Happy New Year to you all. I hope that you have had a restful, positive and reflective Christmas break. Let’s see what the New Year will bring to us all. Some of the themes remain the same and I want to share optimism going forwards but cannot avoid the inevitable warnings about certain excesses too, mainly in the US.
There are plenty of positives to which to look forward – like reducing interest rates and tremendous value in the markets (if you deviate from the ‘momentum’) and a great income yield which happens regardless of the daily movements in capital values. A sound, balanced strategy can still expect in the region of 5% or more of income yield – which is a great return when it recognises that capital growth and increases in income going forwards are also likely, albeit neither guaranteed of course (as that’s not allowed to be promised!)
However, it means that investors can better weather short-term gyrations in capital values and indeed look forward to lower asset prices as the excess income can be used to buy stocks at depressed prices when others are dumping theirs in panic. Indeed, valuation anomalies can show that great capital gains can arise from some of the highest payers too – as two of our leading assets with double-digit incomes have demonstrated over the last quarter, confounding traditional investment expectations for many. However, yes, these sorts of assets can be seriously undervalued in capital terms too.
So we end the year with Apple about to broach being the first $4trillion company and the biggest concentration of the US index ever with the largest ten companies counting for 40% of the value of the whole of the US market (S&P500) and at just under $21trillion (that is simply the combined current price of all their shares in existence). That trumps the Dotcom bubble by 14 points (ie over half as much again). In 2024 these stocks rose in ‘value’ by over $7trillion, chased by momentum investing, as Terry Smith rightly notes – not ‘value’ in the traditional investing sense. These stocks alone are being valued by speculators at just under $5trillion above the whole of Europe’s stocks.
At the same time we are told cash holdings in portfolios are at 3.9% and one of the lowest recorded sums (from the Bank of America survey of 171 fund managers with $450billion assets). It’s no surprise US stocks are now an amazing 73% of the world’s stocks (MSCI Global Index), for a Country generating 26% of the world’s GDP (economic output).
Perhaps Mr Trump (Mr Musk?) will take some of this ‘value’ (or he will tax excessive earnings) and help fix the US National Debt problem which stands at a colossal $26trillion… (and apparently needing economic growth of a mere 5%pa just to keep servicing it – remember, our latest figure for ‘growth’ was 0%). That would be interesting! However you view this though, the concentration is very unhealthy and likely to end in tears. Philip Coggan in 2024’s last Weekend FT wonders if investors with too much emphasis on the US ‘will be like the first class passengers on the Titanic toasting each other with champagne as the boat bears down on the iceberg’. Our clients can be assured our primary emphasis presently is to manage downside risk protection as opposed to chasing dragons.
What else is news? Watch the oil and natural gas prices which have been spiking upwards again, potentially inflationary. Yes, the hopes are that President Trump will cut prices as more supply is encouraged but Russia’s gas has been switched-off from most of Europe now. Meantime our new Government’s promise of reduced energy bills is instead seeing some of the highest electricity/energy prices in the world – not only impacting consumers savagely but also business costs etc – and just as it is about to become much colder to
Good news/bad news
Well, not by design but we held seven of the best 10 risers in the FTSE100 over 2024. That’s quite a feat and no, we didn’t hold all 100! In general terms it was because we held deep value assets (in our view) and finally the markets began to appreciate the attractions. However, could we have predicted that list? No.
Stocks like IAG we’d held for years and can hardly say we were prioritising purchases and also Standard Chartered which we have now sold and Rolls Royce which we cleared ‘too soon’ (sorry)… as ever, what is most important is picking next year’s and not dwelling on the past. The UK market gained 5.7% but nothing like the US. However, having even a smidgen in these seven (and other good performers in the wider market list) has helped us.
I suppose too with this ‘game’, winning is also about not having too many of the big losers to drag things down overall. Over the year through these eshots we have tried to keep clients apprised of our special winners and the losers but as ever, a good overall income yield is paramount to us as value investors. Our ’balanced’ strategies still generate over 5%pa income whilst we wait for value to be unlocked. Bearing in mind in that list there are plenty paying nothing or very little, some are very generous indeed. That MSCI Index sits at an income yield of a mere 1.4% in comparison, so its components could drop in value by 72% before income equals what we receive… the US S&P500 pays even less – 1.32%.
Logistics Developments Plc agrees the sale of NashTech at a 36% internal return rate and does a tender to return cash to us at 19p. The shares rise 42%. We can’t complain. General trading levels have been 10-13p and latterly most have been bought-in by the Company anyway, enhancing the value of such special disposals to those remaining patient.
Digital 9 Infrastructure has just announced the sale of its EMIC subsea system for $42million, albeit at a 15% discount to its last asset value. However, that has still pushed shares up 9% – still undervalued based on the new management’s savagely cut remaining asset value. They are now up 34% since 3 December. If they sell all remaining assets at a 15% discount to the 47p 30 June value, that’s over double the present share price – and it could be more. We have been continuing nibbling-away, the more the lower they went. Remember, we never bought these when they attracted new investors’ money at the float for this lovely, environmentally-friendly and technologically-attractive investment idea.
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
