Oil & Ethics

Dear Friend

So prospective ‘more freedom’ day for the UK hasn’t been greeted globally by pleasant markets with the main indices having a day of red with few places to shelter. Curiously indeed but the FTSE100 fell by exactly the same percentage as the FTSE250 (2.34%) and the riskier smaller companies’ indices fell by much less (that’ll confound those who like to see things in simple ‘risk basket’ terms). The AIM 100 index fell the least though some of this is artificial because some things aren’t traded, so prices stay unchanged. The expensive NASDAQ didn’t fall further too – defying gravity

Well, a contradictory good news’ item for ‘Value’ investors (even if the top has been knocked-back a little of late) is that UK banks have been given the nod to be free with their dividend policy after constraints imposed after the Bail-out. That bodes very well as they are way behind and also count for a big chunk of our market. Secondly, it is projected that average UK dividends will recover this year after the various cuts and caution last year in the face of the storm, so dividends could increase by as much as 25% to a whopping £77billion, so good news for income investors – like us. Rio Tinto is likely to be the biggest payer too – not the oils any more. Investors win twice – higher pay-outs to shareholders usually herald better times too so the share prices respond as well – a real case of having one’s cake and eating it. Honestly, we really don’t mind! Additionally, a good yield underpins the capital values in a downturn as the income is relatively secure. The likelihood of Rio halving (and thus paying income of 11%) is rather less likely than Tesla halving and still paying nothing…

Oil & Ethics

Hot on the heels of my last missive, an interesting letter in the FT on 9 July from two eminent UK professors noted how plenty of companies are dealing with the well-intended pressure against them to ‘conform’ to green obligations imposed upon them by virtue signalling politicians, pressure groups and accounting fraternities. (indeed, listed companies have less than six months to comply with 1.5°C warming target according to the MSCI and meeting the Paris 2015 accord). I have said already that there are unintended consequences of actions here which do no good whatsoever in the ‘battle’ which is ‘climate change’ but actually which make it far worse. Try telling that to ‘Extinction Rebellion’ which isn’t interested in listening it seems and instead where the local branch decided to apply police crime scene tape and have a fake a body with a cleaver in it outside our local MP’s office, accusing her of murder – not pleasant for the Mums and toddlers’ who share the same building and indeed disgraceful intimidation after Jo Cox’s murder not so long ago. And of course, we (and they) continue to consume yet more of the cheap products so often made with the benefit of all these cheap fossil-fuel energy sources.

Big, developed market oil giants are selling their ‘dirty’ assets and buying ‘green’ ones so they can meet the corporate targets impressed upon them to satisfy blanket ‘woke’ investors’ demands. As much as $140billion of such assets are up for sale apparently. Emissions are shifting to entities and countries far less worried about such matters – including ‘pollution haven’ places which subsidise oil exploration and consumption. How unhelpful of protestors and ‘ESG investments’ is that! These two academics analysed a comprehensive set of data from thirty-three countries covering all the major capital market asset classes from 2000-2015. Globally, investment in oil and gas has continued growing at 8%pa since 2008 when such divestment first started. Actions again may be well intended but that is no excuse for crass misinformation and negligence is it?

Big Firms All Doing The Same Thing

Interesting. The biggest twenty-five wealth management firms manage 85% of all surveyed assets. That also means they all do the same things, in a nutshell. We are not one of them. We can pick about in the biggest investment opportunities but find real bargains in the lower 15% which they can’t afford to touch because they can’t get in and they can’t get out. Indeed, when the sentiment changes, because they control so much money, they are all the sellers and they are all the buyers so guess what can happen to prices when vast tranches of assets all move in the same direction at the same time. And don’t let them tell you they are different because you only have to look at the Pandemic’s collapse in prices and then the mad scramble to buy back again from November, as well as what has happened to prices since to see that fundamentally they and their clients all mirror one another’s actions.

Indeed, even financial advisory firms have rapidly been ‘out-sourcing’ the investment management of their clients’ portfolios too and not making their own selections like they all used to do. Who are these biggest firms in the survey? St James’s Place, Schroders, Brewin Dolphin, Tilney Smith & Williamson, Quilter, Rathbone, Investec, Charles Stanley, MAN GLG and Ruffer. We are contrarian and make our own minds-up – independently minded and not opposite just for the sake of it though, I assure you.


What pricks bubbles? Usually totally unexpected things. Are we overdue one or two of those? Yes – and not wishing to be pessimistic. Residential houses, US, Tech and ‘ESG’ shares especially… Black Rock, the world’s largest manager has just announced it has broached $9.5trillion under management – soon to be the first ever commercial organisation to have the control over $10trillion dollars – wow! There are two troubles. The first is ‘what do you do with your money whilst waiting’ (we have lots of defensive things incidentally) and secondly, rather than second-guessing the peak of something but it is easier to take a more pragmatic view with a few points.

Take residential property. The first is that prices cannot rise much more. The second is that if they do, the upside must be severely limited as on pretty-much all historic criteria they are very over-extended and thirdly, there could be some almighty collapse in prices, probably connected to even a gentle increase in interest rates, either in reaction to inflationary pressures or the simple colossal debt fuelling these price increases. Last year the population in the UK actually fell and the global demographics are pointing that way. In the UK for the first time since the 1980s more died than were born and that is not directly related to migration either (and don’t forget they are building new homes like there is no tomorrow as well at the moment!). Yields on expensive shares are paltry and rents on houses are really poor when considering the capital tied-up. Indeed, if you ‘threw’ that sum of capital at all the market investments which existed, including ‘Value investments’, you could generate a greater income ‘naturally’ than the net rent possible from most houses but with infinite diversity of asset type, access, ease of management and so on. (I am not suggesting that strategy incidentally but just to demonstrate a point!).

I am reminded randomly that Facebook is now worth 38% more than all of Italy’s stocks and that Tesla is not far behind. Likewise, between 2000 and 2001, the NASDAQ (US Tech index) lost 78% after a finance-fuelled gush the previous five years. So what caused the heart-change? The easy flows of money dried-up as interest rates started to nudge-up as the economy started to improve…? Is it now the end of ‘Quantitative Easing’ (after all, it can’t continue expanding for ever and ever on the never-never)? I suppose then, at the end of the day, not that we own any but better to have investments like we own which are like Rio Tinto – colossal mining entity, giant copper producer (needed for all those ESG applications) with a yield of 5.5% and P:E of six. We’ll still need them even if Trillion Dollar Facebook has gone bust, replaced by ‘Find my Friends 2’. 78% sounds a lot (it is) but not in the face of the whole NASDAQ index which has more than doubled from the March 2020 lows too.

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Interesting Times

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Economic Bounce

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Risk Warning

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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