Looking into 2022

Busy financial markets
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Dear Friend,  

Happy New Year! I hope that you have had a comfortable and enjoyable Christmas and a time for a rest as well as reflection. I was afflicted for a few days after with the ‘Supercold’ and haven’t had such a thick head and sneezing bout since I can remember last and no, it’s not been Covid-19, fortunately. I hope I have not shared it too much. I have also been reminded that in Chinese tradition, a bald-headed man brings good fortune in investments, so let’s be positive about conditions into 2022!
The markets in focus
So we enter the beginning of the year with 2020 results which look ‘very reasonable’ and ‘normal’ but really they are nothing like that when you look under the bonnet. A handful of US stocks created pretty-much all of the MSCI World Index gain (10 stocks on the NASDAQ count for 80% of its returns) and in fact, two-thirds of all new US floated companies ended the year lower than their launch prices. Even US tech stocks, which the received wisdom suggests are ‘great’, saw 80% of NASDAQ, end the year down. The Dow is entertainingly now hovering around the same ‘number’ to which Japan’s Nikkei Dow rose in 1989 before crashing-back to earth not long after (pure superstition but humour me!) and just as Apple hits the $3trillion mark, the first time for any company ever (all its shares multiplied by the current share price).

The Japanese index counted for about 40% of the value of all World stocks in 1989 and now; the US market counts for nigh 70% (with Japan a mere 8%). Japan hit 39,000 at the end of 1989 (so its 22nd anniversary now) and then plummeted to 17,000 a mere three years later (so a drop of 54%) before finally bottoming-out in December 2011 at 8,450 (down 78%).

Could that happen to the US? No, not that much, but could the main indices there drop by 54%? Yes, and with such a bubble driven by so few stocks, it is easy to expect that.

The upside has been fuelled by myriad reasons, from cheap and easy money to index-tracking passives ‘’cause they are cheap’ but as our clients will know, we have steered away from the US where there is great value elsewhere and especially in the UK (again, reasons for it but the FTSE100 is still only just above the December 1999 level).

The passives’ zealots conveniently ignore the Nikkei Dow 1989 issues as they pile-in to global trackers dominated by the same over-priced US stocks and recently, ‘Green’ and ‘Ethical investing’ have been buying the same stocks as well (despite very shady credentials to qualify). We don’t invest on superstition alone (though December 31st is a curious portent for many past peaks!) but we know why we are avoiding certain areas.

What else may you not have noticed? The Euro is slipping and against Sterling could soon be the lowest since June 2016 – Brexit vote time – interesting.

We are followers of ‘value investing’, however defined, as opposed to pure ‘growth’ or ‘momentum’ as have gripped the majority. The one good thing about that is that typically there is real underlying value when prices do fall. At the end of the day, if the ‘Market’ won’t better reflect the true value of a company, then a corporate predator of some form will often move in and we have benefited from many of those over the last few years, bonuses for clients ‘for free’. In 2021, global mergers and acquisitions topped $5.8trillion – their highest ever (and making some lawyers and bankers very well-rewarded as a consequence!). Remember too that as interest rates rise, the long-held tradition that ‘government bonds are safe investments’ could be up for serious challenge too.

In July 2020 the 10-year Gilt yield hit 0.1%. It is ‘now’ 1%, near enough. In simple terms, what does this mean? It means that when interest rates are low, the price you pay for the asset is very high. Whilst other factors bear (such as the ultimate redemption at ‘par’ – £1 per £1’s worth of stock), in the short-term prices can be barmy.

Basically, if say you are paying £1 for £1’s worth of a 40-year loan paying only 1.5% interest, if interest rates elsewhere in 10 years were 10%, then your loan stock is more likely to be worth only 20p for every £1 which will be repaid 30 years after that!

I have not calculated linearly but just to give you examples of what can happen after the biggest bull market in bonds ever – so watch this space going forwards. Minor changes can have big capital influences on your ‘safe’ investments and that’s even before we start thinking about the real-terms’ destruction in value from inflation north of 5%pa.  

The Premier there has been doing what he can to destroy the economy, it is reported. The Currency has plummeted over the last few years, making it a fantastic place to visit and to buy their goods (Turkey is still a large manufacturing country and selling most of the World’s hazelnuts, amongst other things!). However, an unexpected policy change caught the rest of the world with its pants well and truly down. Turkey is no tin-pot country but over two days, the currency surged by 50% against the Dollar (and thus most other currencies).

There will have been some speculators short-selling the Lira and they will have thought it was a one-way ticket these last few years but this action will have left them with a seriously bloody nose – basically the Turkish Government is underwriting any currency losses for private savers of Lira. It’s curious (and the ‘World’ is saying it is like an interest rate hike) but so far, it won’t have cost them anything as there is no loss, but clearly into the future this may change things.

So economists who think they know everything have to remember there are still new things to learn and I guess, to even remember that the concept of the word ‘economics’ is still predicated upon base ‘human behaviour’.  
Tightest spreads  

You may or may not know that how you (or your underlying investment manager) buy shares normally, on the market, is from a ‘marketmaker’ who runs a book of stock, like a shop. You can buy at one price and sell at a lower one. Popular stocks have many marketmakers and so the ‘market’ should show the one with the highest selling price and the lowest buying price.

Of course this will change all the time. Less popular stocks and especially smaller companies have far fewer marketmakers. To be a marketmaker you have to guarantee to trade stock in ‘Normal Market Size’ which can be several thousands of pounds for popular companies to mere hundreds in smaller, less frequently traded stocks.

Dealing sometimes has to be executed with special care as you can easily end-up ‘just pushing a deal through’ and trading at the ‘extremes’ as opposed to dealing ’within the spreads’ as is crucial (if possible) for those which are sometimes very wide indeed. These can increase universally during times of volatility, making this a big and hidden cost (like spring 2020). Generally speaking, spreads now are very low for popular stocks. One of the keenest is Vodafone – here the difference in highest selling and lowest buying price can be as low as 0.1p so the marketmakers aren’t making much for a position at all!

Some illiquid stocks can see spreads of up to 20 to 30% so you must be very wary about how you trade and the quantities of stock too. For us, it’s all part of what we see as our responsibility to try to manage. I can tell you that not everyone does that and some of the biggest culprits of ‘stupidity’ can be the biggest institutions which take a buy/sell decision and then just swamp the market – if they can secure a price at all of course. This will lead to extreme price movement too – so great opportunities for the contrarians looking for just such examples when they arise. (I apologise that this is all technical ‘stuff’ but most financial advisers or investment salesmen have little understanding of these nuances but clearly they all add-to or detract-from your returns and need managing. To us it is all part of how we add value for ‘free’ even if it is not reflected in any headline ‘cost’ ratings, simply better overall outcomes than ‘you’ can achieve elsewhere because we care enough to do our best to manage such things).  
Big business – bad service!  

Who else has noticed that these giant, ‘modern’ companies don’t believe in proper service? Have you tried finding an email or an information form for Amazon Prime for example? Why don’t they invest in the facilities which enable them to provide a service to customers? Instead they have inane telephone services, often on premium rate telephone systems so it costs an arm-and-a-leg to ring.

We’ve had a fraudulent transaction on a credit card and have reported it to the card company but out of courtesy were going to inform Amazon – it is impossible, when a simple email service would have enabled that valuable piece of information to be relayed to it. Here’s a portent – good service still counts for something and complacency or arrogance about how your customers and prospective customers may be able to connect with you is important and reflects how you want to be considered by your customers in the end (and valuing their time too). Take note Amazon… maybe time to sell your shares (they’re over-priced anyway…)  

What’s happening there? Now with an 18% shareholder (up from 12% in November) who may have aggressive tendencies (Openreach being the prize apparently and potentially worth twice what the whole company is worth on the Market).

Yes, the UK government has a ‘golden share’ and our rules are about to tighten again but at these price levels anyway, the shares are cheap regardless – not that I am allowed to make any recommendations without all the usual risk warnings, naturally… however, for clients we have been maintaining and increasing our exposure anyway. (Just think, in 1999 the BT share price target for the tech dreamers was £20 and whilst there’s water under the bridge and corporate activity et al, at figures around £1.70 22 years later… who says US tech can sustain present values eh!).  
Victorian Plumbing  

This company floated in 2021 and became the biggest AIM float but its shares have since been abysmal for those who bought. The company only raised some £11million and the float enabled the founders to sell big chunks of their shares at a high price.

However, it reminds me to warn those thinking new floats are always a good idea – a few maybe – but just because you ‘know the name’ doesn’t mean the shares are the right price. You could have paid £3.30 and they have since been below 86p – and indeed the two founders have been buying shares back-in again – shrewd operators!  
Behavioural bias numbers three and four affecting your financial/investment decisions…  

Do you recognise this in yourself? If so, then you are on the way to sensible life judgements and investing. Not only that, but not recognising these traits will lead you to some awful judgements or inaction – we have seen it time and time again sadly. You are more open to superstition and not fact and more prone to scams and pure gambling when the odds are against you – they always are. We are here to help you realise these psychological traits are not good for prudent investing! Here’s the next in the series!

Attribution bias’ is when you ascribe success to yourself but blame others/circumstances for your failings. Taking responsibility for your own decisions is crucial – both the ups and the downs! That way, you will learn even if the best thing to do on the failings is to repeat the mistake if that remains the ‘right’ thing to do when faced with the facts behind the judgment too!

Endowment bias’ places a higher value on something we have owned or do own. This might suggest our car is better than all other cars or our home is clearly a better home than other identical ones. It is hard to break-away from that but again, another trait when looking at our list of investments versus others’ lists.
I suppose however that it is true that we learn more quickly about our returns when we hold something (rather than just watching it) that loses money too – a great teacher!  
Residential property prices – again…  

Just an observation really… has anyone noticed that Estate Agent experts are only ‘brave enough’ to note that the ‘rate of future growth is slowing’… in other words, even if prices had doubled in the year that further growth will be slower… never ‘we predict a drop of 25% to bring them back into line’.

I suppose too the behavioural traits I have noted above cover this and with stock markets as well; that’s why we have to be brave enough to reflect our views for our and our clients’ monies by the decisions we take based upon what we expect and yes, that can mean being brave enough to avoid things we believe are more likely to fall too.

I am reminded of the lost tourist asking the yokel the way to a certain destination and the appropriate and clever answer being ‘aaar, well I wouldn’t start from ‘ere if I were you!’ Please find me an estate agent predicting future losses in his pet subject…!  
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