Dear Friend
It is an interesting time for reflection at the moment. We’re not through the other side of ‘things’ yet at all and despite the worsened position medically and the new lockdown, the light at the tunnel’s end is becoming brighter as each day passes – and the days themselves are enjoying a little more light as each dawn breaks. It has been a year to realise what is essential too and perhaps what was and is not so important; our clients are essential for us too and we thank each and every one of you for your trust and tremendous forbearance, even in such difficult times as we have all endured. It is appreciated – it is an honour and also an onerous responsibility for us too, especially when times have been so awful and hard.
I shall take this opportunity to wish every reader a Happy New Year, if that does not seem insensitive. The markets have opened curiously, with big ‘bad’ banks, miners and oil companies pushing the main indices higher as they attract investment at still ludicrously undervalued levels. It is curious that the growing lobbying from the ‘ESG’ group (Environmental Social and Governance) on ‘Responsible investment’ had powered the declines in these sectors and to unbelievably undervalued positions, so some catch-up was and remains very necessary. Without being a Philistine on the subject but none of us is today or tomorrow stopping the use of oil or the extraction of metals, etc, from the Earth and the banks – well, we still use their facilities even if we don’t like some of their behaviours and practices. That doesn’t change the positive ‘changes’ ongoing but it does remind us that piety and ‘greenwashing’ can be very much overdone in the short-term and I am afraid some of the ‘ethical’ sectors’ supporters will end-up with a bloody nose as too many ‘friendly companies’ fulfilling all the ‘nice’ criteria have seen their share prices rise to ludicrous levels on the back of this artificial demand and of course, guards are lowered so some of these wonderful opportunities will end-up being worthless as well no doubt.
2020 delivered the worst year ever for oil stocks. That said, Exxon Mobil kept to its fantastic thirty-seven year record and raised its dividend as most others cut theirs and at the same time, stepping-up its exploration activities, a stance becoming more out of step with the clarion call for ‘niceness’. For the same year, the very limited S&P ‘Global Clean Energy’ Index more than doubled (now up 145%). However, it only has thirty components and most are utility companies (which often have caps on what they can charge customers, etc, so more like bonds than shares so not to be valued as growth stocks) but investors scrambling after ‘ESG’ stuff ‘don’t care’ as they don’t understand. Even advisers frequently don’t really know what they are buying – or is it what they are selling to their clients, to take a fee any way they can and responding to the marketing hype?
Apparently the resulting valuation gap is also extreme. Exxon is valued at $175 ‘per barrel of oil equivalent from upstream production’. Atomic power EDF in France is $280 but Spain’s Iberdrola is $1,200 or simply seven times more expensive than Exxon. Yes, the dirty companies will have almost unquantifiable costs for the clean-up but they are still generating cash like there is no tomorrow. Start-up technologies in renewables still consume colossal amounts of cash too even when subsidised by governments and tax breaks but on a simple investment call, ignoring ‘anything else’, the money has to be on these once-giant oil companies at these low levels and let’s add-in banks and miners to boot too – in the face of ever overpriced US tech stocks (many being unquestionably ‘unethical’ in one way or another but no-one is prepared to make that call investment-wise at the moment) followed by too many investors with too much money. The good thing too is that these ‘old’ companies will be generating the income which most investors still seek – and a very healthy yield unmatched by ‘growth’ companies. Investors can, too, always donate their income under GiftAid to environmentally favourable charities to continue effective research and perhaps this is indeed the best way for any and all of us, to direct our investing consciences? After all, the cynic would say that responding to the over-zealous and patronising sales’ methods of so many of the attractively labelled ‘ethical investment’ providers’ material simply means you have fed their unethical desires to become very rich from the chunky fees and commissions they are still charging you, oddly enough. Curiously, one regulatory change which is not now happening was to have been yet another layer of patronising questions which advisers were going to have to probe of investors, centred upon their personal political, social and ethical preferences. As the option exists already anyway for investors to ‘choose’, having yet more rafts of (EU) obligatory demands was not welcome though I suspect many a salesman flogging ‘ESG’ products are now trimming their personal bonus expectations savagely. What a shame.
Testimony
Thank you to SG for your kind and humbling comments following the last message. He was an investment professional with one of the largest UK institutions and noted: “Just to say many thanks again for these updates. Always full of good advice and practical common sense, sadly not something I consistently saw during my 30+ years in financial services!” We always try and we say it ‘as it is’ perhaps. Too many don’t – or simply look either to sell you something or to respond to the ‘trend’ – which anyone can do. Oddly too, as ‘value investors’ we have a fundamental underlying purpose with investment – but if you pay exorbitant prices for shares, what is your basis for exiting them as you no longer have a peg upon which to hang your coat?
Interest Rates And Inflation
I have shared on these subjects many times, but did you know that about 80% of the World’s ‘Investment Grade’ bonds are paying under 1%pa (and don’t forget the $15trillion or so with negative rates so you have to pay for the privilege of owning their debt!). Governments are keen on one hand to keep rates very low as that reduces their borrowing costs and even our own Bank of England is briefing on negative interest rates (so look forward to having interest taken from savers’ colossal cash deposits rather than added, as well as bank charges coming back as banks can’t make anything on your credit balances to subsidise the service anymore!). Yes, the flow of State cash is likely to fuel an uptick in inflation. That will then entice (force?) central banks to raise interest rates for borrowing and what that will do for things like the Residential Property market here could be catastrophic yet oddly enough, it could still be matched by negative or low rates for savers, as institutions don’t want your cash. All this bodes very well for the stock market in fact, despite the ‘other reasons’ I have given previously as to why the UK market particularly is so undervalued and could be in for a fantastic year (though we’ve already had about 20% gains since 1 November as it is) – partly catch-up for the uncertainty’s under-performance. If we add to this the fact that with ongoing redemptions from ‘active funds’ it is suggested that a net 100-120% of all new money presently subscribed to markets is going into some form of tracker fund buying everything ‘just because it is there’ and bloated with all the over-priced US tech stuff. There is likely to be a ‘curious’ albeit significant rebalancing and indeed reawakening ahead. Guess where we are not exposed almost at all…. Which is why, probably, we can still generate a natural income for a very diversified, balanced portfolio of circa 4%pa without compromising recovery and growth opportunity in both the capital values and indeed future income levels too, even if some of the value is harder to find already. Is that what you are receiving for your cash or other investments?
Euro Bank Accounts
Stories are circulating of EU banks failing to act on the instructions of British nationals when it comes to releasing money held in Euro bank amounts, or charging awful exchange rates and costs for converting funds into Sterling. There is little which can be done to counter their reluctance to release investors’ money but one outcome will be that UK nationals will realise how under-developed are the financial services of all forms in the rest of the EU and indeed the World, compared to those in the UK (and yes, don’t tell me, some of our big institutions are atrocious too!). Let us hope and trust that the lead we have shown to date will be something upon which we can build going forwards – multi-currency accounts here perhaps (several of the new internet banks are responding well to the need too, as some bigger banks are closing accounts to those in the EU). If problems persist too, whilst our own complaints’ protocols are laboriously lengthy, the French system is nothing like as efficient or impartial and without the same regulatory obligations and protections imposed upon them as ours have.
Brexit – What Now?
Whatever you wanted, we have left the EU. We also have a deal and for us in business and our private lives, it is up to us to make the very best of the situation. I don’t say that in resignation to anything but our mindset will also affect how we can benefit from the new environment, an ‘independent’ United Kingdom free from many of the shackles which many felt were holding us back. I think in simple terms, the majority was fed-up with what appeared to be an ever-growing political experiment which had swamped the mutual benefits of collective trade and so on but time will tell. There will be unexpected problems and also unexpected bonuses and benefits.
There is likely to be more paperwork for importing and exporting and as individuals, there will be more hassles when it comes to travel and things like that. However, I should like to feel too that some of the rafts of EU legislation can be rolled-back as well so that our private and business lives will become easier (and business more competitive) and so we can concentrate on what is important and not what is less relevant.
There are many (especially those still hankering after ‘Remain’) who demand incessantly the ‘list’ of benefits as if there were two schedules, one of pluses and one of minuses. It’s not that simple but yes, there are benefits from being outside and not ‘just’ the significant multi-billion annual net payments we had been making to the ‘system’. In fact, I am surprised that there were not some forms of ‘payments’ obligated as part of the deal to cover the costs but I suppose they will be mutual going forwards.
We must also not confuse rising or falling costs with ‘Brexit’ alone. Currencies move up and down too and for example the US Dollar is down 19% since its March high and that saving to us on so many base products such as foodstuffs traded in Dollars is better than all collective tariffs which could have applied. I suspect the Euro will fall against Sterling now after having risen by 23% since July 2015 alone and that reversal would cut import costs on goods from the EU. Of course, that means our exports to Dollar economies are 19% more expensive and the same would happen to those to the EU (though in actual goods we suck-in far more from the EU than we export at the moment).
I believe a healthy form of national pride will begin to reappear too (that’s not isolation, nor hatred of things foreign) – even as firms will be able to advertise ‘made in the United Kingdom’ again perhaps. This will bolster the home trade, increasing demand and reducing imports. There are so many food products we import unnecessarily when we have world quality options made in the UK already and often which we export… isn’t it greener too to cut down on food miles by buying nationally when we can? The rest of the EU has always had more ‘pride’ in their own goods above those of other nations for most/many products.
The Pandemic has distracted us all (not trivialising its awful impacts) and global economies have been hurt hard. However, ours has had the uncertainties of ‘Brexit’ hovering over us like a cloud as well. However, Brexit is a new dawn and this will mean that we have certainty instead – some bad and some good and consequently, our economy is likely to rebound better and faster than others as the cloud has been lifted. We all hate uncertainty more than anything else. Our financial markets are likely to outperform other global markets likewise for some time and I see Sterling continuing to rise against the Dollar and to rebound significantly against the Euro, a currency which is over-stretched on so many measures anyway.
What are the individual business opportunities? Suddenly, we shall be responsible for connections with countries which had stopped seeing us as an individual nation. We shall welcome more products to our shelves from ‘new’ parts of the Globe and the dynamic will look to see what there is and how they can create business openings in them. There will be new service opportunities too in the whole arena of international trade and the processes. I am very optimistic for the City and all aspects of the financial services’ sector generally too – including Free Ports and perhaps even an onshore Tax haven to attract trade which otherwise ends-up in some of the less salubrious parts of the world – I am not talking ‘illegal’ here nor evasion (the UK leads the world on anti-money laundering, evasion and aggressive tax avoidance yet still far more needs to be done) but geographically accessible, where the international wealthy need such places and can rely upon one of the most advanced financial systems in the world, the greatest of security, capable employees and legal structures and the international language of commerce.
So I am positive about the future for our Nation and the opportunities will percolate out for all in business, to consider how they can avail themselves of them. Don’t let your negativity for the inevitable hold you back but yes, adapt if your business model has to change, to benefit and to counter any consequences from our withdrawal.
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
