For no ‘real’ reason, markets have decided it’s time for the coin to flip from ‘all news is positive’ to ‘all news is negative’ and within a matter of days sentiment has changed dramatically. I suppose we should have been expecting it, after such a positive run and after all we have said about overblown US values. No one rings a bell at the top – nor the bottom either.
Because of our concerns, it would be wrong not to comment. If anyone is thinking of selling good value, market assets at times like now, it is likely to suggest your outcomes could prove to be far poorer values than you should receive. Of course, I cannot say how long this high volatility might ensue; it could be brief or it could continue for some while.
So, weak employment levels and fears of recession in the US were enough to act as a catalyst to see the largest ever two-day day points’ decline in the Japanese stock market, down 25% from its 11 July peak. At least for overseas’ investors it is not so bad, as the Yen has also risen by 12% against the US Dollar since then, so the net loss is not so savage unless your holdings hedged the currency. Most UK retail investors will not have much exposure to Japan however, though all of us may regret not having trimmed even our tiny holdings more, when prices were higher.
Falls became a catalyst to worry other markets with contagion fears, especially impacting over-extended stocks and particularly US Tech which we have long avoided. The news that Warren Buffett had sold a meaty chunk of Berkshire Hathaway’s Apple Inc and now with record cash balances of almost $300billion was enough to hurt sentiment. You’ll know we have been shouting loudly about the valuations of US Tech shares for a very long time and most of the damage is being felt amongst them – and long overdue that is too.
There are problems in the World. There always are. The Israel/Iran/Lebanon issue could escalate and drive-up oil prices (though the US is presently the biggest oil exporter). It could inflame other Middle East players. Economic growth in the world, blighted by rising costs, is slowing again and in tandem these events will likely lead to savagely reduced interest rates to offset the pessimism and to stimulate spending, after they had been used to try to stifle people’s inflationary tendencies, so that’s good news for borrowers.
At home, riots have sprung-up especially in deepest Labour strongholds against what appears to be a ’lack of listening to ordinary people’s fears’ and a sense of ‘inequality of treatment’, as well as illegal economic migration jumping national policy queues.
Seeds have been sown, met with threats of more industrial action as all public sector employees feel entitled to the same high, albeit unaffordable treatment doled-out by the new government as a reward trophy to the ‘Junior’ Doctors and Teachers, with Winter Fuel payments for pensioners helping to fund that. The rights or wrongs and the politics of all these things are largely irrelevant – it is how people see them that matters. No riotous destruction and violence are ever acceptable nor an excuse but governments failing to appreciate the consequences of their own actions (or probably inaction) are wholly unacceptable too. The same issues are spreading across Europe and also the US.
I am also not wishing to alarm anyone unduly but clearly, volatility can escalate and have significant short-term impacts as much as it can also offer great opportunities to investors, especially longer term. We nor you cannot control daily events.
There is a general negativity now, encouraged by a series of events which can unravel – or indeed they can just as easily ‘go away’ too. Such volatility over many concerns, from recession, war in Israel and the continuing Ukraine war, let alone colossal levels of government debt, certainly never create best conditions for selling investments. Buyers sit on their hands too.
Whilst for us (and thus clients’ accounts) the impact from these is nothing like as bad as the pandemic upsets, pessimism and hesitancy of market-makers to hold stocks abounds, so greater volatility increases the spreads between buying and selling prices temporarily too and even small transactions can see poor prices for sales. That means sellers are likely to receive poorer values from others’ negativity. Prices for sales of smaller companies and certain other assets and Trusts can be cut too, effectively trying to dissuade sales or even to encourage buying; that can have the opposite effect of course.
We enjoyed excellent recovery after the Pandemic but these things are very unsettling. That said, we did profit-take on many stocks like mining and soft commodities such as wheat and energy (which also all rose as Russia invaded Ukraine) to allocate cash to very depressed stocks, as clients would expect us to do.
We have also had many ‘good news’ stories over the last few years, reflected in clients’ valuations and particularly shown by many closed-ended funds starting a process of ‘winding-up’, so we receive the real underlying value of the assets held (often significantly over prices we paid for the shares originally). Of course, it is never a smooth journey and there have been bumps in the road too. Indeed, recently the funds we manage hit their highest ever levels of over £250million, so a tremendous improvement from the Pandemic depths and as clients’ patience was rewarded. However, negative global reactions affect shares, bonds, commodities, currencies, property and precious metals.
Investors always over-react in the face of uncertainty like this, despite the ‘best’ emotional stance being to stay calm and even to buy cheap holdings, not to sell them. We own many ‘special opportunities’ too and ones less related to general conditions. Reasons for their ownership are unchanged. We also had some which rose in reaction to the troubles, as they benefit. There are also few places insulated though yes, through our vast diversity, there are some – for example we do hold the Japanese Yen directly. Fixed interest assets have also risen in 2024 in expectation of lower interest rates.
I understand the concerns in these situations. We are experienced and I have weathered many storms in my forty-seven years in the financial world but we have no crystal ball. Things will settle. We shall do the best we can and all our clients have our absolute, continued assurance on that. We also communicate with you; some advisers and managers are somewhat like rabbits in headlamps at such times, especially if their reasons for having bought something are purely momentum-driven when it is very hard then to reflect upon what the true underlying ‘value’ of a stock should be, without earnings, tangible assets and income distributions from profits as value handles too.
Reality will prevail. The Ukraine war and the Middle East situation will settle and economic growth return. The gains possible from even the slightest ‘good news’ could bring a colossal benefit to investors, like in late 2020. Don’t forget that the good and growing income flows (especially into value strategies as our own) continue. Remember, you still buy groceries, put fuel in your car and home, use electric, water, telephones and mobiles, use pills, maintain properties, engage accountants, pay your insurance premia and all the other bills and yes, you continue to ‘enjoy’ yourself. You’ll still buy technology and cars and things for your home and business.
Businesses will survive, make profits and pay us dividends, rents and their loan interest. Indeed, the income our component investments are generating for our clients now remains at exceptionally good levels – income in the short-term which comes regardless of what happens to capital values one day over the next.
No one can offer performance guarantees nor say how long investors need to wait for a change of sentiment. However, a bounce can be big on good news from the Ukraine war, global economics or interest rates even if this is not a prediction. Indeed, on value assets like in the UK especially, risk:reward balances are very favourable. Volatility is two-sided. It can flip back to positivity easily. If you talk to anyone else in finance worth their salt, they will say this too.
I hope that you find my comments helpful and to reassure all our clients that we are continuing to assess matters very carefully indeed and to react as we believe it is wisest to do – even if that means sitting tight, let alone buying bargains with available cash as others panic to exit.
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
