Last time I talked about the 4% yield (the income) on the market and the upside opportunity that has always presented previously. This time, I am going to talk about the perceived under-valuation of UK shares versus the rest of the world. The estimates are that the UK market is now undervalued to the tune of 30% compared to the MSCI World Index (which is dominated by the US of course). Whilst I continue to hold that the mainstream US is over-valued, the point is that whatever happens we are far cheaper than we should be and all because people, (investors and institutions and the passive public), hate ‘uncertainty’ and prefer to sit on their hands during it that whatever the Brexit outcome (and is there at last a glimmer of hope for some stability soon?) it is too cheap. Here’s the rub. If the UK catches up with the rest of the world, that means that an investment in the average UK share would experience an increase of 43%. That ignores income and is simply saying that had ‘normality’ prevailed and we kept pace with everyone else, that is where we’d be at the moment. Could that happen? In reality, yes, it could. What is interesting is that to be frank, UK situations are so depressed in value anyway that they are ‘cheap’ and could we say that the lower they go, the lower the risk as most of the ‘risk’ has happened already. Of course things can always fall short-term – that is panic and collective human emotion and irrational behaviour. However, if they stay at these levels, you are still buying very cheap assets but in reality, at some point there will be a rebalancing. If the market does not do it itself, then corporate activity (like the Hong Kong bid for pub chain and brewer Green King at a 50% premium to the Company’s value the day before the bid) will happen. It is not the time to be out at the moment – you have been warned. And to improve the value you buy, remember Investment Trusts at deep discounts to the underlying value as well – and that is just the sort of thing we are buying for clients. We are pretty fully invested at the present time within our mainstream strategies and if you want to add to them or to start an account, without advice there is no ingoing fee to subscribe ‘Execution Only’. Why not try us with a small sum to see how and what we can do if you are not invested already?
I have touched upon personal vulnerability before. It is a subject close to our hearts for clients. The conviction of the Church Warden over the killing of a vulnerable elderly man after first ensuring his Will had been changed in his favour, as well as defrauding an elderly woman (and potentially others) reminded us that we all need to be vigilant.
The FCA has launched a review of the whole field. We have seen many cases and shall continue to see more as time passes and more people have wealth as well as more people who think they are entitled to take it inappropriately. https://www.fca.org.uk/publication/guidance-consultation/gc19-03.pdf
We have said before that many times we have protected clients. If we have the management control over their relevant assets (in a discretionary account/ISA/Trust for example) then we are a barrier to that fraudster (who can come as a wolf in sheep’s clothing) who can be a family friend, even a family member and not just that ‘nice sounding’ person on the telephone telling you about this great opportunity.
And before you say you’re fine, read the report and you will see that it notes that as many as half of all of us could have some reason for vulnerability in our lives – ill health, simple infirmity and deterioration through age, mental illness, shock events, employment, scams or whatever. Then suddenly, the reluctance to take advice (whilst you have the capacity to make such decisions!) because there may be a ‘cost’ involved is seriously foolish – as the cost of not engaging a trusted Firm such as ourselves in this way could cost you everything you have. Can you afford a fee of 100% of all your money defrauded from you?
Well, thank you again Plimsoll for your glowing report on our stability! According to its analysis across all financial advisory companies we have done better than the average and we are one of those rated as financially ‘strong’ which must continue to give reassurance to clients. Apparently we are in the top 7% of companies for value and in the top 30% for business growth too, with the firm’s highest accolade of ‘best trading partner’. Thank you!
Fancy buying a home in Denmark? You can take a twenty-year mortgage for 0%. That’s right, no interest to pay. Nordea Bank prefers to lend you money for nothing, than it cost it money to deposit its cash elsewhere. Has the world gone mad? In Sweden they have just floated a ten-year government bond which will pay -0.295%. Yes, that’s right, it costs you 0.295% every year to let the government have your money. I’ve said it before and shall say it again, this silly situation where approaching a third of all bonds are on negative returns if held to maturity cannot endure for ever… And pretty much at the same time, ten-year US bonds have just gone below 2%pa, for the first time ever.
And then, just as we think that can’t be topped, a German mortgage company with a ‘triple A rating’ has just launched a three-year bond and it proved so popular it could increase the size. So it had thirty-eight orders for E1.2billion of debt, of which 60% came from other banks, especially German and Nordic ones. This was the biggest issue for six years. And the interest rate? Minus 0.59%. Yes, you pay them 0.59%pa to hold your money. The market takes the view that that is ‘better’ than holding the comparable German Government bonds where you lose 0.94%pa at the moment.
Now the reality is, if you had any sense, you’d borrow as much as you can and stuff it into the UK Stock market, say. Even if you were paying 2%pa, the starting income yield from all the components would be over 4% and any capital gains are for free – you don’t need any to return your capital at the end – just give a long enough timescale for time, inflation and so on to do its work. And remember, the less sophisticated are repaying their mortgages every month at the moment to clear the debt when instead they could invest that capital instalment (just pay the mortgage company the nominal interest!) with great potential to make a good return and if they use a pension pot to that end (accessible from age fifty-five which is not far away from the average earliest maturity of mortgages anyway) then they would receive Income Tax relief on the contributions as well so a fantastic boost to the pot.
Whilst you can always take this sort of report with a pinch of salt (ignoring the great strides made by everyone and certainly those at the bottom and the median) and proving the statistics misleading, if you were to lose the top earners so the average income dropped then the poorer pensioners affected would not suddenly be more affluent) but there is a lesson here. https://www.theguardian.com/society/2019/aug/18/elderly-poverty-risen-fivefold-since-80s-pensions?utm_term=RWRpdG9yaWFsX0d1YXJkaWFuVG9kYXlVS19XZWVrZW5kLTE5MDgxOA%3D%3D&utm_source=esp&utm_medium=Email&utm_campaign=GuardianTodayUK&CMP=GTUK_email When you are working is when you need to make sure you put money aside to produce an income when you are not working any more. Putting something aside and taking the free tax bonus you secure at the same time will start to accrue a pot for you which begins to buy you choices at ‘retirement’. Imagine that pot then will provide a 4% natural income in retirement so if you have accumulated say £100,000 then that is £4,000pa without the capital being impacted (and it should rise and the income it generates). That sounds a lot of money but if you start early it is amazing how it can accumulate if it is invested sensibly and not all sitting in ‘cash’!
I smiled to read of Sir Francis Drake’s financial exploits from his time on the Spanish Main. J M Keynes wrote in 1930 that in 1580 Drake’s Golden Hind exploits brought back enough treasure whereby a major shareholder (Queen Elizabeth I) used her share to pay off the whole of the national foreign debt and balance the budget. The £40,000 left she invested in the Levant Company and from the profits of that the East India Company was formed. He noted that at 3.5%pa compound return the amount accrued would have been equal to the total amount of our foreign investments at the time of writing. ‘Every £1 Drake brought home in 1580 had become £100,000 by 1930’. Sticking your cash under the mattress or in the bank, building society, national savings or Premium Bonds is not investing it and you will not secure these long-term returns.
Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.
To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!
If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrated our thirtieth anniversary in 2015 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.
Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.