Category: Education

John Plender and John Rosier Articles and Technology Update

John Plender published a good article in the FT on Friday. He covered what he had learned from five decades in the investment world. This was a period when the “cult of the equity” took over from investment in fixed income bonds. With inflation racing ahead of interest available, bonds such as Government gilts were a big loss-making investment. They may have been nominally “safe” but only equities offer some protection against inflation caused by Government policies. This cycle has been repeated more recently.

There is much to learn from this article and he concludes with this wise comment: “After a lifetime spent watching the markets, I am struck how, with each new cycle in which central banks act as lenders of last resort, debt mounts inexorably. We continue to muddle through. But a great debt denouement is inevitable because debt cannot rise faster than incomes for ever”.

See https://www.ft.com/content/52f06fb9-ef15-498f-9a98-39673c960de4 for the full article.

Another good article was published on Friday in the Investors Chronicle by John Rosier, who managed to achieve an even worse portfolio performance than mine in 2023. He had this to say:

“Lessons from 2023. It was a poor year for me and while it is tempting to beat myself up, 12-year record of 12.4 per cent per year is good. However, as a matter of good housekeeping, I should examine what lessons I should learn from 2023. In last month’s outlook, I pondered whether I had been guilty of focusing too much on macro factors and not enough on bottom-up stockpicking. The conclusion must be yes. My exposure to commodity stocks, although helpful in 2022, was hugely detrimental in 2023. I had too much exposure to this theme. I allowed my belief in the positive drivers to influence my portfolio construction. I was also too obstinate to change course – perhaps because I had invested too much emotional capital in such a significant exposure. I intend to shift the balance back towards bottom-up stockpicking – in truth, I already have with purchases of stocks such as PayPoint, highlighted earlier……In what is a perennial problem for me and many, if not most, investors, I must get better at cutting losses earlier”.

His comments could just as well apply to my own portfolio management although not to such an extreme. I may from experience have avoided the worst mistakes but am still not cutting losses early enough.

One thing I have done this week is update my technology usage. My 10 year-old Lenovo Thinkpad Carbon X1 was a great business laptop PC running Windows with a touchscreen but battery life had dropped to about 2 hours so it was time to replace it. I have purchased a Samsung Galaxy Tab S8+ tablet to replace it. With more than 8 hours battery life it can last for a dialysis session where I like to watch old movies. These are readily available from YouTube so I watched a film called Greenwich Village last week. It included a memorable dance routine from William Bendix who usually played “heavies” in the 1940s. To quote from one biography: “character actor William Bendix’s burly physique and New York accent were equally suited to playing genial lugs and vicious thugs”.

I am still running a Windows 10 desktop PC for my main business applications which should last another couple of years.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Banks and Following Other Traders

The travails of Metro Bank and its need to raise more finance have reinforced my conviction not to invest in bank shares. In theory there is a gap in the market for a bank that can provide a good local service through a branch network when the major UK banks are closing branches as fast as they can (there is not a single bank left in Chislehurst where I live when there used to be several only a few years ago). My sole brief contact with Metro Bank did not convince me they were a good alternative.

Esther Rantzen had an article published in the Daily Telegraph headlined “I’m furious with Barclays – I’m leaving after 70 years” which spells out the common gripes. It included the comment: “Barclays, for example, is paying a rate of just 1.6pc on its “Everyday Saver account”, while charging mortgage customers rates ranging from 5pc to more than 7pc. Certainly Barclays and other major UK retail banks seem not to care less about retaining long-standing customers by offering competitive savings rates. If you have a “no-notice” savings account there are now much better alternatives.

It’s surely a mistake in marketing terms to close bank branches. A customer visiting a branch is a great opportunity to sell them something new and to build a personal relationship. Post offices and pharmacies know the benefit of a steady stream of old and new customers walking through their doors every day so why have banks not developed services to do the same?

Following other traders

There was an interesting article in the FT today headlined “Copy trading: a road to riches or risk?”. Apparently some share trading platforms now enable you to follow other popular traders and replicate their trades. This is a service for those who don’t want to think about their own trades but just want to follow some guru. Or likely just follow the herd.

When I first started investing in the stock market I thought following others was a sure recipe for success. But as the article points out you are just as likely to be following others mistakes and prejudices. To make money you have to be somewhat contrarian.

I suggest such services need regulation because they encourage herd behaviour which can suck the inexperienced into trading manias rather than investing based on fundamentals.

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

Telegraph article: https://www.telegraph.co.uk/money/banking/savings-accounts/esther-rantzen-barclays-bank-loyalty-savings-interest-rates/

FT article: https://www.ft.com/content/beac06bd-61d2-4326-89f7-59a1689132a0?

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A Political Manifesto

A few years ago I penned some policy suggestions for a new political party. I just had a clear out of some of my old files and thought it was worth publishing as it’s still very topical.

Reference Policy Suggestions My suggestions for policies in those areas and others are below:

Finance

1.       The personal taxation system is way too complicated and needs drastically simplifying. At the lower end the tax credit system is wide open to fraud while those on low incomes are taxed when they should not be. The personal tax allowance, both the basic rates, and higher rates, need to be raised to take more people out of tax altogether.

2.       The taxation of capital gains is also now too complicated, while tax is paid on capital gains that simply arise from inflation, which are not real gains at all. They should revert to being indexed as they were some years ago. For almost anyone, calculating your own tax that is payable is now way too difficult and hence requiring the paid services of accountants using specialist software.

3.       Inheritance tax is another over-complex system that wealthy people avoid by taking expert advice while the middle class end up paying it. It certainly needs grossly simplifying, or scrapping altogether as a relatively small amount of tax is actually collected from it.

4.       The taxation of businesses is inequitable with the growth of the internet. Small businesses, particularly retailers, pay a disproportionate level of tax in business rates while their internet competitors often avoid VAT via imports. VAT is now wide open to fraud and other types of abuse such as under-declarations, partly because of the EU VAT arrangements. VAT is in principle a simple tax and the alternative of a sales tax would create anomalies but VAT does need to be reformed and simplified.

5.       All the above tax simplifications would enable HMRC to be reduced in size and wasted time in form filling by individuals and businesses reduced. Everyone would be a winner, and wasted resources and expenditure reduced.  

6.       The taxation of company dividends on shares is now an example of the same profits being taxed twice – once in Corporation Tax on the company, and then again when those profits are distributed to shareholders. This has been enormously damaging to those who receive dividends and the lack of tax credits has also undermined defined benefit pension funds. The taxation of dividends should revert to how it once was.

7.       The regulation of companies and financial institutions needs very substantial reform with much tougher laws against fraud on investors. Not only are the current laws weak but the enforcement of them by the FCA/FRC is too slow and ineffective. Although some reforms have recently been proposed, they do not go far enough. Individual directors and senior managers in companies are not held to account for gross errors or downright fraud, or when they are, they get off too lightly. We need a much more effective system like they have in the USA, and better laws.

8.       Shareholder rights as regards voting and the receipt of information have been undermined by the use of nominee accounts. This has made it difficult for individual shareholders to vote and that is one reason why investors have not been able to control the excesses in director pay recently. The system of shareholding and voting needs reform, with changes to the Companies Act to bring it into the modern electronic world.

9.       The pay of directors and senior managers in companies and other organisations has got wildly out of hand in recent years, thus generating a lot of criticism by the lower paid. This has created social divisions and led partly to the rise of extreme left socialist tendencies. This problem needs tackling.

10.     Governance of companies needs to be reformed to ensure that directors do not set their own pay, as happens at present, but that shareholders and other stakeholders do so. Likewise shareholders and other stakeholders should appoint the directors.

11.     Insolvency law needs reform to outlaw “pre-pack” administrations which have been very damaging to many small businesses. They are an abuse of insolvency law.

Transport

1.       Way too much money is spent on rail transport and trams which cannot be justified on any cost/benefit analysis. HS2 is just one extreme example of this. Meanwhile the road system does not receive enough investment – this has resulted in traffic congestion, wasted time which is damaging to the economy and lots of poorly maintained roads (e.g. potholes). Only 25% of direct tax on vehicles is spent on the roads.

2.       Public transport should generally pay for itself. In London alone there is a subsidy of £1 billion per year on buses which is totally unjustified. Many of these subsidies are given to people who could afford to pay for their travel, even when they are receiving social security benefits.

3.       Road safety has flat-lined due to an excessive focus on speed reduction and the perversion of the law by the use of police waivers to force people to take useless “education” courses. Policies have been distorted to enable the police to make money from drivers, while improving the roads, better education and other policies to reduce road casualties have been ignored.

4.       Charging of drivers via road pricing to reduce congestion should be opposed (as it does not work and is just a money-making taxation scheme). Likewise Clean Air Zones where drivers are taxed for driving some vehicles, all of which were legal when purchased, should be stopped and the whole focus of environmental legislation should be reviewed. EU regulations in this area have made illegal air pollution levels when there is no real evidence of danger from them. ULEZ and CAZ schemes are just a way to raise taxes with little real benefit on health grounds and no cost/benefit justification.

5.       Likewise the EU has mandated speed limiters (ISA – Intelligent Speed Adaptation) for all vehicles in future which will delay vehicles and not contribute to road safety, while generating millions of speeding fines on innocent drivers. There should be a commitment not to follow the EUs lead on such legislation.

Education

1.       Education should be free for all those who can justify they will benefit from it. At present too many people go to university who will be unlikely to benefit from it and they should be redirected to lower cost vocational courses.

2.       Loans to support students taking courses should be interest free.

3.       There needs to be a much stronger focus on technology education in the UK as only people with such education will contribute positively to the economy.

4.       There needs to be more emphasis on the use of technology in teaching to improve the productivity of that profession which has basically not changed in hundreds of years. The use of on-line resources can assist and would enable teachers to be more productive and hence be paid more.

Environmental, Climate Change, Population and Housing

1.       There should be more attention paid to the real science of environmental impact rather than the hysteria of left-wing campaign groups.

2.       Mrs May’s commitment to a zero-carbon economy, which is financially unaffordable, should be scrapped because there is no practical way to achieve it and it is based on very dubious scientific analyses.

3.       The population of the UK needs to be controlled, if not reduced, to improve living conditions and ensure a healthy economy. This can be achieved by tougher limits on immigration (along with better enforcement of existing rules), and encouraging the population to procreate less.

4.       Housing costs, and the inability to find suitable accommodation, are major problems for the young. Controlling/reducing population would help but other measures need also be considered including the financing of more social/rented housing.

Local Councils and London

1.       The funding of local authorities, and some of their important functions such as providing social care, needs to be reformed. At present they are too dependent on central Government funding which means obligations are often put on them without the funds to cover the cost.

2.       There are wide variations between the efficiencies of different local councils with many being wasteful. They should have guidelines and limits on how they spend their money, laid down by central Government, to avoid waste.

3.       London is a particular problem where it has become dominated by populist Mayors (both Labour and Conservative) and where elections are driven by national politics rather than local issues. The most recent Mayor, Sadiq Khan, has been pursuing a “gerrymandering” policy of increasing immigration to gain more people that are likely to vote for him, thus making London even less acceptable as a place to live than it has been for years. Crime, transport and housing are all in a major crisis. I suggest the position of the Mayor, and the Greater London Authority be scrapped as Mrs Thatcher did with the GLC when Ken Livingstone became so damaging. In other words it should revert to central Government control, with the local boroughs having more control over their own affairs. That would no doubt be popular with London borough councillors.

4.       Transport for London should be taken out of the control of the Mayor be made an independent body with an objective of making it a profit centre rather than a consumer of enormous subsidies. They should also lose control of the road network (the TLRN) where they currently have a perverse incentive to make the road network unfit for purpose so that more people use public transport from which they gain income.

I hope you find the above useful.

Yours Roger W. Lawson, M.B.A., M.B.C.S. ++++++++++++++++++++++++++++++++++++++

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Young People’s Poor Knowledge of Investments

The AIC published an interesting press release last week. It was headlined “Young people more aware of cryptocurrency than any other investment”.

Young people they class as those aged 20-40 but it shows an astonishing ignorance of different types of investment. Even more astonishing is that they rely on web searches, Instagram, YouTube, Facebook and Twitter as sources of financial information.

Some 70% of survey respondents were aware of cryptocurrencies such as Bitcoin, but only 18% of investment trusts.

The fact that most of these media that young people rely on are motivated by the desire to sell something to investors shows how easy it is for young investors to get misled. You can see why new investors are so easily sucked into speculative investments of one kind or another.

See https://www.theaic.co.uk/aic/news/press-releases/young-people-more-aware-of-cryptocurrency-than-any-other-investment for the full press release.

How to solve this problem? Education is one key and at a young age. But anything taught in school at age 15 will soon get forgotten, and be swamped by clever marketing by financial promoters.

ShareSoc has been working on this issue via their “Investor Academy” (see https://www.sharesoc.org/investor-academy/ ) but it does not seem to be having a great impact so far. There is little incentive to learn.

The only way I can see this state of affairs improving would be if investors had to pass a qualifying examination before they could invest in some types of investments. Having “health warnings” on cryptocurrency investment schemes is not enough.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Silicon Valley Bank Rescue and Wandisco Discussion

Silicon Valley Bank (SVB) has been rescued both in the USA and UK. In the UK HSBC has taken over the business for £1 and put in some more cash. But bank share prices are still being negatively impacted as doubts about their stability remain.

The problem at SVB was in essence a failure to manage interest rate risks on bonds they held as security which they could not sell to meet depositor redemption requests without recognising big losses. It demonstrates the knife edge that most bank balance sheets sit on, which is why I don’t invest in banks. Lending long and borrowing short as all banks do is a recipe for disaster unless very carefully managed.

Last night there was a panel discussion of the problems at Wandisco (WAND) at the Mello event. I gave my view of the likely problem at the company which is likely to have wiped out investors in a company that was worth £905 million before the shares were suspended.

This company has been reporting numerous very large “orders” in recent months but if you read the last annual report it says this: “Commit-to-Consume contract structure to be widely utilised across all future clients, where a customer is contracted to move a minimum amount of data over a given time” and reports several new deals using that structure. What exactly were the implied commitments in terms of cash by these “orders” is the key question which is not apparent. The company revenue forecasts were probably based on more than the minimums committed and probably inherently too optimistic. We will no doubt learn more in due course.

Who was to blame for this fiasco? The sales person or persons involved as the company suggests or the CEO and CFO for not being more sceptical about the likely future cash flows? The latter I suggest. The announcements made by the company were in my view misleading and hence effectively a fraud on investors.

Can the company recover? As I said in the meeting, the company does appear to have some good technology but avoiding administration is not going to be easy. The company may need more funding urgently to meet its customer commitments but who would invest in the business as confidence in the management will have been lost and investigating the problem will take time? It may take weeks if not months to resolve and the longer the company shares are suspended the more difficult it becomes.

There was a general discussion at the Mello event on how to avoid frauds which lose investors their money. Can you spot likely frauds was one question discussed. I think you can in many cases. There were warning signs at Wandisco such as never reporting a profit since they listed which is why I never invested in it. But sometimes it’s very difficult as at Patisserie Valerie where the audited accounts were fictitious.

One of the speakers mentioned a good book on the subject entitled “Lying for Money” by Dan Davies. I have ordered a copy. I would also recommend “The Signs Were There” by Tim Steer and I cover some of the things to look at when researching companies in my own book entitled “Business Perspective Investing”.

What should be done to avoid investors losing money from frauds?

Tighter regulation of announcements was one suggestion and tougher penalties for convictions was another. In general the UK legal regime is much too weak and the FCA has historically been very lax although they have been improving.

David Stredder suggested that companies that list should contribute to an “insurance” fund in case the company suffers fraud that would compensate investors (it’s rarely possible to recover funds from the fraudsters). This is an interesting idea but it would need to be a large fund to cover the likely cases.

Note that relying on non-executive directors or Nomads to pick up and stop problems does not work. Investors need to do their own due diligence.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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A New National Purpose?

The Tony Blair Institute for Global Change has published a report, jointly authored by Tony Blair, William Hague et al, which has received wide media coverage. It recommends a “radical new policy agenda” that will transcend the current fray of political ideology.

It’s worth reading (see link below) and I will pick out some of the important points in it:

It recommends “building foundational AI-era infrastructure”. This should include: 1) Government-led development of sovereign general-purpose AI systems, enabled by the required supercomputing capabilities, to underpin broad swaths of public-service delivery; 2) A national health infrastructure that brings together interoperable data platforms into a world-leading system that is able to bring down ever-increasing costs through operational efficiencies; 3) A secure, privacy-preserving digital ID for citizens that allows them to quickly interact with government services, while also providing the state with the ability to better target support.

To encourage investment in “growth equity” it suggests encouragement of pension scheme consolidation by limiting capital gains tax exemption to funds with over £20 billion under management (it argues that there are too many small schemes).

It suggests Increasing public research and development (R&D) investment to make the UK a leader among comparable nations within five years, coupled with reforms to the way our institutions of science, research and innovation are funded and regulated to give more freedom and better incentives. Investing in new models of organising science and technology research, including greatly expanding the Advanced Research and Invention Agency (ARIA), and creating innovative laboratories that seed new industries by working at the intersection of cutting-edge science and engineering.

Comments:

The proposals for a “national health infrastructure” seems to be reviving the old concept of a single monolithic patient record system which was abandoned after unsuccessful implementation and the waste of many billions of pounds. Trusts and hospitals now have disparate systems but interoperability is the key while the Government is funding “digital transformation” and having some impact on improving systems. We don’t need a new “big bang” approach with the enormous costs incurred with chosen consultancy firms.

The report appears to suggest that technology can solve all the problems in the NHS by improving productivity. But this is nonsense. Management is the problem, not lack of technology.

The report has a touching faith in the possible impact of AI. So it says: “As a general-purpose technology, AI has the potential to make an unprecedented impact that will exceed those of the steam engine and electricity combined during the industrial revolutions. These previous revolutions focused on the harnessing of energy to mechanise physical labour, but our current revolution is the first in history to automate cognition itself”.

AI is improving but it so far has limited applications. The fact that products such as ChatGPT can help students to write essays (albeit with frequent factual errors) by completing sentences based on internet word frequencies does not herald a revolution in productivity.

The report strongly promotes digital identities. So it says: “Today, many of us can set up a bank account in minutes and pay for shopping at the tap of a watch or phone. For the generation now entering middle age, this level of digital simplicity and streamlining is expected as a default while those in their 20s have grown up in an entirely digital age. Despite this, government records are still based in a different era. The debate over digital IDs has raged in the UK for decades. In a world in which everything from vaccine status to aeroplane tickets and banking details are available on our personal devices, it is illogical that the same is not true of our individual public records”.

I personally would welcome a digital ID. At present I have over 500 separate log-ins for different organisations which I have to record and manage with some help from technology. But I still occasionally have to prove who I am by submitting copies of a passport or driving licence and proof of residence by a copy of a utility bill. This is archaic nonsense when companies such as Experian or GB Group can already verify my identity from their records.

But the NHS and Government bodies like HMRC have separate systems which still require separate log-ins. The report suggests personal data should be shareable between organisations but that should only be permitted for digital IDs when a user permits it.

The report says: “Governments are the original issuers and source of truth for most identity documents, from birth certificates to passports. Rather than creating a marketplace of private-sector providers to manage the government-issued identity credentials of citizens, the government should provide a secure, private, decentralised digital-ID system for the benefit of both citizens and businesses. A well-designed, decentralised digital-ID system would allow citizens to prove not only who they are, but also their right to live and work in the UK, their age and ownership of a driving licence. It could also accommodate credentials issued by other authorities, such as educational or vocational qualifications. This would make it cheaper, easier and more secure to access a range of goods and services, online and in person. A digital ID could help the government to understand users’ needs and preferences better, improving the design of public services. It would make it simpler and easier to access benefits, reducing the number of people who are missing out on support they are entitled to. It could even help the government move to a more proactive model, meeting people’s needs before they apply for a service, tailoring the services and support they are offered to their individual circumstances and reducing administrative burdens on both individuals and the public sector”.

Some of that goes far beyond what is necessary or wise. But giving everyone a digital ID from birth is surely a good idea. Almost everyone already has a National Insurance Number so this is not a new concept but it needs extending to provide digital ID verification. Other countries such as Finland and Ukraine are ahead of the UK already in this regard.

The report has some interesting things to say about the lack of investment in the UK. For example: “Despite startup financing being the focus of several government reviews and new funds, the UK has continually struggled to deliver a sufficient scale and volume of patient and growth capital to the country’s startup companies. The UK’s DB pensions industry is fragmented, with over 5,300 schemes with an average size of £330 million. Their investment strategies, driven by risk-averse corporate sponsors and finite investment horizons, have typically pursued a zero-risk approach. According to Michael Tory, co-founder of the advisory firm Ondra Partners, the UK is one of the only major economies where domestic pension funds have in effect abandoned investment in UK companies. The proportion of UK pension funds invested in bonds increased from less than 20 per cent in 2000 to 72 per cent in 2021, even as their investments in UK equities dropped from 50 per cent of their asset allocation in 2000 to just 4 per cent in 2021”.

This is certainly an area that the Government should look at. Effectively pension funds have become risk averse due to the imposition of regulations that require limitation of risk.

In conclusion the report suggests that technology can solve many of the UK’s economic and social problems. It is way too optimistic in that regard but it does contain a large number of suggestions for where improvements could be made.

Full Report: https://institute.global/policy/new-national-purpose-innovation-can-power-future-britain

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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FCA on Getting to the Gamers

On Friday the Financial Conduct Authority (FCA) published a fascinating article on the views of people on the risks of investment offers under the title “Getting to the Gamers”. It included these comments:

“Consumers can now easily invest in high-risk investments. Some of these promotions use popular ‘gamification’ techniques to encourage people to participate. Gamification uses elements of game playing, like score-keeping, competition and league tables, to encourage people to take part. High-risk investments can be a valid part of well diversified portfolios, but we are concerned that many investors don’t recognise all the risks involved”; and:

“First, we had to find out more about these investors, what attracts them to these offers and where they see them. Our research found they tend to be aged 18-40 and are often driven by emotional and social factors. They enjoy the ‘thrill’ and feeling of ‘being an investor’. 78% said they relied on their gut instincts to tell them when to buy and sell. 

But nearly half of them – 45% – didn’t realise that losing money was a potential risk of investing, and over 60% relied on social media when researching investments. They were also disproportionately attracted to offers and platforms that used gamification”.

See FCA article here: https://www.fca.org.uk/about/getting-gamers

Comment: it is certainly plain to see that in the last few years a lot of new investors have been attracted into stock market investment. They have never been through a bear market and their perceptions of risk are therefore inadequate.

What can the FCA or anyone else do about this? Encouraging investors to get some experience before making big bets on shares is one thing to do and more education before they even start to invest are surely the things to look at. Some education should be a pre-requisite before being allowed to invest in the stock market.

Warnings about reading or listening to social media posts on investment topics would also not go amiss and tougher regulation in general of investment web sites would help.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

The Outlook for Stock Markets and Bank Runs

It’s that time of year when financial commentators like to pontificate on the future for the stock market in the coming year and tip sheets give their hot share tips for the New Year.

As regards economic forecasts and how the stock market will perform I can do no better than quote John Littlewood in his book “The Stock Market”:

“The sequence of bull and bear markets in the 1950s shows a reasonably strong correlation with changes in the direction of Bank rate. This most simple of yardsticks has been underestimated as a guide to the direction of equity markets. It was to prove to be the perfect indicator in 1958 when there were 4 further reductions in Bank rate, in half-point steps, to 4% on 20 November 1958, and the FT Index established a new all-time high of 225.5 on literally the last day of the year, passing its previous peak of 223.9 set 3.5 years earlier in July 1955.

The reason for a correlation between changes in direction of Bank rate and the occurrence of bull or bear markets is simple. Bank rate sets the interest rate for money on deposit and the yield earned on government securities. If it falls from, say, 4% to 3%, yields will settle at lower levels, prices of government securities will rise, and money on deposit will earn less. Conversely, if Bank rate is increased from 5% to 7%, as happened late in 1957, yields rise, the prices of government securities fall sharply and money on deposit earns more.

Two consequences follow for equities. There is always some broad correlation between the yields on equities and government securities, and equity yields will move upwards or downwards in the same direction as government securities. Second, if money on deposit earns more, it will make equities seem less attractive and cash more attractive, or if it earns less it will make equities look more attractive and cash less attractive. Subsequent changes in Bank rate will also tend to move in the same direction, upwards or downwards, and will further enhance the strength or weakness of equities”.

I shouldn’t need to tell readers that we are in a period of rising bank interest rates as the Bank of England tries to clamp down on inflation. That does not bode well for stock market indices although some of this has already been anticipated. The S&P 500 is down 20% over the past year which tends to lead the UK market and the FTSE-Allshare is down 2%.

Another consequence of rising bank interest rates is that high yielding shares will be favoured over those yielding little or nothing. We have already seen this process at work.

With more rises in bank rate forecast (as it should be as it is irrational that it should be lower than the rate of retail price inflation) this process is likely to continue. But readers are warned that all economic forecasts are subject to gross error so the key is to simply follow the trend. In other words, this might not be the time to be putting more money into stock markets.

I am not suggesting that investors should move wholesale out of equities and into gilts and bonds. Equities provide the best long-term hedge against inflation while fixed interest bonds lost value in high inflation periods.

As regards share tips these are subject to even bigger errors than economic forecasts although they can be worth reviewing. As someone who always falls for a good story I know not to plunge into large purchases of new share tips. I might buy a small holding and wait to see the direction of travel while I learn more about a company and its management. In other words, I buy more of the winners while selling the losers in my portfolio. This might not maximise my returns but it ensures the avoidance of big mistakes which can be so damaging to one’s wealth.

For similar reasons I never publish share tips. If I do comment on companies, it is simply to report on news, good or bad, not to try and predict the future.

Bank Runs

One of my favourite films was shown on Christmas day television. Namely “It’s a Wonderful Life”. It stars James Stewart as the manager of a small town savings and loan bank which runs into a cash flow crisis as an employee mislays $8,000 on the day a Bank Examiner visits. A run on the bank follows as news spreads around and folks queue to withdraw their savings. Stewart has to tell people that their money is not in the bank but is out on loan to people to buy their houses. Bank runs are still taking place but latterly on cryptocurrency exchanges.

The film reminded me of a seminar I attended during the crisis at Northern Rock which likewise faced a temporary cash flow problem. The panel of speakers from the financial media, including Andrew Neil, were opposed to any Government bail-out. But one member of the audience asked “would they have let Bailey savings and loan go bust? This question stumped the panel as they did not understand the reference which was a pity because the answer from anyone who had remembered the film would have been “NO” because the bank was clearly a positive contributor to the community and was only suffering from temporary problems.

James Stewart aims to commit suicide but is rescued by an angel when shown the negative consequences if he had never lived. It’s an emotionally warming story that is marvellously well acted and directed. One of those films one can watch several times over the years and still weep with joy at the happy ending. The outcome at Northern Rock was much sadder of course as the Bank of England chose not act.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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AEW UK REIT, JGGI Merger and ShareSoc’s investor Basics

Yesterday I watched a presentation by AEW UK REIT (AEWU) on the Investor Meet Company platform. This is a property investment trust which I hold but like many property companies the share price has done badly in recent weeks and it’s now on a discount to NAV of over 24%. The portfolio manager, Laura Elkin, explained that the company’s objective is to achieve a high income for investors through active management.

One of the main concerns of investors in such companies is that with interest rates rising, property investing may become less attractive as they typically have significant amounts of debt used to finance property purchases and may need to refinance their debt at more expensive levels. But AEWU have fixed their debt at 2.9% p.a. for the next 5 years and they have a high current cash holding. Their loan to NAV ratio is only 31%.

The current dividend yield is 8.7% although that is not covered by current earnings. This arises from some property disposals resulting in a high cash holding but they expect the dividend will soon be covered again.

There are apparently opportunities arising to buy properties at good prices and they are having conversations with open-ended property fund managers who are having to dispose of assets after falls in the property sector and pension funds having to realise cash.

Another question was whether their property leases were indexed linked. Generally not. Indexed linked leases often have a cap and collar which provides only limited protection and AEWU’s leases are generally fairly short term anyway so can often be relet at higher prices. But that does surely mean that if the economy grinds to a halt then vacancies might increase and pressure to reduce letting prices will rise.

One interesting comment was that the office market is being hit by the ESG agenda. Prices are being affected by the quality of the property in that regard and this is meaning some improvement of properties is required to make them more attractive before reletting.

This was a useful presentation and a recording is available. AEWU have a good long-term record but property trusts are currently out of favour. Taking a long-term view, commercial property is looking to me to be quite an attractive sector at current price levels and AEWU seems to be nimble enough to take advantage of opportunities.

There was news today of a proposed merger of JPMorgan Global Growth and Income (JGGI) trust with JPMorgan Elect (JPEI) trust. The latter is a rather peculiar investment trust with three classes of shares – Growth, Income and Cash. Holders of any of the latter can switch between the classes without incurring tax liabilities.

Total assets of Elect are relatively small at £341 million in comparison with JGGI’s £1446 million so it is certainly a rational move so far as Elect holders and the manager are concerned. Is there any benefit for JGGI holders? There is some minor advantage of a larger asset base reducing overall costs so I will probably vote in favour as a holder of JGGI.

Investing Basics: ShareSoc has launched a series of videos. See https://www.sharesoc.org/investor-academy/investing-basics/ . It’s a meritorious attempt to educate people on the basics of investment in an easy-to-use format and in a few short sessions. It may help some people although this may not be a good time to encourage people to take up stock market investment. The markets are volatile at present with poor returns in the short-term discouraging new investors.

But shares are beginning to look cheap particularly in the small cap sector and where can one get an income of 8.7% which is what AEWU is paying in dividends? No instant access bank or savings account is paying more than 2.5% while gilt yields are higher but still nowhere near 8.7%. There is a capital risk in investing in REITs but there is also in gilts. Corporate bonds may be another alternative to look at but information on those is quite limited.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Financial Stability It Ain’t

With the appointment of Jeremy Hunt as Chancellor, we have now had four different Chancellors in a matter of a few months. What will overseas investors who dominate the markets make of this?

It will surely not instil confidence in the stability of the UK and its financial management. Liz Truss has not helped by apparently backing tax cuts and then now back-tracking on those commitments. Corporation tax will now rise as originally planned making the UK a less attractive place to invest. The Truss “high growth” strategy is floundering.

The gilt market is gyrating as the Bank of England planned to halt further QE and then changed its mind to stabilise the market while the FCA has allowed pension funds to pursue risky investment strategies which led them into panic selling of property funds and other assets.

Let us hope Mr Hunt can halt this merry-go-round. But what future is there for Ms Truss as Prime Minister? Not a long one in my view. She has not demonstrated confident leadership and her public statements have been quite dire. In a few months I think she will be gone.

I have decided to join the Conservative Party so I might get some say in who will lead the Party in future. I have supported the Party in the past – for example I helped Boris Johnson become Mayor of London although that turned out to be a questionable decision after London became the cycling capital of the world and the road network was severely damaged. But I never joined as a Member.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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