Ominous Bitcoin
So the SEC has approved 11 ETFs which invest in Bitcoin. First of all, don’t worry – we shan’t be buying them. Bitcoin is not an ‘asset’ and has nebulous, proven legitimate value and use. This ‘development’ is added to the latest speculative explosion about ‘AI’ (which of course has myriad applications and much worth!)
The US market’s ‘Equity:Risk Premium’ is so low now (c1%) and the last time it was here was just before the Dotcom Bubble burst. Not to be superstitious but with the Dow Jones ominously peaking at nigh the same number as the Nikkei Dow in 1989 (38,916 and that is still 11.5% below that today, 34 years later – a near-term peak as well)… could these three facts be a portent for a rather bloody nose over there for the ‘Magnificent Seven’ as Apple and Microsoft vie for top position at a $2.8trillion ‘value’ (all their shares times price)? However, there is really attractive value in the UK, Japan, Europe, Emerging Markets…
Of course, the cynic could say that next, the SEC will approve ETFs which mirror flies climbing up a wall. After all, as long as the promoters provide the financial results to match the movement… that’s all it means isn’t it? Here’s a prediction, the hype before the consent is likely to mean the price of Bitcoin will now fall from its near-term peak (still way below the earlier one) rather than rise – a bit like selling shares in oil exploration companies ‘on the strike’ as the hype is usually in excess of the reality!
UK Economic output exceeded expectations for November and the markets liked that. Playing with percentages, but that was 50% better than pundits had predicted and dismissing ‘Recession’ for another half a year at least… However, worries about the trillions of debt we have resurfaced – both that it has to be ‘repaid’ (even rolled-over) and indeed, interest due meantime. Germany also avoided recession in the end with a revised Q3 at 0% growth…
UK value
The FT’s Lex remarked on the value of markets and that the UK is not far from an historical low insofar as its FTSE100 components are concerned, compared to the US’s S&P500. In simple terms, in earnings’ expectations, UK shares could be double present levels and they would only just be comparable to those ‘values’ in the US. Alternatively and perhaps more believably… US shares could be half present levels and they would just be back to the values given to top UK shares… the ‘world’ excluding the US is around 20% more expensive than the UK.
This does bode well for the UK for a number of reasons. The first is that in time, imbalances like these do tend to repair. The second is that the UK is much cheaper and thus much safer as well in the face of a speculators’ rout – yes, they do happen.
Thirdly, whilst investors wait, they receive a very generous level of dividends which you don’t see from the US. Of course these aren’t the only reasons and there is some interdependency but the point is very much worth making. This recent divergence began in 2006 whereas just prior to that, earnings’ views of UK companies were higher than the US – and of course, there are technical differences between the markets too.
Another interesting fact is the currency. Sterling is predicted to continue increasing against the Dollar, which has been too strong for too long. This reduces the value of your overseas’ investments, in the same way that on the way down, it inflated them.
2024
What will 2024 bring? Resource stocks may be interesting again when we consider the ongoing investment into renewables. It is suggested that in 2023 $1.8trillion was invested in renewables alone and these use-up base metal like there is no tomorrow (amongst other materials). (Check the main metals’ price charts). As an aside, it is encouraging as it reminds us that despite the inane protestors who disrupt people’s lives causing cost and pollution, much is happening and as ever, the big negatives are not the UK but China, India and the US. Science is advancing dramatically in these technologies all the time too – another good news story.
Did you know though, the average wind turbine blade in 1991 was under 20 metres? This year they are projected to be over 120 metres. All this doesn’t stop us having our foot on the accelerator but it puts it things into context.
Of course, miners don’t feature in ESG strategies as they despoil the environment but we need these green transformations… The arguments are not clear – the Norwegians are cutting back on fossil fuel investment but are at the forefront of seabed mining… which is it to be? Even locally, a giant offshore wind farm is seeking consent but a band of locals (headed by environmental campaigners curiously) doesn’t want the cabling to be brought ashore in what seems the obvious place…
Finally and reassuringly to our pockets, UK Natural Gas futures are down nigh 40% since last October and since the artificial spike in August 2022, they are down almost 90%. Just to make you smile too (and it will filter-through to prices of goods and inflation) but petrol/diesel prices are lower than those before the Ukraine invasion started.
And maybe after a fair year in 2022 as interest rates rocketed from all-time lows, Banks slipped in 2023 in view of the negative overall backdrop. Plenty are looking pretty cheap now and with compelling income (yields) too. They’re still recovering from the pandemic, to be truthful and a little economic growth can work wonders for bad debt positions, etc.
Nuclear returns
Who has been watching uranium recently? We have had a ‘side interest’ for a few years, buying when no one wanted it (about 0.7% of our total client assets now). It has since rocketed and whilst we are running with the momentum for now, at some point it will be time to move-on to the next unloved ‘comparable’ asset… As ever, I’ll regret not buying some for ‘everyone’ nor indeed more than we have already… but that’s just plain greedy.
Maybe it is right to ask too, how many investment managers, financial advisers or private investors would have any or even the capacity to acquire some anyway? We bought it because we felt it was seriously undervalued and because it is uncorrelated to ‘shares’ (and thus it represents a risk mitigation hedge against a systemic risk affecting markets). Every penny helps in that regard and no, of course, not all such balancing strategies like that ‘work’ and sometimes we have to wait a long time but it doesn’t make us an ‘index-tracker’ of any form though, does it!
Private Equity
Private equity companies own more businesses than you may realise. They manage trillions and the funds are spread across quoted investment funds and private portfolios. Apparently, they have entered 2024 with $2.6tillion of cash looking for opportunities, as investors have been keen to subscribe their cash to be used and as old companies have been sold-on or floated on the markets. It would not be unwise if some of this was used in launching bids for quoted companies – especially UK ones – where the value is so good. This would be a change (some has always gone this way) but better perhaps than valuing an unquoted entity or creating your ‘own’ business to package it together ready for sale.
On top of this, the sector has $2.8trillion of unsold companies as sales have faltered in the volatile conditions these last few years. In itself this is not a problem as these companies are still functioning but the Private Equity model works primarily on only holding something for a limited number of years and then moving-it-on. However, if lower prices are realised that could begin to be a problem and valuations of their portfolios could face further scrutiny. However, it is not all gloom and so far, prices raised on sales have not been ‘bad’ and many are still cleared at figures above book levels.
As for us, whilst frustratingly we may have entered the field a little too soon a few years ago as smaller companies and then had been hit hard, there are plenty of very attractively priced PE funds trading at deep discounts to the underlying asset values presently and filling portfolio holes attractively (we have lots to spread the risks even more). Finally, Blackstone has just announced it has raised another $1.3billion from wealthy private clients for yet another fund… on top of this, Blackrock is acquiring Global Infrastructure Partners for $12.5billion, adding $100billion to its assets under management…
Investment Trust ‘charges’
As predicted, Parliament, with HMRC and FCA support, is now reviewing the daft EU rule-hangover on ‘cost disclosure’ which appears to make many of these seem more expensive than other forms of collective investing.
MPs and peers urge Treasury to amend proposed investment trust rules – FTAdviser
We are happy to be one of the signatories to the paper to the Treasury Select Committee. This problem has led to advisers and institutions to dump shares in these companies to satisfy an inane but well-intended ‘fair value assessment’ regime which did not allow such compensations. Upon success, suddenly these vehicles will appear to be much lower in costs… and thus purchases preferred over other forms of investment and then buying demand will raise share prices… yet in reality, ‘nothing’ will have happened to the underlying costs, etc but just a better understanding of what these funds offer. Isn’t that daft? Buy whilst the anomaly exists I guess!
Money management
Politicians need to be careful what they say. During an interview with ‘GB News’ about money in voters’ pockets to spend, Labour’s wannabee Chancellor Rachel Reeves noted that she ‘winces when she sees her bank statement as the money coming in is increasingly short of the money going out’. So this is the person who wants to manage the UK’s economy and someone who declared earnings last year of £353,100. It doesn’t really suggest being in touch with the electorate either, does it! Let us trust that it is not true, especially as she is married to a director-general of the Department for Work and Pensions (who was Gordon Brown’s former speech writer and private secretary) rumoured to be on something like £180,000 as well, so they are doing very nicely thank you.
Talking of which, ex-chairman of the FSA (The Financial Services Authority, for forerunner of the FCA) suggested on radio it wasn’t difficult to buy a house… he now chairs Nat West Bank and really should be more switched-on to the difficulties faced by so many in relation to the housing market these days…
Economic projections
Much store of value is given by economists, investment managers, politicians and others on projections to assess how things are looking. However, 45 MPs have noted a ‘deeply worrying’ situation about our fabled ‘Office for Budget Responsibility’ and its accuracy. It was established by George Osborne and was meant to ‘score’ the impact of policy changes which it then uses to calculate the headroom for chancellors in their financial statements.
They suggest there are ‘systemic issues’ which have downplayed and deflated the realities of our economic growth since 2010 and thus affecting policy and budgets as a result. The group suggests that our growth has been under-projected by some £500billion – a very significant sum indeed. Of course, Covid muddied the waters but the group says that even removing 2019 and 2020 the shortfall was still £138billion. Was Prime Minister Truss ‘right’ by not asking the OBR to produce a forecast ahead of the ill-fated mini-Budget?
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
