in discussions. Curiously there was no equivalent step taken
against the FAANG companies which all scoop our data into US servers where they
openly admit they mine the data for all their might.
To be fair, the
Chinese had other things on their mind when the Indian’s acted. Twenty-three years had passed since the Brits
allowed our lease on Hong Kong to lapse, with a century-long undertaking of
independence for the islands. That is
now history because the Chinese government unanimously passed National Security
Legislation without publishing the text of that new law. Before the UK made any response the USA
rescinded the “special status” of Hong Kong, essentially ending almost all
trade between those two territories.
communication channels are diminishing following the independent decisions of
Twitch and Reddit (me neither) to suspend his account as a result of his posts
and re-posts of “hateful speech”. Having
eschewed the mainstream media in favour of the new kids on the block, the
incumbent President is in danger of becoming a single-term candidate for want
of the oxygen of publicity.
Thanks be to your
God, our government has decided not to reinvent the wheel after all but rather
to improve the tried and tested Covid-19 mobile ‘phone application in use
across the rest of the planet. Unwilling
to accept second-best, they also decided not to start using the software until
the UK’s superior distance-detecting upgrade has been incorporated. No doubt its release will be scheduled for
the week after 30m doses of the speculative vaccine have been administered.
adverse weather conditions are not an ideal addition to long, slow, open-air
queues to get into shops, leisure or hospitality establishments. Whilst 80% of
sales pre-Covid-19 were through bricks and mortar outlets, that degree of
dominance has changed during the lockdown for ever.
Those IT businesses
collectively referred to as FANG (Facebook, Amazon, Apple, Netflix and Alphabet
[aka Google]) have understandably increased their stranglehold upon online
activities through the Pandemic, which has led the OECD to co-ordinate a global
clamour to review the taxation of their activities. Historically, businesses are taxed in their
native land and any local taxes paid upon overseas activities has predominantly
been set against the domestic tax burden through reciprocal tax treaties. This system has served well since long before
the Great Brutish Empire and it has kept fancy accounting firms in business
every time they find another loophole in another tax jurisdiction for their
corporate clients to sneak through.
It is hardly news
to say that the internet is impacting upon every nation’s traditional domestic
economy, but this is important. If
Company B thrived at the expense of Company A in the past the tax receipts in
that nation remained the same even though the source changed. This time around Company B appears to be
based in (say) America but is paying its taxes through a shell-company created
in a tax-sheltered country like Eire. That means Southern Ireland (there are lots of other willing hosts to
such activities) collects some tax on the operating profits that FANG businesses
have earned through their operations across the rest of the world.
Having spent eye-watering
sums upon fiscal stimuli to keep their domestic economies alive, nations are
wondering how to get the money back from their citizens and the businesses that
live off the backs of their citizens: hence the French, British and other
attempts to introduce a “tech-tax” and the ire of President Trump at the
thought. Pandora’s Box appears a doddle
in comparison to sorting this out.
worked out well for you so far, but there is almost certainly another shock
coming to investment markets. You might
not remember it, but in an earlier Update you were reminded that NO-ONE can
“time” investment markets consistently to their advantage and so the best policy
is to sit tight. These three quotes, taken
from highly experienced and successful investors, may be comforting as you read
the Daily Wail or suffer Robert Peston’s coverage – with apologies for the
gender specificity in the first 86-year-old offering:
“An investor should ideally wait for periods of depressed business
and market levels to buy assets, since he is unlikely to be able to acquire
them at other times except at prices which the future may cause him to regret”
- Benjamin Graham in 1934, author of The Intelligent Investor.
“Interesting to reflect that whereas 3.9m shares were sold
yesterday, there were 3.9m shares bought yesterday; and possibly the purchasers
may be more intelligent than the sellers” – Sir John Templeton, famed investor
and founder of Templeton, Galbraith and Hansberger Limited.
“Only invest in an asset you’d be comfortable owning if they
closed the stock exchange for three years tomorrow” – Warren Buffett, perhaps
the most successful investor ever and founder of Berkshire Hathaway.The message
is the same throughout – relax; you can trust your fund managers to apply your
capital well and there is no need to panic, because it really will all turn out
right in the end.
Thursday 11th June saw the US Equity market wake up to the risks associated with a second
wave of the Covid-19 pandemic, which was quite amusing as America has yet to
finish its first wave. Official data
shows their peak hospital resource usage varying from one State to another
between 8th April and 27th August, so some States still
see infections and deaths rising. The
market fall of 6.9% was significant but its impact elsewhere was far less pronounced,
because Eastern nations in particular enjoyed vastly superior outcomes from
their management of the crisis. Although
American consumption will be reduced when their second wave arrives, China,
Japan and the Antipodes can play amongst themselves while waiting for the
developed West to get its act together.
In response to
this the Federal Reserve bank reintroduced Quantitative Easing (QE), this time
for corporate bonds (loans taken by big businesses from investors). This had the predictable effect of sending
its equity markets strongly upwards, confirming the old adage that “you should
never bet against the Fed”.
thoughts will be turning towards stimulation of the British economy as the
nation returns to work. This might be an
opportune moment to a) abandon the £106bn (and counting) HS2, because it is now
abundantly clear that video-conferencing is a vastly superior use of time than
physically travelling in a carbon-destructive manner to take even more wealth
to London, and b) stump up the £15bn needed to replace the cladding on 2,000
blocks of flats which remain a fire hazard three-years after Grenfell. All that outdoors work across the Kingdom
would be helpful in spreading the economic benefits of the stimulus and
limiting the spread of the virus too.
There are also
fringe benefits from such an approach:
Modest £91bn help to balance the books for the country after all
the understandable Covid-19 fiscal stimulus even after paying for free school
meals during the summer holidays,
Saving the nation from the embarrassment of copying early mistakes
made by China in the construction of White Elephants, and
Doing the right thing by flat occupants, substantially from the
BAME community, who continue to live in fear at the “wrong” end of the economic
Who knows It may even win votes, if not from the young
or those leaving full time education.
This category is
at greatest risk when the domestic furlough scheme changes in July to require
employers to pay something towards keeping their workforce off the unemployment
list. In the hospitality and leisure sectors
there continues to be virtually no income and therefore negative cash
flow. Such employers are most likely to
bring contracts of employment to an end rather than heap greater financial
troubles upon their shoulders.
is a splurge to look forward to after three months of self-denial. The human habit in the developed world after
all pandemics and suchlike in the past has been to indulge ourselves in
gratitude for having survived, so luxury brands will prosper greatly as the
lockdown comes to an end. That effect
will be most pronounced at the extreme end of the spectrum: £1m cars and
watches, superyachts and the like. This
is in contrast to big-ticket retail, for which the outlook is subdued unless
the business is a Disrupter like Wayfair.
It is instructive
to note that the re-opening of shops in other countries has met with a
consistently cautious response. DIY and
“home improvement” retailers have enjoyed bumper times, but the general
footfall is about 30% down – even after the first month has passed.
Looking for more
insights around the world, China’s industrial output is up 4.4% despite
consumer spending dropping 3% and weak export demand. This economic progress is hampered by a fresh
outbreak of 49 cases in Beijing after 56-days incident free, fuelling fears of
a second wave of infections. Chinese
authorities have reacted swiftly with their polished track and trace system in
the hope of snuffing out these embers before they turn into another
inferno. No doubt the UK is equally well
prepared for similar outcomes here.
The Bank of
England is increasing our own QE programme by at least another £100bn, taking
its total financial stimulus up to £650bn. That will be another boost for UK Equity markets in particular and also
Fixed Interest too, because it essentially increases the natural demand for
those financial instruments.
like these mean precious little to most of us, but you might appreciate knowing
that the ONS published the twelve-months rolling national GDP figure in May
2020 at £513.273bn. This means that our
economy has been “stimulated” by the Bank of England to the extent of 127% of
our annual turnover – not profits, but turnover – and still the economy is
performing in a pedestrian manner.
You need to remember
that QE is not borrowings – it is simply devaluation by any other name. Our nation decided to print more money and so
whatever we already owned now represents a smaller proportion of all the money
in the country i.e. our wealth has been devalued.
positive note, the RAF ‘plane used to ferry our Prime Minister and Royal Family
about is having a £900,000 respray. Air
Force Blue is not deemed good-enough by our Prime Minister to market Britain
abroad and so he is having a Union Jack colour scheme applied instead. It is surprising that Tony (Cool Britannia)
Blair didn’t think of this gimmick when he was in office, but Mr Johnson must
surely be relieved that he was gifted the comparatively cheap opportunity to
respond positively to the pleas of a 22-year old footballer the day before this
nonsense was leaked out.
There are moments
when surveying the damage to our nation that you might be tempted to wonder who
the Minister for Fiddle-Playing is, but businesses will thrive and investors prosper
despite the best efforts of governments to help.
Government has had much criticism levelled at it for the outcome of the
Covid-19 pandemic sustained by our people, but there are some real positives
that the usual suspects have overlooked. For example, a British firm (Diagnostics for The Real World) modified
their approved HIV testing kit for Covid-19 use. This has been a huge success, providing rapid
and extremely accurate results. Addenbrooke’s Hospital was the first to use it and there are now
hundreds of them in hospitals the length and breadth of the Union. The export potential for this machine is vast
and as the scale of production rises the solution will become affordable to the
Third World too.
they miss is the fact that on 4th June Great Britain became
Champions of Europe. Our sceptred isle
had more new infections and more deaths from Covid-19 than the rest of the EU
put together, which must explain why our liberty is being restored.
In a phenomenon
known amongst PR circles as “Dead Cat distraction”, a three-year old police
lead relating to the disappearance of Madeleine McCann flooded the media. This has no relevance to investment matters,
but it is curious just how far our leaders will go to avoid awkward questions.
Bernard Barnier recovered from Covid-19 to report no material progress on any
of the four points that the EU won’t negotiate on, nor any willingness by GB to
extend the negotiating period by up to two years: the maximum period that the
EU is hoping to drag things on for. The
EU is renowned for achieving nothing with its talks until at least the day
after the final deadline has passed. Perhaps our negotiators have been wise in drawing their own deadline for
30th June – a point early enough to allow the EU Task Force to reach
agreement before the spectre of a hard Brexit comes to pass on 1st January 2021.
In the wake of
German ratification for the “Merkron” bond, the ECB has felt sufficiently
emboldened to add another €500bn to its budget for buying yet more Bonds, so QE
is set to continue for some time in mainland Europe and that is a fillip for
its Equity markets.
A surprising move
of appeasement from China arrived with their decision to allow inbound flights
by 95 airlines from the US and many other countries to be resumed from the
middle of this month. The US has agreed
to accept a reciprocal quota of flights from Chinese airlines and others are
expected to follow suit. No details are
currently available about isolation requirements or testing at either end of
that journey, but the travel sector will be encouraged by the development.
after the COBR meetings have become uncomfortable viewing, with successive
Ministers straining every sinew to filibuster and avoid answering
questions. There can be no doubting that
errors have been made in Britain’s response to the pandemic but no-one can change
the past (and that includes public protesters). Stalling tactics need to be abandoned immediately, lessons learned and
change embraced to get better outcomes tomorrow.
Around the world
there has been an immediate rebound in demand for reopening businesses to quite
surprising levels. In the first ten days
of June South Korea has seen exports surge by more than 20% year-on-year. This includes mobile ‘phones and microchips
up 36% with medical equipment including PPE showing a 130% increase, so it is
not just China’s economy that is on the mend.
America, the Fed confirmed the view expressed earlier in this series of
articles that the base rate will remain close to zero for two years or so. There is certainly no thought of an increase
no matter how well the economy rebounds before then because GDP is expected to
be 6.5% down this year if there is no second wave of Covid-19 infections.
That position is
more pronounced in the UK because our nation entered the pandemic economically
enfeebled by five successive quarters of weak GDP figures. A drop of 11.6% is expected in our 2020 GDP
as the economy is so heavily dependent upon services. It seems certain that unemployment will rise
sharply when the furlough scheme changes and then again when it ends. This is likely to be accompanied by a flood
of bankruptcies and falling Capital Expenditure by businesses as a short-term
reaction to improve profitability.
A major factor in
our domestic recovery will be the confidence of consumers, who currently face
job insecurity and millions who remain employed have had their income reduced
by a fifth or more. Re-opening
non-essential shops is unlikely to be the economic panacea our nation longs
significantly the World Health Organisation, recently freed from the need to
cow-tow to American whims, has announced its research findings that
asymptomatic Covid-19 victims (those who are infected but not showing any
symptoms) pose an “R rate” close to zero i.e. these people rarely infect anyone
else. This news will be gleefully seized
upon by governments when considering the shape of their response to the
pandemic, because it emphasises the efficacy of locking-down the infected and
their family whilst leaving the rest of the population to roam free.
Yet more positive
news to wrap up with. The combination of
a big improvement in Britons maintaining personal hygiene - washing hands more
thoroughly, covering mouths before coughing or sneezing – and the reduction in
“touchy-feely” greetings (mwah, mwah darling) has slashed the incidence of ordinary
coughs, colds, measles and similar common ailments. So our parents were right then to instruct us
to be socially difficult rather than European and also when they instilled the
mantra that “coughs and colds spread diseases”. Ah yes – the good old days of rickets, scurvy and boils the size of
gobstoppers – I remember it well.
Germany has long
had its own agenda in relation to the EU: a confederation of countries with a
single strategy for all of them across trade, tax, employment and military
matters – the United States of Germany if you will. Another material step towards that goal has
been provided by the need for fiscal action to address the effects of Covid-19.
EU Rules dictate
what proportion of each member’s GDP can be borrowed at any time but, whilst
there is a tiny margin of latitude in this, the sums required today simply cannot
be accommodated. Talks between Angela
Merkel and Emmanuel Macron spawned a rescue fund unsurprisingly dubbed the
“Merkron bond”, initially worth a modest €548bn. This is to be a new issue of Eurobonds,
backed almost exclusively by security from Germany and France, to provide a
non-repayable grant from the EU as a whole to member States. The gift is outside the parameters for EU
borrowing constraints for the recipients and so the fudge of EU accounts
carries on in its own inimitable style, albeit strengthening the region’s
economy in the long term.
On the subject of
fudges, EU Rules dictate that there cannot be State Aid for domestic industries
or businesses. So that explains why
Germany is now allowed to put €9.125bn into Luftansa to stave off bankruptcy in
exchange for a 20% stake and the French inject €8.2bn into its automotive
sector: €1bn of which is a financial incentive to encourage French citizens to
buy electric vehicles as a replacement for their current transport.
There is no truth
in the suggestion that Dominic Cummings was writing Rules for the EU before he
started work for our Prime Minister though.
In a futile
attempt to change the focus away from that special adviser, Matt Hancock
announced that the UK had now ordered 2bn pieces of PPE from UK companies and
2.7bn gloves from overseas, simply to replenish our depleted stocks. He did not go on to say “in readiness for the
second wave of infections”, but that is what everyone read into his statement.
infection rates, hospital bed occupancy and deaths are said to be abating, it
hardly seemed incredibly relevant for him also to announce that UK Pharma
company, Gilead, had secured NHS orders for its Remdesivir treatment because it
shortens the Covid-19 recovery period from 19 to 15 days on average. Still, any distraction in a political storm
is welcomed by some.
Zoom remains a
relatively small company but it has become known to billions as a result of the
pandemic increasing interest in video conferencing. The Chinese spotted this trend and so they
temporarily blocked Zoom. Surprise,
surprise – domestic offerings by Alibaba (DingTalk) and Tencent (VooV)
blossomed during that lock-out period and are now used by hundreds of millions
of Chinese. There is no realistic prospect
of Zoom doing anything about this intervention, which amounts to theft in
ordinary language, even though it brings greater profit to those investing in
citizens of Japan did not suffer any form of lockdown but the controls
introduced by their government were only necessary for six-weeks before new
infections fell to a handful or less per day and greater personal freedoms
became possible. Their plan for a swift
return to economic norms is supported by a US$1.8trn aid package, which rather
puts the pedestrian and modest EU approach into context. Perhaps that is why Europe is expected to
take four years to regain its former economic success, whereas the timeframe
for the UK is just eighteen months.
On the subject of
European comparisons though, Germany has 80bn people and suffered just over
8,000 Covid-19 deaths while our 67bn population is above 37,000 deaths. That’s 20% more people and yet almost 80%
fewer deaths. It is hard to believe that
the conversion from Imperial to Metric produces such a pronounced difference on
its own. Promises of a retrospective
review by our government receive the hollow laughter that they deserve, because
the only heads to roll will be the 37,000 already recorded. Lessons need to be learned now: before the
heavier impact of that second wave is felt, if only to improve the nation’s
response to it.
has a basinful of problems. The largest
invasion by locusts in 25-years is devastating their agriculture and the
pandemic is laying waste to workers in the cities to complete the bleak
employment landscape. Several States
have responded by suspending laws giving rights to workers that took 150 years
to secure, hoping to help employers survive while simultaneously attracting
overseas capital to newly competitive markets and thereby stave off
recession. A bold measure that Indian
“unions” are understandably exercised about, and businesses are delighted in
equal measure, but it flags another high-risk opportunity for investors.
News that four
hospitals in the UK will be offering Antibody tests from 1st June
2020 is good for our government, better informing them about the specific
citizens in greatest need of the 30,000,000 doses of vaccine that are hoped to
be at their disposal. No details have
been released so far about the number of tests that can be carried out each day
and the time it will take to get the results. Home testing kits are also being made available at the same time, one costs
£69.00 through a BUPA associate, but a “personal immunity passport” is some way
off. Civil Libertarians might have
something to say about such an ID card though.
Roche and Abbott
were the first two Pharma companies to have their Antibody tests approved by
our government, now rewarded with a joint order for 10m of them. Field tests showed 17% from London and the
South East already had the antibodies but that fell to 5% across the rest of
the Kingdom. Three more Antibody tests
are close to conclusion and so there may be another 15m test kits on their way
is the progress of field-tests for the Government’s “track and trace” mobile
‘phone Application on the Isle of Wight. This unique approach is behind schedule and so it might be thought a
pity that the UK did not adopt the proven mobile ‘phone Application adopted
across the rest of the world. In tandem
with this, 24,000 people have been employed on a zero hours contract to carry
out manual searches by telephone, e-mail, text and letter but this will be the
only element in place for 1st June. Training of these temporary workers is allegedly going well and they are
expected to contact 10,000 people per day. If that target is achieved and it remains our only tool for this aspect
of the defence strategy it will take until 4th October 2038 to
contact everyone in the UK – including today’s under 5’s who will be 23 by then.
government figures showed 61,000 more citizens being infected every week. If all 24,000 of these T&T workers did a
six-day week and none of the infected people had contacted more than one person
in the previous nineteen days, the T&T team will be able to keep the spread
of the disease stable. Easing the
lockdown rules does not look so wise now.
show that the number of currently infected people has been flat for several
weeks and the aggregate daily death toll is falling at an encouraging rate. Both are positive facts as far as the global
economic recovery is concerned.
finally gained confidence in a home-grown vaccine which, like that in the UK,
has yet to be approved for use. Unlike
the UK though, which is only keeping 30% of production for our own use, America
immediately announced that 100% of production will be for use on US citizens
and not a single shot will be allowed out of the country until every one of
their people who wants one has had it. Trump did warn the world that under his reign it would be “America
First”, and so the third-world will just have to wait.
More good news
comes in the form of the outlook for inflation, which has been benign for the
last 17 years - averaging 0% per year in Japan and just 1.7% per year in the
UK. History shows that slowdowns and
recessions have always been dis-inflationary and there are no grounds for
expecting anything different this time. No developed economy had reached a point where they were “running hot”
before the pandemic struck and the increase in money supply / fiscal measures
taken by governments are simply designed to restore the economy to pre-pandemic
health: there is no attempt to induce rapid expansion. That means the only material risk as far as
inflation is concerned is in the event of sustained policy error by
Central Banks and governments. So
inflation is expected to remain insignificant for quite a while yet.
On that subject,
Central Banks do not believe that the “stick” of negative interest rates is an
effective tool in stimulating any economy – witness biscuit tins of cash buried
in Irish gardens. They are pressurising
governments to increase their fiscal stimuli as a more direct “carrot”, safe in
the knowledge that this growing mountain of international debt is simply
devaluing everyone’s wealth by stealth because it can never be repaid.
You have known
for years that houses are for living in and that they make consistently bad
investments. It doesn’t matter to you if
your home rises in value or falls - although your children might take a
different view… They will be
disappointed to discover that the expectation for house prices is a 10% fall in
value year-on-year for the next three years: that’s 27% altogether, but that
should make it easier for you to help them leave home.
between China and the US are likely to prevail for decades rather than weeks,
as each wrestles for the distinction of being the largest and most influential
economy in the world. Their military
ambitions are equally matched too, so that is good news for shipyards, aircraft
and armaments manufacturers. It will not
surprise anyone though – least of all His Excellency Xi Jinping - when
President Trump faces-off against China in the coming weeks as part of his
Presidential re-election campaign. That
may explain the decision by the Chinese Congress to scrap their growth target
for this year – essentially accepting a national failure to double the size of
their economy within ten years as laid down in their 2010 Congress.
meaningful progress in relation to Brexit negotiations the prospect of a Hard
Brexit grows. As there are no negatives
for the UK associated with a finite extension of those talks, businesses are
hoping for a membership extension. The
last thing that businesses need while coping with Covid-19 repercussions is
Brexit too and the hope is that our government recognises this.
investment markets have lagged the rest of the developed world by 10% in 2020
due to concerns about Brexit and our subsequent economic relationship with the
rest of this Continent, let alone worldwide. This is a useful cushion, because some markets have anticipated a
quicker resumption of normal business activity than seems likely. Surprises on the upside are always welcome,
but rarely the other way.
Argentina is unsurprisingly
the first of the Emerging Market countries to indicate its likelihood of
defaulting upon national debt, as it seeks a three-year suspension on
repayments and a hefty discount to its overall debt mountain. There is none of this debt in any of the
36.4m people, almost a quarter of the US workforce is now unemployed and that
puts all the power into the hands of employers. As we have said since the UK Referendum vote was announced, such harsh
conditions are hellish for families of working age but manna from heaven for
businesses and investors. Tomorrow’s
recruits will enjoy poorer wages than might have been expected before the
pandemic, worse Benefits in Kind and a more demanding workload in tandem with
less job security. These same factors
improve profit margins for employers, which drives up the share price and makes
The President of
America is not enjoying the best press at the moment and so he turned once
again upon China. Within twenty-four
hours the world’s largest dedicated semi-conductor manufacturer, Taiwan Semiconductor
Manufacturing Company, announced it was to build its first “overseas” factory
in Arizona to supply the needs of the US IT manufacturers and that calmed The
Donald down a little. He has yet to
explain the difference from a security perspective between Huawei and TSMC, but
why let minor detail get in the way of a good PR story
renowned for its centralised governance. That structure brings enviable oversight and control, which probably
explains the timing for our announcement of an additional £2bn to fund road
repairs and improvements the day after our Prime Minister exhorted the nation
to return to work rather than while the roads were eerily quiet. The money is long overdue and the aims
laudable, bringing the prospect of improved efficiency for our transport network
and reduced operating costs for motorists, but a swifter decision might have
brought greater praise.
On the same day
that British scientists announced they had made “the world’s safest face
visor”, ITV national news showed footage of a young lady turning an ankle sock
into an effective face mask with just four snips of the scissors. Seemingly such cloth protection is actually
quite helpful in this Coronavirus context, provided that you change your
face-sock three times a day and launder them before re-use. And what a great re-purposing for all those
lonely socks floating about at home!
recognised for generations that most resources are allocated to London and then
they are spread out across the rest of the nation, with regional “distribution
centres” like Birmingham, Manchester, Cardiff, Belfast, Glasgow and Edinburgh
taking much and the most remote areas getting the least. Unsurprisingly the population is similarly
concentrated and the Coronavirus infection pattern has followed this template.
resources have helped the “London and the South East” bubble to reduce its
infection rate to the point where they are clamouring for greater freedoms of
movement. They literally have the ear of
our government and so the pace is picking up. Meanwhile, much of the Kingdom struggles to get transmission under
control and yet the resources in London and the South East have not been
diverted to help their colleagues elsewhere.
This virus grows
undetected in victims for five days and it typically takes a further fourteen
days before its existence is added to the national statistics. As a result the daily COBR graphs may well
continue to show improvements until 4th June, but there is an
estimated 30% risk of an exponential reversal in fortunes. Taking that risk is a perfectly valid choice
for our government to make, but only if they accelerate the “track and trace”
strategy to get a better picture of its progress and are braced for swift and
effective action to deal with the casualties whilst tightening the lockdown
beyond its original intensity. Let us
hope that “past performance is not necessarily a guide to the future”.
One positive to
emerge from the spotlight upon British healthcare is the recognition of how
disconnected the Health Service is from Social Services: the first being
concerned with fixing the presenting symptoms promptly and the second focussing
upon the root cause in the long-term, which is frequently quite different. Health Secretary Matt Hancock intends to make
this Gordian knot a focus for government attention when the pandemic comes to
Raab, our Foreign Secretary, recently led the post COBR briefing he chose not
to answer a direct question from a member of the public who asked whether we
prepared for a second, bigger, wave of infections in terms of PPE and the
capacity within the NHS and Care Homes. To Mr Raab’s chagrin, Professor Johnathan Van Tam was more forthcoming: “No. We are hoping not to have a second wave and
whilst it is right and proper to be ready, the UK must learn to live with this
virus for many months to come – possibly years.” It might be some time before the Professor
returns to the post-meeting briefing podium.
One third of the
UK workforce is now working reduced hours, furloughed or unemployed and so the
unemployment figure could rise to 7%. Although the worst for 24 years, it is far better than the USA and
Europe but also less impactful. Domestic
levels of employment have counted people as employed if they had even two hours
of work per week. As a result underemployment
has been a domestic plague for more than a decade and so the loss of these part-time
positions has less impact upon our economy than a full-time job.
This brings the
conversation onto “the speed of money”: the pace at which we borrow and spend
being vital to our consumption-based economy. It has undoubtedly slowed since the restrictions upon movement came into
force but the effect has not been as pronounced as the change in employment
numbers. Whilst it is early-days, that
fact is more supportive of the underemployment view than of the economy heading
off to Hades in a hand cart.
You may recall
from Update 13 that Astra Zeneca had begun manufacturing the Oxford Team Trials
vaccine. They will have 100m doses
available by September 2020, 30m of which are earmarked for UK use. This implies that a happy and early end is in
sight provided that a) the field tests upon humans continue to yield positive
results, b) the National Institute for Health and Care Excellence approve its
use within the NHS and c) our government knows who to administer the vaccine to
by then. A quantum leap in the pace of
“test, track and trace” is now vital if that potentially precious resource is
not to be wasted.
politics has officially been abandoned by our government, as seen in the
farrago flowing from its unilateral decision to encourage citizens to go back
to work. That is a great shame but it
couldn’t last for ever, so how does that impact investors
voluntarily cut its oil production by another 1m bbls per day and this gave
rise to a small increase in the price of oil, which continues to hover around
US$30 per bbl. At the same time global
equity markets expressed their confidence in widespread easing of lockdown
restrictions by a steady slide backwards. Whilst liberalisation is warranted in territories like New Zealand,
South Korea and Germany on the grounds that their response to the pandemic was
both swift and highly effective, that is not the case for every nation.
A decision for
the USA to largely abandon, and the UK to water-down, its loose lockdown
arrangements is seen as a conscious decision to allow widespread infection
through a second wave. This will have a
more pronounced impact upon the economies of those hasty nations to the greater
financial benefit of those which took the virus threat seriously from the start.
the SARS virus and others proves that a) antibody tests are the only reliable
means of verifying the extent to which the population has been touched by the
virus, and b)contact tracing is by far the best way to close the pandemic
off. Thankfully Public Health England
announced that is has identified one highly specific antibody test which is
100% accurate. None of these tests can
identify antibodies until 8-14 days after someone has been infected, but it
must be hoped that our government has ordered 67m of the test kits.
In tandem with
the progressive return to work strategy, the furlough scheme has been extended
for another month on the existing basis with a further three months on an
unspecified basis under which employers will be asked to bear more of the cost
themselves and this is good news for investors. Recruiting and training personnel is notoriously difficult and
expensive, so keeping people you know “on the team” is crucial for a swift
resumption of efficient working and a return to profitability.
have already begun to take advantage of the long-term bargains on offer, and
this includes Qatar Airways. They
already have a stake in Cathay Pacific, who are looking for cash to prop their
business up in the crisis. Cue Qatar
Airways offering all the money they need on exceedingly attractive terms plus a
bigger stake in the business. Their
cheek might even succeed.
As reported in
the last Update, negotiations with the US about trade relations beyond Phase
Two of Brexit are under way. The Financial
Times has shared the news that the UK has already expressed a willingness to cut
tariffs on US agricultural products. It
seems that cheaper (chlorinated) chicken and (Genetically Modified) arable
crops are on their way together with (hormone and steroid-accelerated) meat. That may not be the encouragement UK farmers
were looking for to make our Island more self-sufficient, but it will keep
Sur le Continent the borders within mainland Europe are
being re-opened for those traveling to meet seasonal work needs in tourism and
agriculture. Italy and Spain are alone
in continuing to insist upon 14-days isolation upon arrival, but all nations
agreed social distancing, test, track and trace remain indispensable.
Credit is due to
the Doctor who writes for Private Eye when he wrote in the latest issue: “The
two best ways to avoid a Covid-19 death are a) not to catch it and b) be as
healthy as possible. Those with chronic
diseases are most likely to die prematurely from any cause, and yet 80% of
those diseases are preventable with a healthy diet, regular exercise, refreshing
sleep and good mental health. We put off
getting healthier ….. because coping with the present is tough enough. We deliver killer donuts to thank NHS
staff. But what we put into our mouths
is easily as deadly as what we breathe into our lungs. It just tastes better. Meanwhile South Korea boasts the healthiest
diet, lowest rates of obesity and longest projected life expectancy in the
world. We have a lot to learn…..” Facts like these might be a useful aid to the
thought processes of our leaders as they plot a course for us through this
challenge, wherever you are in the world.
Having got the
celebrations for Star Wars Day “done”, 100 of the UK’s negotiators were taken
off Task Force Europe and their Brexit talks with the EU the next day to start
negotiations with the USA about the mutual trading relationship once our
European divorce is finalised. The
strange thing about that statement is the conflict with Number 10, which announced
on 27th January 2020 that there were only 40 staff in this European
team. It hardly inspires confidence in
government statistics when they appear to have difficulty counting beyond 40.
In the Antipodes
our Commonwealth friends have begun discussions about international freedom of
movement. Their plan is truly
splendid. New Zealand, Tasmania and
Australia managed the pandemic incredibly well and they intend to maintain
their rigid border policies. The very
low incidence of the virus amongst the three nations encourages them to believe
that travel within their combined borders should be a low risk move. This will reignite both tourism and industry
to the obvious benefit of all their citizens.
approach like this appears likely to be replicated elsewhere, with citizens
moderating the enthusiasm of their government for increasingly liberal
policies. Infection and death rates in
the UK have yet to fall materially in Wales, “the North” and Scotland and so
our Prime Minister was not expected to announce an immediate change to our
lockdown strategy on Sunday. No matter
what he or others say though, neither you nor I will go anywhere or do anything
that does not sit well within our newly re-set awareness of risk.
particularly surprising though for PM Johnson to deliver a vague announcement
of several conditional changes that might be made with the benefit of a
following wind. His proposal that many
could return to their place of work despite advice to the contrary (without any
government guidance as to how it might be achieved) from the British Chambers
of Commerce, the Institute of Directors, TUC, Police, NUT and an array of other
equally wise representative bodies came as a shock. Members of his own Cabinet were taken aback
and so it must be hoped that he “mis-spoke”.
in Northern Ireland, Wales and Scotland were quick to gain-say the leader of
our Kingdom, insisting that their citizens must “stay home, stay safe and
protect the NHS” rather than adopt the English pattern from Wednesday 13th May to simply “stay alert”.
The 54 nations
making up Africa have fewer options. Setting aside Lesotho and their claims of being Coronavirus-free, 1,300m
people live there and 750,000 are said to have been tested so far. Of the 44,483 diagnosed as being infected
1,801 have died – that’s 4%. In the UK
there have been 190,584 cases and 28,734 deaths – that’s 15%, so the claimed
statistics are unusually good. There are
5 ICU beds for every 1m citizens (100 in the UK) and just 2,000 ventilators in
all of the public hospitals. Isolation
is just impossible in the cities and settlements, but the only input from the
World Health Organisation is to say that “the statistics appear unreliable and
excessively optimistic”. Optimism is a
curious word to use for such a situation.
to home, the Isle of Wight is trialling the Government App for “track and
trace”: the next phase in our march towards restoring freedom of movement. Its success depends upon at least 60% of the
populace voluntarily downloading the App and it may be contextually helpful to
know that WhatsApp is only on the ‘phones of 67% of UK citizens. On this occasion, our government appears to
have backed the “Betamax” solution though: technically better than “VHS” but
not a practical success. After one week
55,000 are said to have adopted the App from a population of more than 134,000
– Huawei ‘phones being unable to do so because the US banned them from using
All data from the
UK App is retained by the government for ever and a day whereas with the more
common App adopted overseas the data rests on the ‘phone of the individual
user. In both cases an alert is sent to
all who have been within “Bluetooth” contact range during the previous 14-days
when anyone is diagnosed with the virus, asking them to self-isolate and seek a
test. With a centralised NHS and
centralised COBR planning the logic of the government is perfectly
understandable, but willingly giving your detailed movement record to Big
Brother may be a big ask from two-thirds of the population. International travel also becomes be more
problematic, because the App does not meet the requirements of other countries
i.e. there is no contact data associated with or on the handset itself.
At a practical
level, 18th March 202 saw every UK fund holding physical property
act in unison by suspending all dealing. This was understandable because the valuers employed by the fund
managers had no clue how much each asset was worth during the pandemic. The extent to which rent can be collected
today – or ever – and the financial prospects for the current tenant all affect
the value, as does the demand for space. With virtually no “deals” being done to confirm what investors are
willing to pay for premises, the valuers have no benchmark and the suspension
To illustrate the
problem, Legal & General can usually collect at least 99% of its rents but
admitted those figures were now down to 86% for Office space, 81% Industrial,
76% from “alternatives” such as airport hotels, 61% from the Retail sector and
just 15% from Leisure – a segment that represents just 3% of the total fund
assets. It is hardly the work of a
genius to point out that the longer lock-down persists, the more enduring the
problem will be for both businesses and individuals.
As so many Office
workers have been able to do their job from home it might be tempting to assume
that demand for Office space will shrink, causing values to fall, but this
appears unlikely. The “tech” generation
have found little difficulty with home-working but that is not the case among
those with greater experience in work, many of whom yearn for the atmosphere of
the office environment. More space will
undoubtedly be needed for kitchens, canteens, rest rooms and work-stations when
people do return to their business premises because workers now appreciate the importance
of social distancing: a phenomenon that will not evaporate quickly, if at
all. When allowance is made for the
remote-working segment of the workforce the demand for Office space is still
expected to exceed supply and so values should hold firm.
an interesting conundrum. All but
Ryanair in Europe have accepted money from their government, in exchange for
which the state has sought to influence business employment decisions and control
the routes being flown for blatantly political purposes. Were it not for the US election later this
year, most if not all should be allowed to close – clearing the way for a new
aviation model when or if demand for such travel arises again. That won’t happen though and so the US
Government is being asked by its domestic airlines to provide a gift to the
industry that bears an uncanny resemblance to the total amount the carriers
have spent in the last ten years buying-back their own shares from the open
market because they had nothing better to spend their profits upon.
On the subject of
international affairs Chinese exports had been widely expected to fall by 15%
in April when comparing the figures year-on-year, but they rose by 3.5%. Those government stats are actually backed up
by independent verification of the shipping and land-haulage sectors. When the Chinese get time off work they can
now visit Shanghai’s Disneyland, which had been closed for three months. Tickets went online last week and sold out within
minutes. Capacity is currently limited
to 30% of pre-crisis levels, but all social distancing measures will be
preserved – and this is in a Country with far more effective understanding and
control over the spread of the virus than the UK has yet managed.
continues to finesse its fiscal stimulus in response to the pandemic and in the
last week has confirmed that loans between £2,000 and £50,000 to small
businesses will attract no more than 2.5% interest alongside 100% capital
guarantee by the government. This was
inevitable because the Banks had learned hard lessons through the most recent
Banking Crisis: don’t lend money to sinking borrowers.
Rather than award
pay increases to front-line Coronavirus workers within the NHS and Social Care,
our Chancellor will now pay £60,000 to the family of such people whose death is
directly attributable to the virus. Now that just looks mean.
With the sound of
laughter ringing in our ears after China announced that the total deaths from
this virus were exactly fifty percent higher than the published statistics for
hospital deaths alone, the UK said precisely the same thing. Cue the music: who do you thing you are
kidding Mr Hancock, if you thing Ole England’s dumb
Last week the
Lancet published a paper from Oxford Team Trials to say that neutralising
antibodies kill the virus and tests in monkeys showed repeated exposure to the
virus did not lead to a second infection. South Korea made a similar publication at the weekend after human trials
and this led the Blood Service to take plasma from recovered donors in the UK
to start tests upon those still infected.
This led Astra
Zeneca, who have an exclusive contract with Oxford Team Trials, to announce
immediate production of the vaccine being tested. Even though Oxford will not submit its
paperwork to NICHE for consideration until late June, and a decision from NICHE
is not expected before the end of November, Astra Zeneca intend to have
millions of doses ready for use by December 2020. Production is also being franchised around
the world and the only caveats are that DURING THE CURRENT PANDEMIC the vaccine
must be supplied free to emerging countries and at cost to the developed world.
If this gamble
pays off, it will deliver a Pandora’s Box of wealth for Astra Zeneca in the
years ahead but the immediate beneficiary will be the British economy. Armed with a vaccine the nation can return to
work with complete confidence once each person has either been vaccinated or
holds proof that they have already had the virus. That event would set markets soaring.
of movement in a controlled manner will be a challenge for every country and
each has taken very different approaches so far. The US State of Georgia now says “anything
goes: open if you want or close – it’s up to you”, despite the fact that
poverty, inequality and discrimination has seen its Black, Asian and Minority
Ethnic people suffer double the death rate of the Caucasians.
(This is not a
uniquely American phenomenon. In Britain
one third of Coronavirus hospital admissions die and 60% of them are BAME. Our explanation is that Dementia and obesity
are the predominant underlying health conditions that the virus puts the tin
hat on, but the parallels with Georgia are uncanny.)
begun planning to re-open around June 2020. Never let it be said that we Brits
have no sense of humour.
Hong Kong sent
its Civil Servants back to work as its first priority. Thailand has a low and flat infection level
but extended its State of Emergency for another month behind its closed
borders. Despite just 20 (twenty) deaths
in new Zealand out of 4,800,000 residents (that is 0.000417%), the first
400,000 key workers are being allowed back to work provided that social
distancing measures are maintained. In
Britain our 30,000 deaths out of 67,000,000 residents amounts to
0.044776%. That is 107 times worse than
the New Zealand outcome, so somebody got it badly wrong somewhere.
the most regular statement by our government, that these are unprecedented
times, when admitting that it did not have enough PPE for its strained
hospitals. At the same time Scotland
announced that face masks are beneficial for the general public in all enclosed
public spaces. The next day UK government
talks with unions and business groups informed us that going back to work will
be fine if we all have PPE and social distancing in place, but the NHS and
social workers continue to face a shortage of PPE to do their front-line
Wizz Air, and Lufthansa
now require passengers to wear face masks from the check-in desk until they
leave the airport. Is anyone joining
these dots up
Coronavirus Ground Zero, the Purchase Managers Index for factory output has
risen above the “magic” 50 level once again. This is evidence of widespread optimism amongst businesses in China. So that’s alright then.
Our nation has
had its spirits lifted though by a centenarian. Colonel Tom Moore took his daily exercise quota seriously and raised
more than £31m for the NHS in the process. A fabulous act, even if it simply means in practice that the money is
given indirectly to our government. The sad
truth is that the NHS won’t need as much financial help from our government after
his selfless service. What a shame that
it could not be spent on a single and enduring facility with his name over the
statement after the daily COBR meeting has been led by a succession of leading
figures in our government, supported by the highest ranking leaders of teams
giving advice to attendees and they have been consistent. There will be no change to the restrictions
on movement, the capacity for testing races upwards and now stands at 51,000
per day and the failure to use all of that capacity is not their fault. Thanks to the single-minded effectiveness of
our Armed Forces 31 of the 48 planned drive-In test centres are now up and
running and those at greatest risk can now book their own tests direct. That should ensure the testing capacity is
used to the full.
This measure now permits the system of “test, track and trace” adopted so
successfully by New Zealand and Germany to be adopted here too. This is very welcome news and should better
inform COBR about the true extent of immunity and the reach of the virus across
our kingdom, thereby ensuring the most appropriate allocation of resources to
hasten the arrival of the New Normal.
Home testing will also be available soon, but the Chief Medical Officer,
Professor Sir Chris Whitty, emphasised that even if both British vaccine teams
were successful the chances of a vaccine being widely available before the end
of next year were extremely slim. It
certainly will not be any quicker if one of the other 78 teams engaged in the
same search across the globe achieves their goal first.
Nevertheless, these evolutions in the UK response to this virus are encouraging
and several businesses have already taken the decision to get back to work in a
Whilst on that subject, it hardly matters what the official position is when it
comes to social distancing. Almost
everyone has got the message now that if we do as we have been told we will
probably live and the converse is equally true. The New Normal will actually be signalled by the day that you and I are
happy to jostle with others at a market stall for vegetables or even pile into
a crowded lift without a second thought. Not any time soon then.
On the other side of La Manche the EU has finally agreed an emergency stimulus
of €540bn for its membership, borrowed collectively. Hours earlier the US agreed on another
US$483bn to add to the US$2.2trn already signed-off for its small businesses
and hospitals. It is easy to see from
here that eth EU was super-efficient with the practical steps of isolating and
testing but predictably slow to make any fiscal policy decision – and they
decision they have reached is ludicrously little, far too late. Much more needs to be done to help the
European economy at a time of great stress.
More good news to lift the spirits at the end of this update. Bulgari took ten days to stop making
toiletries for five star hotels and produce medical hand sanitiser
instead. Their product has been given
away without charge to hospitals in Italy and Switzerland in the first instance and it is coming to the NHS from Friday 24th April.
Bulgari is a member of the luxury goods conglomerate LMVH and they have stopped
making catwalk fashion items to manufacture and give away millions of
medical-quality face masks to the same groups of hospitals. Thank you.
Where is Corporal
Jones when you need him As our nation continues to export hundreds of tons of
PPE across the world each week, our own government allows our NHS and community
carers to go short at a time when opportunists are increasing the cost of PPE by
a factor of twenty. The cargo from Turkey that did not arrive on Sunday as
agreed related to a contract signed on Thursday – except the Turkish contractor
hadn’t made any of the equipment by then and it had no export licences. That’s the real reason why the first of three
RAF aircraft were sent to collect a fraction of the order, returning at 3:30am
on Wednesday. Don’t panic Mr Mainwaring!
entertaining diversion the Americans told us that Kim Jong Un, the 5’ 7”,
twenty-one stone, cheese-loving, heavy smoker who leads North Korea, was
struggling to recover from major heart surgery. There wasn’t any truth in the rumour, but at least it shifted the
spotlight momentarily away from politicians everywhere else who are stalling
and unwilling to be honest. The only
exception has been Jacinda Arderne, who speaks to the nation every day and
tells them just how it is. She led her
government swiftly and decisively from the start with MASS testing and tracing
to accompany lock-down. Their death rate
is a fraction of ours and the New Zealand economy is starting to emerge
confidently from lock-down.
Germany followed an identical path and is enjoying similarly rapid success too.
over-engineered world has a system whereby farmers and other manufacturers can
sell their wares before they have made them. These are called “futures contracts” and they give the manufacturer a
guaranteed income whilst allowing speculators the chance of profit if they can
sell the goods for a better price later. The pandemic-led global shutdown has made some of those deals look very
silly indeed. Oil companies are forced
by the futures contracts to deliver the oil on specific dates, but there is
literally nowhere left to put the product because demand to consume it is
almost non-existent and all the storage facilities are full. That’s why people who already agreed to buy
oil at one price were happy to pay you to take it off their hands last week –
as much as US$37.63 per bbl at one point.
In America more
than 80% of the public support the lockdown, but some have expressed the view
that there should be more focus upon the Economy as a patient rather than the
tiny proportion of citizens who are conventional patients. To illustrate the point, Brompton is a
British company that makes folding bicycles and they have an enviable order
book. Sadly they cannot get the components
they need to assemble the bikes and fulfil the orders, so now they are having
to furlough most of their workforce. A
financially sound business in healthy conditions is having to increase the
national debts and reduce the incomes for its workforce as a consequence of the
shutdown. You can see why our government
initially chose the economic solution to the crisis rather than the
So. How do we get out of this Rishi Sunak told us that all we have to do as
a nation is meet these five criteria and we will be up and running:
The NHS must be coping with the workload,
Operational challenges can continue to be met (no specifics here,
but it appears to be about sourcing PPE)
Daily death rates must fall consistently,
Infection rates are decreasing, and
There is NO RISK of a second peak in infections (my emphasis).
It is starting to
sound like economic norms are expected on the twelfth of never.
He went on to
announce £22.5m investment into Imperial’s vaccine research and another £20m
for the Oxford team trials, which begin upon humans on 23rd April:
St George’s Day, in conjunction with efforts to improve domestic drug
manufacturing capacity so that Britain might be at the front of the queue if
these searches for a successful vaccine bear fruit.
Just to put
things into context, Singapore is a single-city State. It has a low-paid immigrant worker population
of 10m, 80% of which live in dormitories consisting of twenty to a room and
they unsurprisingly make up almost all of the infected cases in the State. There is zero facility for segregation. We should count ourselves lucky.
There has been a
short break in commentary upon investment markets amidst the current pandemic,
caused by the author falling victim to the virus. It was a nasty episode but is now safely
consigned to history: thanks to the many who enquired about my welfare.
The court of
public opinion, referred to as a Kangaroo Court in less favourable
circumstances, has obliged both Liverpool and Tottenham football clubs to
abandon their claims upon the public purse for help in meeting the cost of
their non-playing payroll. Rough though that justice is, it does feel better
that the money we are borrowing is not being larded upon overseas investors who
are not experiencing financial difficulties as a result of this short-term
Whilst on the subject
of consistency from the media, it is obviously not okay for a public servant to
escape 44 miles to her family retreat from the coal-face of fighting the
Coronavirus each day. It is okay though for another public servant recovering
from the virus to escape 41 miles to his holiday home with the mother of his
latest baby and for our royal family to do likewise to their more distant
retreats. Orwell was spot on when he wrote that some animals are created more
equal than others.
On the subject of
overseas dominions, markets took delight in the €500bn aid package announced by
the EU last week which seems to have misunderstood the “me too” campaign. This
belated recognition of the need to put public money into markets to avoid
economic collapse and human misery was never in doubt; it was just a question
of scale and timing. America recognises that its measures have made a big
impact but more will be needed due to the scale of the tragedies it is facing
and that sentiment is echoed across all capital markets.
Trump-inspired meeting of OPEC, the largest ever cut in oil production by 10m
bbls per day was agreed and it quickly translated into action. This cut came
though after a global glut created by the selfish actions of America, Russia
and Saudi Arabia and so it was dismissed as irrelevant by markets, which
punished the oil price by another 4%. This is naturally an economic drag upon
oil-producing nations but the exact opposite for the oil consumers, stimulating
the Chinese economy still further.
In what was
widely seen as a budget-driven decision, Saudi Arabia agreed a ceasefire in its
five-year war against Yemen. This throws attention onto the problem in a very
For example, in
Bangladesh 24m people have an income below the poverty line and so face death
by starvation in the event of lockdown because they have little or no savings:
work is needed each day to get food. Home-working is not an option for them and
there is little or no support available from social care and a health service
with almost no spare capacity today i.e. before the pandemic arrives. Free food
or money for the entire nation is the only short-term answer, but this won’t
There is one
Doctor for 500 of us in the United Kingdom and the best stats in the developing
world sees one Doctor for 10,000 in rural India. When this is combined with
population densities of 500,000 per square mile, there is zero-prospect of
self-isolation in communities with very little water and sanitation standards
that do not bear committing to print. Human tragedy appears unavoidable.
advice from the World Health Organisation continues to be for everyone to wash
our hands more frequently, observe at least three-meters of personal space and
if in doubt self-isolate. That’s alright then.
China ended the
lock-down restrictions upon Wuhan after just 76-days and the province
celebrated in style with a lighting display across the city and a return to
work. Their economic output was expected to be prolific but the actual purchase
of raw materials and exports being shipped has surprised markets with their
scale. Regional equity markets responded very positively and this extended
worldwide, because investors are looking for the green shoots of hope.
Yet more positive
news came with the withdrawal of Senator Bernie Sanders from the race to secure
the Democratic Party nomination to run against President Trump in this year’s
US election. In a sense Bernie was the yin to the yang of the current
President, each one being as extreme in their views as the other. Now that
Senator Joe Biden is the last man standing there is the genuine hope he might
put forward a common-sense campaign that is more centrist, potentially taking
votes from the Republicans in swing States. That would certainly be less
concerning for investment markets.
It is quite
sobering to realise that just 0.01% of the world’s population (one in
ten-thousand) has been infected by the virus, but look at its short-term
impact! This panic-led reaction has cast a new light on most investments and
opportunities abound for active fund managers. As one in five dividends have
already been cut the short-term impact is priced in. You and I remain invested
for the long-term though and so the rebound will be pronounced when this hockey-stick
recovery is complete.
from the leader of the Opposition has been to demand statistics for Coronavirus
deaths outside a hospital setting. This from a party that has rightly
criticized the ruling party for chopping and changing the way that statistics
are measured and presented over thirty-plus years in power because it serves
only to confuse and make direct comparison impossible. The current approach
needs to be maintained, even though it will look vastly worse when testing reaches
more acceptable levels. At least by this method there will be a verifiable
means of tracking overall numbers under the same conditions, making it easier
to identify the turning point in the progress of this pandemic throughout our
As the major
outbreak of Coronavirus in Italy spread across mainland Europe, the investment
“game” changed. It rapidly exposed the precarious position of companies with
highly-geared balance sheets. When that was combined with Saudi brinkmanship with
Russia over the oil market at the same time that the pandemic had depressed
China’s demand for oil, a sell-off in equity markets became unavoidable. The
speed at which everything happened has surprised everyone though, but
opportunity lies in such adverse circumstances.
It is important
to remember that our world has not improved or got worse; it is merely
different. The pandemic will severely impede ‘normal’ growth prospects in the
short-term. Balance sheets in both the private and public sectors will become
significantly more stretched with the result that confidence and capital
investment will suffer. But this is already old news. Long-term investors are
more interested in the enduring changes in consumer behaviour that will ensue.
This pandemic will
have a damaging effect upon some previously resilient business models, but it simultaneously
creates new opportunities for others. Whenever businesses in general find
growth harder to come by, genuine growth opportunities will become even more
valuable. All it takes is foresight and patience.
In the midst of
every crisis lies opportunity, in this case associated with the significant
changes most of us have had to make to our daily habits. For example, an acceleration
in demand is probable in the field of clinical diagnostics. Nations are finally
conceding that “if you can’t measure it, you don’t know if you are succeeding”
and that failure to test delayed the start of defensive action. The Coronavirus
has highlighted the cost-benefit advantage to national health systems from
having faster and more comprehensive diagnostic testing services in general –
not exclusively for Coronavirus.
industrialisation of the food supply chain appears more likely. Government
attention will move to different fires shortly, and high on their list will be
the vital need to maintain food and farming industries during the worldwide
battle against the Covid-19 pandemic. Before anyone had heard of Coronavirus,
China had already seen African Swine Fever wipe out half of the country’s pig
herd. In Europe there are firms like Genus which are global leaders in
providing porcine and bovine genetic solutions. Their remuneration strategy is
to collect a royalty every time a commercial pig is weaned. As pigs farrow
three times per year, yielding about 36 piglets per annum, that is a royalty
restrictions within the supply chain in February meant that Genus sold no pigs
in China at all and so the share price suffered. Nevertheless, in the wake of
this outbreak of Swine Fever and Coronavirus there is likely to be a rapid and
more professional rebuilding of the highly-fragmented domestic pork supply in
China through the creation of large-scale integrated pork producers. This is a
key priority for the Chinese government and should drive significant demand for
such products as all developed nations strive to improve resilience in food
At some point the
world will substantially migrate back from the Digital World to the better-known
physical world, but lives will be changed for ever. Home-working has obliged
many workers to adopt IT solutions that they previously baulked at, but the
vast majority now realise the experience is not as bad or difficult as they had
feared. In the same way that the forced arrival of women into the workforce
during the Second World War was a HUGE positive for everyone, the enforced introduction
of vast swathes of people to the opportunities offered by the digital world
will bring similar benefits. They include an acceleration in the adoption of
online shopping, home delivery, virtual communication rather than physical
travel (do we really need HS2) and other digital products such as gaming or
entertainment. One consequence of this will be the belated acceptance by
governments of the need to improve the capacity and speed of the internet. It also
seems reasonable to expect the rate of digitalisation to see a material step up
and fast-forward the benefits anticipated for businesses and national economies.
On the surface,
this improves our carbon footprint and hastens our national progress towards
net-carbon-zero to slow or even reverse global warming, but it is not quite so
straightforward. Sadly you, me and the next person all hoard “stuff” and now
the vast majority of it is online where it is stored in vast data farms. It
takes energy to keep all that data and energy gives off heat – can you see
where this is going The prolonged isolation might usefully give us the time
needed to cull our libraries of music tracks no longer listened to, photographs
taken but really not very good and therefore not viewed, banter on social
media, business records dating back to 1982 (guilty as charged) and a host of
other retained but far from necessary items.
hardest decisions that fund managers must make is which of their long-term
loves they must jettison to make room for tomorrow’s winners. That will surely
be a test of their professionalism and skill.
Meanwhile, at the
sharp end of the problem, our government assured the nation two weeks ago that
“testing is our number one priority”. This has now risen to 10,000 tests per
day and they hope for 15,000 tests per day within another fortnight. As the NHS
employs 1.5m people it will therefore take another 100 days (a little over
three months) just to test them, let alone patients, ancillary workers, the
other emergency services or the general public.
explanations have been advanced by government for this stately progress with
little supportive evidence, as the UK not only manufactures the reactive agents
needed to perform these tests but we export them too: 17 million testing kits
sent overseas so far and counting. To be fair, there are two types of test.
When our order finally arrives from China that kit will say whether someone has
already had Coronavirus and so enjoys freedom from reinfection, hopefully for
two years. European tests merely say
whether the virus is present at the moment of testing and so, like an MOT, it
is irrelevant as soon as you drive away from the testing station because you
need to be tested repeatedly.
One country we
export to is Germany. On 31st March the Science Ministry of the
German State of Hessen announced that they had developed a method that
dramatically increases the capacity to test for Coronavirus. This new method allows for several samples to
be evaluated at once, so that their test capacity rises from about 40,000 tests
per day at the moment to about 300,000 tests per day without any loss of
quality in the diagnostics. That approach would test all NHS staff within a
week, bringing up to a quarter of the NHS workforce out of their current
self-isolation and back to work upon proof that they were not carriers of the
disease after all.
We continue to
have all of the EU benefits throughout 2020 (as well as the costs) so it is
hard to accept the government statements of intent when their short-Cummings
(sorry, I couldn’t resist it Dominic) are so patently obvious. The impression
is left that our government prefers to spend our money on investment
propositions, assisting big businesses, rather than on the welfare of our
citizens. Is a culling of the weak and the elderly, sometimes considered the
biggest beneficiaries of our NHS and State Welfare systems, secretly seen as a
positive by the authorities
It is now a
near-universally accepted global view that a successful testing programme
delivers more clarity on the progress of the epidemic, the ability to focus
medical efforts precisely to address it, faster release of people from
isolation and consequently a more rapid return to economic normality. So let us
hope that our government achieves its “number one priority” very soon.
Pavlov’s dogs, taught to respond to a stimulus, large international businesses
have learned that if they complain or threaten loudly enough then our
government will throw cash their way. For example, and without wishing to
single out one specific firm because the example applies to many, Tata owned
“British Steel” while it was profitable and understandably took those profits
back to their homeland. When the tide turned they threatened to dispense with
most of the workforce and so government grants and subsidies arrived as if out
of thin air.
That business was
still sold on to a speculative investor based in an offshore tax-haven who,
after sufficient State incentives had been secured for its next owner, sold it
on again to a Chinese steel business by the name of the Jingye Group: owned by
Li Ganpo - a former Communist Party Official.
acquisition of Jaguar Land Rover also enjoyed equally generous encouragement
from our government, and when grants for training were taken overseas the
government was eventually persuaded to oblige Tata to bring the money back and
use it in the manner intended. At each stage in JLR’s growth Tata has been at
the front of the queue for handouts and now that times are tough again there is
no question of using any of the retained profits to smooth business
performance. It is not necessary of course now that our government has agreed
to pay 80% of their entire payroll for every furloughed worker. Dr Pavlov would
be proud that his research remains valid to this day.
continue to dance to a variety of tunes. The tide of money responds to the best
available offer and so new issues of government debt are impacting upon Fixed
Interest Securities. Before the vast supplies of Dollars, Euros, Pounds and other
currencies came to the market, investor demand pushed the second-hand cost of Treasury
Bills, Eurobonds and Gilts so high that the effective yield (sometimes referred
to as the coupon, or interest) became negative i.e. buying the loan and keeping
it until the government repaid the debt guaranteed the investor would make a
loss. As these new issues come to the market there is an over-supply of
safe-haven assets and so the second-hand prices will come down again and the
effective yields will rise a little.
Markets for risk
assets clearly believe that the world’s central banks have delivered enough
liquidity to preserve the integrity of the financial and banking systems. This
was a prerequisite for some semblance of market stability and that largesse
remains without limit.
Allied to this
was an increasingly robust fiscal response from governments around the world,
promising all manner of support from cash hand-outs to loan guarantees. This
seems to equate to more than 5% of global Gross Domestic Product for the entire
planet already. As the biggest spenders in percentage terms (Japan and Germany)
are nearly 20%, and America stands at 10%, the stimulus seems set to get larger
unless nations want to go backwards relative to others in terms of economic performance.
manager that many of you will be employing is Terry Smith: he of Fundsmith
Equity fame. Recent comments that he shared provide a suitable means of
rounding off this update.
that the current market reaction to the pandemic is explained by a simple analogy
relating to the virus itself. The COVID-19 virus is not fatal for the vast
majority of people, but has proven fatal to those who have an immune system
already weakened by age and/or pre-existing ailments.
He extends that
analogy to the economy and markets in general, by pointing out that the
“emergency measures” taken in response to the most recent Banking Crisis are
still in place because economies remain in less than perfect health ten-years
on. Conscious decisions to undertake deficit spending, maintain zero or very low
interest rates and Quantitative Easing all remained in place because
governments knew that the patient – in this case the global economy – was not
back in rude health. When this virus struck it gave rise to a market panic.
This appears to
be quite a valid analogy and it extends to the future as well.
In the last ten
years Fundsmith has outperformed economies across the world because it does not
invest in every share in the world – just the businesses that it believes
offers the greatest potential.
No matter what
emerges from the current hiatus, how many of us survive, when the shackles upon
our freedom are loosened or even if inflation becomes an unavoidable outcome,
none of this is relevant to investors. All of these matters lie outside your
control and ours, so why waste time and energy reflecting upon them The
managers running your money every day remain focussed upon maintaining the
processes for their published investment strategy so that they can identify and
grasp any new investment opportunities unearthed by the turmoil. And their
record of success in the last ten years provides reassurance for the next ten.
The measures taken
by central banks and governments in response to the consequences of restrictions
upon movement to deal with the threat from Coronavirus cannot actually turn the
tide, but they can considerably mitigate its impact. Without them, the economic
impact of the Coronavirus would be potentially catastrophic. With them, and a
little luck, the situation is manageable. Curiously, if it had not been for the
most recent Banking Crisis and the corrective action subsequently taken by
Regulators to oblige Banks to be more financially resilient, the current
situation would be far worse.
markets have reassuringly behaved in a rational manner in response to the most
fundamental instincts of humankind: that of fight or flight. There is an unprecedented
lowering of demand as a result of isolation and so it is hardly surprising that
there has been a barrage of corporate trading updates to the effect that the
impact is very severe. Markets knew this and the issue is one of how long it
will last – BUT – this places far too much emphasis upon the short-term,
whereas markets are usually looking at the long-term instead.
Both Chinese and
Korean data appears to show that, in the short-term, isolation works. The world
has yet have yet to see what happens when restrictions are lifted, but the
rapid diminution in new infections in these countries is both underreported and
also grounds for optimism. Here in the West, everyone knows things are going to
get worse before they get better. Testing equipment (exported predominatly by
China, who are struggling to get sufficient raw materials from the West to meet
demand) is an important part of the road to recovery; the hope being that many
more than thought have already had the virus asymptomatically and can then
continue as normal. Eventually a vaccine is possible and the population will
build immunity. All that is certain; it is just the timeframe that is not. That
the impact of Coronavirus on the economy will remain severe for some time is
not in doubt, but it will improve and so the only issue is ‘when’ rather than
Mankind is also
relentlessly entrepreneurial and will quickly adapt to the world of Corona and
other viruses, because great businesses are run by great people with great
ideas. There can be few better examples of this than the response of the UK
Mercedes motor-racing team, Dyson and others who have designed, built and are
now manufacturing ventilators from scratch in ten days. That ingenuity and
entrepreneurial spirit will never change and when the news flow surrounding the
virus takes a turn for the better, asset prices will soar.
valuations of fantastic businesses suggest their very survival is in doubt.
Knowing that there will be a time when the virus news flow will be getting better,
the best investment strategy is undoubtedly to ride out the coming weeks and
The whole planet
can currently be divided into three groups: those that knew they had the virus
the soonest and who locked-down first, others who delayed a bit in the hope
that some viruses only infect people in other countries and others (the USA in
particular) who are still winging it. Accepted wisdom is that lockdown is the
way to go, but the truth is that no one knows for sure today. That it will get
very, very bad indeed in America is not in doubt, but all eyes are on China to
see whether the infection rates start to rise again now that their restrictions
on movement have been lifted. If it appears that isolation has been effective
and there is no second wave of infection then all is fine, relatively speaking.
But if the number of cases takes off again, then everything goes back into
remain in a state of limbo, dancing to the tune of gamblers needing to
cover-off those of their “short” positions that didn’t work out and also
institutional fund managers who have had to rebalance their portfolios back
towards equities to coincide with the end of Q1.
To be absolutely
clear about this: in the absence of a second wave of infections the economic
damage of lockdown will be limited to a quarter or three. Equities will rise
further and the value of safer havens will drop back a bit.
A second wave of
infections in China will send things down again. Either the lockdowns will
continue for much longer than the three to six months that seems to be the
accepted policy now, or else policies will change. The problem with extended
lockdowns is that the natives will become restless - and not just the Jack
Peter Grealish’s of this world. Governments cannot print GDP for ever and the
populace will all start to become a little miffed at the economic catastrophe
unravelling all around them. That would probably mean governments having to
respond with troops, tanks and martial law: not a great road to go down.
As a result,
reinfection rates in Wuhan are much more important to the world than domestic
daily death tolls. The latest such stats show that China has had 81,518
Coronavirus cases in all, of which 3,305 have died (5 more than yesterday), 76,052
have recovered and 528 are critically ill from a population of 1,438,000,000.
In “denier’sville, USA” those figures are currently 146,027, 3,186 (up 45
overnight), 5,544 and 3,535 out of a population of 330,510,000. In straight
numbers that means the US has already had a worse outcome than that experienced
in China because at the end of the pandemic the US numbers should be 23% of those suffered
in China. It is accepted that China had the freedom to brutally oppress their
citizens, but a relative comparison of the countries suggests that America is proportionately
heading for at least eight times worse an outcome than the Chinese population
suffered. Oops - so much for laissez-fair!
Of the 67,800,000
of us in Britain 25,150 have been infected, 1,789 died (381 more than
yesterday), 135 recovered and 163 are critically ill and these should be one-twentieth
of the Chinese experience on a proportionate basis. The UK infection rate is already worse than
China’s so far and the other stats are also worse, so maybe we were a bit slow
off the mark after all. Thank goodness for the intervention of the World Health
Organisation into our domestic affairs!
At times like
these we can take comfort in the words of Joseph de Maistre, that well-known
French lawyer, diplomat, writer, and philosopher (see – they even had
“portfolio” careers in the 18th Century: little is genuinely new),
that “every nation gets the government it deserves”. And it is precisely at
such times that we can be thankful we are not in the USA.
In the UK we are
blessed with a government that appears better at giving advice than taking it,
if the health of its principle Minsters is anything to go by. Our government has been
unable to convert their expectations into reality on any level, whether in terms
of the number or types of tests, ventilators or timeframes, let alone Personal
Protection Equipment for those in the front-line of our defence. Who knows if
that is due to incompetence, negligence or just bad luck, but when Dominic Raab
recently took the stage at the daily press conference in stead for PM Johnson
and licked his fingers it fairly took the breath away. Whether intended as an
act of Coronavirus defiance or if it was simply an act of stupidity, it flew in
the face of all the advice his government has been pushing.
But it is still not as bad as America.
Not so very long
ago Angela Merkel took the radical decision to allow 1m immigrants into Germany
to the great angst of many Germans. She
understood the facts about their ageing population combined with the shortage
of able-bodied and willing workers to pay taxes to meet the cost of benefits
for the retired. It seems possible that one positive consequence of this
pandemic will be opportunities for work in America, the UK and Europe for refugees
desperately trying to flee their native lands. Assuming, of course, that the virus does not lay waste to all of the
overcrowded “camps” that they are currently contained within.
Some may think we are all off to hell in a handcart but we are not.
Many of you will
hold at least one fund managed by Lindsell Train. In a recent shareholder
update the eponymous Nick Train announced that he has added to his personal holdings
in one of the Lindsell Train Investment Trusts due to it trading at a discount
to Net Asset Value (a technical term which basically means you can buy £1 of
assets for less than a £1). The result is that he now personally owns more than
half of the Investment Trust, which is a remarkable vote of confidence by any
standards! He did go on to say that he does not believe or even care very much
if the price has bottomed, because irrespective of the current and unprecedented
situation there are three reasons to continue investing:
In his view the current market conditions flow from the
evolutionary origins of panic and so the prices that financial assets have recently
settled at are not rational but merely signals to the rest of the tribe of our
current anxieties. It is vital to remember that the value of any company
depends very little upon short-term profits, and he highlighted Tesla as a
loss-making company that remains "exceptionally valuable".
As an example of how unrealistic markets currently are, Train pointed
out that the longest UK gilt currently offers a gross redemption yield of
little over 1.1% pa through to 2068: representing a P/E ratio of over 90. This
is patently nonsense and demonstrates why stock markets appear extraordinarily
undervalued by comparison.
In the long-run, high quality companies have the common attributes
of durability or just pure survival power. Although those businesses will face
challenges, giving rise to profit warnings and dividend cuts in the months to
come, they are just a short-term distraction. History strongly suggests that
these tests will not prove to be existential and that is why Lindsell Train
'took advantage' of the Coronavirus sell-off panic to increase holdings in
companies already owned and take new positions in others.
Lindsell Train is
not unique among the funds in your portfolio. All of your fund managers were
appointed because they are at the top of their game in their respective fields
and are taking similar action to ensure the most rewarding future for your
Such is the
gravity of this illness that the G20 convened an emergency meeting that was
hosted by Saudi Arabia – that well-known paragon of virtue and pillar of the
international community – at a virtual conference also attended by the World
Health Organisation and the International Monetary Fund. Clearly someone is
starting to wonder who, how, when and indeed whether any of this tsunami of
borrowing might ever be addressed.
Across the globe
there are examples of previously unimaginable grants to businesses and
individuals. The US$2trn measure in America alone tripled their national debt
and will add 8.3% to national Gross
Domestic Product. When combined with the waves of cash being made available
for an unlimited phase of Quantitative Easing, these measures effectively
dilute the fractional share of global wealth that anyone or any business has.
And the money is not even printed any longer – it is just a series of dots and
dashes in a number of computer programmes that allows the amount of cash in
circulation to be increased or reduced.
important positive that everyone can take from these steps is that governments
and central banks have learned the lessons of 2008: they are all determined to
do whatever it takes to ensure the financial system remains fully functioning.
We must remember though that they are spending our money and getting us into debt.
his Third Law of Motion in 1686: for every action, there is an equal and
opposite reaction. In monetary terms, the loss of industrial production through
ill-health caused a reduction in consumption. It is an isolated instance of
damage, but things will get back to “normal” when the health worry passes.
Governments and Central Banks are providing a correspondingly excessive
reaction to the panic reflected within investment markets, proving that
Newton’s principles have stood the test of time.
that the G20+ reached was that this problem is not of their making but is the fault
of you and me, so we are the ones who must bear the cost in the end. In the
meantime they earmarked a war-chest of US$5,000,000,000,000 and the
International Monetary Fund got permission to double its lending power so that
they can both do “whatever it takes”, starting with about 80 of the poorest
nations that have already lined up for subsidies. Whether citizens will meet
this enormous cost through increased taxation, a resumption of austerity,
enduring unemployment, reduced State Benefits, a pay-as-you-ail NHS, greater
state control over our lives and actions or even the brave step of simply
devaluing everything through inflation to essentially write the debt off
doesn’t matter: there is still no such thing as a free lunch.
Last week Fixed
Interest Securities saw an indiscriminate sell-off across the board. You may
recall from earlier updates that this was led by market gamblers who had to
sell their most liquid assets to raise cash. Just like in 2008, this hit US
Treasuries hard and it is fully expected to be a sort-lived, temporary
phenomenon this time around too. Once the chaotic flows slowed down in 2008/9 the
fundamentals reasserted themselves and US Treasury yields dropped i.e. their
value rose. That is precisely what is happening again now, with US Treasuries starting
to stabilise after the “liquidation phase”.
All safe haven
assets in the Fixed Interest sector will return to stability and thereby
continue their trend of relative outperformance despite the volatility. Within
corporate credit, many companies will be negatively affected by the virus
containment steps that have been taken and so the quality of the Bonds
(reflecting their likelihood to repay the debt) is being reassessed as more
companies are affected by the broadening economic slowdown. This is why the
sell-off in Fixed Interest Securities markets has been just like equities.
consequence of this “US Dollar is King” mentality is that there will be
considerable pain in those emerging markets where US dollar-denominated debt is
estimated to be around US$12 trillion in all. The oil emirates of the Middle East
will also suffer through the Saudi / Russian oil dispute because the drop in
oil prices (and its direct impact upon their national economies) will be amplified
by US Dollar strength.
Details of the US bail-out are
starting to emerge, including acceptance of the President's idea to send US$1,200
to most Americans and US$500 to most children – that’s a gift of £2,835 to the
average US household on current exchange rates. It also features a substantial
increase in unemployment insurance, granting US$600 a week more for four months
to those laid off. The aid for industry gives grants of US$50bn to passenger
airlines and another US$8bn to freight airlines. Quite clearly, Rishi Sunak’s
reluctance to support Dividend-paying businesses is not shared by the
This determination to support
the nation actually pushed the Dow Jones index into “Bull” market territory
because those three successive days of gains produced an increase of more than
20%. Not even the announcement of an extra 3.3m unemployed Americans last week
alone could dent market delight. Please do not be mistaken though – this is
anything but a Bull market: substantial volatility like this will continue for
a few more months yet, each time adding profits for the long-term within your
Knowledge remains key to
success in today’s investment markets and so news of the work of the Oxford
University Evolutionary ecology of Infectious Disease team was greeted
with delight on Wednesday 25th March. That august body believes that
the Coronavirus may have been in the UK since early January with the result
that up to half the population has already had a mild form of it and may now
have resistance to getting it again.
Wow. That would flatten the PM’s curve quite
nicely and accelerate the economic performance of GB plc towards the front of
the global grid, bringing demand from overseas investors in bulk.
Our government has worked
quickly to get a test for antibodies in the blood of people who may have had
the disease and it hopes to be rolling out those tests soon. The only disappointment
is that the test kits are made in …… China. You couldn’t make this stuff up!
This Oxford research identifies
a tension between professionals. Our national policy rests upon the
pronouncements of Imperial College UK. It assumes a later arrival and faster
build-up of bad cases at a time when most of the population has no immunity to
it: a stance shared by the World Health Organisation. Both cannot be right but
scientists not only respect each other’s work, they also share every aspect of
it so that their peers can test it and either endorse their findings or point
out weaknesses in the solution. A little time will tell.
In the meantime everyone is watching
Italy in the hope that they are now witnessing a sustainable reduction in the
growth rate of cases, with the hope of a downturn in deaths as a result of
their very tough measures. If this stringent approach works in Italy it will
not only stiffen governmental resolves for tougher and longer restrictions
elsewhere but also imply an end date to the restrictions upon freedom
each nation affected so far show that 70% of Coronavirus deaths are male: 2.8%
of infected men in China and 1.7% of their female cohort, although no
satisfactory explanation has been given for this fact. Could it simply be that
the well-known reluctance of males to engage with medics is not unique to the
Speaking of the
UK, the latest measure announced by our Chancellor of the Exchequer brought
good news to the self-employed that do not pay Higher Rate Income Tax. They
will also enjoy financial support if their business has been adversely affected
by the pandemic. To the dismay of those who have extracted their profits almost
exclusively by Dividends (traditionally referred to as unearned income), it is
only their salary and Benefits In Kind that qualify for this support. Our
government and Chancellor are both keen to take more tax from the self-employed
and Rishi made his intentions abundantly clear in his statement and the
subsequent questioning by journalists that there will be no free lunch for the
It has been
instructive to see how different nations have grappled with this problem and
the contrasting timing and scale of their efforts. Few can escape the
conclusion that the once-great Western nations have been overtaken by the Far
East both in terms of the ability of health services to cope and more
importantly the alacrity with which governments have tracked, traced, tested
and isolated victims to great effect. This has the potential to be particularly
damaging in America unless its citizens drive the actions of their government,
as has happened in the UK, by self-isolating for their own self-preservation.
number of clients have begun adding to their portfolio, confident that good
value is on offer today. It does not take a huge leap of the imagination to
consider the aggressive capitalism whereby some retailers and manufacturers
have ramped prices up (because they could) in the context of faster inflation.
Trump’s stance of “America first” is unlikely to be unique in the post-virus
times and when this is combined with the temptation for governments to inflate
this unplanned debt away as the cheapest solution, it would be prudent to
assume that faster inflation lies ahead.
In what we shall
try to make the last of the scientific references, Albert Einstein expressed
the view that “Compound interest is the 8th wonder of the world; he who
understands it earns it and he who doesn’t pays it”. Cash deposits are a vital
part of everyone’s financial plan, but excessive deposits (representing more
than you expect to spend over the next six months) have been losing money in
real terms for years and that problem will escalate with inflationary pressure.
There will be few better times to reconsider moving those spare deposits into
real investments, where compounding growth, Dividends, Interest and Rents can
build your own 8th wonder for tomorrow.
lead of Britain, tardily copied by the European Central Bank, the Federal
Reserve Board put everything into rallying the market for US National Debt:
Treasuries. It also did a great deal to boost the Investment Grade corporate
bond market with its announcement this week that "The FOMC will purchase
Treasury securities and agency mortgage backed securities in the amounts needed
to support smooth market functioning and effective transmission of monetary
policy to broader financial conditions and the economy."
What on earth
does that jargon mean Good news.
This is as
important as (Super) Mario Draghi's "do whatever it takes" statement
in the wake of the most recent Banking Crisis, Ben Bernanke’s “helicopter
money” remark around the same time and the Bank of Japan's commitment to buy as
many Japanese government bonds as necessary to keep the 10 year interest rate
at zero. In practical terms it takes most of the risk out of investing in US
Treasuries and more than matches the Bank of England's strong interventions to
keep the Gilt market (our national debt) working whilst keeping prices up.
The Fed has trumped
every other nation by going a lot further to ensure the supply of credit to
large companies, businesses in general, consumers and the local authorities. In
exchange for a minority equity ownership of the Special Purpose Vehicles the
Treasury has created for each sub-sector of these potential borrowers, there is
six months’ interest-free credit on pretty much any amount asked for. This ensures
The US government can spend whatever it likes to keep their
consumer-based economy on track,
Lay-offs can be avoided by American businesses,
Americans can buy cars and other large-ticket items on really
US students can continue to study with no restrictions upon the
debt they enter into – a massive feature of tertiary education in America, and
New businesses in America can borrow the capital they need to get started.
It was a similar
story from the Bank of Japan earlier in the month when it announced a 63%
increase in its budget to buy national debts during March and April plus a
doubling of its purchases of business loans for the same period.
moves provide welcome support for Fixed Income Securities, but what about
markets have done much, the US Congress reached agreement that was ratified by
both the Senate and President to make a US$2,000,000,000,000 package of
direct cash support for businesses and people. This enormous measure is
designed to avoid substantial damage to corporate balance sheets and
family budgets. That agreement sparked the largest one-day gain of the Dow
Jones Index since 1933: 11.37% and similar elation spread across the globe.
In isolation this
will be no “silver bullet” of course, because it does not solve the problems faced
by businesses relating to the ultimate duration of the shutdown and the scale
of losses during the associated interruption. Some weaker businesses in the
West will not survive whilst others will announce dividend cuts, capital
expenditure cancellations and the suspension of share buy-back programmes: all
of which feed directly through to the market value of their shares.
On the subject of
weaker businesses, UK airlines were dealt a dose of reality by our Chancellor.
He seems to have taken exception to businesses continuing to pay Dividends to their
shareholders whilst pleading poverty and begging the government for bail-out
money. A degree of financial assistance was not ruled out, but put firmly
second to (and proportionate with) calls for additional capital from
shareholders in conjunction with the responsible application of existing
capital within each business. In short, there really is no such thing as a free
lunch and if your business has enough spare cash to pay a Dividend then it will
not need any help from UK taxpayers.
Another fillip to
market sentiment is provided by the looming end of the first quarter: a time
when many portfolios are automatically rebalanced between the major asset
classes. The fall in share prices and suspension of physical Property funds
means liquid cash and sales of Fixed Interest Securities will be needed to
increase the holdings of shares within those funds. That demand can be
predicted with the same confidence that tides will ebb and flow twice each day,
and so the timing of the Fed support for Treasuries, Corporate Bonds and the
supply of US Dollars could not have been more perfect for Developed equity
As if to
underline why trading of physical Property funds had been suspended, the vast
majority of commercial leases operate on the basis of traditional “quarter
days” for rent payments: 25th March (Lady Day), 24th June (Midsummer Day), 29th
September (Michaelmas) and 25th December (Christmas Day). Valuers will be keen
to discover what proportion of tenants fail to make their expected rent payment
in full, because that has a direct impact upon the implied value of the
building those businesses occupy.
Those of us not
glued to updates on the Corrigans website or still at work have seemingly been
enjoying Netflix, Facebook and other on-line diversions. In the case of
Facebook, ten-times as many people are using its group video facility as would
ordinarily be the case, with subscriptions up by half. So is that why their
shares are down by 20% since the end of February, or is it just blind panic
continue to be the rule rather than the exception for several months to come
and that, as you may recall from earlier articles, is actually a positive thing
for long-term investors like you because it brings wonderful opportunities for
the active fund managers running your portfolio.
between optimism and pessimism are fed by such nonsense as the Purchase
Managers’ Index. This is a barometer of survey results across a large number of
businesses in each country, designed to show whether those businesses are
confidently ordering more to support an expanding future or running down their
existing assets because they expect a slowdown. It does not take much thought
to predict what each PMI statement is currently saying across the globe, nor
even that they are worse than during the immediate aftermath of the latest
Banking Crisis, so why should the release of confirmation of your expectations
make you push asset prices even lower Behaviour like this proves the
inefficiencies of investment markets and the risks / opportunities introduced
by such irrational human behaviour – but that is a different article
This is a difficult time for
all clients of Corrigans and every effort is being made to ensure you can have
the contact you want with the team. You might not have known this but most
investments made in Chinese businesses by investors that do not live in China
use the “H” share class, exclusively marketed through Hong Kong. A significant
number of investors lack confidence in announcements made by the Chinese
authorities, but the markets and press in Hong Kong are virtually Western
Capitalist in their behaviours so their feedback is invaluable. Lessons learned by market participants in
Hong Kong relate directly to experiences of the first nation to suffer under
this virus and they have helped to shape the stance taken at Corrigans. In the
meantime your continued trust is appreciated.
Modern Portfolio Theory is
working in the manner expected, minimising losses in comparison against the
indices, and the Business Continuity Plan is also delivering the benefits it
was intended to do. Contact levels are appreciably higher than usual, and
understandably so, but response levels are as expected.
Coronavirus has provided an
economic shock on a type not seen in a century, but in that time consumption became
the predominant driving force: now making up about two-thirds of Gross Domestic
Product for the largest 150 countries. Edicts demanding that people do not go
out therefore have a direct impact upon the economic wellbeing of that nation.
The latest economic models suggest
that global growth has halved in the last quarter to about one percent. That
number is sure to fall further, as the low frequency of testing in some
countries means their cases are under-recorded and other countries have yet to
enter the shadow of this pandemic. In both cases though there is an increasing
likelihood that more stringent containment measures are yet to come.
It is hardly rocket-science
to state that the coronavirus will pass, including the second wave expected
next Spring, but how will consumers react afterwards There is sufficient time
for habits to be broken in terms of consumption generally and some may be
emotionally scarred to the point where they will be reluctant to join larger
groups of people. That fourth dimension is a great healer though and consumer confidence
will return as the weeks and months pass by.
Even though there were no
economic grounds for the latest falls in asset prices, they have most of the
usual characteristics familiar to investors and this can help to guide decisions
now. Classically, a long bull market leads to a “correction” with a spike in
volatility, which gives rise to a huge fiscal and monetary response by
governments and central banks around the world. No surprises thus far.
The raft of measures to shore
up economies and financial markets are all positive:
injections should soften the collapse in aggregate demand,
opening of taps to free-up US dollars for investors worried about cash
Easing resumed in the EU and Britain is also likely to be followed in the US,
providing “free money” to equity investors,
of England base rate is the lowest in three centuries and
pledge by the European Central Bank to buy an additional €750bn in bonds will
support credit markets.
As previous articles have
stated, timing the market is a game to be avoided at all costs. What we
continue to do though is review where your capital is best deployed and that
includes every nation on this planet. Given that China is coming towards the
end of its domestic crackdown, it necessarily follows that it should be first
out of the gates in terms of economic recovery. Perhaps this will become known
as the China Recovery, because it too started in that country……
On that theme there are other
factors to consider because on 25th March almost all of the 60m
people living in Hubei Province of China have their liberty restored in full:
all restrictions upon movement are being lifted. The only exception is the city
of Wuhan which remains under limited freedom of movement until April. That is
just five and a half months of economic suspension for the nation that suffered
the consequences first, giving grounds for optimism that subsequent nations
will cope far better.
Rather worryingly, the US
President for the time being made his own announcement within hours of the
Chinese statement. He said that social distancing would end in America within
two or three days (contrary to the warnings from his scientific advisors) so
that America would lead the way in economic recovery. His stated view was that
he would not allow the cure to be worse than the problem in the US. It is
hardly surprising that US Equities fell sharply as a result of that stunning
Might this be an opportune
moment for someone to provide Donald Trump with an audio-version of the King
James Bible, particularly Proverbs 17:28 which features the line ‘Even a fool,
when he holdeth his peace, is counted wise: and he that shutteth his lips is esteemed
a man of understanding’
More positively SoftBank has
announced a £15.4bn share buy-back programme because its share price had fallen
to such a ludicrous extent the Board wanted to avoid any attempt at a hostile
takeover. This was in conjunction with a decision to divest itself of some its
most successful Third Party investments (such as a 25% stake in Alibaba) and
its worst (We-Work, which patently has not worked). The result was a 19% rise
in its share price on Monday and a 20% rise on Tuesday, at which point the
automatic suspension of its shares kicked in because that is the maximum
movement allowed in a single day by that marketplace.
As we enter these “darker”
days of relative solitude, this could quite easily be a good time for all
investors to remember that the sun rises in the East and sets in the West.
You may appreciate from the
earlier articles that no-one has seen all this before, but the one thing
that is abundantly clear is that the balanced portfolio you have is the best
safeguard against the slings and arrows of a terrified market.
Last week saw an increasing fear
of the impact the virus will have upon on normal daily activities and the
effect that subsequently has on economic growth and company profitability. The
only certainty that emerged was that the “V” shaped pricing hoped for (but
actually expected to more closely resemble a hockey-stick: a steep decline
followed by a more gradual return over a nine-to-eighteen month period) would
be deeper than previously thought possible, because more countries imposed increasingly
draconian containment measures.
Faith that “the authorities” would
provide the correct responses to the unfolding crisis – even if not always as
early as markets would like – was dented when both President Trump and the
European Central Bank were complicit in the latest mayhem: a risk that was
avoided when the UK Chancellor at the time of the most recent Banking Crisis
led and co-ordinated a united global response.
The Donald imposed a surprise
travel ban between the US and Europe at a time when the world was crying out
for co-ordinated responses, not unilateral self-preservation and
finger-pointing. At the same time Christine Lagarde, President of the EU,
seemed ready to throw Italy to the wolves during its post-meeting press
conference. This patent lack of a cohesive plan created a major liquidation
event, with investors (some might term them gamblers) rushing to raise cash
from safe as well as more risky investments. Much of this selling was not by
choice but by the need either to reduce leverage or to meet margin calls
(gambling). You should not find yourself
in this position and so will benefit from the eventual recovery – however
implausible that might currently feel.
Those two major errors of
policy judgement were augmented last week by a shortage of US dollars and that curtailed
economic activity even more. The fundamental problem was that the rapid rise in
demand for the “safe-haven” currency of US dollars had run up against
regulatory supply constraints. It now appears certain that central banks, led
this time by the Federal Reserve, will stop at nothing to continue to provide
funds to the system: a belief reinforced by last week’s aggressive 1% interest
rate cuts and accompanying policy tweaks.
In terms of how things play
out from here, the onus shifts firmly to governments to create an economic bridge
to the eventually recovery. This will help those companies and individuals who
have been prudent but still face financial stress to get through the
pandemic relatively unscathed while many “zombie” companies will finally be put
to the sword. Some credit is due to our government for laying foundations for this
in the most recent budget and then showing a willingness to go further in terms
of support to employers to retain their entire workforce. The full extent of
the measures required has yet to be seen from this or any other government
Current volatility will have
a vastly different effect upon client outcomes depending on where you are in
the investment cycle. If you are withdrawing money then you can potentially be
hit by “sequence risk”, in that taking your money out at a faster rate than
your appetite for risk can sustain from a temporarily depressed portfolio could
put future income at risk. On the other hand, those still accumulating assets
should be cheered by the fact that the potential for future returns is greater by
virtue of a lower starting point.
Each of us knows that mistakes are most common when there is too litttle time available and too much to do. Government and investors are no different to you and I.
China has announced zero new domestic infections, whilst admitting to thirty-four infected citizens returning from trips overseas. This is a very significant milestone, as the virus was first reported in mid-November 2019: some four months ago.
Since then every medical research laboratory in the world has applied itself to finding a chemical solution and they are succeeding. The Japanese already have a drug which shortens the illness from seven to ten days down to just four. Each country in the path of the virus has also been able to learn from the experiences of its predecessors and so national responses are more tailored to the needs of their culture and people. The combined effect of these facts is that the impact upon national economic activity should progressively be less pronounced than it has been in China - shorter in duration and therefore a more rapid return to normality.
That's the logical side of the problem addressed, but what is happening in real life
In times of stress more capital flees to the safest havens and that means America, because even gold has fallen in value. The actions of every nation are superficially compared against those in the US by investors and they react as a herd. When President Trump signed a Bill to ensure paid leave benefits to most Americans it confirmed their willingness to pay any price to ensure their consumption-based economy can carry on unaffected by the pandemic. More conservative and time-measured steps like those taken by the British government therefore appear half-hearted in comparison (even though they are probably the right "just in time" approach for our nation) and so investors shun UK assets in favour of the other side of the Atlantic, thereby exaggerating the domestic market movements.
That snap decision creates marvellous opportunities for genuine active investment managers i.e. the ones retained to make daily decisions about each part of your portfolio. There is no doubt that big swings in value will continue for at least three more months but this is nothing more than a potential distraction from achieving your long-term goals. Keep your faith in the fund managers proven to be the best in their class and that faith will be repaid handsomely in due time.
Although the most recent Banking
Crisis of 2008-09 is fresh in the minds of all investors, the current pandemic
seems more akin to the influenza pandemic of 1918. It is instructive to
consider the similarities and differences between the two as a guide to what is
most likely to happen next.
The latest Banking Crisis was
exclusively a “balance sheet recession” led by foolish banking practices that
eroded confidence in the banking sector as a whole. This caused the housing
sector to collapse as prices fell and lending was then squeezed (by the
institutions responsible for the problem in the first place) to create a
vicious and self-perpetuating circle. There was history on that occasion
too: the US housing collapse in 1929. On both occasions it took about ten years
for the system to heal and the economy to recover to its potential. This time
the travel, tourism and retail sectors are at greatest risk, but the overall
time to recovery is expected to be much shorter.
Like the 1918-19 ‘flu outbreak,
the current pandemic is an event-based crisis and 102 years ago the recession
lasted only seven months despite the second wave of infections in autumn
1918 being more deadly than the first. That must be reassuring for us all.
It seems almost churlish to
remind you that the 1918-1919 pandemic arose while the world was trying to
rebuild itself after World War 1, but even under those conditions only 5
per cent of the global population died and one-third were infected. The UK is
now in its second month of this pandemic (the fifth month globally) and
communication / health systems are far better than they were in 1918, but it
remains to be seen how the virus will progress and how soon it will be
contained. Thankfully the data from China, South Korea, Tenerife and Italy all
show identical trends and so the nations that have yet to suffer the full
onslaught of the virus can plan with greater confidence. On the subject of
China, its new case data has improved every week since the start of March and
the country is close to normalizing in several regions.
Travel, tourism and retail will
continue to see the biggest losses from virus containment measures and the
sector accounts for 10.4% of the global economy whilst giving work to 10% of
the workforce. It takes an average of around 19.4 months for that sector to
recover from epidemics (source: the World Travel and Tourism Council), longer
even than the 11.5 months required to snap back from terrorist attacks.
This means that airlines, cruise liners, hotels, restaurants and associated
businesses in their supply chains will continue to suffer until the summer of
2021. These assets are almost non-existent in your portfolio.
Bricks and mortar retail will
continue to lose out to online shopping because footfall will obviously drop
sharply over the next two quarters. The sector has been struggling for a while
and the decline in consumer confidence combined with an increase in credit
stress makes it likely that a number of businesses will go to the wall. Once
again, your Property funds have little exposure to this type of asset.
Amongst the blatantly obvious
over-reactions the financial stocks (especially banks) have taken a big hit and
are trading well below their book value despite having dividend yields much
higher than (solvent) government debt. Gamblers have acted as though this is a
repeat of the Banking Crisis when it patently is not: banks in America and the
UK have improved their capital levels and safeguarding systems beyond all
recognition over the last twelve years and most of the credit risk now sits with
non-banking financial companies like private equity, venture capital, hedge
funds and insurance companies. It is those entities that will incur the
biggest losses: banks, by way of specific contrast, should glide through this
pandemic relatively unscathed.
Manufacturers had already
started to recover from a slowdown and are in good financial shape. As China
returns to work (presumably at 125% of the pace it maintained before, simply to
achieve the end-of-year targets set by their Leader) it will find that
inventories have been drawn down across the global supply system and so orders
for raw materials will be significant. Those industrial businesses are expected
to recover fastest: probably within the next six months, and with the vast
majority of shares offering higher yields than government debt (this is a
record high percentage) the risk/reward ratios are looking more favourable over
the medium term, i.e. shares represent fantastic value for money and investors
will buy them.
All that remains to be done whilst
being patient and avoiding the scare-tactics of some news outlets is to assess
the economic impact of the virus in the context of the magnitude of the
monetary and fiscal response across the globe.
Please be assured that the
future remains bright, and that is not as a result of an exploded Atom bomb.
Volatility across all investment
markets has risen considerably since the end of February, making clear the fact
that each market is inefficient because a herd-mentality drives group outcomes.
To illustrate the point you will
acknowledge that everyone knows there are enough toilet rolls, bars of soap and
bottles of milk to go round, but a fearful few cause widespread panic by
hoarding against a “nuclear” situation and some unscrupulous traders ramp
prices up to exploit those anxieties. Investment indices are even worse,
because investment market gamblers use complicated financial instruments to
amplify the returns they get on their bets. For example, it is possible
to buy £1,000,000 of shares for a short time with a “stake” of little more than
£1,000 but rent has to be paid upon the £1,000,000. If the share price
rises quickly enough you will make more profit than the rent and all is well,
but if the share price falls you suffer enormous losses: many time greater than
the initial £1,000 gamble and so holders of those deals have been off-loading
their shares at any price in terror that markets could go even
lower. Nonsense like that drives markets down very quickly and this
triggers automatic sale instructions by index-tracker (passive) funds to create
a vicious circle and untold opportunities for the best active fund managers:
the very people retained to manage your money.
Pronounced markets movements are
expected to continue for a few months but they are a short-term distraction and
all will be well in due time. Whether that time is twelve months from
now, nine, eighteen or another period is anyone’s guess but the fundamental
valuation factors do not support the extreme changes witnessed of late.
Investors agonise unnecessarily about timing their
investments. Nobody wants to be the fool that bought at the top, but it is
human nature to be carried away by the euphoria of a rising market, projecting
past returns indefinitely into the future.
Similarly, everyone wants to buy at the market low but that
is easier said than done. With markets plunging, confidence falling, the
consensus of media experts gloomy and corporate profits on the slide, it is
easy to delay, waiting for better news and hoping for even lower prices.
When markets suddenly rally, inevitably well before the news
has improved, it is equally difficult to chase a rising market. The best advice
is to focus on the long term – and hence target “time in the market, not timing
It is nigh-on impossible to time the market – so don’t
Studies regularly show that, because the long-term trend has
been upwards for at least 100 years, consistently buying at market highs is actually
a profitable strategy provided that you don’t then panic out at a subsequent
Markets are volatile and that volatility is what scares many
investors away from the excellent long-term returns. In the last 50 years, UK
equities have generated compound annual returns of 5.5% ahead of inflation.
Yet those returns are concentrated in remarkably few days no
matter which market you are looking at. For example, missing the best ten days
in the US market in the last 20 years would have halved your returns; miss the
best 25 days in the last 30 years and your returns would be little better than a
Those big up days occur when they are least expected,
especially when markets turn. In early 1975 UK equities had fallen 70% in the
previous two and a half years, but they jumped 50% in a week and doubled in a
month. Buying on the way up, let alone at the low, was impossible and that is
still the case today.
Market swings in the last ten years have been considerably
less drastic, with “corrections” (sorry, it actually means “falls” but that is
the language you will find in the press) of 20% rare. Waiting for one could
mean missing out on a lot of upside in the meantime, with no certainty that
even if a correction then occurs asset prices will return to the levels
The best any investor should aim for is to hold back when
the markets have risen too far in the short term and treat any setback that is
accompanied by media gloom and pessimism as a buying opportunity. Strategist Ed
Yardeni lists 66 such panic attacks since 2009, all quickly recovered.
The low-stress guide to managing your portfolio
You already have in place the best protection possible for
your portfolio – a balanced investment strategy that includes each of the
different asset types. This is because Corrigans remain adherents to Modern
Portfolio Theory: an approach scientifically designed to help you achieve “the
efficient frontier of investment” i.e. the allocation of your money to assets
and funds designed to deliver the optimum return for you within the degree of
risk that you are comfortable with. Trying to “mess” with that approach simply
courts disaster whilst increasing the risks for you.
Few investors can resist checking prices regularly after
purchase, only stopping when the purchase is firmly profitable. But thereafter,
checking more than once a month is unnecessary; if you are not going to trade
it, why bother
A monthly price check on a portfolio gives a good
perspective on overall performance compared to the market and may highlight
under-performing investments. Maybe the manager of the fund has changed, lost their
touch or perhaps was just riding a favourable market tide. But does that fund need
culling Everyone makes mistakes, but only seasoned investors recognise them
and that’s why you have retained Corrigans to do that work for you.
One popular saying is that “nobody ever went broke taking a
profit” but it is one to be wary of: the best strategy is to let your winners
continue to run while the conditions suit them. Trying to pre-empt the ups and
downs of the market is a mug’s game.
Occasionally, irrational exuberance takes over market
sentiment, as in the technology, media and telecoms boom of the late 1990s.
Those detached enough to spot it can head for the exit before the herd panics,
but that is a rare breed indeed. It is more profitable and less stressful for
you to follow the wisdom of Warren Buffett’s quip that “my favourite holding
period is forever”.
Einstein is credited with saying that “compound interest is
the eighth wonder of the world”, a saying that works better when applied to
compound returns. This belief is widely shared: as Foreign & Colonial once exhorted
in its marketing, “get rich slowly”. You should trade only occasionally, expect
volatility and stick like glue to good funds and fund managers. There is no
need to do much more than ride out the ups and downs of the market as Corrigans
guide you to run the winners and cut the losers.
The current noise associated with Coronavirus and Brexit has
given rise to massive over-reactions across investment markets, but this is
temporary and investment markets will recover not only their composure but also
the paper value. Your active fund managers are using the latest volatility to
your long-term advantage, buying assets that they are convinced are priced far
too cheaply using the cash reserves that they maintain. It will take time for
those fruits to develop but all long-term investors have our eyes on the future
rather than today.
16th October 2019 - The Suspension of the LF Woodford Equity Income fund Update
to the possibility of an appeal against their decision by Neil Woodford, Link
Financial has announced the closure of the LF Woodford Equity Income fund and
the end of the fund management charge.
is the single worst thing that could happen as far as investors are concerned
sale of unquoted companies has not been concluded yet and so the bidders are
likely to withdraw or drastically reduce their offers,
in the market now have a finite timeline to attack the shares probably held in
the fund at a time when Link Financial are now legally obliged to sell them,
proceeds from these asset disposals will be distributed to investors in dribs
and drabs, starting in January 2020, which is a particular problem for ISAs.
essence, Link Financial has decided to cut its own costs and workload in
exchange for the imposition of losses upon investors: a reprehensible decision.
event like this is something that neither you nor this firm could control and
so a plan is merely needed for investment after Woodford. Your adviser
will give you bespoke advice at that time but you remain unable to withdraw any
of your money from this fund until Link Financial make a further announcement.
3rd October 2019 - The Suspension of the LF Woodford Equity Income fund Update
At a time when the British economy is strengthening (rising employment, incomes
rising faster than inflation, government commitments to financial stimulus for
infrastructure and hospitals) and our government is collecting far more tax
than it had budgeted for, it has surprised many that the performance of this
fund deteriorated materially since it was suspended from trading by the
FCA. It would be easy to conclude that this is yet another nail in the
coffin for the fund, but it is important to understand the causes for this
divergence from the majority.
one message to get across at the outset is that investors are not at any risk
of losing the Woodford holding in its entirety, no matter what happens to
Woodford as a firm. Every asset chosen by Woodford for investment on your
behalf is registered in the name of a completely separate Trustee
company. When these assets are sold the money comes directly to you and
it does not pass into the hands of Woodford.
has been made previously to the financial attacks that Woodford has suffered in
recent times and it may be helpful to understand a little more about
them. For the sake of simplicity, these are details relating to one
business that this fund invests in: Burford Capital. Their business is the leading global finance and investment management firm that focuses upon law and
its share price at the end of June 2019 was £15.50 (four weeks after trading in
Woodford was suspended), having stood at £18.36 in March 2019. At the end
of June Woodford’s investment into Burford represented almost 6.8% of the fund,
so it was a significant stake and changes to its value have a noticeable effect
upon the unit price for the fund as a whole.
secretive “shorting” club that adopted the name Muddy Waters announced on 6th August that it was about to mount a shorting attack upon an un-named
stock. In the next 24-hours (and one ten-minute period in particular)
Muddy Waters placed “spoof” sell orders for shares that they did not own in
Burford amounting to £90m – five times the normal daily trade volume for that
share. This flood of sell orders was significant enough to register on
all the Quantitative computer screens and it triggered the greatest ever
decline in Burford’s share price: a fall of more than 60% to £6.05 per share
(recovered to £8.41 on 2nd October 2019). Muddy Waters
cancelled most of their sell orders before they became binding and only sold
shares to the value of £186,000 (0.2% of the attack), but they bought many more
at the ludicrously low price they had engineered.
different firms of solicitors have been engaged to bring the people behind
Muddy Waters to book, because “spoofing” is illegal, but the impact upon the
Burford share price lingers beyond the attack through sentiment and a desire
for fresh business performance data to re-establish its market worth. You
will appreciate that the legal action will take both time and money, neither of
which are limitless and in the meantime “the damage is done”.
is just one example of the targeting against Neil Woodford in particular and
investors like us in general, but the combined effect has been to artificially
depress the investment performance of the fund.
heap further apparent misery upon investors every unquoted asset has been re-valued
by a different firm as a precautionary measure, naturally on a more
conservative basis. One particular firm in the Woodford portfolio had its
valuation marked down on the grounds that “there might be difficulties if the
business wants to raise more money in the future to fund its expansion because
Woodford is a large shareholder”: a view that is hard to justify at any
level. Thankfully, the fund has made significant progress towards selling
its unquoted assets. Non-Disclosure Agreements and initial bids were
finalised by 6th September for many of these assets pending final
bids and conclusion at the end of this month. When the achieved sale
prices are known there can be no distortion in the true value and so the
picture will be far clearer in early November.
FCA has continued its 28-day inspections of Woodford as planned, with the
result that it has extended the suspension from trading until December.
telephone briefing is scheduled for Wednesday 6th November followed
by another face-to-face meeting with Neil Woodford on Monday 18th November and further updates follow these contacts.
20th June 2019 - The Suspension of the LF Woodford Equity Income fund Update
A face to face
meeting was held with Neil Woodford in Leicester on Monday 17th June
to learn the facts behind the latest news and there was considerable evidence
to suggest that the prospects for we investors are quite good.
In the same way that the media was filled with stories about dangerous dogs attacking
youngsters some years ago, which are thankfully conspicuously absent now, the
vast majority of news-hounds want to write about Woodford today. If Neil Woodford were to single-handedly save
the Pope from an assassination attempt this afternoon he could not buy an inch
of positive news coverage, such is the parlous state his reputation has sunk
to. But is that fully justified or is it
simply that news-hounds like an easy story
From the outset this fund has told everyone that it would contain shares in
unquoted companies and Biotech investments in particular. This is not a new phenomenon but a consistent
feature of the fund that has actually given rise to the strongest investment
returns within the portfolio. Media
coverage has suggested that the fund has changed and, as usual for unqualified
commentators with no responsibility for anything that they write, they are
This has been the only fund management group ever to publish in full a list of
the investments that were bought on your behalf – a stance taken when the
business began because that was what the Regulator was encouraging everyone to
do. That has proven to be a costly
mistake, because other investors have consistently “shorted” (pushed down the
price in the short-term) the most price-sensitive assets each time they
discovered that withdrawals were being made from the fund to artificially
created profit for themselves from those temporary market distortions.
Those withdrawals were easy to spot because the Woodford fund grew or fell in
popularity in exactly the same way as the rest of the UK Equity Income funds –
it was not losing investor support any faster than other funds in the same
sector. Indeed, the liquidity of the
Woodford portfolio is highlighted by the fact that £6.5bn of withdrawals were
met without any hesitation or delay over a two year period.
Neil accepts that the comparatively bad investment performance over the last
two years is entirely his responsibility, but his apologies are
short-lived. He has always been a
“value” investor, placing your money with businesses that he believes are
considerably under-valued by the market, rather than following the momentum of
other investors. His stance has
delivered exceptional returns over decades, pock-marked now by three periods of
prolonged under-performance. Woodford
still maintains that the assets within the fund represent the best value he has
seen in the last 39-years: a store of latent profit, just waiting for other
investors to recognise it.
One example that he cites is Kier – a property and services conglomerate that
is deeply out of fashion. Kier has accepted
that it needs to divest itself of three assets: their property business,
housebuilding arm and its land-bank. The
written-down value of those three assets stands at £364m after paying off all
borrowings. Planned redundancies in the
remaining four business assets will increase their profits from £100m last year
to £155m this year, but the market valuation for the business stands at just
£200m in all.
This is entirely in keeping with the single-minded confidence, bordering upon
arrogance, that Neil has maintained throughout his career. So is it plausible today
The media’s alleged “rag-bag” of small businesses within the fund were already
destined for sale six weeks before the suspension arose simply to eliminate
potential liquidity problems. Such is
Woodford’s reputation for being a specialist investor in this area that there
has been interest in buying every one of these assets from the four corners of
the world. His team are determined not
to sell at any price though nor to speculators looking for a quick profit
because their sister fund, Patient Capital Trust, has nothing but these micro-companies
as assets and many appear in the UK Equity Income fund too.
That caution was rewarded last week when two small company holdings were sold
for slightly more than £100m – a significant premium to the “carrying”
valuation when the fund was suspended from trading.
Attacks by “short” investors will run out of time soon and that provides fresh
opportunities for assets to be sold at full value rather than the artificially
depressed level flowing from those hostile actions.
These two factors support Woodford’s belief that current investors will be
rewarded by a rise in the unit price by the time the Financial Conduct
Authority and Woodford agree to restore daily trading.
Similarly the ill-informed clamour from the media for Woodford to cancel their
fees for managing the fund are entirely without merit. The entire team is working as hard as ever to
maximise the investment return for us all and so the firm deserves to be paid
for its endeavours on our behalf.
Further progress reports will be posted at suitable junctures.
5th June 2019 - The Suspension of the LF Woodford Equity Income fund
Neil Woodford enjoyed an
unparalleled reputation for his investment expertise for more than thirty
years, but that all came to an end on Monday 3rd June when trading
in his Equity Income fund was suspended. He was able to start the fund
because Hargreaves Lansdown and St James’ Place pledged huge and immediate
investment through their “managed” portfolio services from the outset and the
investment returns were very impressive from the start.
Never afraid of taking a
contrarian stance, Neil believed that the Brexit vote posed different threats
to those envisaged by other fund managers and it similarly brought different
opportunities. He committed the investment strategy wholeheartedly to his
beliefs straight away and even though other managers have eventually come to
share his stance, the investment performance has been terrible for a long
time. His fund is ideally placed to perform strongly as soon as agreement
is reached over the terms for our divorce from Europe but until that happens
the fund continues to flounder.
For the last year or more
clients have been informed that the intention was to retain investments with
Woodford Equity Income until Brexit was achieved, switching into replacement
holdings shortly thereafter. The plan was to enjoy the more pronounced
“up-side” from his fund post-Brexit, having suffered this prolonged period of
under-performance, but trading in the fund was suspended following the decision
by Hargreaves Lansdowne (whose clients owned more than one third of the entire
fund) to switch everything out – an instruction that failed because there was
simply no way for the fund manager to sell enough assets to produce the cash
required in the time available.
The suspension of trading in
his fund does not mean that your money is lost – far from it – all of the
investments are entirely safe and are held for your benefit independent of Neil
Woodford’s company. This now means that the timing of departure from the
fund is in the hands of the Regulator and the suspension is reviewed at least
once every twenty-eight days.
It is fair to say that the
fund has changed considerably in the last six months, to the point where it is
believed to be in breach of the rules for fund managers. In this case the
smallest businesses cannot make up more than 10% of the entire fund, but these
assets are the hardest to sell quickly and so Woodford has been selling the
biggest companies to meet redemption claims. As a result it is thought
that the smallest companies now make up 18% of the entire fund and so
suspension became inevitable. The positive point is that this gives
Woodford time to get rid of all the shares in the smallest businesses at a fair
price, rather than as victims to other market participants who are
understandably taking aggressive short-term action to force down the value of
those shares in an attempt to exploit the fact that Woodford are essentially
A close eye will continue to
be maintained over this fund and further advice follows.
8th January 2019 - The Markets and Economy
would do well to heed the advice from World War II to ‘keep calm and carry on’,
as they remain excitable about relatively little. There have been a succession
of minor tribulations ranging from widespread uncertainty about the state of
international trade, to slowing growth in China and the Italian government’s
budget, but nothing to justify the wild movements witnessed.
times like this, it can be difficult to differentiate between the events that
matter and the temporary distractions. As investment markets have headed south
some investors are apparently worried that the Federal Reserve will tighten
monetary policy in the United States, sending it into recession as the
tit-for-tat exchanges between China and the United States drag the rest of the
world into a slump. Similar stories of doom, gloom and misery abound but they
all appear unnecessary.
knows what the future holds but it really does not matter very much
because the vast majority of these feared events can quickly and easily be put
right. For the avoidance of doubt, this is not a repeat of 2008 but simply a
phase of market irrationality.
in its widest sense thrives upon sensationalism and so there is almost no
coverage when everything is going smoothly and the content in times of
turbulence is neither balanced nor well informed. So let the facts be a
reliable starting point.
week the US published its monthly non-farms payroll data, showing that 312,000 extra jobs had been created in December. This was far ahead of market
expectations and is anything but a sign of the US economy slowing down: quite
the opposite. America is simply growing at its more usual 2% per year rather
than the over-stimulated 4% that The Donald achieved last year through
short-term tax-cuts and bribes to big business.
also seem to have forgotten, or simply discounted, the fact that Central Banks
can intervene to reverse any slowdown. Each one has a duty to engineer some
inflation into their domestic economy but not let it rise out of control. A
resumption of QE in America is but a distant possibility because the Fed can
cut interest rates by 2¼% before that might be considered, but it shows the
extent of influence that the Fed has at its disposal.
introduction of new money into developed economies is also at historically
benign levels: less than 2% a year in Britain according to the Bank of England,
in the Eurozone it is 3.7% according to the ECB and in the United States the
money supply is rising by less than 3.5% according to the Federal Reserve Bank
of St Louis. This means that the inflation pipeline is neutral.
trade tensions will be dealt with very shortly. Both the US and China have
moved on from the chest-puffing stage and deals can now be done. China must be
the ultimate winner because it has a President for life rather than just
another two or six years in Trump’s case. Xi can afford to make short-term
concessions to overcome “local” resistance to their ‘Belt and Road’ policy. The
very long-term financial ties that it creates for China are not universally
welcomed across Asia and the continent is experiencing a reduction in trade as
a result of the US tariff disputes. Conceding a little ground in the short-term
will generate considerable pan-Asian goodwill towards China.
15th August 2018- The Markets and Economy
It was entertaining
when that intellectual colossus, David Davis, tossed his dollies from the crib
in a fit of pique. A report by the Financial Times established that the former
head of our team had spent four whole hours in meetings with Michel Barnier so
far in 2018. Four out of four thousand, five hundred and thirty six does not
seem like very much for our brave musketeer by anyone’s standards. Of course,
most negotiations happen at lower levels, but it is hard to understand how so
little contact might have produced any meaningful progress at all – perhaps
that is one reason why there has been none.
With time rushing
headlong past the nation, Mrs May is to be congratulated for having wrought a
Brexit proposal that pleased almost none of her cabinet but which did attract
their support. Few would have thought it plausible given the polar opposites
adopted by the two wings of her Party. Thankfully, a starting point has been
settled upon for negotiations with the other 27 countries and the nation ought
to be thankful that Mrs May has taken charge of the negotiations herself,
because she clearly has the ability to negotiate the seemingly impossible.
No matter who starts
fighting our corner for what, there are only four possible financial outcomes
for Brexit as far as investment markets are concerned:
- You’re on your own sunshine.
Trying to stay
apolitical here, if St Theresa decides against “the will of the people” and
also keeps her job a) talk of miracles will be commonplace and b) the markets
will be jubilant. A decision to remain that subsequently led to her losing
office and a general election that would probably see Gezza in charge is an
anathema to markets, but the further down that list of bullet-points the
outcome sits, then the more negative the reaction from investment markets in
achievement of Mrs May at the start of the month stacks the odds in favour of a
Soft Brexit. Our Brexiteers are not so stupid as to resign en-masse and make an
assault on the PM’s job just yet. That would court disaster for the government
because an uncompromising stance on Brexit is opposed by half of their own
party and most of the Opposition, so a lost election would be imminent for
Danger lurks at
every turn for our courageous PM. Her latest agreement should embolden her to
press for a Soft Brexit even though the negotiated settlement must go back to
Parliament for ratification. Her Eurosceptic colleagues may yet vote against
her deal, gifting Labour the opportunity to vote it down, despite their
preference for that Soft outcome, to win a vote of no-confidence and the
resultant general election. As the mighty fashion guru, Gareth Southgate, might
say – it would be wrong to underestimate the lust for power.
Change and change
management have been rich sources of income to “Management Consultants” for
decades, because change is frequently feared. The Commie President, as Trump
surely must become known, seems to be lusting for the days when America was
great. Having extended loans to much of the world to wage the World Wars of the
last century and predominantly watched from the bleachers as Europe and the
Middle East was destroyed, the world immediately afterwards was their omelette
Rodney. Yankee businesses bought up competitors or established businesses in
new lands on subsidised terms, creating an unassailable financial strength for
Russia went down a
different but similar path, aggregating countries into its empire for more
effective central control.
Over the years
though change has eroded those comfortable oligopolies, to the point where the
leaders of neither country are content to let things carry on as they are.
provided the bulk of global manufacturing in the 1950s it was quite happy to
allow other countries an equal voice and vote through NATO or the UN, but the
current President does not like being the object of criticism by those organs.
The US of A is also finding it harder to maintain the generosity it previously
showered upon other nations in terms of their financial commitment to the
planet; subsidising everyone else in the name of “the free world”.
From a Russian
perspective, it is one thing to allow satellite countries or regions their
independence but quite another when the result is them cosying-up to nations
that Russia has long considered to be their foes.
truth is that the world order is changing by virtue of the return of China to
economic strength with many emerging nations flourishing in that Chinese wake.
Both of the established super-powers are keen to divide and rule (hence The
Donald’s nonsense about supporting Boris for PM and a Hard Brexit after suing
the EU) because it would allow the current order to linger for longer, but it
would only delay the inevitable.
diplomats across the planet are simply watching the US make a fool of itself,
waiting to capitalise on their misadventures. New alliances will be forged with
the next nations of influence – in the same way that the Commonwealth did when
they were abandoned by Blighty in favour of the EU experiment – while the old
guard struggle to come to terms with the new realities of economic life.
businesses have no interest in nationalism. They simply seek the best return
for the capital of their owners from whatever circumstances they perceive, and
that will continue to be good news for all investors. What seems most likely is
an enduring alliance between Europe and Asia, leaving Americans to pay more for
their duty-laden imports.
Not that Europe is
Trump’s only target: he has the UN and NATO in his crossed-hairs too because
they allow smaller countries to criticise American behaviour. Trump and his
supporters don’t like that one little bit – no sirree.
On the other side of
the frozen wasteland though, Comrade Vladimir is exercised too because the
European experiment has stretched its tentacles as far as the Ukraine. It is
not hard to understand why Putin might see this as a threat. The more that
Trump broadsides the world with his disconnected tariffs then the greater the
likelihood of the rest of the world looking to the east for a stable economic
Future dominance in
technology will be less likely to come from Silicon Valley than from Bangalore,
Shenzhen or Bangkok. Few people drive Yankee metal nowadays but the Chinese
seem certain to emulate and then trump the Japanese and Korean car
manufacturers in the next twenty years. Neither Trump nor Putin will like it,
but the global economy is changing in favour of something that is more exciting
and dynamic; it may even be a jolly good thing too for those Nations seeking to
cosy-up to others in a frantic search for replacement trading relationships……
Improved science and
technology has been transformational in the mining sector, replacing inspired
guesswork with near certainty in most cases. This is hardly surprising, because
it simply confirms what has already happened and what is there but beyond the
limits of our eyesight. Until Elon Musk or some acne-faced youth from the East
cracks the space-time continuum and builds a Tardis though, the future is not
ours to see and so financial markets remain beyond the immediate threat from
3rd July 2018 - The Markets and Economy
Equity markets in general have a narrow mind-set that is
dominated by a herd mentality and an arrogance that can be staggering. It is
therefore important to understand this mind-set, to which the Brexit vote was
such a shock. Remaining in was in the interests of the City and so many there
believed that it was the only possible outcome of the referendum, which is why
the possibility of a vote to leave went into the ‘does not compute’ box.
Dissent is not welcome, which is why Neil Woodford and Jupiter
Strategic Bond both get pilloried for daring to say that they think 180 degrees
differently to everyone else at the moment: expecting a huge correction
everywhere except in the UK domestic market. The City, Wall Street, Tokyo
and Frankfurt all believe that Central Banks are doing a brilliant job today,
with no-one saying that the Fed is leading us into oblivion again through
unduly hasty Qualitative Tightening. This coterie is especially cosy: growth is
all around, inflation is benign and everyone is as happy as can be. Markets
were doing very nicely thank you, so don’t upset the apple cart.
It is this City mindset that must change if “sustainability”
is ever to become a world-changing ethos rather than a soundbite. Something
more complex, engaging and rewarding than money is needed to motivate the
entire business leadership team and their stockbrokers. Plausible
solutions on a postcard would be gratefully received and faithfully applied.
Until then, there is no incentive to invest “for the world” when shareholders
will approve a five-year earnings-based package to dole out wealth that even
Croesus would have been embarrassed about. It could be a long wait.
The Fed continued its programme of Quantitative Tightening
(by accepting the cash from maturing Treasury Bills to reduce national
borrowings rather than buying replacement debt) and raised the cost of
borrowing in America as expected in June. On the other side of the pond, the
European Central Bank said that it will stop buying bonds at the end of this
year. No surprises there, but liquidity is the essential requirement for the
world economy and it is being removed. To use an engineering analogy, if there
is no lubricant then the machinery is likely to seize-up, so this is a
high-risk tightrope walk.
It began with $10bn per month in the last quarter of 2017 in
America, then $20bn in Q1 of 2018, $30bn in Q2, $40bn in Q3 and from Q4 $50bn
until all of the QE injected in the first place ($4,110bn) has been removed.
That will take another ten years at this pace - a programme that simply
cannot be sustained if there is any faltering in US growth.
By way of explanation it is worth noting that an abundance
of liquidity in the US Dollar is associated with strong global growth, a weak
US Dollar, higher prices for commodities and buoyant equity markets. The
converse is equally commonplace.
Commentators hope that this gradual resumption of what
passes for normal will not cause investment markets to go “cold turkey”: a view
bolstered by the repatriation of more than $400bn through Trump’s amnesty for
corporate overseas cash hoards and the financial strength of US banks. So
things still look OK for America, but the growing strength of the US Dollar is
making life very difficult for those countries who had to borrow in greenbacks
because no-one trusts their domestic currency / economy. This increases the
cost of natural resources and forces weaker economies into huge interest rate
hikes to lure depositors into buying their currency rather than yet more US Dollars.
Whilst American banks can lend money if they want to,
essentially stepping into the role that the Fed had been playing, this is not
the case in mainland Europe, Japan or China. Banks in Italy and Spain have not
made the progress with balance-sheet strengthening that the UK has seen and so
their economies are very vulnerable, as witnessed in the rapid fall in the
momentum of their investment markets.
Equity market volatility is picking up everywhere. Daily
movements of 1% or more are becoming more common. Whether the latest
explanation is based upon Trump’s trade wars, the MPC’s quest to raise interest
rates or something else, the outcome is the same. Falls and rebounds are
getting larger: this frequently means ‘something’ is about to happen.
Well; what a waste of a month. Everything was going
swimmingly until The Donald decided that he could climb any mountain and ford
any stream in pursuit of his dream. At the current rate of progress, his only
friends might well appear to be his lawyers.
Corporate tax cuts and bribes / threats about repatriating
overseas cash piles to the US can be claimed a BIG success, but not in the way
that Captain Weetabix had hoped. Instead of stimulating corporate investment as
a prelude to his plan for economic growth, the money fed straight back into the
pockets of the senior managers of those businesses through share buy-backs that
drove up the share price to qualify that same management for enormous
“performance related pay” bonuses. Hopefully, a loose grasp of The Law of
Unintended Consequences will come quickly to Mr Trump, because the Trade Wars
he has embarked upon are likely to cause a more insular – and therefore less
efficient – global economy. The targeted responses by the developed world
are hitting those regions and local economies that voted DT in to the Oval
Office and pushing up the cost of living in the US. With a Budget in a
parlous state and mid-term elections on the horizon, Trump cannot afford to
keep this nonsense up for very long.
6th February 2018 - The Markets and Economy
February has provided lots to
write about! The month began with US employment data confirming that jobs are
being created, the unemployment rate is very low and the resultant skills’
shortages are causing some wages to go up. Quelle surprise! It is fair
to say that this could not have been the trigger for the American slide.
Minutes after the release of
the payrolls data last Friday, US Treasury bond yields rose a little and it was
after that that the Dow Jones fell. That 2.5% drop gave birth to copycat falls
across the globe and worse was to come on the Monday for America, which is
still up almost a quarter in the last twelve months.
By way of comparison, the
S&P 500 saw fifteen straight monthly rises up to the end of January – a
feat it had never achieved before. Chartists (who only ever look at things
backwards) note that the S&P was a staggering 13% above its 200-day moving
average, with a Relative Strength Indicator of almost 87 (50 is average and the
closer it gets to 100 the more Bullish everything appears to be). Although
these are both technical terms that you may not have been familiar with, each
of the measures were extreme and made this the most technically ‘over-bought’
American stock market for 30 years. This is hardly a surprise when you discover
that an extra $100bn went into the US Equity market in January 2018
Whilst many believe that
American equities had been ripe for a fall, it can be no coincidence that the
market rattled its sabre on the last working day before Janet Yellen was succeeded
at the Fed by “the President’s man”: Jerome Powell. Rising Treasury yields and
simultaneously rising wages are traditional signals for pushing up interest
rates more quickly – something that equity markets loathe, because it harms
dividends, growth and consequently share prices. Janet had already told the
world that another increase of 0.25% is coming in March – with two more along
the same lines later in the year - and the equity traders seem to have been
reminding JP that it could all turn to dust if he does anything precipitous.
That worry seems likely to
persist until Wednesday night, but by Thursday the keen-eyed will already be
picking up what they see as bargains and the merry-go-round is expected to
resume its happy tune. The Bull run still appears to have a lot of life left in
it and pauses like this after stellar growth are not unusual, so your
confidence in the fund managers chosen for you remains well founded.
3rd October 2017 - The Markets and Economy
You cannot have missed the direct impact that Mark Carney's sabre-rattling had upon the FTSE. His overt goal has always been to keep inflation within outdated parameters and he has consistently failed to do so. This is a greater criticism of the goals than it is of Mr Carney, but his secondary objective is to look after Sterling.
The pound has been on a steady decline for several years and the decision to paddle our own economic canoe accelerated the process. Initially of the view that this was a temporary market over-reaction, the MPC decided to sit back and watch. Faced with the reality that international investors do not share their peachy view of the economic future for Britain he decided to go nuclear.
Reinstating the post-Brexit quarter point cut and raising bank rate to 0.5% really should be neither here nor there but it provided sufficient excitement for international investors to ignore the facts and gamble on the hope that his will be the first of many rises in quite quick succession. With the currency buoyed by that increased demand the FTSE naturally fell, for the identical reasons that investors had so recently profited through the weakness of Sterling.
Oscar Wilde famously wrote that ‘the only way to get rid of temptation is to yield to it' in what was supposed to be a waspish aside. The last ten years though has seen the world tying to cure its addiction to debt by yielding to the temptation of taking on even more, whether through QE or any other means. Rising interest rates must be worrying.
On the one hand, the BoE has to raise interest rates to give it some options other than QE to manage its affairs because there is virtually nowhere for them to go at the moment. Conversely, even a small rise in the interest rate cycle might tip this palpably fragile economy back into recession.
Closer study of the latest MPC Minutes revealed that they believe a lack of business confidence has led to underinvestment in capacity in the economy, with the result that even the low growth of late is rapidly taking up the available spare. This is a legitimate view but it is hard to see how raising interest rates will deal with both the expected inflation and perceived underinvestment. The economic brains on the MPC are amongst the best in the country but it does seem more likely that their voiced solution is only going to make everything worse. With any luck it will prove to be nothing but a bluff.
The Governor had hitherto been at pains to stress that the unwarranted weakness of Sterling was the sole cause of above target inflation. With the currency now at a post-Brexit high and approaching pre-referendum levels against the US dollar, that argument starts to run out of steam. A more probably bogeyman is less tangible and therefore much scarier: the output gap or, more accurately, the lack of one. Only political intervention from an astute Chancellor could address this and his Autumn Budget should have that topic as its focus. On a positive note, Hammond does not have the distraction suffered by the rest of the government: those all-consuming and angst-ridden but fruitless Brexit talks.
To the surprise of almost no-one Angela Merkel secured election for a fourth time and that political continuity is a very positive thing for our brave Brexiteers. Some common sense and deal making might now prevail, but it might prove a disaster from Germany's point of view that they did not find a replacement. Evidence from the UK suggests that the repetitive election of a Premier tends to be a bad thing for anyone, whether that was Thatcher, Blair or anyone else. The Founding Fathers deduced this more than 250 years ago and even the Russians adopted a constraining policy to prevent it - until Putin rewrote the rules.
Super Mario faces a diametrically opposite problem and it will come to a head this week at the meeting of the European Central Bank. In their case the temptation will be to hint that it is time to reduce the extent of QE and stop buying quite so many bonds. Last month's Eurozone Flash PMI data saw manufacturers' confidence hit a dizzying 56.7%, but the euro is floating ever-higher on the expectation of just that step. With the Euro currently buying just under $1.20 or £0.90, the most since early 2015, he will be damned either way.
The shabby behaviour of Ryanair and demise of Monarch Airlines in the budget flight world were nasty surprises but of little consequence for investors. Footage from Spain though brought another dimension entirely. What sort of democracy is it where you get a sound thrashing from the police for voting within the EU While stock markets have shrugged the episode off it is hard to see how the Catalan situation is going to end well.
October is the month when the Federal Reserve switches from Quantitative Easing to Quantitative Tightening. Despite this certainty, markets appear not to care one iota. The message seems to be that they do not believe that the Fed will see it through when the economy slows again and QE resumes. The recent years of easy, risk-free money is an unsustainable fantasy which essentially discourages risk-taking and so something has to change.
9th June 2017 - UK Election 2017
It has taken a mere twenty eight years for there to be a
less predictable outcome than when Sutton United took on Coventry City FC on 7th
January 1989 and they emerged victors 2:1. Nineteen months after winning the FA Cup, Coventry were still riding
high in the Premiere League when the non-League amateurs beat them “at their
own game”. Now that was embarrassing
and in this context the Conservative victory
is OK really.
Irrespective of the quality of the debate or campaigns the
reality is that there is a hung Parliament in Britain and that shock brings
more volatility to investment markets in the short term. Sterling always loses international value in
such conditions and while that means your overseas holidays become more
expensive, it is good for the FTSE 100 because more than three-quarters of FTSE 100
profits are made overseas. When those
overseas profits get converted back into Sterling the dividend is higher and
that pushes the share price up too.
Several positives have emerged from the result though:
A softer, less combative stance towards the EU is likely to help Sterling and reduce market uncertainty,
The nation voted overwhelmingly for the two parties that accept the “Leave” vote and so there won’t be another vote on whether the deal negotiated is wanted or not – GB is leaving the EU,
Our fellow citizens in Scotland do not want another referendum about possible independence from Britain any time soon, and
British businesses are even more attractive to overseas investors and so the pace of takeovers and mergers is likely to accelerate.
Political necessity will shape what happens next and so no
changes should be made to your portfolio just now. Whether Mrs May soldiers on with or without
the DUP or is politically despatched in favour of another Leader, a
Conservative led government seems certain. Back in 2010 very similar things happened and over the ensuing year the
short-term volatility had made no material impact upon investment markets. There are no grounds to expect a different
outcome on this occasion.
The UK already uses World Trade Organisation terms to great
effect with much of the world and progress has already been made in expanding
those relationships. In the
twenty-months or so left to conclude the terms of the GB departure from the EU any improvement beyond the WTO standard
– which simply cannot be denied – constitutes a win for Britain.
House prices and supercars are likely to get pushed higher
still with the influx of foreign cash into the “bargain basement” of Britain if
the Sterling weakness endures, but the message for Fixed Interest Securities is
that there is even less likelihood of a Bank of England rate rise soon. The summary position is that rates will “stay
lower for longer” and so the possibility of falls in those asset values has
Please remember that your investment strategy has not
changed overnight. Brief storms do not
determine the valuation of buildings, currencies or companies but rather the
fundamentals of management. The
short-term noise is nothing more than a distraction and the best managers –
each of whom have been hand-picked for your portfolios – will exploit the
temporary distortions in market prices to your long-term advantage.
8th March 2017 Spring Statement from Philip Hammond
The last in the current series of Spring Budgets was no
sombre affair, with our Chancellor displaying unexpected comedic talents.
Coming so swiftly after his first Budget, last Autumn, little had changed and
so the content was necessarily limited to some light pruning as his focus
shifted from one part of the economy to another.
All politicians colour their messages to their own liking
and this was no exception. The Office for Budgetary Responsibility (OBR)
revised its forecasts of changes in the nation's Gross Domestic Product (what
the country "earns") to show annual increases of 2% in 2018, 1.6% in 2019, 1.7%
in 2020, 1.9% in 2021 and 2% again in 2022. Sadly the same august organ
also forecasts increases in the Retail Prices Index of 3% this year, 2.3% in
2018 and 2% in 2018 i.e. the nation is going backwards rather than growing, but
this was portrayed as being a success story.
Hopes of balancing the budget during this Parliament also
faded away, but at least the OBR confirmed its hope that the national debt will
"only" rise from 86.6% of GDP this year to 88.8% in 2018 before falling
progressively to 79.8% by the end of 2022. Just forty more years of
austerity to go then and the public sector debt will have been paid off.
Previous tax announcements were repeated but there was a
sting in the tail as far as the self-employed and dividend recipients are
concerned. Over the next two years the self-employed will pay 22% more
National Insurance Contributions on the same profits as the rate rises from 9%
to 11% and the tax-exemption on dividend income was cut by 60% from £5,000 per
year to £2,000 instead. The change to NICs has fuelled a great deal of
adverse comment from the government back benches, let alone other sources, but
the logic of the argument put forward by the Chancellor is hard to argue with
even if it does fly in the face of their last Manifesto.
One very positive tax hike was the imposition of a 25% levy
on all pension funds being moved into any non-EU QROP - an offshore type of
pension that has become popular amongst those "advisers" involved in illegal
pension liberation scams.
Most of the window-dressing was quite ephemeral, with £113m
going to Midlands and "the North" of England to be spent on road "pinch-points"
(even though the potholes cost many times more than that to fix every year) and
£216m over the next three years to repair existing school buildings in England:
a sum that would barely cover the outstanding work for Warwickshire let alone
the country as a whole.
With the nation desperately short of GPs it was also good to
discover that £110m of capital has been earmarked for the next six months to employ
more GPs in triage units at the A&E departments of hospitals. No
mention was made of where they might be coming from, but immigration seems the
only possible solution.
A welcome announcement though was that the April NS&I
bond will pay 2.2% interest on balances up to £3,000: a highly competitive rate
that should become part of everyone's cash resources.
24th November 2016
Autumn Statement 2016 from Philip Hammond
A budget by any other name, the November speech delivered both bitter and sweet news for the nation. Much of the content was eminently sensible and to be applauded whilst other elements appear at odds with his stated aims of addressing the:
- Poor productivity record that Britain has become famous for,
- Gap between demand and supply of housing, and
- Growing imbalance in prosperity from one region to another.
Bringing the annual Budget forward to the Autumn from 2017 is welcome news, giving everyone time to consider how best to organise their affairs before the tax system changes the following April. Responding each March to the Budget feedback generated by the Office for Budgetary Responsibility is also a good idea, keeping the financial plans all within the same tax-year; so full marks for originality of thought.
Much of the content simply repeated previous annoucements although his confirmation that the current tax road-map for business would remain in place for the remainder of this Parliament bring the stability and reassurance that all businesses need.
Several spending initiatives were created or enhanced, including:-
- A £23bn budget over the next five years for the National Productivity Investment Fund, which is partly earmarked for -
- Research, Development and Innovation using £2bn to grow our brightest ideas into valuable businesses rather than allow them to be snapped-up by overseas investors,
- An extra £0.9bn for the existing Homebuilders' Fund to acclerate the construction of 100,000 homes in areas of highest demand (that is just £9,000 per property and so seems likely to allow developers to make an extra £9,000 profit,
- Another £1.4bn into the Homebuilders' Fund to get 40,000 more affordable homes built (£35,000 apiece in this instance, so the assumption is that these units will be flats),
- Unspecified extra funds to encourage tenants to exercise their Right to Buy from Housing Associations,
- Unspecified support for the Help To Buy mortgage loan schemes and also the Help tp Buy ISA for first time buyers,
- £220m to address traffic pinch-points in England,
- £450m for digital railway signals and £80m for smart ticketing in England,
- £390m to encourage the purchase and use of low-emission vehicles in England, renewaable fuels and Connected & Autonomous Vehicles (CAVs).
His wish to make the UK the "5G world-leader" is a aludable one, but Japan and many other developed countries already have 5G-specification fibre optic connections into their homes and wirelessly across their entire territory: not just 4G to a box somewhere nearby, as is the case for over 85% of the UK. Many had hoped for a vast increase in the capital devoted to improved Internet speeds and capacity, but the £500m (if matched by the same amount of private capital) committed over the next five years falls far short of those dreams.
Our Chancellor highlighted the huge disparity in wealth between the South and the North of our Kingdom - he said it was the most extreme divergance in any developed country - before stating his intention to address it. Whilst the Northern Powerhouse continues to be a topic for discussion, hopes for a Midlands Engine strategy were announced just after confirming funding of £27m and the go-ahead for the Oxford to Milton Keynes to Cambridge Expressway. Presumably the wealth imbalance can wait a little longer.
Changes to the Barnet Formula see more money flowing to the local authorities responsible for the extremeties of our Kingdom: £250m to Northern Ireland, £400M to Wales and £800m to Scotland.
An additional £400m of Income Tax Relief for investors into Venture Capital Funds will translate into an extra £1bn of finance for new technology companies - an act aimed squarely at "patient capital" needs. This was accompanied by another £50m per year to help FinTech specialist businesses to aid growth and £13m per year for businesses who wish to train their Board and management "the Sir Charlie Mayfield way" to improve productivity. Hopefully great oaks my grow from these tiny financial acorns.
Largesse amounting to £542m will be spread amongst the Midlands Local Enterprise Partnerships to financially prime businesses with the potenential to generate growth, bringing access to extra capital where and when it is needed most. The South got a further £683m in the same way.
The austerity measures imposed upon most Government Departments is not being watered down, but those which succeed in finding the desired efficiences will be rewarded from a pot of £1bn for targeted areas of expenditure that were not announced. Excused from these financial exigencies is the Ministry of Justice, whose immediate goal is to cope with the burgeoning prison population in order to bring safely for both inmates and staff.
An existing commitment to preserve the "triple-lock" on the State Pension to April 2020 was ratified, as indeed was the plan to reduce Corporation Tax by anothr 1% to 17% by 2020. Other taxation announcements included:
- Discounts for business Rates,
- Harmonising the starting point for National Insurance Contributions at £157 per week: adding £8 per year per qualifying employee to the costs for every business,
- Insurance Premium Tax being increased by 20% from next June to 12% in all - please talk to your insurance adviser about the change Corrigans can offer you to reduce the growing impact this tax has upon your business,
- Salary Sacrifice confirmed as being approved for pension contributions and advice, childcare, cycle to work schemes and ulta-low emission vehicles but worthless for aggressive tax-avoidance schemes such as cars, accommodation, school fees, Private Medical Insurance or Life Assurance premiums and the like from next April or April 2018.
- Cutting the annual pension contributions allowed from £10,000 to just £4,000 for anyone using Flexi Access Drawdown Accounts (FADA). This does not apply if you have only taken "tax-free-cash" from your pension but please contact your adviser about your circumstances, and
- Increasing the ISA allowance next April from £15,240 to £20,000 per person.
Increases in Personal Allowances against Income Tax remain as currently planned: £11,500 each from next April and rising to £12,500 by April 2020, at which point the 40% threshold will be £50,000.
Next April sees the National Living Wage rise from £7.20 to £7.50 per hour and free childcare for working families doubles from 15 to 30 hours per week progressively in 2017. At the same time the rules on Universal Credit change to allow claimaints to keep 37% rather than the current 35% of their Benefits whilst working - a direct measure to financially incentivise work as a culture.
Savers were also rewarded with news of a new Bond to be issued by National Savings next April, offering 2.2% pa gross for a three-year deposit.
All in all it appears to be a very sensible Budget (sorry, Autumn Statement) but quite how it meets his stated aims of improving productivity, bridging the housing gap and reducing the diverence in prosperty from South to North is unclear.
9th November 2016
America has shown that it is not immune to reactionary politics in making their latest choice of President. Widespread disillusionment at the gulf between those who have done well out of the latest Banking Crisis and the vast majority has stoked the appetite for change in Britain, Germany and now in America too. The die seems to be cast for France, Spain and Italy as their Referenda and elections take place in the coming months.
For investors there will be the same knee-jerk reaction seen post-Brexit, with a sharp sell-off in Equity Markets and a weakening of the US Dollar. That shock will not last though because there are constraining measures to limit the ambitions of any President which have been in place since the first Independence Day.
Although there is likely to be a clean-sweep of Republicans from the Oval Office through to the Senate and House of Representatives, the views of the next President are not universally shared by his party. He will find progress frustratingly slow when compared against the outcomes he is accustomed to through the nimble team that helps him to run his business empire. With no experience of how the organs of government work there will be heavy reliance upon an extended chain of bureaucrats who, in a real-life parody of "Yes Minister", will accelerate or hinder policies according to their collective, unwritten but very-long-term, agenda. In short, little will change in practice.
The common factors in each of these votes has been increasing isolationism and a desire for self-protection, neither of which might be considered positive factors for the UK as it seeks to renew its outward-looking business relationship with the rest of the world. Thankfully though the dead-hand of the civil service in each country will limit the progress that their political leaders can make towards these extreme policies. Business as usual beckons.
In America the stock-market was pushing towards the top end of its value-range in October and so the short-term sell-off represents an opportunity to buy the market. Much had been made in the campaign of the wish to redirect the US military budget back into America rather than protecting the rest of the world, on the basis that local problems should be resolved locally. Of all the countries that want to do business with America the UK is therefore in the best possible place, having played a full part in all the US fields of military battle.
Two months of negotiation now ensues as a new team is identified by Mr Trump to support him over the next four years. Their identity and credentials will be scrutinised closely by many, of course, but the growing military, computing and political confidence within Russia and China may take this signal as an opportunity to "grab territory" or renegotiate trade terms with weaker nations.
Interesting times such as these are best faced with a portfolio of investments that are actively managed and have the right asset allocation for you. The short-term turbulence that follows another unexpected political outcome is just a distraction in the long-term journey towards your goals, but please contact your adviser if you have specific concerns.
7th October 2016
After any period of sustained market rises there is an inevitable moment of the jitters and that is no bad thing. It often feels though that the fate of the financial world rests in the hands of a tiny clutch of politically appointed bureaucrats. The leaders of the central banks posess extraordinary powers to set the trajectory for the global economy and its stock markets. Not underlike the Democratic system at play in the UK, leaving important stuff to long-term and un-elected workers is probably better than entrusting such things to short-term but elected politicians of any hue.
Over the Summer there were several rumblings from the Mandarins that market volatility was lower than expected post-Brexit. The Conservative Government has got off to a marvellous start under Mrs May though and that has given investors greater confidence: uncertainty being the worst thing possible for investment markets. To make matters even better for British investors though the UK has achieved what every developed nation has yearned for since the most recent Banking Crisis - devaluation. A 13% drop in value relative to all major currencies since that surprise vote is no mean feat and that translates directly into higher share prices in the UK. This is because London and Switzerland are unusual stock markets. The rest are all "domestic", with the constituent businesses being local to that stock market and earning their profits in the same market. One benefit of our former Empire is that 85% or more of the profits made by UK listed companies arise overseas. When those foreign profits are brought back to the UK to be paid out as Dividends they are worth more in Sterling than they used to be because of that devaluation. Those higher Dividends lead directly to higher share prices without any smoke or mirrors.
Japan has stated that it is targetting zero "interest" on its borrowings for the next ten years: something they can achieve through Quantitative Easing, and this volume of purchases forces the price of all national debt higher with the terrible result that the "interest" paid on it gets lower and lower. Investors are therefore flocking into other assets because high-quality companies that pay 3.4% dividends year-in and year-out offer a more compelling solution to anyone looking for an income in life beyond work.
Meanwhile on the other side of the Atlantic a frightening game of bluff and counter-bluff is under way. One of the two least-loved Candidates in a long time will become President though and in the meantime Syria, rather than Rome, burns. It puts all this into perspective really.
14th April 2016
The economic situation in China continues to influence the UK Stock Market. China has thankfully lowered its GDP growth target range for the year to 6.5%-7%, but what does that mean At the bottom of this range it would amount to an extra $706bn: the same amount as 9.4% growth would have created in 2012. It is also the equivalent to the annual GDP of Switzerland, or half that of Spain, or even a third of the GDP of Italy - the 8th largest economy in the world.
It is a massive sum and it screams confirmation that China is not imploding. The United States is growing nicely and deflation is currently an exclusive phenomenon of the geopolitics associated with the engergy industry. Negative bond yields are an abberation of seemingly misguided and outdated monetary policy with the result that the world is a much more normal place than is commonly portrayed.
Brent crude oil spent part of the month above $40 per barrel and other commodity prices rushed up in adoration.
Inflation is a-coming and markets are terriby happy again.