Investment value and the Autumn Statement

The Autumn Statement from the Chancellor had some good and bad in it, in our view.

I am pleased to report that whilst I have been in South Africa, with the Autumn Statement happening, values on market investments seem to have been nudging gently upwards, after unrelenting negativity. That’s helpful but the opportunities are not quite so attractive of course then – but still compelling.

We have just issued what we have noted is perhaps one of the most important newsletters to investing clients for a long time, noting that the recent times represent perhaps one of the best opportunities for a generation in underlying value – and we have given examples. Letter November 2023.pdf

Well, what did you think about the Chancellor’s Autumn Statement? There were plenty of positives in there but some contradictions and negatives too – including how wrong the OBR has been with its predictions (and to which ‘everyone’ seemed to cling so slavishly at the time of Kwasi Kwarteng’s Budget… funny that).

The Minimum Wage has been increased by 10% to £11.44 – one of the highest in the world now and ultimately this will prove a bête noir for employment opportunities in the Country but for now, in a constrained jobs’ market, simply a cost employers must shoulder. This is not being negative about what people would like to receive to help pay their bills but the cost which employers must find for every job – and to pass-on in costs to customers etc. This also means the Public Sector and the biggest employer – the NHS and overall taxpayer funding. So a full week’s pay is £23,795pa from 5 April but when statutory holiday, sickness, pensions, National Insurance, etc are added that means a typical cost to the employer of £30,500 for one job, whether the candidate is good, bad or ugly too. That’s £590pw. Whilst the Chancellor lauds the shrinking of headline inflation rates, this additional 10% is a core cost-push which forces higher prices to pay the bigger wage bills. Employers will have to expect even more output (productivity) from employees to substantiate job positions at all if they are unable to increase revenues by the same 10% cost rise and remember, this means charities and so on as well.

Now before anyone complains… I have just returned from a holiday in wonderful South Africa where people are begging for jobs. The unemployment rate is 32% and effectively there is no benefit system for the unemployed. The Minimum Wage is £43.70pw. Some of these global disparities will rebalance themselves ultimately but how shall ‘we’ be affected when this starts to take effect, I wonder? These figures will also drive migration for those keen to enjoy our attractive pay, let alone benefits and free public services of course.

Investment Trusts – costs

At last a possible light at the end of a tunnel… the Chancellor has become involved in the silliness over total ‘costs’ being noted to retail investors in Investment Trusts. There is tentative agreement that inappropriately EU rule interpretation is suggesting Investment Trusts are more expensive than their unitised brethren.

The Regulator may introduce provisional mitigations and if I have read things correctly, it will mean that quoted Investment Trusts and Funds will suddenly appear far cheaper than these unitised versions used by most advisers and investors as ‘all’ their costs will be excluded. Whilst ‘nothing’ aside from a daft interpretation of ‘what to include’ will have changed, advisers and investors will suddenly see that costs on quoted Investment Trusts seem lower and will want to choose them again. We like them for myriad reasons and ‘cost’ has never been the only one but that argument has been lost by the ‘charges’ reporting fiasco, as so many investors and institutions have dumped them as a naïve reaction – and as I have shared, even some platforms have banned investors from some because their total costs exceeded an arbitrary cap they felt they should follow because the Regulator says it is hard to substantiate that.

All I can say is… presently the average Investment Trust is at a discount trough last seen in 2008, so fill your boots before the changes take place and investors and institutions cotton-on. The rise will create its own great performance bubble too, thus driving even more investors to buy-in as foolishly the majority loves to buy past good results (now is best value, not ‘then’). The cynic might say ‘but what if it doesn’t happen? I say I don’t care, revert to my incessant message about deep discounts and inevitable wind-ups – what do you really have to lose by being patient? We have had 13 corporate events from actual wind-ups or considerations to them in 2023 alone. The latest to close has been abrdn Smaller Companies Income Trust (one of our largest exposures) and cash is due soon – at a 1.5% discount to the net asset value so a useful bonus uplift to the share price.

Bright Sparks

We are delighted to be the main sponsor for Spark UK’s Exeter Cathedral event this year and the launch of the 2024 calendar – can you support the initiative and these great young people in their endeavours?

Celebrities join forces with Spark UK for mental health advent calendar – Devon Live

 Well done to all involved and raising this very important subject so effectively!

AIM stocks

With rumours of cuts in Inheritance Tax but not actually manifest in the Chancellor’s Autumn Statement, AIM shares breathed a sigh of relief. Why? Most AIM shares give IHT exemption when held only two years. So if IHT cuts happened, fewer people would need to alleviate their liabilities by holding these shares.

This omission has boosted the already depressed values of many of these companies’ shares – often great businesses in themselves and at very cheap prices regardless.

French luxury

Remember when I suggested the hype about luxury goods’ producers in France was likely to be temporary? Well, the FTSE100 has regained its position and is now valued at more than the CAC 40. There are still issues which the UK has to address however as our market is shrinking in numbers as the regulatory backdrop has tightened too much. The USA looks far more attractive for companies to be listed there (though readers will know my views on the excesses there too).

However you look at it though, the UK is a compellingly attractive place to invest presently and low values and high and dependable incomes mean less distance to fall in a market rout too, as prices are better supported by ‘realities’. Again, the cynic may say ‘ah, UK companies may move to the US.’ I could say ‘great, values will rise significantly from now then’. Curiously the World Economic Forum has also recognised that the UK (6th) has knocked France back in global economic positions again too – I remember reading in the media when the opposite happened but oddly enough, they haven’t remarked on the UK regaining that position! The five largest countries count for half of global GDP.

Canaries in the mine

So if central banks and governments are not careful, they can react and then over-react to situations and not watch all the indicators which point to the future. Britain’s money supply has contracted sharply, helping inflation control but not so good when considering economic growth. With the pandemic reaction, money supply rocketed as governments worldwide looked to stimulate spending. The annualised growth rate in the UK rocketed to 15% (M4 ex-growth rate). It is now declining at almost 5% – the largest one year drop since 1922, when two years then showed a significant slump after the post WW1 boom.

Talking canaries… a powerful Lords’ Committee has slammed the Bank of England over its handling of the inflationary crisis.

Powerful Lords committee damns Bank of England over inflation forecasts | Bank of England | The Guardian

Readers might recall that I thought certain actions and reactions were ‘obvious’ at the time but clearly I was and am not alone. Losing confidence in one’s central bankers is not ideal.

Company pension funds

So, apparently superannuation funds now have possible surpluses from vast deficits a few years ago. These are superannuation schemes like BT and the Universities Scheme. However, some, like the BT scheme, became clever and peddled their liabilities for other things like ‘Liability Driven Investments’ and caught a cold. The USS held-out and keep a wise, broadly-based investment pot and has been able to increase pensions for members and avoid further cuts as a consequence of not holding ‘just’ over-priced government bonds, now enjoying a £7billon surplus from a £14billion deficit a few years ago.

The survey suggested that the vast majority of trustees and managers of these things knew what LDIs were all about for managing risk… when clearly they didn’t as they remained piled into the biggest bond bubble of all recorded time. Since March 2020, 10-yr US Treasuries have lost over 45% of their value as yields changed from figures not seen for 5,000 years to 4.8% in months. How is that for ‘safe’ and ‘low risk’ investments?

Remember too, regulators and trustees alike were encouraging schemes to escalate derisking by selling other assets to buy more government debt… as well as cutting benefits and imposing larger contributions on members.

Bumbling along…

Yet another ‘new share issue’, this time a dating app designed for women, floated on the market with grand fanfare and ludicrous ‘valuation’ (and followed by all the excited, ‘must-have’ ‘latest innovation’ institutional buyers) has seen its shares plummet by over 70% since float in 2021. It’s not alone with Chinese social media group ‘Hello Media’ (which owns dating site Tantan) down 64% and Tinder and Hinge down 83%.

Did we invest in these or funds which did? No. Would we today? No. The relationship is over I think…

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

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