Hope For The Future


Dear Friend

HOPE FOR THE FUTURE?

INTERESTING FACTS – SCHRODERS

VOLATILITY CONTINUES

CASH LEVELS

ORGANIC CLIENT UPDATE

ESHOT MIX-UP

RISK WARNING

HOPE FOR THE FUTURE?

Those on our client database will soon receive an update on conditions as we see them.  It is the largest piece of work we have done on the crisis so far.  If you would like one, please ask and we shall add your address to the postal list.  We have found that there is a shortage of salient and lucid information for investors to be able to consider – it is easy saying ‘what sensible things everyone else’ is doing or appears to be doing or commenting on what has already happened, after the event – that is not very helpful to anyone.

So at time of writing, the Dow Jones’ index has bounced 29% from its lowest point (technically a Bull Market when over 20%), the FTSE100 by 19% and the FTSE250 (more UK-centric) by 20.5%.  That’s encouraging, though is it too early to tell if this is a recovery or a ‘dead cat bounce’ in a Bear Market.

All types of strange behaviour have exacerbated present market conditions and will continue to do so.  Some is understandable – for example, an investment fund which has borrowing and which invests in companies which may have been most badly affected by the lockdowns would drop further than say a pharmaceutical company which may be working on a vaccine.  However, in many regards, how can funds value their investments? What values should they apply to closed commercial properties for example?  What value is debt which may have been ‘safe’ but where now it is unrealisable and not paying interest and the assets upon which it was secured may have tumbled in value if indeed it could be sold at all?  What about if certain loans have ‘covenants’ (something I have always never liked as the times they are likely to be exercised is when it is the most stupid of conditions and it does nothing to help the borrower or lender).  We have heard of several examples where lenders have demanded that debts are repaid so rafts of investments have been liquidated at stupid prices to satisfy that, assets which today could be worth a third more. Then with smaller companies, shares are typically valued at the price on the market but if you own a big chunk, you may be unable to sell at all and certainly not at anything like the quoted price but that can work against you too – you can’t buy-in either.  Then there are companies which have investments as part of their reserves – like insurers.  Yes, travel insurance claims will be very high but there are few other accident/fire/etc losses happening for them so will there be windfalls and enough to offset the declines in the values of their reserves?  Their share prices have fallen because of the market, because of the claims, because of the cancellation of dividends as demanded by the regulators and because of the drops in their asset values but through the other side, this becomes a multiple bonus upwards.

It is the same with ‘gearing’ generally, borrowing to invest.  If you do so and asset values fall, you lose on your stake money and you lose on the borrowed money too (which you still have to service and repay) but if things go up, you gain on yours and also on the borrowed funds (that’s how most people have made money on their homes, profiting at the expense of the savers who lent them money to buy their homes).  Again, if this is an investment fund, it will have lost because of the market, lost on the values of its assets and lost on the borrowed money too but when things turn, the same nastiness impacting it on the descent is gearing, multiplying its recovery.  No, I am not saying that you fill your buckets with these but having some in a balanced portfolio is not high risk when matched with the prospective recovery.

There is a simple adage which many institutions are peddling at the moment like ‘we only buy companies with little borrowing and with robust business models and earnings which will endure through the other side’.  It is as if there is some exclusivity with the thought or that it ‘means’ anything – which it doesn’t really.  If you have a billion pound company with £500million of debt and £750million cash in the bank it is not high risk and some of these geared models can offer some of the best returns as long as they can service that debt (at record low costs to them now) and with comfortable margins against discomfort and indeed an ability to refinance upon maturity.

There is talk of ‘recession’ as if that is a surprise.  That means ‘two quarters of economic decline’.  So in theory, purists could say that the economy could fall by 35% in one quarter and rebound by 25% the next and not be a recession… or that a drop of 0.1% in one and then another 0.1% the next is a technical recession.  Yes, there will be a dramatic decline in economic output and all the nasty consequences of that – we know that, it is not a surprise.  The markets know that and price it into their figures.  We shall only be able to see what long-term negative implications last after many months after the whole pandemic is over.

There is another market factor to recognise perhaps.  That is the return to equilibrium.  This theory applies to all asset classes – including residential properties’ values (and don’t forget that).  It suggests that if say the market rises exponentially and way above its long-term equilibrium line that at some point the over-stretched elastic will snap-back.  Indeed typically, the higher above the line then the sharper the fall and then it goes way below that line before rebalancing to somewhere more relevant to where it should be.  It can be ‘black swan’ events which trigger such ‘reversion to norm’ but the theory says that perhaps simply it is ‘cause and effect’ and that the event, the virus, is then the excuse for what was going to happen anyway.

INTERESTING FACTS – SCHRODERS

Thank you to Schroders for some interesting facts. https://www.schroders.com/en/insights/economics/downturns-this-deep-can-take-a-long-time-to-recover-from-financially-and-mentally/  apparently since 1871 there have been eleven times when the Market (the S&P 500) has dropped by over 25%.  The median recovery point from such a drop has been 1.8 years.  In seven of those 11, full recovery took less than 2 years and three took between 4 and 5 years.  Those who shifted to cash after the 1929 collapse (a fall of 80%) had to wait 34 years before break-even.  Those who stuck-it-out only waited 15 years and those who drip-fed-in additional small investments only had to wait 7 years.  Those who rushed for the door in 2001 (tech bubble bursting) and 2008 (financial crisis) would still be out-of-pocket today.

Over the longer term, over the last 148 years and two months, US stocks have returned an amazing 8.9%pa which is 6.7%pa ahead of inflation.  Cash returned only 4%pa and clearly at the moment that is effectively zero.

VOLATILITY CONTINUES

So the markets continue their gyrations and it will have been as easy to have missed-out on the bounce as it has been to miss-out on the drops too.  ‘Unprecedented’ continues to rear its head in so many ways.  We are told the US Market enjoyed its best fifteen day streak since 1933 though the recovery has not necessarily been driven by the stocks which fell the most.   I am not in any way trying to be ‘religious’ with my next thought, but it was helpful and it may be valuable to you too.  I am also not trying to upset anyone with faith who may recognise the story.  In the bible there are two significant mentions of Jesus and storms.  We are in the midst of a colossal storm now but I suppose the analogy is that when our medium and long-term plans are steady, we can overcome the storm.  Matthew 8 v 23-27 is one and the second, Matthew 22-32, helpfully shared here. (I do not promote the website or have any connections with it incidentally):-

https://urbanchristiannews.com/2020/04/greg-laurie-on-trusting-jesus-in-the-coronavirus-storm/

Such extreme volatility doesn’t make it easy for us as investment managers.  Let me give you some more silly examples but in the positive this time.  Whilst our main holdings are funds, we own a few direct shares as well.  We own some shares in Costain, the large construction company.  The sell-off and concerns about being unable to raise new equity to refinance its balance sheet saw those shares hit 24p at the lowest point.  So the Company announces a share of government orders worth a mere £3.5billion and this £30million company almost quadruples in value with the shares at 96p, with a  couple of days where between 5-10% of all its shares change hands.  Yes, for many investors the recovery is still simply diminishing their losses but yes, we did buy some at lower levels if we had cash.

Then a smaller company, Premier Foods Plc which has been going flat-out manufacturing foodstuffs for us to consume; its shares hit 18p and are now back to 32p, a gain of a mere 78%. Or Funding Circle, the peer-to-peer loans’ company which did not float all that long ago; its shares had seen 25p but on announcing that it has been picked by the US to aid its ‘Paycheck Protection Loans’ and also as a recognised lender for the UK’s Business Support Loans, the shares have hit £1.39.  How can any rational investor or manager have confidence to buy shares at the low levels in such insane conditions when within days the market’s view is transformed so ludicrously and really with little actually happening?  However, what is clear is that if you are out, if you have sold at a loss, that paper loss has become a totally unrecoverable loss.

The oil price is interesting too.  Frankly, it has to be a ‘buy’ when West Texas Crude has been as low as $18.03.  OPEC and the US will agree further cuts in production.  The price can fall further but at some point, it will recover to more normal levels and we cannot rely upon universal green energy for some time in our lives yet.  Indeed, the lower prices will drive-down green energy prices too and cause some of them financial problems as they are often far more expensive than very cheap oil.

CASH LEVELS

Not made as a prediction of anything but a survey has found that portfolio managers’ cash levels are the highest since the 9-11 terrorist atrocity.  When added to private investor activity (withdrawing rather than investing) historically extremes tend to represent some of the best times to invest.  It is not going against the masses just for the sake of it but recognising that herd mentality tends to do the wrong thing at the wrong time (or the right thing at the wrong time).  Rationally, it is appreciated how difficult it is to buy when things are very depressed in price as the reason they are depressed is the expectation that they will become even more depressed.  If the expectation for the future was rosier, then clearly the bottom would have passed and the asset value would already reflect the improved consensus view going forwards.

ORGANIC CLIENT UPDATE

The Financial Ombudsman Service has found against the original pension company which arranged a transfer of a standard pension into one which facilitated the purchase of a hotel room/apartment in the Resort Group Plc’s project in Cape Verde Islands.

This is good news as it creates a precedent.  The company involved, Insight Financial Associates Ltd, defended itself by saying it was only the pension host and did not provide advice on the transaction nor the underlying investment.  Whilst on one hand we have total sympathy with Insight in that it didn’t give advice and to be frank the investor should be responsible for his unwise decision and investing in a totally unregulated asset, the Ombudsman noted that Insight’s responsibility extended further than simply accommodating his request.  The good news is that if you have been encouraged to have investments with The Resort Group Plc in any way, then compensation to put you in the position from which you should never have been moved initially is now likely, whether you had advice or not.

The ’bad news’ is that Insight Financial Associates Ltd clearly has some link to the Organic debacle in that it has acquired, amongst others we understand, N J Associates Financial Services Ltd and with it, all its clients which include the largest batch of afflicted clients to the Organic issues and for which that firm was responsible under the Pension Calculator Ltd banner.  As with that entity, if it goes into liquidation then compensation is paid by the FSCS so all ongoing practising financial advisory firms have to pay into the pot to compensate those firms which did the wrong things in the first place.

If you are an Organic client and have yet to start your claim, please contact the FSCS without delay now – or us for further guidance but please don’t go to one of the parasitic Claims’ Management companies and see up to 48% of your right and just compensation going to them.

ESHOT MIX-UP

Apologies if you had a ‘new contact’ email about eshots recently.  A database audit resulted in a few duplicates being issued; I do apologise for that.  However, I promise that you are on the list!  However, we were reminded that for foreign currency transfers, if you haven’t discovered it yet, it is worth having a look at ’Transfer Wise’ which is really reforming the traditional bank transfer methods of sending funds overseas and at very competitive rates and costs.

RISK WARNING

Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.

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