Trump inauguration and UK economy

Trump inauguration and UK economy


Well, despite record low temperatures for a presidential inauguration so the event is moved inside, over here spring is in the air with new bird song, Albert the Peacock’s beautiful train almost complete, bulbs are showing and snow drops are emerging. Let us hope for good things to come and a great summer!

In the US, hope on the expectancy of what the Trump Administration will bring has reached new heights, best encapsulated by new peaks in ‘crypto-currency’ and Melania launching her own, to great speculative acclaim, as the Trump Meme coin rocketed to colossal heights (‘worth’ tens of billions) too before plummeting on his wife’s launch. This hype about crypto, the tech titans on the US market and expectations from the President’s office may well emulate the saying which used to apply when a prospector found oil – ‘sell on the strike’.  This is because the hope is typically far greater than ever the best reality can provide, so sell into the speculative fervour (and buy true ‘value’, as we hold).  

‘Investment’ was left behind a long time ago, replaced by wild speculation and gambling, the ‘fear of missing out’ dressed-up as rational belief but without any valuation base whatsoever. Let’s give it a couple of months (if not weeks) – enough to ‘beware the Ides of March’ perhaps. Meantime, it is hard not to have a wry smile in that all the efforts of Mr Trump’s enemies (rightly or wrongly) to jail or bankrupt him and to deflect and defeat his chances backfired into one of the biggest political mistakes ever, instead creating electoral success and vast fortune – as long as he banks some of the hype himself and now.

At home, some good news for the Chancellor – inflation was lower than expected and the economy stopped retracting and rose a meagre 0.1% but less than expected. Still, it is positive – just. Of course weak figures may suggest economic progress and consumer confidence are poorer and signal that interest rate cuts are safer again so Sterling fell more as a result in expectation (indeed retail sales fell 0.3% in December, the biggest decline in over a decade). I thought the Bank of England was independent… Meanwhile the PM has taken the hint and the Corruption Minister has resigned after corruption allegations persist. Regardless of guilt (or apparently unlikely innocence), could they not have seen the harm the continued appointment was causing to financial confidence and sentiment?

However, the US came to the rescue with ‘goldilocks’ figures’ which pleased their markets and thus ours too – UK banks and energy stocks showed excellent gains – we have plenty but many managers here have very few. Sterling is still struggling however and UK bond prices remain weak as government borrowing costs are far dearer than they were.

At times like these (well constantly of course) we assess conditions and if we believe that volatility (or negativity) has increased to such an extent, at our cost, we write a special letter to all clients considering or in the process of capital withdrawals. That’s not to frighten them nor to deter them but simply to note that if they issue a blanket instruction, they must understand it might be exercised at what is not necessarily the best time for them.

Heightened volatility can create short-term panic and if an instruction is routinely and blandly being discharged in the face of that, the outcome may not be what they expect nor as good as it should be. So, we suggest that if the withdrawal is not desperately pressing, it may be wise to defer till conditions stabilise, not that we can guarantee that in the very short-term, or are there other alternatives for them, such as taking smaller sums over a lengthier period for example, or an income, or other assets they can plunder first.

Sometimes an investor may be moving to a new facility to invest somewhere else (such as a legacy from a deceased client and the beneficiary has an existing adviser they wish to retain) and that can be especially dangerous as they could fall between the two stools, if the new firm won’t transfer the existing investments. They could sell on a particularly bad day or series of days and then, when the funds are processed and sent along (perhaps something taking a few weeks in the case of a ‘product’ etc and new application processes to be fulfilled by the new firm), the monies received could be being reapplied after there has been a big jump in prices. I recall the 12% drop in the Japanese market last summer for example – now effectively ‘forgotten’.

Sadly our experience suggests that most new advisers do not exercise such discretion to defer the opportunity of them receiving the funds… hmmm! They just want the business at earliest opportunity (the other way around we watch things very carefully and look to transfer holdings too, if we can and if that allows a staggered change to strategy without being all out at once, etc. That’s all extra and unpaid work for us but what we believe is the right way of dealing with such things depending on the quantum etc).

Indeed – our warnings were absolutely right as within days, the FTSE100 saw a new all-time peak so anyone encashing on a temporary blip would have been caught sorely between the stools. Our managed funds are again at all-time highs.

Government borrowing – are Gilts a good buy?

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Some Government defendants are saying that all currencies have fallen against the Dollar and interest rates on bonds have been increasing elsewhere but did you know Sterling has fallen more against the Dollar than all major and most minor currencies since 1 January? That’s a reflection of the international investing community’s thoughts of the UK Government, its budget and the extra £141billion borrowing over the next four years, not the Opposition parties and media shouting (as they are)!

Gilts are certainly now far more attractive the cheaper they become but investment may still be foolhardy. Let me give a simple answer, basic investment stuff (this job’s easy to understand isn’t it – that’s why people use competent investment specialists like us I hope!) Since 1 January, 30-year Gilts have seen yields rise by over 29% and capital values falling.

So, the Government borrows lots of money – too much. It owes £2.8trillion now, much on index-linked terms too so not helpful when inflation takes-off (and foolhardy of it to have too much of that frankly but that’s the past lot’s fault too). Investors can become carried-away and pay far too much for this debt sometimes – like in the run to 2022 (and especially on ‘Linkers’ as naivety saw people paying ludicrous prices for this ‘index-linking’ – good concept maybe but absolutely wrong price). Lots of people with ‘safe’ investment funds lost bigtime – up to 50% on Linkers and some ‘low risk’ funds were full of it. We had none. How did your ‘safe’ pension fare, especially ‘Lifestyle’ ones linked to occupational schemes?

Even ordinary Gilts with fixed repayment and interest terms were over-priced, as global interest rates were so low (‘minus’ in many cases so you paid money to lend your money to governments!) and central banks were buying their nations’ own paper, issued like confetti by governments, fuelling price rises (‘quantitative easing’).

Take an example. Let’s say the government needed £750million of 30-year money today. It will take your £1 and promises to repay it in 30 years. Meantime it must pay you the going rate which let’s say is 6%. These are fixed factors. Let’s say interest rates generally double, then the value of your Gilt on the market could fall to 50p so that the interest equals the 12% which then applies. If rates halved, then your Gilt could double to £2, as you receive twice what the new investor would receive so price adjusts. Aside from that, clearly as the maturity date approaches, the price will reflect that you’ll be paid a fixed £1 at the end.

In 2022, silly people seeking the lowest risk ‘investment grade government debt’ were paying the equivalent of what would have been £8.45 for your £1 of 6% Gilt (subject to the time drag to maturity). The biggest buyer was the Bank of England and hence why it is now losing tens, hundreds of billions as these Gilts either mature or are sold back to the market.

So if you buy this today, you receive 6% interest on your investment. If inflation exceeds that, you lose real spending power. Better to buy something like an existing ‘3% Treasury 2055’ because then you’d pay 50p for £1’s worth (so you receive 6%pa interest) and the capital gain you make for holding it till maturity (or any future date) is tax free too.

Yes there are risks with even the safest ‘investment grade government bonds’ but there are risks with everything and don’t let anyone tell you differently – even cash under the mattress let alone festering at the bank, building society or National Savings. If you bought the ‘really safe’ 1 1/8th Treasury 2073 on 4/3/22 at 97p, it will have lost you two-thirds of your capital and you’d still only be receiving 1.125% interest on the nominal sum. You’ll be repaid £1 if you wait till 2073. However, what do you do today?

Good news/bad news

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So last year, in the closed-ended space the top performer was Seraphim Space – a somewhat esoteric Trust, to say the least! We have a very small amount. However, better news is that we had the second – Petershill Partners which rose by 71% (a ‘mere’ £3billion fund). You may recall me writing about this though no, we started buying too soon but yes, we chased it all the way to the bottom. We have just over 1% of clients’ total assets in that.

Indeed, as a result of excellent increases in value (as reported here), our largest holding has now jumped to over 2% of client assets to become the biggest ever stock we’ve held – Tetragon Financial, where we were buying at levels in excess of a discount of 65% to the quoted net asset value. And of course what is also pleasant is that both of these pay handsome income whilst we have waited too – what more can anyone want – aside from the usual ‘I wish we had more and I wish all our clients had them’ (most do).

Petershill has almost doubled since December 2023 and that excludes the dividends but another asset sale is announced at a 62% premium to the book value. A special dividend will also be received – we’re not unhappy! The discount at which the share price trades is still big. We chased them all the way to the bottom, now one of our top 20.

Bad news – Digital9 Infrastructure writes-off $229million on a subsea project, showing that not all green and friendly investments come good, especially if they keep eating new capital to reach operation. Digital9’s share price slumped a quarter in exasperation and news that even then, the funds could take a year to materialise pending governmental agreement to the sale. However, there remain other assets and most of the loss was already in the price as at the 30 June revaluation so it’s not totally as bad as suggested.

A law unto themselves

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We have a client who is inheriting £750,000 from his Mother’s Estate.  She died before October 2022. They planned to move home on the strength of the legacy. To date, nothing has materialised, no interim payments or anything – that property fell-through long ago.

By all accounts it is not a complicated estate. Fortunately for them, his Wife’s Mother has now lent them money so they can buy but they need yet a final balance for the house in which they are living instead. So Mum will need to sell investments and we suggested instead asking for an interim payment as that would avoid costs and removing money from tax-friendly assets. The response:- ‘does not want to even bother trying as has had such a bad experience with the Solicitor firm and knows she will just be waiting months for a reply’.

Sadly we come across such stories far too often and beneficiaries feel unable to do anything. A complaint afterwards may be fine but to what end for now? I think the answer is – who have you appointed as your executor – what confidence do you have in them to act appropriately and efficiently with your Estate to ensure your family and other beneficiaries are being looked-after properly?

There are some great law firms out there but some executorships are abysmal and frankly, if mainly you have financial assets, you’re best engaging a competent firm of financial advisers and investment managers like us to act and not a law firm as we know what we are doing whereas it’s not the average law firm’s strength or specific regulated capacity.

I hate to think what may have happened to any market assets in that estate over the last two plus years for example (and there are problems if the Estate isn’t concluded within two years of the death too and opportunities for a Deed of Variation have been lost as well).

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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