US stocks and the Budget

US stocks and the Budget


Hurricane Milton wreaked havoc in Florida but nothing like the worst expected. We trust this namesake won’t be doing the same with markets! Helen was not so impressed it followed right after Hurricane Helene as well. This is a once-in-a-lifetime storm, we were told and as ever, the risk to life the biggest fear but costs of many tens of billions could ensue.

So the latest Quarter’s investment reports will be winging their way to clients shortly and it will have been a steady three months despite the volatility in between. Silver, one of our defensive assets, broached its highest levels since 2012 so we are quite content – few investors will have exposure to any precious metal or indeed miners in the sector. We have held it for three reasons – the first that it was far too cheap, the second that it is uncorrelated to ‘shares’ and the third that it has defensive properties as and when the US tech bubble bursts. We haven’t gone overboard (we don’t on anything!) but even a little of such an asset then is better than none at all.

Bond yields (interest rates) in the US and the UK have been creeping upwards again over recent months – which is somewhat worrying, taking capital values of bonds downwards at the same time. This can be a concern – not so much for the quantum but the direction.

As for shares, the growth of ‘passive’ investing (having it simply because it is there) is also making markets less efficient and more fragile when sentiment changes; between a third and half of all ‘managed’ assets are now index trackers. Americans remain very optimistic about shares, with US households’ allocation to them having risen to a record high of 42% of their assets, since records began in 1952. Even professionals have increased ‘bets’ on the US when looking at futures on the S&P500. That’s grand when things keep going up but not when the opposite happens. The virtuous spiral then turns into the vicious circle.

At a very illuminating conference day hosted by the AIC last Friday I was reminded just how expensive the US majors have become. Yes of course, that can be ‘confirmation bias’ but the data is interesting, from Nvidia being priced at 40x sales (not earnings!) through to historic consideration to earnings’ ratios over history. Hussman Strategic Advisors has completed some very interesting research and applied this to graphs and the one flagging the US market, with a simple conclusion that history has shown that at these excessive valuation levels, returns over the next 20 years could average -4%, yes, that’s a minus and with averages… it doesn’t tend to be smooth… This compares to when the US has been ‘cheap’ and those annualised returns after that have been 18%pa, versus ‘normally valued’ where a figure between 8-10%pa has applied. The positive, to balance the fear this may create, is that the UK market remains at a 40% discount to the US and with the highest dividend yields in any major world market, so a juicy comfort cushion for us.

The Budget

I have covered this a few times but what could you or should you do in anticipation? We don’t know what may be there but cuts to tax relief on pensions, higher Capital Gains Tax and business relief, nasty surprises on Inheritance Tax and disqualification of AIM shares and a few other nasties. So don’t go mad and do too many things that aren’t wise to do anyway but you may want to think about (or if you were already thinking about it):-

Maximising your Market ISA – £20,000 each

Make some capital gains if you have shares with lots of pregnant profit (it’s too late to sell property…). We’re doing what we can for clients. Prices generally are not bad.

Gifts to children/grandchildren – the annual allowances should be ok but lifetime gifts?

Tax-free cash on pensions? The jury is out; the Chancellor may cut the % amount but don’t take it if you don’t ‘need it’ (if you have time left to complete the process anyway) because then you have increased your IHT estate and have to invest, probably, in a taxable regime rather than tax-free ones – why not wait till the next government… as the amount could easily rise again anyway.

Good news/bad news

UIL, an esoteric (once utilities’ orientated Trust) asset in which we have a reportable stake, has announced that in 2028 it is going to leave the Stockmarket and go private. Whether that is good or bad is debatable for myriad reasons but it also announces that it plans for its 8%pa dividends to continue and that shareholders will be given several options to exit at a 20% discount to the net asset value at the respective times. What does that mean? Well, simply put, on the announcement day the shares were 94p and the last net asset value £1.56. If all else remained equal, that means that we’d secure £1.25 for each share so an uplift of 33% on that share price and income whilst we wait. The market must think it’s good as the share price has risen to £1.07 on the news. Right away, we bought 50,000 more at 96p.

Tetragon, another of our biggest, rises 8% on press speculation about a component investment – the shares remain far too lowly valued with such a discount and still yield 4% at the higher levels. Any bad news? Pleasingly nothing of significant note to report.

Image: Ermolaev Alexandr/Adobe

Second homes

So our Council, North Devon, has written to 2,246 second home owners to note that their Council Tax will be doubling from next year. What with the appropriate removal of Small Business Rate Relief from holiday homes which cannot fulfil the business criteria any more (where such properties paid neither Business Rates nor Council Tax, which was ridiculous but as a consequence, are also not Inheritance Tax breaks any more either), will the holiday letting rules and licensing obligations change the recent holiday letting frenzy and see more holiday homes and parts of homes, etc revert back to residential or long-term letting use again?

The regulatory regime has already imposed considerable extra costs on landlords generally, whether for holidays or permanent lets and that may well result in far fewer renting opportunities in the end. Will this also lead to higher prices to visitors as there will be much less accommodation choice I wonder, or drive more people overseas for holidays where the rules are easier and the prices cheaper as a consequence?

Taking AIM

Yes, it has changed dramatically since its launch in June 1995 to provide a platform for companies to raise capital and with less intrusion than demanded by the main market. I appreciate that an index is simply a number which can be skewed by its participants over time (there’s a warning about present markets and passive investing, if ever there was one!) but did you know that the FTSE AIM All share index is still lower now than it was at launch? It started at 1,000 and is now 735. With the dotcom bubble it spiked at 2257 on 31 March 2020 (another bearish reminder about enthusiasm for technology!) and troughed at 389 on 28 February 2009 at the depths of the financial crisis.

It is now a much better market with some great value and quality companies there, many of which are and have been systematically ‘picked-off’ by predators on the cheap – because the market doesn’t reflect the prospects nor value. Of course, if the Chancellor curtails the Inheritance Tax relief on most AIM shares in the Budget, that could sound the death knell as demand from those protecting their capital has helped support the whole index but even then, it stands down 43% since its near-term August 31 2021 peak and not much above its pandemic trough of 682 on 31 March 2020. There has already been some selling-off in anticipation and I wonder what would happen to some of the big players of IHT plans as they will find they have unsaleable stakes perhaps.

Of course it is true too to say that some of the good have gravitated across to the main market but for the real contrarian, perhaps they should be fishing in these rather depressed waters now, even if it is hard to know what the catalyst might be to ‘change’ prospects. We do have a handful in mainstream strategies, simply because they are good prospects regardless of the market upon which they are quoted.

Image: Jag/Adobe

India & oil

I reported last time on India’s new blast furnace. The Country is also doing all it can to attract as much oil and gas exploration off its coasts to maximise revenue from these fossil fuels before the green transition may mean its value has gone. It’s a strange old world.

The cynic will say that we shall be able to keep buying cheap Chinese and Indian goods and services, powered by some of the cheapest energy going (and fuelling global warming in the process) whilst our industry and households pay some of the highest.

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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