We look at some long-term trends this week and the implications for
equity investors. We do believe investors in our funds are in for the
long haul. That is after all somewhat the idea of low volatility
investing.
So, what could be more long term than speculating on when the main UK
index will finally hit five figures? Is this just an amusing thought?
Well perhaps, but if we want to pretend to do the right thing for our
pensioners, our economy, our children, our workers, then nothing
matters as much as the efficient allocation of capital, and having a
pretty good supply of it. Not just capital but equity capital, risk
capital, long term committed investment.
Any Third World outfit can pile up debt. But lending money helps the
lender, not us. They would not do it otherwise. And debt helps our
children least of all.
So how have we done in the UK? Are we growing our wealth ahead of our consumption?
Well the FTSE hit this century at about 7,000, and well, we are just
about 6,000 now. Twenty years of apparent economic growth and we have
gone backwards. Nice one.
Well how about another index, say the S&P 500, it was about 1,300 then, and, well now it is 3,500 – well over doubled in that time.
Not that impressed?
Well look at the NASDAQ, much the same, indeed I will use the year
2000 high of 5,000 for this one, as if you use the actual closing price
(after, just to remind you it had almost exactly halved), the rise to
11,600 now feels too extreme.
You can whistle in the wind as much as you like, pump your patriotic
pride up, or indeed believe we can furlough COVID out of existence, or
not want to fund pensions, or do want to pay for HS2, or think
devolution is easy.
All or any of that does not matter a jot, if you can’t grow your
wealth as fast as your consumption, and it seems from this, that we are
not even starting.
Well we are better off than most, surely, how about that terrible Mr.
Modi, in India? Well the SENSEX was at 5,000 in 2000, it is at 40,000
now, and no, that’s not a typo. Some of that is high local inflation,
but the majority is not.
Luckily, our European friends can always help us out, Macron’s lot
are pretty similar to the UK, 6,000 to 5,000. That’s surely a relief of
some sort? Only doing as bad as the French feels solid enough.
Looking instead at Private Equity and the USA
Faced with such dire UK returns we do of course have ways out. Which
we have been taking in ever increasing numbers, one practical one is Private Equity,
at least you avoid the nonsense of public markets rules and
regulations, which are it seems just suited to outfits that go nowhere.
Or another much favoured strategy, is to hold anything but sterling.
While tucked away in private portfolios and pension schemes you will
increasingly find large chunks of the FAANG stocks, at the very least
(if not whole sections of US indices).
Ignoring any moral purpose in investing
Well OK, so? I guess we are ignoring both any moral purpose in
investing and any national value in allocating capital, as investment
“performance” trumps everything.
There is ESG, it is true but as far as we can see, unless you are
actually operating a coal mine you can get a green pass on most things.
Certainly, those FAANGS seem to feature in a lot of ESG portfolios;
convenient that.
Or perhaps not. I feel nervous about so much of our economy and savings resting on investing in a handful of star names.
We were, in the meantime, also looking at a presentation this week, showing that for the S&P 500 as a whole
profits, are just as stagnant as in the UK, those spectacular rises in
aggregate reflect a slice of buybacks (about 20% it seems) plus a big
slab of re-rating.
In other words, the FAANGS are neatly balanced by a shedload of turkeys.
While perhaps our performance is then a failure of our institutions, not necessarily of business?
Yet, do we see any of this ending? If we don’t, then why invest anywhere else?
Reviewing our Funds
As a house we have both an active Global Total Return Fund and the
systemic Monogram momentum chasing model. So, we are certainly not
taking any stance, we invest abroad (that’s the global piece) and chase
markets, (that’s the momentum). Nor in truth to make you money, do we
have very much choice. It seems our industry has no alchemy, no clever
tricks, beyond avoiding our native land.
This is an odd place to be forced into. It is equally an odd Establishment that does this to us.
It would be wrong of us, equally, to claim otherwise.
Monogram in-house collage using pictures taken from Wikimedia commons
FULL OF SOUND AND FURY
Stepping slightly back, we see the political frenzy consuming the US
as being more tinted by the need to feed the voracious news cycle (and
the media money that earns) than reality. We have been clear for a long
while that Trump is unelectable, indeed it was something of a fluke he
was ever elected. Rightly or wrongly he has become even more unelectable
since and lightning will not strike twice.
So, ditch that as a concern (I believe the market has already),
indeed, perhaps more to the point, ditch any chance of Republicans
holding the Senate either. They can barely muster a majority for a
Supreme Court pick now, to believe post-Biden’s win they will be of much
relevance is folly. In short it is all a non-event, and silly talk of
coups and legal disputes, can be kicked into the long grass too. Shorn
of the badge of office, Trump will have strikingly few friends in DC.
If
the market has discounted it, then I suspect so, soon enough, will the
economy. There is, it is true, a long and archaic interregnum, but with
so clear a result, I expect the new cabinet and hierarchies to drop
fairly easily into place.
So, what of another US stimulus
package? Well as ever Wall Street is running with the hare and hunting
with the hounds. It craves more hand outs for short term gain, but knows
the excess liquidity damages our future prosperity, by increasing the
debt burden.
So it is a good sign that the Senate is at
last standing up to the populists, craving ever more bail outs. While
Congress clearly wants the political gain, more than any concern at the
social pain, as well.
Anyway, we are so close to the wire, it hardly matters now, either way.
HAVING EXHAUSTED EVERY OTHER ALTERNATIVE
So, what of the other mess, Boris and COVID? Well we are now trying
to copy Germany and back off the US approach, and so along comes ‘Kurzarbeit’.
Which means exactly what it says on the tin, no ‘heroes’ here and a
topic we have indeed mentioned before. This was how Germany survived the
last recession. Notably it targets the working poor, a persistent UK
theme under several governments.
So, it does not just aim
at voters, as the US does (albeit in an election year) with its
helicopter money. That arguably both inflates asset values and damages
the labour market. So, in that regard, the UK move is to be welcomed as
an economic, not political choice, for once.
Otherwise it
holds to a theme of modest subsidy to keep people in jobs. De facto it
cuts the minimum wage for the next six months, an action we have said
for a long time will be needed. The capped cost is then not too far off
adult short-term welfare benefits. The maximum per month is six hundred
pounds and change, so also designed for slim cats only.
I
hesitate to be positive about the man whose daft Eat Out to Help Out,
has duly given COVID an early autumn leg up, just in time to wreck
another year’s education. But this measure does have a degree of
practicality to it, which is welcome. The rest of the package
tinkers with the wrong VAT (on cafes and like venues) where I suspect
the business cull is now sadly inevitable. More ‘good work’ by a
lobbyist firm, I sense.
One (the only?) thing I learnt from
my time on a local Health Overview and Scrutiny Committee a decade ago,
was that excess winter deaths are correlated with spend on space
heating, so if we get a harsh winter, you should divert funds direct to
the electricity meter to save lives. Those on a budget will cut
life-saving warmth all too easily. Let us also hope Macron keeps sending
us his cheap nuclear power, the French having plenty of inexpensive and
sustainable power, for their fortunate citizens. Meanwhile could VAT on
domestic fuel therefore be waived till Easter too?
You
may also have noticed that much of the ‘banking’ measures in the latest
UK fiscal package seem to convert shorter term bail out debt into
longer term quasi equity. Had Governments not spent a decade crippling
High Street banks for populist reasons, they might have all that done
for them. But again, given the nonsense we live with, fairly sensible
and a sign of long-term planning, which makes a change.
SIGNIFYING WHAT?
Still, if the US election result is now baked in, if they have found
someone numerate in Whitehall, and if death rates stay low (despite
soaring case numbers) it might not be so bad after all.
A steady fall in the gold price is a welcome sign of returning
normality too. So perhaps that is actually a light at the end of the
tunnel.
Ciaran Mulhall looks at the latest US labour market report and what, if anything, it tells us.
“After
Thursday’s large reversal in risk assets (which had seemingly gone
almost straight up for a week) Friday brought the much anticipated (by
both the bulls and bears) United States labour market data.
Unfortunately, it has left plenty of questions unanswered. Private
payrolls grew less than expected, but headline job growth matched the consensus forecast, thanks to US census-taker hiring. Yet the unemployment rate dropped significantly more than expected thanks to household employment gains that were nearly three times as big as those reported by the establishment survey. While (if you have a job) year on year wage growth still looks quite tasty.
Table 1 United States Economic Data
Event
Survey
Actual
Prior
Revised
Two-Month Payroll Net Revision
Aug
—
-39k
—
—
Change in Nonfarm Payrolls
Aug
1350k
1371k
1763k
1734k
Change in Private Payrolls
Aug
1325k
1027k
1462k
1481k
Change in Manufact. Payrolls
Aug
65k
29k
26k
41k
Unemployment Rate
Aug
9.80%
8.40%
10.20%
—
Average Hourly Earnings MoM
Aug
0.00%
0.40%
0.20%
0.10%
Average Hourly Earnings YoY
Aug
4.50%
4.70%
4.80%
4.70%
Average Weekly Hours All Employees
Aug
34.5
34.6
34.5
—
Labour Force Participation Rate
Aug
61.80%
61.70%
61.40%
—
Underemployment Rate
Aug
—
14.20%
16.50%
—
All told we are not sure if there is anything in the data to
change anyone’s mind, because we all can find something to confirm our
prior opinion, if we look hard enough. Are you upbeat on the economy?
Look at that household employment gain of 3.76 million, which drove the
unemployment rate down to 8.4%, even as the labour force expanded
nicely. Are you more sceptical? Observe that private payrolls missed by
300k and that permanent job losses rose by another half a million. If
you were confused about the state of play before Friday morning – this
report did not help matters.
We suspect, as with Thursday’s
initial unemployment claims data, some further work is required to iron
out these inconsistencies. Our initial read is that we are likely to see
some uptick in the unemployment rate next month, as the household
survey gives back some of the seasonal adjustment gains from last month.
NO CAUSE TO ADD FUEL
At
the very least, it is hard to argue that this data justifies an
accelerated monetary intervention from the Federal Reserve – indeed bond
yields rose on the day, despite further equity weakness. The Fed has
made it clear that they want to be as pre-emptive as possible, but it’s
hard to argue that the cost of money or the level of financial market
risk premia, have stood in the way of repairing the labour market.
Equally we are not sure if this data will be enough to spur Congress to
come together to agree on a further economic stimulus package. Indeed, the language out of the White House on this topic, over the last 48 hours, has not been encouraging.
So,
we are left to figure out what really happened on Thursday to spark
such a big sell off. In truth, there had been warning signs littered all
over the market landscape. We have discussed poor breadth in this space
before — if you have only got a few horses pulling the market higher,
things can easily go wrong, if a couple of them come up lame.
Meanwhile,
earlier this week the dollar started wavering in-line with ebbing
momentum and precious metals never seriously threatened last month’s
highs. The question that owners of high-flying equities need to answer,
is whether this is the start of the Great Profit-Take, ahead of the US
elections or simply an orthodox late summer correction.
Not to
sit on the fence – but at this point it is just too early to tell, while
US markets initially took another dive on Friday, they then stabilised
ahead of the long Labor Day weekend in the US. We are not sure that
either the data or the market have told us, as yet, that anything has
substantively changed.
If you have been surfing the wave of
abnormal asset price appreciation with plans to eventually sell to a
greater fool, then by all means carry on. We would just caution that as
the last two days showed, this is not the one-way market it was in
August – Autumn is coming and with it some significant event risk.
Ciaran Mulhall Solus Capital Partners Ltd
Disclaimer
Monogram Capital Management is authorised and regulated by the
Financial Conduct Authority (FCA). This report is for general
information purposes only and does not take into account the specific
financial objectives, financial situation or particular needs of any
particular person. It is not a personal recommendation and it should not
be regarded as a solicitation or an offer to buy or sell any securities
or instruments mentioned in it. This report is based upon public
information that Monogram considers reliable but Monogram does not
represent that the information contained herein is accurate or complete.
The price and value of investments mentioned in this report and income
arising from them may fluctuate. Past performance is not a guide to
future performance and future returns are not guaranteed.
This week Ciaran Mulhall looks at several linked themes, the narrow
group of equity winners in the US, set against the far larger pool of
losers and how extreme that already is in a historical context; plus the
strength of European currencies, set against the damage to sentiment of
resurgent COVID cases in seasonal tourist areas, in particular. The
combination leading to a choppy outlook all round, but still seeing US
weakness in the medium term, as the long hoped for vaccine finally comes
into play.
Narrower and narrower
“One of the prevalent themes of the equity rally over the last few
months has been the degree to which it has been turbo-charged by mega
cap technology stocks. We can observe this through several prisms, such
as comparing the performance of the market-weighted S&P 500 to its
equal-weighted equivalent or indeed the Russell 2000 small-cap index.
This relative out performance has gone into overdrive post the mini
correction in June, with the market weighted S&P 500 now
outperforming, year to date, by a staggering 10.5%. This period of
outperformance is unprecedented in the post GFC (2008) investing world.
Market breadth is another way of looking at these issues; clearly it
is healthier when a broad swathe of stocks all rally en masse – but over
the last couple of weeks – despite the market grinding higher- we have
seen more declining stocks than advancing, in seven of the last ten
trading days.
The relationship between breadth and market returns is not perfectly
linear, particularly when we are dealing with a market that is dominated
by a few mega cap stocks.
But what was notable about Thursday’s price action, is that while the
S&P 500 return was positive (+0.32%), there were 193 more falling
stocks within it than rising ones. Clearly that’s not typical behaviour,
but how unusual is it?
Well, since Bloomberg’s breadth data begins in 1996, there have been
just 17 occasions when the SPX rose by at least 10 basis points, but
declining stocks outnumbered rising stocks by at least 100. Eight of
those instances occurred in 2000, either side of the dot-com bubble
peak. Three more have come over the course of the last month.
Almost with the Bears – our GTRF investment strategy
So, what does this all mean for our investment process – for the
moment we remain cautious without fully stepping into the Bear Camp. We
would want some hedges in place (short S&P 500) but not nearly to
the extent that we had back in February. Combined with these hedges, we
have a reasonable amount of cash on the side-lines to deploy, should we
come across any banana skins over the next few weeks.
This cash has been moved into US Dollars in recent weeks, as we see
the Euro and indeed GBP beginning to look expensive at these levels,
particularly in the context of the much weaker than expected European
Purchasing Managers Index data released for August.
The declines we saw in the PMI (particularly in the service sector)
were not a surprise to us, given the resurgence of COVID 19 across
Europe in recent weeks, particularly in Spain and France, but also more
broadly, with now only Italy below that key 25bps daily growth level.
Market participants seem reluctant to look past COVID 19 in Europe
(unlike in the US) and we have seen some under performance of European
Risk Assets over the last week. Without the mega cap stocks that
populate the S&P 500, it is likely European risk assets will now
move more in line with virus developments.
While we still expect to see a vaccine being introduced by year end – before we get there the Autumn will bring increased opportunities for setbacks – bringing some potential for European risk assets to underperform.
In that event we would take the opportunity to add exposure, as we
continue to see in the longer term a better chance for upside growth
surprises in Europe and indeed Asia, as against the US where much of the
upturn has now been priced in.”
Ciaran Mulhall
Solus Capital Partners Ltd
A European Home
There
are various things to report this week, but first we will hear from
Ciaran Mulhall on how he sees important developments with the EU and the
Euro this week.
“Following tough negotiations, EU leaders this
week reached an agreement on the Recovery Plan, with the final deal
maintaining the €750bn envelope, but reducing the volume of grants to
€390bn (from the €500bn initial proposal). Despite a somewhat less
ambitious final package we see the outcome as an overall positive, for
three core reasons, We estimate that, together with the European Central
Bank’s sovereign bond purchases, the Recovery Plan will effectively
close the Euro area’s funding gap over the 2020-22 period. The total
envelope of EUR 750bn—390bn in grants and 360bn in loans—is larger than
we expected and will provide the Euro area with more of an area-wide
safety net than a smaller envelope would have done. We think that the
strong commitment from EU leaders, subject to the European Parliament,
as ever, to finalize the agreement earlier than we expected, points to
continued EU integration down the road. While a single fiscal policy
might still be some way off, this is a step towards that goal. To
finance ‘Next Generation EU’ they decided, for the first time in
European history, to enable the Commission to borrow funds on the money
markets and use these funds to finance the recovery.
We continue
to believe the Euro area is well-placed to recover from the Covid-19
shock. This despite some uptick in positive test results this week in
Europe – particularly in France and Spain and indeed in Eastern
Europe.
Covid-19 and its effects continue
While
the move higher in cases in Europe has gone (so far) unnoticed by
market participants, this is in contrast to the growing storm over the
Sun Belt outbreak, which has pushed US new virus cases to an average of
66,000 per day, over the last week. Several states have further
tightened measures to control the disease. States representing about 80%
of the population have now paused or reversed reopening plans, 70% of
the US population is now under a face mask mandate of some sort.
While
there’s strong evidence that such targeted measures are effective, we
think it is hard to know if they will be sufficient to bring COVID 19
under control. Should these measures turn out not to be enough to
contain the virus, we think some states may need to shut down still more
consumer activity.
We discussed at length a couple of weeks ago
our preference for European risk assets over United States ones, so we
will not go over old ground – save to say the building blocks continue
to come together. The test to our thesis will come on any “risk off”
move lower – if we are right, we are expecting to see some relative
outperformance from European bourses as against US assets. With the move
lower late in the week – we have already begun to see this theme play
out – particularly as it seems apparent that some profit taking is now
due in the Technology sector that has driven the outperformance of the
US markets, in recent years.
The sharp move up in the Euro against the dollar, has already taken out the early March 2020 old twelve-month highs as well.”
Ciaran Mulhall Solus Capital Partners Ltd
Corporate announcement – Monogram Capital Management Ltd
We
have two other things to report: we are pleased to say Monogram Capital
Management Ltd has entered into an Investment Advisory Agreement with
icf management ltd, in connection with the VT icf Absolute Return
Portfolio fund.
This reflects the joining together of the fund
with the RJMG Global Total Return Fund and with both Monogram and Solus
Capital Partners Ltd.
New larger fund, with UCITS structure – our GTRF comes home
A
larger fund with a standard UCITS structure and widespread availability
should allow both original components to thrive and naturally to be
more cost effective for investors.
This provides a continuation
of our twin approach: the low-cost systemic Monogram model, which
continues to perform well, alongside a revived and streamlined actively
managed fund. We will report further on this in due course.
On a less happy note, I am sad to report the passing of John Gwilym
Hemingway, at the age of 89. He had been influential in the course of
both RJMG and before that RMG, and latterly in MCM.
His support and wise counsel will be sadly missed.
Finally, we too will take a break here, for such summer as 2020 affords us, and will return suitably refreshed on the 16th August 2020.
We wish all our readers a safe and tranquil fortnight.
Ciaran Mulhall of Solus this week sets out his tour d’horizon for the rest of the year ahead.
COVID WATCH
“As we try and assess where the world economy stands – six months
into the first global pandemic in 100 years – we are struck by the
extent that developments are still being driven by the virus. Both
monetary and fiscal policy has had some effect in terms of dampening the
economic shock, but the long term path of global growth is still very
much dependent on the successful sourcing of a vaccine along with
developments in treatments that reduce the fatality rate. Lock downs or
no lock downs, as the United States currently shows, if people do not
feel safe returning to their pre Covid 19 routines then they are
unlikely to do so, regardless of what is or is not officially permitted.
Figure 1 Covid-19 Confirmed Cases 5 Day MA % Change
Before we discuss our concerns for the future – it is important not
to ignore the recovery in growth we have seen over the last couple of
months, estimates suggest that global GDP has now made up roughly half
of the 17% drop seen from mid-January to mid-April, with substantial
gains almost universally. Global manufacturing and service PMIs surged
nearly everywhere in June and are now back to around 50 in many
countries. Suggesting some return to expansion, albeit from a lower base
than before.
Figure 2 Bloomberg Economic Surprise Index
However, the sharp increase in confirmed coronavirus infections in
the US (see chart at the top of this piece) has raised fears that the
recovery in global growth might soon stall.
A significant part of the increase reflects higher testing
volumes—which together with younger patients and better treatments, will
likely keep measured fatality rates lower than in the March/April wave.
Nevertheless a broader look at the Centre for Disease Control criteria
for reopening, shows that not only new cases, but also positive test
rates, the share of doctor visits for covid-like symptoms, and hospital
capacity utilization, have all deteriorated meaningfully in the last few
weeks. Moreover, these pressures have already persuaded many states and
cities to put reopening on hold or start to roll it back. But again,
regardless of the official reaction, consumer behaviour has begun to
front run the worsening backdrop, as evident by the slowdown of, for
instance, online restaurant reservations after an initial sharp bounce
back.
Figure 3 OpenTable United States Restaurant Reservations YoY %
REASONS TO BE CHEERFUL ABOUT THE WORLD ECONOMY
There are reasons to be hopeful that we are not about to embark on a re-run of the March/April collapse in US economic activity.
Consumer services accounted for only a little over half
the GDP decline through April. The disruptions elsewhere—i.e., in
manufacturing and construction—continue to unwind quickly, judging from
the strength in the ISM survey, automaker production schedules, and
particularly most housing indicators, where we have seen a strong ‘V’
shaped recovery.
We are optimistic that measures such as the
closing of bars, stringent bans on large gatherings, and more widespread
face mask mandates, could lower the virus reproduction rate back
towards the critical 1.0 reading. As we approach the second full week in
July, it is true we have yet to see the confirmed case data slow – but
further corrective action (particularly at the state level) is happening
nearly daily, which should dampen the spread.
The vaccine news
has improved significantly – with the likelihood of having some form of
FDA approved vaccine ready before the turn of the year.
It is important to point out though, that the virus is still in the
driving seat – to force down the R number in the US from this point will
require a greater degree of co-operation from the population than we
have seen (outside of the north east) to date.
POWELL POLICY – the monetary and political backdrop
We now expect the Federal Reserve committee to publish its
much-heralded fundamental framework review within the next couple of
months—including an expected shift to average inflation targeting—with
the possibility of more aggressive outcome-based forward guidance. In
terms of what that revised forward guidance might look like, our view
remains that the most natural approach for a central bank with a dual
legislative mandate would be to combine the two, e.g. by requiring core
PCE inflation of 2% year-on-year and a labour market at or near the
committee’s estimate of full employment. This would appear to force a
more expansionist policy, with both targets currently well adrift.
BIDEN BURDEN – likely US Election outcomes
Looking ahead to the presidential election in November – polls have
swung further in former Vice President Biden’s direction. He is ahead by
about 7pp in Florida—currently the most likely “tipping point” state
for reaching 270 electoral college votes—and prediction markets now
imply a 55% probability that the Democrats will gain control of the
White House, as well as both chambers of Congress. While the
macroeconomic backdrop is very different – this outcome would not be too
dissimilar to what happened in 2009. In any event this result would
imply an increase in the Federal corporate income tax rate, alongside
higher personal taxes on upper income earners.
While the above would pose a challenge for risk assets – other
implications of such a political shift could be more market friendly.
Although tensions with China will undoubtedly persist regardless of the
election outcome, a re-escalation of the trade war would become less
likely and the prospects for international cooperation on vital issues
such as climate change would improve.
EUROPE AND BEYOND
Outside the US, the cyclical news is generally positive. We are very
optimistic in Europe, where the new infection numbers remain low (again
see chart above)—the spike in confirmed cases in Germany last month has
proven temporary—and the high-frequency economic indicators are showing a
robust rebound. After hesitating initially, policy has also turned very
supportive.
Although we expect the EUR750bn Recovery Fund to shrink slightly to
EUR600bn before implementation, it is coming alongside aggressive ECB
asset purchases that should suffice to close the sizable “funding gap”
of its underperforming Southern member states.
Turning then to Emerging Markets, case numbers and fatalities remain
extremely low in most of Asia but continue to surge in Latin America,
with CEEMEA in between. The same ordering is also visible in the
economic growth numbers, with Asia back in solidly positive territory
but Latin America lagging. Although we expect growth to bounce back
relatively sharply later this year, even in countries with weaker virus
control performance, the crisis is likely to have lasting effects on the
level of GDP and the degree of spare capacity. This should keep
inflation low and enable EM central banks to keep monetary policy very
easy for some time.
THE WAY AHEAD
So, taking all the above into account where do we currently stand in
terms of our investment process and its three pillars (Strategic,
Dynamic and Tactical)
Strategic: Positive
Global economic activity continues to rebound as the world learns to
live with the virus by keeping selective restrictions in place. While
this level of economic activity will remain materially below potential
growth, we remain confident that both the fiscal and monetary response
can continue to support markets as we wait for a vaccine. This
suggest to us that we should remain invested in risk assets, with a
somewhat lower level of risk-free assets, given that their return
profile (outside of EM) is now so poor. We continue to use cash holdings
to dampen portfolio volatility (remember the VIX is still around 30%) –
cash that can be deployed during what we expect to be many risk asset
drawdowns in coming months.
Dynamic: United States underperformance and a weaker USD
We expect the US to underperform in the near term as it partly
reverses its overly hasty reopening in the consumer sector, combined
with stretched valuations particularly in the Technology space. This
suggest to us that Europe – after several years of underperformance,
could see at least some positive fund flows particularly as valuations
are much less stretched.
The weaker USD theme should also benefit Emerging Markets –
particularly in Asia where, as we noted above, the effects of the virus
has been modest. We continue to favour a large position in Large Cap
Asian stocks (ex-Japan) with a focus towards China where we see
significant further stimulus coming down the tracks.
Tactical: Plenty of Trading Opportunities
There is a certain amount of tension between these forecasts, and
cyclical assets might struggle to reprice higher until that
contradiction has been resolved – historically it has been difficult for
global markets to move ahead without the United States at least keeping
pace. Indeed, with the negative market view combined with the pending
US presidential election – we see plenty of reasons for markets to sell
off over the next few months. But any drawdown of 7-10% will likely be
met by us allocating at least some of our cash pile to the dynamic
themes already outlined.”
RJMG Asset Management and Monogram Capital Management have announced
the merger of their business operations to offer a more focused solution
to the private client investment market. RJMG has acquired the MONOGRAM
assets, people and customer contracts and the merged business will now
operate under the Monogram brand.
MONOGRAM, founded in 2013, provides an evidence-based and easily understood momentum model
for investment. These are intelligent investment solutions that keep
investors in touch, and use transparent methods of investment and
communication, in line with its investors’ ethical needs and areas of
expertise.
“MONOGRAM offers an exciting opportunity for RJMG to strengthen and
expand its service offering in investment for a wide range of clients”
explains Charles Gillams, Managing Director of Monogram. “With clients
who have in the last few weeks avoided a 20% fall in value, thanks to
our active investment approach, the acquisition of MONOGRAM supports the
RJMG strategy to meet the future requirements for a wider range of
investors, in times of both stability and extraordinary volatility”.
Milena Ivanova, founder and CEO of MONOGRAM, also commented “RJMG’s
acquisition of MONOGRAM provides a major growth opportunity for both our
businesses through a wider range of service offering for our clients.
As investors look for greater control and autonomy, as they become
better informed, or begin their journey to that position, we will be
best positioned to support them on that journey.”
Milena Ivanova has been invited to join the Board as a Non-Executive director.
The expanded business will serve a range of clients based in the UK, the EU and Hong Kong.
Alan Ewart, who chairs the MONOGRAM
board, welcomed the merger and said ‘It was excellent to
see a real comparison of the two models at a time when both had a chance
to show what they could do in times of extreme volatility.
The 27% drop in equities, peak to trough this year,
has been an excellent testing ground, for a merger which has been under
discussion for some 10 months now.’
Listen to Charles Gillams talk a bit more about the MONOGRAM model, and its more recent performance in an interview here.
Some reflections on key indicators by Ciaran Mulhall, advisor, GTRF
By Ciaran Mulhall on 31/05/20 | Overview President
Trump continues to try and pick a fight with China, even as China in
turn sabre rattles at sensitive pressure points, from Hong Kong to
Kashmir. It looks like Trump may therefore have decided to abandon his
“trade deal” with China in the hopes of scoring some political points
(blaming China for concealing information on the pandemic) ahead of the
November election, just as we feared a couple of weeks ago.
We
thought instead of puzzling about all that posturing, we might try and
take a look at what is actually happening on the ground in the United
States.
WHERE IS THE ECONOMIC CRISIS THEN? Looking
though April’s US National Income data it appears that American
households have had an interesting crisis so far. While the past few
months have obviously been a stressful time as millions have lost their
jobs or been furloughed, through the end of April at least, the fiscal
response has, it seems, easily bridged the income gap.
With
spending constrained by lockdowns, this has pushed savings rates up
substantially in the U.S. and indeed across the world. While it will be
natural for spending to increase once you can do so (as America begins
to reopen), a key question moving forward is whether households will
engage in more precautionary savings. That is if the scares of the last
few weeks and a concern about a “second wave” in terms of the pandemic,
will discourage people from opening their wallets, thereby keeping the
savings rate at or close to its historic high (see chart below).
Figure 1 United States Personal Savings % of Disposable Income
The
response to the 2008 crisis also indicates a fall in spending and hence
a rise in net savings (or reduction in debt) is a likely consumer
response to uncertainty.
If so, this in turn raises some doubt
about how long “money printing” can prop up asset prices, unrelated to
real demand in the economy. If economic activity stays suppressed, in
other words the Panglossian “V” shaped demand recovery fails to arrive,
the equity market will not be cheap, despite the sharp drop in the
risk-free rate of return (on Treasury Bills).
Individual
experiences can differ from the aggregate, but the American public
seemed to have weathered this crisis well through the end of April.
Bloomberg analysis suggests aggregate job losses pushed wage
compensation down some $1.07 trillion, since the end of February on an annualized basis, while enhanced unemployment insurance gave back some $404 billion–roughly 3/8 of lost income. But government stimulus checks added another $2.6 trillion (again, on an annualized basis), meaning that aggregate household income in April was some 8.1% higher than
it was in February. Add in a record decline in spending (see chart
below) and for a month at least, household balance sheets look like they
are in great shape.
Figure 2 United States Personal Spending YoY %
PAIN DEFERRED The
obvious hole in this argument is that the stimulus cheques were a
one-off boost, that will possibly be absent in May and beyond. Sure,
unemployment insurance represents a pay raise for the lowest income
bracket, but there are plenty for whom it does not.
Still, the
idea that the public “got a massive pay rise for not working” may be a
theme that bears watching in the coming debate about further stimulus.
It seems to be a line that the Republicans have already latched on to.
To
date, however, the impact seems inarguable; the latest money supply
data shows (again from Bloomberg) that savings deposits have risen by
$1.5 trillion, or 15%, since the end of 2019. There is perhaps an
element of “fighting the last war” here, so determined are policy makers
to prop up credit markets this time round, despite a very different
causation, and indeed despite very solid bank balance sheets, that a flood of money (and debt) has been let loose.
Nor
are higher savings just a U.S. phenomenon, we also saw a sharp rise in
French household savings rates in the first quarter (currently at 20%).
If you want a snapshot of the impact of the fiscal stimulus, look at how
the U.S. savings rate rose above France’s for the first time in
recorded history. Likewise, projections for the UK show the savings rate
moving well into double figures.
What is notable, however, is
that American savings rates have already been trending higher ever since
the GFC in 2008. So that is one change that may also continue; memories
are long it seems.
WHERE TO NEXT Where this
goes from here is anyone’s guess but hoping that the US consumer will
drive growth over the next few months to us seems somewhat unlikely. It
is hard to read, as clearly pent up demand will be evident for some
months, especially where supply chain disruption leads to shortages. In
turn that will cause inflation (as anyone buying masks or gloves of late
can attest). But that demand surge will then fade in the same time
period that the welfare cheques also start to fall away.
Overlay
all that uncertainty, with the four-yearly jamboree of buying votes on
the tick, suggests numbers that are going to be rather harder than usual
to read, for some while yet.
In the absence of hard knowledge, we expect an even more sentiment driven market than normal.
Our last half dozen blog posts are linked to, below :
Our posts are written on alternate weeks by Charles Gillams, CEO and Ciaran Mulhall, advising the Global Total Return Fund :
On 19/4/20 Ciaran Mulhall decided to dedicate his
entire article to Covid-19, and graphed the reduction in the rate of
increase to new infections himself. He considered whether our reactions
were all Too Far Too Soon.
Charles Gillams on 05/04/20 was looking ahead again – in Far Horizons,
just before Easter 2020, he wondered if the lockdown would bring about
structural changes, how allocating capital would be affected, and the
impact of holding on to dividend bans and buyback suspensions.
Charles Gillams on 22/03/20 took an overview of what
was going on – and came to the conclusion that the underlying assets in
the markets can’t have gone south in the space of a week. His article War makes interesting reading in retrospect.
On 15/3/20, Ciaran Mulhall of Solus Capital, wrote an assessment of
China, Korea and the instability in the markets. His article, Venturing Back Outside took in related themes as well.
Our CEO, Charles Gillams wrote on 8th March 2020
about how the economic outcome of this virus will turn out to have much
greater impact than the virus itself. His article was called ‘Still Panic’.
This means we will try to be relatively corona free and market light for once.
Like many others I surveyed my share portfolio as the tax year ended
and allowances needed juggling and a few (rather diminished) liquid
gains taken. Which made me ponder the value and structure of my
holdings. Our rational (or rationalized) approach to investments means
we should know why we hold assets, where we would add, when we would
sell.
Did I know any of that? To be frank, not really – they made sense as
holdings when I initially read the accounts, but much of that is just
ancient history, rather than the subject of continuous logical
re-evaluation. I also found that market liquidity is far thinner than
you’d think. Many bid offer spreads on London Stock Exchange stocks (and
hence your valuation statements) are either illusory or borderline
fraudulent, at least for now.
So What Are Governments Up To?
As we have thought throughout this sorry episode, the real danger is not a bug,
but the political response to it, and that’s still all over the place.
Disasters usually give incumbents a lift. Suddenly for many our leaders
are a source of hope, of spurious comfort, or even they just come to
dominate the airtime. I have not found that a terribly helpful predictor
of enduring success.
I recall Gordon Brown started off
gloriously popular, standing in incongruous wellies by the flooded River
Severn; that went well for him, and indeed the same river, same floods
occurred a decade on. Not much hope there for either those flooded or
indeed camera hungry politicians.
But is Orban really up to something significant in Hungary? Or Netanyahu in Israel? Or even what is the Swedish story?
I get the feeling the press just likes to emphasize foreign villains,
and so will not trust anything they do, which does make those Swedes a
tough call. They are meant to be so sensible, right?
As the US
Democratic Convention gets postponed, will Trump really fight a November
election? My view for a while has been no. On the other hand, it is
almost impossible to stop a US Presidential election, it has a triple
lock of legal inevitability built in. But with (we are told), no
vaccine, the start of the next flu season in full swing in early
November, no herd immunity either, it is going to be quite an odd
affair. I’m also asking myself whether a delay will help or hinder
either of the old men seeking that great office.
Will The Lockdown Influence Structural Change?
I don’t see the world going back to normal that fast, we are going to
need a lot of new behaviors, at least till we have a vaccine for this.
Methods to sift the infected from the immune, (no one has yet told me
how you sift the vaccinated from the infectious, always a problem), lots
more protective garb, much more separation in time and space. But we
will do it, even governments will learn this draconian response is
non-repeatable.
We eagerly await the first Covid-19 trade fair, I
am guessing early August? J It will be vast, cellular in layout, with a
hundred access points, not one, 20% of the area will be for visitor
health testing, it will run for 24 hours non-stop to space out visitors,
with its own hospital, and loads of real time tracking and drone
surveillance, but it has still got to happen: but no hand-shaking, on
pain of eviction.
So where do you allocate capital in this rout? Governments have
globally swung hard towards massive deficits, greater public services,
universal income (in all but name), greater surveillance, free money.
How much of that is either effective or enduring?
Recessions
should be good times to invest, and indeed record new UK ISA
subscriptions suggest that’s a common view. But does free money make
that less safe a guide? All this liquidity has to flow out into
consumption or savings at some point, somewhere, but does that just
create more dangerous bubbles?
In particular, does this favour
capital invested in old or new firms? If you want to invest in
restaurants, hotels, airlines, cruise lines, do you chase the old losses
or fund the new start-ups, to cherry pick the existing talent and
assets.
I know how most private equity will
be looking at this. But there is also a big and growing vulture
investor sector – for once enough good assets at great prices will be
around, for them to have no need for the existing firms and their boring
debts. While a lot of existing over leveraged venture funds are in for a
long work out. A lot of private equity prices are inevitably simply
wrong.
But then what about trophy assets or long-life ones, less a
mound of lettuce, more a mountain of lucre. Are “world class” copper or
iron ore mines going to be coming on the market? That I rather doubt.
They didn’t last time.
Exploration and even development will be
shut down, miners will endure losses, although mainly non-cash ones,
workforces will be shrunk, stockpiles expand, but they will survive. I
guess the same for oil, but that has many other issues.
In terms
of gilded assets, I suspect buildings let to governments on long leases
in great capitals are fine too. But a lot of space has been let to high
density short-term tenants, in places like serviced offices. A lot of
retail has to now fold and crudely a lot of space must be lost, lost
entirely to the consumer sector; letting to estate agents and coffee
bars will become like letting to charity shops. It keeps the light on
and the damp out, but no more.
Which slot do housebuilders fit
in? Are they land banks with contracting arms? In which case they can
shut the latter, or are they land traders, with too much overpriced
stock, too few buyers and too much debt?
Overall markets are
still seeing this as a re-run of 2008, where debt is the biggest threat.
I am not so sure, or rather the market has been indiscriminate, it will
finish off some zombies, but sound businesses with cashflow are really
not that bothered, if they need to extend a loan a quarter or two, at
current rates. While rates are so low, debt servicing costs are trivial.
What Else Gets Butchered – The Impact of Dividend Bans, Buybacks
Which brings us back to the politics, I know why dividends are being
hit, stupid politicians, populist nonsense and civil servants with
defined benefit pensions, but in economic terms banning dividends and
indeed buy backs is little short of criminal. The entire trillion-dollar
government splurge is about access to capital, about liquidity, about
keeping consumption up, so how on earth does it help to strangle
corporate access to fresh capital and destroy both individual and
corporate (pension) savings?
Classic foot on both the brake and
the accelerator governance, almost guaranteed to make the car swerve and
crash, not to mention burn out the gearbox. In economic terms, buy
backs are of limited value (except to short term executive pay) if
carried out across the market cycle, positively damaging if carried out
in market peaks, but pretty good if carried out as a counter cyclical
buffer. They stabilise the market, add confidence, and optimize capital
allocation. Now is the last time to stop them. If a Board is brave enough to do them (and it takes a strong FD to OK them or indeed dividends, just now), then why stop it?
Stopping
dividends will add to market panics, as any yield support is
eliminated, it will make raising fresh capital far harder, increase
insolvencies, harm employment, make swathes of pensions unaffordable and
drop consumption. It is an extraordinary act of self-harm, by
governments claiming to fight this crisis, actually fighting the last
one, and fundamentally seeking not the good of the nation, but
short-term political advantage. It will accelerate the shift of dividend
payers from such ill-advised jurisdictions, and the shift of savers to
other far less visible and regulated income sources. Neither is
desirable.
Dividend bans are a very blunt, atavistic, 1970’s
style tool, which will need rapid re-evaluation, if it is not to do long
term harm. Not that companies mind, not paying out “their” money to the
real owners, when it could be spent on far more important luxuries,
like grossly inflated executive pay, (and pay offs) is always an easy
choice for supine boards.
But as a nation, we say we want good
governance, high fixed investment, a working capital market, as a
long-term strategic aim, but somehow like so much else, all of this gets
chopped for a few seconds of good publicity in a crisis.
So the
issue now, as perhaps it was in 2008, is too figure out which nations,
by force of circumstance, or wise choices, will come out of this best,
and which will just use it to wallow in the same murky mire that renders
them unsuitable for investment.
Who will join Italy, South
Africa, and many others, in the investor’s ‘avoid at all costs’ camp?
Who will innovate, break free and expand – the new China, or Vietnam or
even Hungary? It would be nice to include an old-style democracy in
there; I am sure one will qualify.
However, the worry is that a
lot of investment mainstays, France, Germany, the UK, the US, look as if
they plausibly could now go either way. Low growth, high debt, high
inflation and decline, look all too possible.
Well at least Easter is coming, with some welcome days off in the
long-awaited warmth and unusual dryness of this English spring; that
grass I am afraid really does need cutting.
We will take a break next week and we hope to be commenting with a
lot more certainty, and a little more optimism, come the following
weekend. An announcement of corporate news is on its way. In the mean
time, a Happy Easter to all.
