Just two weeks after the Election and avoiding politics altogether this time, I shall neither labour any points or be too liberal with my commentary on markets and tax-planning. You may think that I am unable to reform my approach, though I hope that the style of writing does not treat you as green around the gills about your finances either!
It is interesting however (sad?) that only 52% (half) of the eligible adults bothered to vote at all. That’s the lowest ever turnout since universal suffrage in 1928. So, the cynic could say that clearly most people were not as dissatisfied with the last lot as the media and pundits say, as they would definitely have bothered to turn-up to vote them out, or indeed most people didn’t think the new lot, or any of the alternatives, offered something so exciting that it enticed them to want to bother to turn-up to vote for them either. Remember too, a fifth of people didn’t even have to go out on 4th July as they had a postal vote. If all adults were counted, those ‘who didn’t vote’ would have had the biggest share by far… As before, I wish the new Administration the very best in post and so far, so good and Rishi Sunak’s response to the King’s Speech was statesmanlike, so well done to him.
So the markets have remained calm, optimistic even. Sterling has been strong, the highest against the Euro since August 2022 and buoyed by yet another quarter of strong economic growth. Well, that is till today, when a cyber outage has caused selective chaos across the world… frightening everyone whose dependence upon technology is so high… the aftermath from liability claims could be immense if that is the outcome… and what if it is a criminal act – or one of aggression…?
US Technology
So, asks Tigger, as he bounces along behind Pooh on their way into 100 Acre Wood, if you are right, just how far could US Technology shares fall, let’s say as measured by the Nasdaq? Now, that’s an interesting question and the first answer is ‘how long is a piece of string’. Of course, it may not fall at all but the ascent has been so precipitous that there is no time before where that has not portended something of a bubble. And balloons, Tigger, do tend to burst.
What else is there to go on? Well, there is the Dotcom bubble and yes, the AI revolution is not dissimilar. However, many of the giants now are seeing good profits and cashflows whereas with dotcoms, it seemed that the more you lost every year the greater the value you merited so it’s different today. However, even the best companies can become wildly over-valued (and especially as ‘tech’ now counts for 44% of the whole of the US S&P500 index – against even an almighty 34% in 2000). However, from the peak on 31/3/2000 to the trough on 30/9/02, the Nasdaq lost 74%, that’s right, your £100 became £26. Still, since then it recovered till on 10/7/24, it had risen 15 times – so your £100 being worth £1,500 but it took till the autumn of 2014 to regain its March 2000 peak. Could it drop 74% again? No, I don’t think it will – but it can, because these wholly unexpected things do occur sometimes, just as unexpected as was the index rising 15 times in 22 years.
The last five days saw a combined $1.1trillion of US market value wiped-off – the third largest slip in history and the largest since the May 2022 bear market (but don’t forget nominal values are so much bigger now, so the impact is less) – so far.
Remember too that the FTSE100 peaked on 31/12/99 yet in capital terms has done little. From the same date – 30/9/2002, it has only risen 1.2 times in 22 years. However, there is a major difference; the FTSE also paid significant income whereas the Nasdaq hasn’t.
We are value investors and contrarian, which means independently minded. However, you might imagine that we are skewed away from something that may be a tad over-priced towards something which may be a tad under-priced. It’s far safer too effectively, as it has a much shorter distance to fall when the next downturn in confidence happens (note I said ‘when’ not ‘if’).
There is one major structural change to investing which could impact far more investors than 2000, when it was almost mainly spivvy and side-pocket money rather than mainstream capital. So much money now is in global trackers which just buy stuff ‘because it is there’ and the bigger it is, the more of it they have to have. This means that a down-cycle will affect the majority of people with investments now, from ISAs to their works’ pension and a great unwinding could be catastrophic as people pull-out (as they don’t like any losses) and they don’t have the benefit of juicy dividends to soften the blow (as they do in the UK say). That said, in 1973/4, with the global economic and strife issues, the FT30 fell by 73% – the Dow Jones lost 43%.
All I suppose I shall say is ‘be warned’ and frankly, don’t chase the dragon to fix a new high, especially if you can buy seriously under-valued and boring companies which will still be trading (regardless of what happens out there) and in say the UK, with underlying assets worth far more than the value of the whole company. The cynic in us says ‘don’t worry though’ as afterwards, the global regulatory systems will react to the excesses of unfettered, passive investing, after the event of catastrophic losses affecting ordinary and otherwise naive retail investors and their pensions and life insurance savings, etc. That will help avoid it happening in quite the same way in the future…
What with simple charts of market growth showing the US markets attempting to breach the upper trend line (previously breached only in 1929 and 2000), it does make a few of us wonder. Deutsche Bank suggests the US market is as concentrated now as it was in 1929 and that it is more reliant on certain companies than at any time since the dotcom bubble. Price to earnings ratios over there are as optimistic as they were in 1999/2000. From its peak on 3/9/29, the Dow Jones index started to fall till it bottomed on 8/7/32 some 89% lower. In the run-up to 1929, there was such ebullience and things were considered ‘too big to fail’, as investors then saw the new technology as revolutionary in all senses and including profit opportunities, just like now. Of course, if the markets and financial cultures fall into a complacency of almost boundless hope and optimism, it does well for investors to have some suspicions.
As for Pooh Bear, the first book was in 1925 – ‘The wrong sort of Bees’. Maybe now it’s the ‘wrong sort of shares’.
Justice at last
The fraud at LCF where 8,800 investors lost £237million in an unregulated bond scam (though they are being compensated up to £68,000 each by innocent financial firms through the FSCS and the Treasury by £125million for its oversight failures) has caught-up with the lead salesman whose firm pushed these things on the unsuspecting public, in exchange for a 25% commission.
Ex-policeman Paul Careless (would you be encouraged to entrust money to a man like this, a tad like Bernie Madoff?) used his marketing firm Surge Financial Ltd and received nigh £12million in what administrators are saying was indeed a Ponzi scheme. His assets have been frozen though most of the money has ‘disappeared’. Mr Careless is not too happy as £2million was to be used to cover his legal bills to date, so lawyers will have to wait… or possibly whistle if no other money can be ‘found’ if the case is successful, which I hope it will be. Mr Careless denies any knowledge whatsoever of the impropriety at LCF, we assume thinking that a 25% commission was the going rate for such things.
As is often the case with such problems, diligent advisers in the industry had flagged their concerns over what appeared to be far-too-good-to-be-true to the authorities, which sadly delayed any action and hence why the Treasury funded the rump of the compensation. We, too, were warning people to not touch with the proverbial barge pole. The High Court Judge has yet to rule on the merits of the case against the several defendants.
Silly shareholders
Remember I wrote about Regional REIT and its ‘Open Offer’ at 10p a share? Well the capital raise has progressed and the ordinary shares are over 14p as I write so all shareholders buying their entitlement have ‘made’ 40% on the 10p paid. Bizarrely, 27.4% of the shares were not bought by existing shareholders so the underwriter took those, banking an immediate profit (on these figures) of £12million and becoming a new major shareholder (19%’s worth) so good for the Company and shareholders going forwards.
Why did existing shareholders who don’t understand these things seek advice…? We took-up our full entitlement and where we could. This will have saved or made clients the same percentage, however you look at the narrative. Yes, some investors are still in loss overall but there remains a significant discount to the net asset value at these levels and now a more solidly-financed Trust.
Tax Returns
Ostensibly, more people are likely to be obliged to complete Returns every year going forwards. This is not just because of the last Chancellor’s savaging of investment allowances but to imagine that such actions will continue and probably worsen, so people who have had a break from filing a Return (something which used to be ‘obligatory’ on everyone) will have to prepare themselves. This comes on the cusp of the overlap assimilation for businesses which will mean some taxpaying firms having two years’ tax liabilities as one and also ongoing rapid accounting, reporting and tax payment as well.
There is an argument which says that unless your citizens complete a Tax Return, how can the system, the government, know exactly how much revenue that tax policy changes may bring or lose. However, for you personally, unless you are happy tackling the nuances of the system, there may be wisdom in considering the appointment of your Adviser earlier rather than later to prepare! If you need help, we should be delighted to assist and especially in the realms of investments and their tax impacts and reporting.
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
