Dear Friend
This is a quick and brief update eshot following the announcements on Monday which saw markets rocket. We are pleased to share we have benefited handsomely from that renewed optimism in the future! Whilst several investor platforms apparently collapsed temporarily through the volume of buying interest (the time to buy is before such announcement, not after…) there is still plenty of value out there if you are concerned you may have missed the boat. We are happy to receive any new funds to invest for you and shall still spread your funds very carefully and diligently!
Well, what difference just a few days can make. Pfizer’s announcement saw one of the biggest one-day gains for a very long while and improvements in some of the most bombed-out value stocks of up to almost a half – not really what should be the case for multi-billion pound entities but showing how overdone the descent had been and continues to be when considered against ‘normal’. I can’t remember the last time I saw so many significant gains on the ‘leader board’ as that (an old stalwart in the industry suggested last experienced in 1975), with the ‘inevitable’ bounces in holiday companies and so many others which will benefit from optimism which killing the Pandemic will bring. Yes it is early days in any recovery too and there could be some slippage but two other interesting things happened too – those who had done nicely by short-selling shares in these companies beforehand were scrambling to buy-in stock to cover themselves, thus accelerating the gains and secondly, tech beneficiaries from lockdown were rather more unloved.
Interestingly, whilst I am not a superstitious ‘chartist’ per se (we look at all sorts of indicators to consider an investment, or not) but lots of the previous big gaining stocks and funds appear to be ‘rolling over’ on an unsustainable series of peaks on their charts. When considering equilibrium lines, numbers of days above the moving averages, etc and the appearance of drifting enthusiasm to boot, companies like Amazon could easily drop by a third (and would still be expensive). Over here, the funds which have done so well from this frenzy for tech like Scottish Mortgage are just as over-extended and indeed, are geared (they borrow to invest) which accelerates the decline when things go against them, just as much as it boosts performance when things go in their favour. The problem with ‘momentum’ investing is that if most of your co-investors participate on the same premise, so then the trend to exit is likewise as rapid. You won’t find many ‘value investors’ in those stocks so at what levels will a new breed of investors start to acquire a rapidly falling knife? Check-out the graphs of some of the stocks which have propelled things so high yourself and see what you think – and also look at the main US indices and the NASDAQ. And don’t forget, if you are a ‘passive’ investor (so an index tracker) or indeed are full of ‘ESG’ funds (‘ethical’) this expensive tech stuff is the sort of stuff of which you’ll have bucketloads (depending on which trackers you choose ‘actively’ to follow of course). I think for now one of the real value places to be is the oil majors but there is a conundrum with BP on a 9% income yield even after cutting its dividend and we’re still going to need to use oil and its by-products for a few years to come yet… there are plenty of other deep value sectors to follow however and the banks and financials could well offer a solution there as well.
US Election
Aside from a gentle observation or two in terms of how it may affect our investments, I shall not comment on the politics per se but clearly it is a curious scenario right now and remarkably the markets have taken this temporary hiatus in their stride. We were sanguine about the outcome investment-wise though clearly if Mr Biden is going to spend even more than Mr Trump then the Dollar is likely to fall – and will bond prices fall? Will inflation start to edge-up? Are you ready for that? I think that the World will find Mr Biden is more ‘conservative’ than it imagines too and that could prove to be a good partnership for the UK even if there is a greater emphasis on the ‘Irish problem’ which has to be resolved satisfactorily with the Brexit talks and also then trade talks with the US. I think many Americans believe they have elected a very ‘left-leaning socialist’, a little like Mr Corbyn represented but they will find that is not the case even if there are clearly Democrats ‘like that’ but we shall have to see how authoritarian his tenure is. In itself though, if they see him as the far left’s great hope they will be disappointed and then we have to wonder what might happen where and how they air their frustrations, angers and their prejudices. He is also a Family man and with deep religious convictions so that will be an interesting ‘seasoning’ to how the future and liberalism will develop over there and the global influences ensuing from that.
What Price Is Patience?
I have shared many times that ‘value investing’, still so out-of-fashion at the moment, can demand a great deal of patience. Whilst not always the case, often however you are at least rewarded whilst you wait, dividends for what appears to be a dull business model which everyone still needs or the fact that the specific company’s shares are way below the underlying intrinsic value, however calculated – assets held, cash on account, profitability or whatever.
However, the other factor is that if the Market doesn’t finally reflect the true fair value then a corporate buyer can enter the frame to take-out the company in full. If they recognise the value and the under-value effectively, then they buy the lot and without much in the way of objection. In the present conditions, this is likely to happen more and more as so many companies are just so undervalued.
We have plenty of prime targets within our strategies – not acquired for that reason but it is an extra opportunity in there for nothing. However, sometimes you have to be really patient and wait – and wait. One such example is Urban and Civic Plc, a property and development company. Its shares have been trading way below the net asset value and for years and we just kept sitting on a few – not a mainstream holding of course and even now only representing under 0.5% of our clients’ total assets but the Welcome Trust decided it was time to bid to take over the company for £0.5billion. So the shares are being acquired at a 65% premium to their market value. Thank you very much – the wait was worth it and we’d been receiving dividends meantime of course. Then when you look at it like that, a 65% return on one day, how much is that worth over a year, even if you have been in the shares for ten years (6.5%pa) and that is on top of the ‘normal return’ (whatever that may be) you might be able to expect too of course? And just think – you could have been that impatient long-term investor who just sold out the day before as it had lagged-behind the dragon-chasing stocks which ‘everyone’ wanted and for which investors are paying ludicrously high prices to acquire.
Premier Foods Plc is another one which has tested our patience. On 18 March this spring the shares hit 19.76p and had moved sideways for oh so long before that, missing takeover opportunities along the way and so the saga continued. However, had we given up then the recent sale of its stake in Hovis would not have benefited our clients at all. The shares have since been up to £1.06 and because of this magnificent climb, repaying all that patience, that is a 436% increase from those low levels. Yes, much of the gain is repaying previous damage on the way down but I just wish we had had more confidence in March to have filled our boots with these but there we are – easy after the event and we must be happy with our present £1.2million stake I suppose!
Risk Warning
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 celebrate our 35th anniversary in 2020 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.
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
