Postscript to Market Sell-Off

Further to my commentary on the market sell-off in my last blog post I am writing to clarify a few points after feedback from a reader. I may have not explained my thoughts clearly enough whilst certain use of language could have been misinterpreted.

Firstly I was not intending to suggest that China’s debt or Europe’s deflation or any of the other economic factors I listed are minor. They are highly significant problems but we knew about these systemic risks a month ago, two months ago and six months ago. My question is what was fundamentally new to have triggered the equity sell-off last week? It was not a sudden realisation for example that Europe has major economic woes.

My use of the phrase “a little bit of bad news,” caused concern with my reader. To clarify my tongue in cheek comment, I was referring to economic data such as unemployment rates, housing starts, factory gate prices, inflation figures or US non-farm payrolls which are regularly updated and published. If data disappoints markets can be sent into a tailspin especially where investors are already very edgy and sentiment is poor. I think this sell-off is a classic case. My view is a disappointing economic statistic in itself does not change the underlying economic fundamentals, but it colours the investors’ perceptions of such. A negative statistic can be a trigger for a major sell-off but it is not the fundamental cause. Straws and camels’ backs come to mind here.

I maintain that economic fundamentals normally change slowly but stockmarket reactions are more volatile. Whilst over time equity prices should fairly reflect  the economic fundamentals of a market and individual stocks, on a day to day basis investors may over-react and act irrationally. There is even a branch of economic research, called “Behavioural Finance,”  dedicated to this phenomenon whilst Buffet’s maxim is an example of a shrewd investor exploiting it.

For those who think investors are always rationale I would ask the question, what fundamentally changed in the global economy on Friday to send global stockmarkets up sharply, in Europe by nearly 3%, Greece by 7%?

Finally I retain my view the global economy, despite its significant problems which I do not wish to minimise, is not in as a parlous state as it was in 2008 or 2011 during the banking and EuroZone crises. I may be wrong, time will tell.

This blog reflects my own views and is intended as a general investment commentary.  It is not an invitation to buy equities or invest in the areas mentioned. You should seek individual advice before making investment decisions.

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Market Sell Off

In my last investment blog a couple of weeks ago I reported a downturn in equity markets. Since then sentiment has deteriorated further to trigger a major sell off.  So what are causes? The main culprits cited are weak economic data in the US, slowdown and debt in China, fears that Germany is heading for recession, deflation and lack of ECB action in Europe and Ebola. You name it, it is to blame, so perhaps even Germany’s 2-0 defeat to Poland in a recent European qualifier should be listed as a contributor to a downturn in her economy.

Two comments I heard however sum it up. The first was that given the US has been the sole engine of global economic recovery, weakness in the US economy derails this.  It is bit like being on an aeroplane when you hear the following announcement. “This is your Captain speaking, our last engine has stalled, please prepare for a crash.” The second was from Neil Woodford manager of the Woodford Equity Income fund who argues the sell-off is actually a rationale adjustment to weakness in the global economy. He stressed it is not another 2008 banking crisis. Banks are now much better capitalised and there is no problem with liquidity. He also thought we are now through the worst of the sell-off.

My sense however is the correction is somewhat surprising. None of the economic causes listed above are new. They were all known a month ago when markets were riding high after the vote on Scottish independence and the FTSE 100 was close to its all-time high. So what has changed? Sentiment. Investors are a nervous and fickle bunch with a tendency to herd or lemming instincts. A little bit of bad news can send them over the edge.

Moreover it is interesting that a prime cause cannot be attributed to the sell-off unlike in 2008 which was triggered by the collapse in Lehman Brothers and the banking crisis. Similarly the crisis of  2011 was caused by debt issues in the EuroZone and fears of a break-up of the Euro or an exit by Greece. This suggests to me there is less systemic risk to the global economy this time around. Investors seem to be hunting around and trying to pin the blame for the sell-off on something, but they are not quite sure what! I may be wrong and the collapse of asset prices may trigger a longer term depression but I suspect a rebound will follow. If I am right investors should sit tight taking a long term view. Now is not the time to sell but for the contrarians following Warren Buffet’s maxim, “Be greedy when others are fearful,”  it could mean now is a good time to buy equities.

This blog principally reflects my own views and is intended as a general investment commentary.  It is not an invitation to buy equities or invest in the areas mentioned. You should seek individual advice before making investment decisions.

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October Blues, US & UK Update

Global equity markets have pulled back since mid-September, not long after the FTSE 100 index was close to breaking through the elusive psychological barrier of 6,930, its December 1999 peak. So what is happening? A number of factors have weighed on equity markets. The political protests in Hong Kong have been a worry as have stock specific issues, notably Tesco and Sainsbury’s in the UK. In addition this week European Central Bank measures to deal with the EuroZone economy disappointed the markets as did US manufacturing data.

One important issue with the US is that although her economy is recovering well, it does not exist in isolation – weak global growth and demand impacts on US exporters. That said there is a silver lining, highlighted by Cormac Weldon a US fund manager with Artemis Fund Managers. He points out weak global demand and excess capacity makes imports cheaper, keeps inflation down and means the Fed may be able to keep interest rates lower for longer.

Weldon then tackled the thorny issue of the valuation of US equities. You will recall fund managers and other commentators are divided on this matter with many arguing the US is expensive. Weldon posed an interesting question, “expensive in relation to what?” He stated that there is a historic link between P/E ratios and inflation. (To remind you a company or market can be valued by a Price (P) to Earnings per share (E) comparison. The higher a P/E ratio the greater the valuation and vice versa).  Given inflation is modest in the US, Weldon observed that US should be trading at 18 times next year’s earnings rather than 15 times as at present. In other words maybe the US is not as expensive as some claim. In support of the US economy is the International Monetary Fund’s (IMF) view that in 2015 GDP growth in the US will rise to 3% p.a. from 1.7% p.a. in 2014.

In other news UK fund managers are increasingly supportive of large and mega-cap companies on the back of attractive valuations. Although there have been historic periods of outperformance over mid-cap and smaller companies, in the last 10-15 years returns from large companies have significantly lagged. Alastair Mundy, a highly respected contrarian value fund manager with Investec I listened to at an investment forum on Wednesday argued that large and mega-caps are too big to organically grow faster than the market so they have grown by acquisitions. Many of these have been difficult to manage and have not added value. Mundy believes there is now a lot of potential for improvement and highlighted a concept of “shrinking to greatness.” By this I understand he means focusing on their core business. Time will tell if the lumbering giants of the UK equity market will finally rouse themselves and deliver strong return for investors.

In conclusion the outlook for the US and UK seems positive to me. After a period of very low volatility, occasional sell-offs of equities are to be expected. However I suspect this recent reversal is unlikely to lead to a more significant correction. Perhaps the one dark cloud however is that labour markets do not seem to be functioning well, in the UK at least. For all the government hype about job creation many of the new jobs have been in low skilled, part time and zero hours contracts. In other words the employment market is still loose. Until we see earnings inflation topping price inflation spending will be muted, leading to anaemic economic growth.

This blog is intended as a general investment  commentary.  It is not an invitation to invest in the areas mentioned. You should seek individual advice before making investment decisions.


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Aiming High

This blog is not about investment per se but more about the use of a particular type of investment in financial planning. I am referring to investment in AIM companies. AIM is the London Stock Exchange’s Alternative Investment Market. Launched in 1995 more than 3,000 companies have listed on AIM. These are mainly smaller companies and may be early stage, venture capital backed or more established businesses. An AIM listing helps companies raise finance to fund expansion whilst the UK government provide considerable tax reliefs to encourage investment into smaller companies. However as noted not all AIM companies are start-ups and well-known examples are Majestic Wines, ASOS and Prezzo whilst Premier League football team Tottenham Hotspur were previously listed.

So what are the benefits and financial planning opportunities of investing in AIM companies?

1. Risk Reduction

Listed companies are less risky and more tradable than investment in unquoted companies. The latter are small companies whose shares are traded privately rather than on a stock exchange. Shares in unquoted companies are therefore highly illiquid as there is no market for their sale or purchase.

2. Stamp Duty Abolished

Stamp duty is no longer levied on purchases of AIM stocks unlike shares listed on a main stock exchange such as the FTSE 100 index.

3. Can be Held in an ISA

In August 2013 AIM stocks became eligible for inclusion within ISAs.

4. AIM VCTs and 30% Tax Relief

Qualifying AIM stocks can be included in a Venture Capital Trust (VCT). These are collective investments similar to investment trusts and the assets are actively managed. A range of different stocks will be held in a VCT to provide investment diversity and risk reduction. Moreover the tax benefits are quite remarkable. Investors receive 30% income tax relief, on investments up to £200,000 p.a. even if they are basic rate taxpayers, provided the VCT meets HMRC qualifying rules, the investor holds the shares in the VCT for five years and the investor has paid enough income tax in the relevant tax year. For example an investor pays £5,000 income tax each year and buys new shares in a VCT for £10,000 in 2014/15. He or she will receive a tax rebate of £3,000 at the end of the tax year through their tax assessment.

In addition VCTs pay tax free dividends and there is no capital gains tax to pay on shares when they are sold. These are similar to the tax benefits of ISAs although it must be stressed that shares in VCTs may be difficult to sell after five years. This is because there is no market for second hand VCT shares as investors do not receive tax relief on buying these. To mitigate against this many VCT providers offer a buy back facility, typically at a discount of 5-10% of the net asset value of the shares.

5. Relief from Inheritance Tax (IHT)

Certain AIM shares held direct or in a managed portfolio of stocks (but not in a VCT) qualify for Business Property Relief (BPR) for inheritance tax purposes, if the shares have been held for two years or more at the date of death. The use of BPR has considerable benefits compared to other IHT planning options. There is no seven year waiting period for IHT exemption after making a gift; there are no complex trust arrangements and investors retain the right to access capital in their lifetime. Consider an investor, Mr A has an estate of £625,000. On death his IHT bill will be £120,000 calculated as (£625,000 – £325,000) x 40%. Mr A is unmarried and does not want to give away capital to his nephews and godchildren in case he needs money for long term care. If he invests £100,000 into a managed portfolio of AIM shares and survives two years his IHT bill is reduced by £40,000 on his death. At the same time Mr A knows he can access his investment should he need capital in the future although naturally the IHT benefits will be forfeited.

Finally on this point here is a first.  AIM stocks that qualify for BPR can be included in an ISA with the corresponding IHT relief after two years.

6. Potentially Good Long Term Investment Returns

Tax benefits are all very well and good but it is axiomatic that there should be a good investment case for buying AIM companies. Smaller and fledgling companies offer significant capital growth potential in the long term and have historically outperformed larger UK companies although they carry a high risk of failure, volatility of price and illiquidity compared to larger companies. They are especially vulnerable during recessions, credit crunches and risk off sentiment when investors take flight to safe havens.

Analyst coverage of the AIM market is paltry and is normally conducted in house by fund managers running AIM VCTs and AIM portfolios. In this market it is essential in my view to invest via a portfolio of stocks run by a high quality manager rather than pick your own AIM stocks. They can avoid the many poor quality companies listed on AIM, can unearth mis-priced gems and undertake due diligence to ensure a company qualifies for Business Property Relief. In my view there is a strong case for investing in smaller companies including AIM stocks as a small part of a balanced portfolio for clients who are not risk averse.

This blog is intended as a general and brief  commentary for UK residents on AIM stocks and their use in financial planning.  It is not an invitation to invest in the areas mentioned. AIM stocks and VCTs are higher risk investments and may not be suitable for you. They are typically used by experienced investors as  a small part of a balanced portfolio. You should seek individual advice before making investment decisions.


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US Earnings Growth

My last blog post focused on the US stockmarket and equity valuations. You will recall that opinion is strongly divided between the bulls and the bears. The latter have argued there is a disconnect between the high stock valuations and the lack of underlying earnings growth from US companies.* It was with interest therefore that I read a recent technical report from JP Morgan Asset Management. In summary they reported another record breaking quarter for earnings for S&P 500 stockmarket index companies, the fifth quarter out of six since the beginning of 2013. Year on year to the end of the second quarter to 2014 earnings per share (EPS) for the constituents of the S&P 500 stockmarket index grew by 11.4%. To explain, EPS are profits, after costs and taxes, that are attributable to each share.

In simple terms the EPS growth was principally due to two factors – sales growth and increased margins although share buy-backs also made a small contribution. In relation to sales growth JP Morgan observed in the second quarter of 2014 there was strong revenue or sales per share growth; this had been lacking in the previous few years and its re-appearance is positive for company profits. Margin is the profit from each sale item. For example if a company that sells widgets for £1 each made 20p profit last year, but this year the same £1 sale results in 25p profit, for example due to efficiency savings or lower labour costs, the margin has risen.

Another interesting point in the article was that in the second quarter companies levered to the domestic economy surprised analysts’ expectations on the upside. However it should be noted that earnings growth varied across the sectors, with telecoms, materials and healthcare performing well, utilities weakly whilst  EPS for financials contracted.

In conclusion JP Morgan suggested the record high profitability for US companies is set to continue, domestic economic activity will drive revenue growth and the potential for taking on debt onto balance sheets will help counter headwinds such as higher labour costs and wage demands. They conclude although above average equity valuations will reduce expectations of future returns, the current analysis adds up to a constructive and benign environment for equity investment in the US. Time will tell.

* This refers to the oft quoted valuation measure called the P/E ratio, the argument from the bears goes in the US, earnings per share (E) have not kept pace with share prices (P).

This blog is intended as  general investment commentary on the US and is not an invitation to invest or not invest in the areas mentioned. You should seek individual advice before making investment decisions.

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When the US Sneezes

We all know the rest of this adage – “the world catches a cold.” With the US representing around 30% of the global economy what happens on the other side of the pond has an impact on us all, be that a US consumer recession, a banking collapse or tapering of QE. It is therefore with interest I recently read two fund managers expressing polarised opinions on the US stockmarket.

Bearish on the US is Alastair Mundy who runs the Investec Cautious Managed fund. Mundy is a well-known and respected contrarian investor. He has a particularly cautious view of the market and is concerned about the way investors have piled into equities and are buying high. He observed the S&P 500, a key US stockmarket index rose 30% in dollar terms in 2013. Although so far in 2014 returns have been more muted he cites the Bank of International Settlements (BIS)* who considers that “euphoric” financial markets have become detached from reality. Debt remains high in the West and monetary policy is loose. Mundy concluded that valuations of equities, especially in the US are high, he noted corporate earnings have disappointed and warned of more volatile uncertain markets. To date his short position on the US market has impacted negatively on his fund’s performance.

In contrast Felix Wintle, manager of the Neptune US Opportunities fund is aware of the concerns but is positive about the US. He believes the equity rally has further to go despite those who argue that the market has gone up too far and we have not had a 10% market correction recently. Wintle queries what is so special about a 10% fall and observes we had 4% to 5% corrections since 22/5/13 on five occasions. Despite their regularity they have been shallow and investors have bought the weakness, a classic behaviour in a bull market.

Another concern he address is the low yield on 10 year US Treasuries. Ordinarily low government bond yields signifies the market is expecting weak economic growth and hence muted inflation. This makes fixed interest attractive, pushing up prices and lowering yields. However Wintle says technical factors have pulled Treasury yields lower. One of these is the huge reduction in stock being issued by the US government. It is apparently 60% lower than a year ago. This is due to the reduction in the US federal deficit, down a staggering $1 trillion since 2010. It now sits at around $537 billion. This deficit reduction has been an unspoken bull story.

Wintle also consider that valuations are not stretched although CAPE**, a measure of equity valuation is at an elevated level. However he discounts this on the basis CAPE is a historical 10 year moving average during which there was significant stockmarket volatility. Finally Wintle observes an increase in M&A*** activity, a sign of that company managers are more confident in business conditions. He does however consider higher oil prices would be a concern and run-away inflation would hit consumption.

So what do I conclude? Am I am a Wintle or a Mundy, a bull or a bear? I think I am more leaning to Wintle’s view, perhaps though with a dash of caution thrown in. I expect volatility to pick up in the next 12 months and a large correction of 10% or more would not surprise me. This could be triggered by geo-political events or investors talking themselves into a crash – the wall of worry theory. However I sense the US bull market is set to continue supported domestically and by recovery in China and other global emerging markets. This would benefit global exporters and mega-cap US companies with strong overseas earnings.

Of particular interest for me however are US smaller companies. These have underperformed other sectors in the last year. Data from FE Trust (12 months to 15/8/14) show the following average returns of funds in the following IMA**** sectors:

UK Smaller Companies – 11.7%

North America – 8.8%

North American Smaller Companies – 4.0%

If the US domestic economy improves and consumers feel more confident it should be positive for US smaller companies. As you will recall these are much more domestically focused than larger companies. Another positive feature is they are less covered by analyst research than larger companies and mispriced gems are more likely to be exist for good stockpicking fund managers to unearth. Finally smaller companies are likely beneficiaries of M&A activity.

*The BIS is an financial organisation which seeks to assist central banks in their pursuit of monetary and financial stability. It acts as a bank to central banks.

**CAPE is the cyclically adjusted price earnings ratio. The PE ratio is a standard valuation measure for a stock or a market and is the price of a share divided by the earnings per share. The higher the PE the higher the market values the stock or market. A PE may be a forward or historic measure.

***M&A is mergers and acquisitions

****The IMA is the Investment Management Association who place funds, OEICs and unit trusts, with similar investment mandates into sectors.

This blog is intended as  general investment commentary on the US and is not an invitation to invest or not invest in the areas mentioned. You should seek individual advice before making investment decisions.

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China Debt, A Systemic Risk?

Chinese debt is often cited as a potential systemic threat to the global economy. Other culprits are deflation and Japanisation of Europe (the latter incidentally was dismissed by Rob Burnett, Head of European Equities at Neptune Investment Management in a recent webinar I listened to – but this is another story), tapering of QE and predicted interest rate rises. Although I think a stockmarket correction is more likely to come from profit taking or investors talking them themselves into a crash, the wall of worry theory, I want to cover the issue of Chinese debt. To this end it was interesting to read a recent report on this subject from ETF Securities a leading providing of exchange traded commodities. They produce high quality research and reports but clearly have a vested interest in China’s economy given the commodities market is highly correlated with it.

In the report ETF Securities compared debt levels to GDP across the world in the form of a bar chart. To remind you GDP or Gross Domestic Product is the sum of all the goods and services a country produces; effectively the output of its economy.  A debt to GDP ratio is a more important measure than total debt in monetary amounts, as a very productive economy can service a high level of debt. Top of the pile with highest debt to GDP, (debt is private sector including the consumer and government borrowing) was Ireland, bottom was Saudi Arabia. Countries with high debt to GDP ratios included Japan (2nd), Luxembourg (3rd) and Belgium (5th). Countries at the other end of the scale were Russia, Mexico, India, Indonesia and Argentina. As an aside this accords with the observation of generally low debt levels in emerging markets, one reason I favour this sector.

Back to China. Chinese debt to GDP was half way along the scale. It is not a highly indebted economy compared to Japan, the US or the UK, although debt may be under reported. However a unique feature was that Chinese debt was divided into government, local government and consumer debt. For all other economies the bar chart showed only government and private sector debt and this suggests Chinese local government borrowing is a particular feature of their economy. (As another aside, apart from Japan, in every other country government debt was lower than that of the private sector). Further local government debt in China exceeds central government debt. Most of the local authority debt is to fund off budget spending. This arose from fiscal reform in 1994 which shifted revenue away from local to central government. At the same time local authorities had to fund the same level of expenditure including infrastructure spending from the same tax revenue. Local government funding structures are complex and opaque as technically local governments are prohibited from borrowing directly. This led to them setting up companies called Local Government Funding Vehicles (LGFVs) to raise finance.  ETF Securities note:

The central government has recognised that local governments have debt financing needs and the charade of off-budget financing is untenable in the long-term…. Eventually we expect the government to bring in the necessary reform to allow local governments to raise bond finance more directly through something akin to the municipal bond market in the US.

The article also stated central government has already raised bond finance on behalf of some local governments and suggested further liberalisation and oversight of local authority debt but that local debt levels are likely to rise to meet annual growth targets. Rising leverage has risks but ETF Securities consider Chinese government debt is quite moderate and well below the levels considered excessive in other economies.

I conclude there are concerns about Chinese debt (including the shadow banking system*). The biggest issue for me is the lack of transparency, raising the question do we really know how bad and intertwined debt in China is? The role of complex, opaque and ultimately toxic CDOs (collaterized debt obligations) in the 2008 global banking crisis suggests caution.  However with high economic growth rates, large foreign reserves and central bank fire-power I somehow think the Chinese will remain in control of the problem. Time will tell.

*The shadow banking system in China is in contrast to state owned and highly regulated banks, who previously accounted for virtually all lending in China. Shadow banks are alternative providers of credit and include trusts, leasing companies and money market funds. They have raised significant concerns. An interesting article in the Economist you may wish to read is:

The opinions expressed in this blog post are those of ETF Securities and my own. You should not make investment decisions based on them but should seek individual independent advice.


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Half Time Team Talk

In football parlance, for investors we have just come out for the second half. So what is the half time assessment of stockmarkets in 2014? My brief comments are based on my own observations and those of Neptune Investment Management, M&G and Neil Woodford, formerly of Invesco Perpetual and manager of the newly launched Woodford Equity Income fund.

Equity Market Overview

According to Neptune developed equity markets have been in stop start mode in 2014 with returns flat up to April but then a return to the bull market in the second quarter. Weather related factors in the USA were a temporary headwind to economic growth in the first quarter as were deflation fears in the EuroZone. The ECB* have taken action in loosening monetary policy with potential money printing or QE to follow. The second quarter rally has driven US and German stockmarkets to new highs.

Unexpected Bond Rally

M&G observed a surprising feature of the first half of the year was the rally in fixed interest, notably government debt. Prices have risen and yields have fallen even in Spanish and Italian bonds. This was unexpected given tapering of QE in the USA and the likelihood of higher interest rates notably in the UK. The predicted great rotation from fixed interest (or bonds) to equities is still to happen on a significant scale although it should be noted that institutions such as pension funds that need to match financial obligations at different dates will continue to be long term holders of bonds as will income investors.

Other Assets

Commercial property is a sector which is highly economically sensitive and returns are gathering pace although unlike residential property they are predominantly from rental yields rather than capital values. Gold has continued to tread water at just over $1,300 an ounce, although a recent theme is that central banks are net buyers of gold rather than sellers.


In the UK Neptune noted there was a shift in the equity market with investors moving away from the winners in 2013 to the laggards. For example there was a sell off in mid-caps in the Spring with undervalued UK large companies and mega-caps back in favour. At a sector level there was pressure on house-builders, building merchants and retailers with a move into energy and materials. Incidentally this accords with improved investor sentiment to miners and commodity companies globally which have fared badly in recent years.


In the US the economy contracted by 2.9% in the first quarter, much of this was weather related. Despite this the S&P 500 index has continued to rise illustrating that economic growth and stockmarket performance may be negatively correlated. M&A activity has picked up and this may be a factor here.


In Japan the stock market rally has lost steam. One factor was the increase in VAT from 5% to 8% in April which is expected to dampen consumer spending although wage growth was positive, land prices are rising and corporate earnings have strengthened.


The spectre of deflation has been a concern although as Neptune observe, “the ECB’s thorough stress test of banks is a landmark moment for the Euro area. Following the results, strong banks will be able to lend freely into the economy.”

To close I was interested to hear Neil Woodford’s view on the market as it strongly backed the assessment from Apollo Multi-Asset Management which I covered in a blog dated 8/3/14, “Beta Jockey’s to Fall at the First Hurdle,” see .

In Woodford’s article he argues stock-picking is back in favour. He observes in the last five years with extraordinary monetary policy it has been difficult to beat the market. This is because QE has raised asset prices indiscriminately, like a rising tide lifting all boats. Evidence comes from data of global stock market correlations since 1990 which have been significantly higher than average especially between 2009 and 2012. In recent months correlations have fallen and Woodford believes that stock price movements will return to being determined by fundamentals, such as cashflows, balance sheet strength and good management. In this scenario good stock-pickers will do well.


Time and space does not permit full coverage of the global economy and stockmarkets. Moreover there have been country specific factors, for example the Russian market sold off with the Ukraine crisis whilst sentiment to India has improved with a new reformist government.

My assessment is systemic risk to the global economy and financial system does not feel as bad as in 2008 with the banking collapse or in 2011 with the EuroZone crisis. Although high equity valuations in some markets invariably will result in profit taking and corrections, the global economy is in recovery mode, albeit a patchy one. Overall it looks good for equities which remain my favoured asset class although investors will need to be selective, considering undervalued sectors and markets for example large UK companies and emerging markets. In the bond market I favour flexible strategic bond funds that can invest across the range of fixed interest assets and inflation linked bonds.

*The ECB is the European Central Bank

This blog reflects my own views not necessarily those of Neptune Investment Management, M&G Investments, Apollo Multi-Asset Management or Woodford Investment Management. It is intended as general investment commentary and is not an invitation to invest or not invest in the areas mentioned. You should seek individual advice before making investment decisions.

Posted in Asset Allocation, EuroZone, Japan, Market Commentary, Review of the Year, Stockmarkets, UK Equities, UK Mid-Caps, US | Comments Off

Nice One George

July 1st marked a significant change to the investment landscape with the launch of the NISA, the New Individual Savings Account, also referred to a super ISA.

George Osborne*, the Chancellor of the Exchequer surprised us all in the recent budget with liberalisation on how pension benefits can be taken and the new rules on ISAs. At last a Chancellor had the common sense to round up the NISA allowance to a memorable figure rather than the odd amounts such as £11,880 that previously applied.

Aside from the boost of the annual ISA allowance to £15,000 per person in the 2014/15 tax year there were several other key changes:

*All of the annual NISA allowance can be invested in a cash NISA, previously the maximum was 50%.

*Transfers are now permitted between a stocks and shares NISA and a cash NISA. Previously a transfer could only occur in the other direction. The change permits de-risking of equity portfolios using a cash shelter with a decent interest rate.

*Cash held within a stocks and shares NISA, such as Fidelity FundsNetwork NISA Cash Park will now be tax free. Previously the anomaly existed that interest from cash held in a stocks and shares ISA was taxable. It was intended as a disincentive to remain in cash; stocks and shares ISAs after all are intended to boost equity investment. Mind you with Fidelity FundsNetwork paying a paltry 0.1% p.a. interest and other providers paying nought the issue of tax was negligible.

You are still only permitted to contribute to one cash NISA and one stocks and shares NISA each tax year, however transfers of previous tax year ISAs can be to an alternative provider.

I suspect the changes will boost competition especially amongst cash NISA providers. Not only has the cash allowance risen from £5,940 prior to 1/7/14 to £15,000 now, banks and building societies will be eyeing up investors with large amounts of money in stocks and shares NISAs looking to switch to the safety of cash. This competition plus likely interest rate rises in the next year or two is likely to drive up cash rates.

What will be interesting is to see whether stocks and shares NISA providers will develop competitive cash NISAs that sit alongside the former permitting ease and speed of transfers between the two versions. If they can under HMRC rules and offer this facility they are less likely to leak funds to banks and building societies. Incidentally they do not have a great record when it comes to cash ISA transfers and unless they up their game on speed and efficiency I see problems down the line.

*George may not be nice in the future as past performance of Chancellors is not necessarily a guide to the future.


This blog post reflects my own opinions and is a general commentary on changes to ISAs not a recommendation to invest in a NISA.

You should seek individual advice before making investment decisions.

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Climbing a Wall of Worry

Imagine being a rock climber. The higher you get up the rock face or cliff the scarier it gets, particularly if you dare to look down. So it is for investors as stock market indices in the US and the UK scale new heights. A widely expressed fear is we are heading for a crash and investors are getting nervous. So should you be banking profits or switching to the safe haven of cash? Let’s examine some facts that will hopefully provide some guidance.

The current bull market in equities has been going for more than five years and this is significantly longer than average. Data from the US since 1932 suggests this is just over three years and a correction is arguably due. That said the current equity rally started from a very low base after the worst financial crisis since the 1930’s depression. This bull market therefore incorporates a strong element of recovery in very beat up asset prices. It may be dangerous to suggest this but this bull market may be different. Moreover equity performance has been variable in different global markets. The US followed by the UK have led the way being the fastest economies out of recession. The EuroZone in general has lagged whilst global emerging markets have delivered poor returns in recent years with slowing economic growth in China which is seeking to reform its economy, a flight of capital with “risk off” investor sentiment and tapering of QE. Japan had a strong equity rally that lasted for a year but this has since stalled with the third arrow of Abenomics*, structural reform being difficult to fire.

In support of the bears, who might be happy to climb a tree but not a rock, it is true in some markets valuations are stretched with prices rising faster than earnings. For this reason earlier this year asset allocators began rotating from US to UK equities and downbeat sectors such as miners and emerging markets have started to attract investor interest. Moreover a few months ago there was a sharp sell-off in UK mid-caps after a very strong rally in recent years. The best explanation appears to have been this was profit taking by nervous investors. Interestingly undervalued mega-caps are now back in favour after years of dull relative returns.

So what do I think? I am not unduly worried by a correction. The global economy is still in the early stages of recovery and whilst there are systemic risks from a property bubble and bad debt in China and deflation in Europe, my sense is these are relatively small compared to the global banking crisis of 2008 and the EuroZone fallout in 2010 and 2011. I suspect the biggest risk is fear itself. Investors like lemmings have a habit of throwing themselves off the top of the cliff. A sell off will be caused by investor panic rather than fundamentals. In support of this view it was telling to read fund managers suggest in a bull market you buy on the dips and add to your best ideas. A correction itself triggers buying but is healthy in removing the froth in valuations. It may cause the bull market to pause for breath but it may not alter the upward trend. As an example consider the famous stockmarket crash in October 1987 when equities fell 22% in two days. You may recall the chart of the UK equity market I cited in my last blog:

In the context of the equity rally of the 1980s and 1990s the 1987 crash appears as a relatively small blip and the FTSE 100 finished higher at the end of 1987 than at the start of it.

My guidance would be to adopt a long term buy and hold strategy and ride the volatility but it is your money and I can’t take your place on the rock face. You may prefer to be cautious and undertake selective profit taking and risk reduction or rotate to undervalued equity sectors and markets. It is a perfectly reasonable strategy to invest tactically, bank what you have and for caution to take precedent over gaining more. The risk of risk reduction is the correction may not happen, an investor holds cash earning diddly squat and they pay more to buy back into equities later on. This is precisely what happened in late 2011. At that time I was convinced a EuroZone inspired crash was imminent. I was wrong. Guessing the market is notoriously difficult.

*Abenomics is the name given to Japanese Prime Minister Shinzo Abe’s policies to revive the Japanese economy.

This blog reflects my own understanding, views and interpretations of global stockmarkets . It is intended as general investment commentary and is not an invitation to invest or not invest in the areas mentioned. You should seek individual advice before making investment decisions.


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