So UK inflation surprised to the downside – good news. This should lead the Bank of England to keep its promise to cut interest rates. The only fly in the ointment is what government bonds tell us? They’re worried globally but specifically in the UK about the Budget and probable extra borrowing (via these bonds, so the interest cost rises) and interest on them has been nudging higher.
The Chancellor’s rewriting of the borrowing rules has also nudged rates against her but that should be short-term sentiment. Which will win? I suspect we’ll see cuts in headline rates as those have a political expedient… who thought the BoE was independent, ahem!
The Budget is Wednesday – don’t forget to act in advance if you should; latest rumours suggest a cap on the total in your Market ISAs so if you ‘need’ to use your full £30,000, don’t delay! Tax relief on pension contributions (especially at the higher rates) also seems at risk. However, the worst for CGT on asset disposals may not be seen and prospectively, AIM shares and IHT relief saved too.
The value of financial advice
A relatively new client of ours, age 75, not very long returned from working overseas pretty much all their life with negligible contributions of National Insurance for a British State Pension before they left… we persisted, to ascertain a little more and sure enough, not much credit before they left. Simple enquiries on the internet proved the disqualification and that’s that. File your papers. Well, was it right? No, we kept-on…
They have now just been advised there will be a £19,000 back-dated payment (tax-free as they are a non-taxpayer) and a weekly pension of £72.11 (which will still go up to the ‘minimum’ when they reach 80 as well). And how much have we charged for all the work, guidance and so on? Zero. Just think, if they didn’t have the connection with a terrier-like professional financial adviser like us, regardless of what might have qualified them for that status, no pension would ever have been claimed or paid. Who thinks having a relationship with a diligent (caring?) and switched-on independent financial adviser is ‘expensive’?
We’d already sorted their spouse with a cash top-up to secure the minimum contribution record for a State Pension there, so this couple can now enjoy a rather happier and more comfortable retirement.
Interestingly, Nextwealth’s latest survey notes that 79% of financial advisory firms won’t take-on clients with less than £100,000 to invest. The average initial fee from other advisers is £1,995 as well (and transaction charges for doing the arranging on top) so somehow maybe we are doing ourselves a disservice by not charging in most instances… So if you are ‘in’ the Club with rather less, or haven’t been charged this sort of initial advice fee, perhaps you should be very grateful too!
Good news/bad news
Nice to receive another generous instalment from one of our suspended holdings in wind-up, SME Credit Realisations Ltd. The payment is very good with more to come – that’s certainly one of which we should have bought as much as we could find before the suspension! We’ve had to wait a few years but well worthwhile; only impatient people are unhappy there. Likewise SMF Realisations has also paid another ha’penny with probably another 3p to come against the latest market price just north of a penny.
De La Rue at last announces the sale of Authentication for £300million and the shares rise 14% on the day. Good news has been a long time coming but the patient have been rewarded. Our holding in Crystal Amber will also benefit – De La Rue is its second largest exposure so they rose 10%. DLR are now almost back to the 16 June 2020 level at which investors paid a very discounted £1.10 (when their shares were £1.528 on the market!) to capitalise the Company… that might sound bad (it is!) but if you kept buying all the way down to June 2023, you would now be sitting on an almost fourfold increase.
GCP Asset-backed has announced a further repayment to shareholders – £45million at the net asset value, which should be over 90p. The shares rally to 79p on the news – still a discount! Remember, this is simply loans being repaid to it and the cash returned to shareholders but the market continues to price the shares below the asset value (and despite the continuing high level of dividends from the interest).
A recent loser for us, Gore Street Energy, has just announced its biggest project’s new 12-year contract and the shares rallied 6% on the day and the same the next. At £1.23 in the heady days of summer 2022 when everybody wanted ESG options, they have since plumbed 53p, giving a juicy 12% yield and good green assets on the cheap. No, we never bought at launch or their heights but yes, as they fell we escalated our exposure, helping-out panicky sellers.
Hansa jumps 6% as its largest holding reveals the unlocking of value in its own biggest holding, the sale of Wilson Holdings – still a wide discount to the underlying assets but is this a portent of further change and value release?
The JP Morgan Japan Smaller Trust merger is progressing and we shall receive £3.425 for each share redeemed. This is against the last share price of £3.22 and a low of the year of £2.85. Again, the extra return is nothing to do with the market – simply a technical opportunity played-out and generating return for investors beyond what the market has given and more than any unitised holding can achieve as a consequence, because they never trade ‘at a discount’.
Should we be worried?
The US market (S&P500) could be on track for its best ever year says one pundit. This was a familiar headline last year as well oddly enough, best in 26 years and so on. The main trouble is, I guess, it is on the back of other significant gains in recent years rather than a rebound from a very oversold level.
Of course the analysts and optimists denote a new paradigm substantiating this. The pessimists remind us that October can bring some awful shocks (so can all the other months mind you but superstition can have a field day). Novice investors don’t know the difference and gaily follow the momentum and their past significant gains make them smile at their wonderful, prescient judgement yet they do not understand the significance of the risks they face and what a bear market of substance brings.
In 1933 the return was 53.99% but that was after the Wall Street crash and unspeakable depths when very few were investing. The recent down year (2022) was a pimple on the chart, down 18.11%.
My worry is the vast extent of complacency out there. Investors are keen to sell ‘under-performing’ assets, you know, the ones which may have only made say 10% in the last year to put more into the US market (translate – the vast majority of funds people are buying (or being sold) anywhere, as the US counts for over 70% of all shares now). Our priority at this moment in time is capital preservation or at worst, losing the least and generating a good level of income whilst we wait and through any upset, trusting too we can still benefit from several corporate actions on closed-ended funds which literally have ‘nothing’ to do with the price of chips. If you want to have most or all of your money in these US stocks driving the index, we are not for you I am afraid.
Indeed, it is likely to be the same investors who lose the most when the US upset comes (which will happen) who then state they were really the lowest risk-takers of all and that they will never invest in such things again, as they have been so badly burned (probably just when the best value is available to buy). They’ll also look to blame someone else and expect compensation.
Should we be worried? (2)
We are told that global government debt will soon exceed $100trillion, up from $91trillion in 2021. Not helped by global catastrophes but nations have been accelerating their excessive spending, despite rocketing taxes on their inhabitants and businesses.
If everyone retains confidence in the game then all is fine. However, fears are also that interest rates can rise and of course it all needs refinancing and usually sooner than later as there aren’t many 100 year bonds. If the confidence in systems falters, not only do costs to governments rise but confidence can be shattered – as has been happening in a small way in regard to fears over our next Budget and excessive spending plans – that’s not politics – that’s the markets repricing the risks.
Looked at in another way, that is a colossal explosion of debt generally (and private debt isn’t much better). Of course, when interest rates are really low it is affordable but when higher, debt consumes more of government net taxation receipts. What other consequences can arise? Well, such an increase in the supply of money fuels inflation – either costs or bubbles in assets as has been happening especially in the US but UK residential property similarly.
Whilst the party continues (and certain on the Left believe in the ultimate fallacy of Modern Economic Theory that says just keep-on spending by printing more money), all seems well but when the music stops, like in 2008/9 with the financial crisis, the ramifications are serious. Government debt then was just $40trillion and whilst global economies (and inflation) have advanced, they have been outpaced by the debt. What consequences might a reckoning have?
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
